Consent of Members Withdrawl of Member Llc by nrk13716


More Info

                                        1. Fiduciary Relationship which results from the
                                        2. manifestation of consent by the P to the A that the A shall act
Agency;                                    on P’s behalf, and
                             RSA §1     3. the consent by the agent to so act.
Principal/              §1
Agent                                   Principal- the one whom the action is to be taken
                                        Agent- the one who is to act

                             §26        Actual Authority-created by words or conduct from P to A
                                               Express Actual Authority- expressed from P to A
                                             Implied Actual Authority- do what is reasonably necessary to get the
Agency Authority             §27
                                                job done.
                                        Apparent Authority- manifestations by P to 3P, attributable to P
                                        known to 3P and must lead 3P to reasonably A is P’s A.

                             §140       Liability of Principal to 3P for transation conducted by an agent can
                                        be based on:
Liability Based on                          1. agent was authorized
                                            2. agent was apparently authorized
Agency                                      3. agent had pwr arising from the agency relation and not
                                                 dependent upon authority or apparent authority.

                             §320       Principal Disclosed- Agent does not become party to K
                             §321       Principal Partially disclosed- Unless otherwise agreed, A is party
                                        to the K.
Liability of Agent to        §322       Principal Undisclosed- A purporting to act on his own account
3P for Contracts                        but actually for P, is a party to the K.
                             §326       Principal Known to be nonexistent or incompetent- unless
                                        otherwise agreed, A is party to contract

                             §140       Liability of a P to a 3P for transactions conducted by an agent may
                                        be based on the act that:
Liability of Principal                      1. The agent was authorized
                                            2. the agent was apparently authorized
to 3P for Contracts                         3. The agent had power arising from the agency relation not
                                                 dependant on authority or apparent authority (inherent)
                             §4         (1). If the 3P has notice that the A is acting for the principal and
                                        knows of P’s identity- A is acting for a disclosed P.
Undisclosed/                            (2). If the 3P knows that the A is acting for the P but doesn’t know
                                        who the P is, A is acting for a partially disclosed P.
Partially Disclosed
Principal                               (3). If the 3P has no notice that the A is acting for the P- the one
                                        for whom A acts is an undisclosed P.

                             §220 (1)   The important ingredient is that the master has the right to control
                                        the details of how the servant does his job. The requirement goes
                                        beyond the basic control in agency relationships.

                             §220(2)    To determine whether one is acting as a servant consider these factors:
                                                a   The extent of control the master has over details of the work.
                                                b   Whether the agent is engaged in a distinct occupation.
                                                c   Whether the work is usually done under direction by employer or without
Master/Servant                                      supervision.
Relationship                                    d
                                                    The skill required to do the occupation
                                                    Whether the workman or employer supplies the tools, instrumentalities,
                                                    for the job
                                                f   The method of payment
                                                g   The length of time the person is employed
                                                h   Whether the work is part of the regular business of the employer.
                                                i   Whether the parties believe they are creating master/servant rship.
                                                j   Whether the principal is a business.
                      §    §228     Conduct of the servant is within the scope of employment only if:
                                       1. it is the kind S is employed to perform
Servant Acting                         2. it occurs substantially within the authorized time and
                                          space limits
within scope of                        3. it is actuated, in part, by a purpose to serve the master.
employment                             4. if force is intentionally used by the servant the force is not
                                          unexpected by the master.

                            §229    To be within the SOE, the conduct must be of the same general
                                    nature as that authorized.

                                    In determining whther the conduct not authorized, but
                                    nevertheless so similar to be considered as within the scope of
Kind of conduct                     employment, the following are to be considered:
                                       1.   act commonly done by such servants?
within the scope of                    2.
                                            time, place, & purpose of the act
                                            previous relations between M &S
employment                             4.   whether the act is outside the business of the servant
                                       5.   whether master has reason to expect such act will be done
                                       6.   whether the instrumentality of harm has been furnished by the master.
                                       7.   the extent the act departed from normal method of accomplishing
                                       8.   whether the act was criminal.

                          §219      The master is liable for the torts of a servant only if the tort was
                                    committed within the scope of employment.

                                    If the tort is committed within the scope of employment the master
Liability of Master for             is vicariously liable. Compare frolic (not l) v. Detour (L).
torts of servant          §219(2)   A master is not liable for the torts of his servants acting outside
                                    scope of employment unless:
                                       1.   the master intended the conduct or consequences
                                       2.   the master was negligent or reckless
                                       3.   the conduct violated a non-delegable duty of the master

                 UPA §6(1)        A partnership is an association of two or more persons to carry on
PARTNERSHIP      RUPA §202(a)     as co-owners of a business for profit.

                 RUPA §201(a)     A partnership is an entity distinct from its partners
RUPA (entity
UPA (aggregate                    Partnership is not a separate legal person, but is an aggregate of
                                  its partners.

                 UPA §18          The rights and duties of the partners in a partnership are
                                  governed by the rules of UPA subject to an agreement.
a default        RUPA §103        The general rule is that relations among partners are governed by
                                  the partnership agreement. To the extent that partners fail to
Provision                         agree, RUPA provides the default rule

                 UPA §8           UPA
                                  1. All property brought into the partnership or subsequently acquired
                                     by purchase
                                  2. Property acquired with partnership funds
                                  3. Real property acquired in partnership name. Title can only be
                                     conveyed in partnership name.
                                  4. conveyance to the partnership- subject to contrary intent.

                 RUPA §§203,
                                  Property acquired by the partnership is property of the
                                  partnership and not the partners individually.
                                  Property is partnership property if acquired in the mane of:
PROPERTY                          1. the partnership;
                                  2. one or more partners with an indication that the property belongs to
                                     the partnership.
                                  3. by transfer in the name of the partnership or to partners in their
                                     capacity as partners for the partnership.
                                  4. Property is presumed to be pship property if purchased with
                                     partnership assets, even though not acquired in the name of the

                                  Comment §204: Ultimately it is the intent of the partners that controls
                                  whether property belongs to the partnership
                    UPA §18(h)      Any difference arising as to ordinary matters with the partnership
                                    may be decided by a majority of the partners.

                                    Any act that is contrary to any agreement between the partners
                                    must be decided by all (unanimous) partners.
                    RUPA § 401(j)
DECISION                            Any difference arising as to ordinary matters may be decided by a
                                    majority of the partners.
                                    An act outside the ordinary course of business and an
                                    amendment to the partnership agreement requires consent of
                                    all the partners.

                    RUPA            The partnership agreement may not restrict the rights of third
RIGHTS OF 3RD       §103(b)(10)     parties.

                    RUPA §201       The partnership is a legal person, an entity and can be sued.

                    RUPA §305       A pship is liable for loss or injury for act of partner acting with in
                                    the ordinary course of business of the pship or with authority of

                    RUPA §307       A pship may sue or be sued in the name of the pship.

                                    §307(c)- a judgment may not be satisfied from a partner’s assets
                                    unless there is also a judgment against the partner. The only
                                    place you can look is partnership assets.
                                    §307 (d)- a judgment creditor cannot levy execution against the
THE                                 assets of the partner to satisfy a judgment based on a claim
PARTNERSHIP                         against the partnership, unless the partner is personally liable.
                                        Liability is imposed on the partner by law or contract
                                           independent of the existence of a partnership.
                                        §307(d)(4)- if partnership assets are insufficient, can levy
                                           against the partner.

                                    RUPA says that you cannot go after the partner’s assets
                                    unless you have exhausted the assets of the partnership.

                    RUPA 401(c)     The partnership shall reimburse a partner for payments made and
                                    indemnify a partner for liabilities incurred in the normal course of

                    RUPA §§306 &    Partners are jointly and severally liable for all obligations of
                    307             the partnership.

LIABILITY OF                        §306(b)- A partner admitted to the partnership is not personally
                                    liable for obligation incurred prior to admission.
                    UPA §15         Partners are jointly liable in contract.
                                    Partners are jointly & severally liable in tort.
                                RUPA §401(i)   A person may become a partner only with the consent of all the
                                               partners unless the pship agreement provides otherwise.

                                RUPA §306(b)   A new partner is not liable for debts incurred prior to
NEW PARTNERS                                   admission.
                                UPA §18(g)
                                               No person can become a member of a partnership without the
                                               consent of all the partners.

                                RUPA §401(b)   Each partner is entitled to an equal share of the partnership
                                               profits and is chargeable with a share of partnership losses.
PARTNERSHIP                     UPA §18(a)
PROFITS                                        Same
                                RUPA §807
                                               You cannot distribute to partners before creditors are paid first

                                RUPA §502      The only transferable interest is the right to share profits and
                                               losses. There is no transfer of management interest.
TRANSFER OF                     UPA §26        Same
                                               Note: Distinguish between sale of an interest in pship v. transfer
3rd PARTY                                      of interest. With sale of an interest, there is purchase of part of
                                               the entity, and purchaser will have management interest- §101(9).

WITHDRAWAL                      UPA §29        Dissolution- designates the point in time when the partners
                                               cease to carry on the business together.
UNDER                                          Termination- point in time when all of the partnership affairs are
                                               wound up.
                                               Winding Up- the process of settling partnership affairs after
Entity theory: if one partner                  dissolution.
leaves, dissolution is
created and the
partnership is no longer.

                                RUPA § 602     Any partner has the power to dissociate at any time.
                                RUPA           A partner rightfully disassociates upon the occurrence of:
WITHDRAWAL                      §601 (a)          1. Notice
                                                  2. An event agreed to in the partnership agreement
OF A PARTNER                                      3. expulsion pursuant to partnership agreement
UNDER RUPA                                        4. By unanimous vote of the other partners if it is true that:
                                                         a. It is unlawful to carry on pship with that partner
                                                         b. There has been a transfer of all or substantially all of
Aggregate theory: If one                                     that partner’s interest.
partner leaves, partnership                       1. The partner dies or becomes mentally incapacitated.
is still in tact and
dissolution is not created.     RUPA §602(b)   A partner’s disassociation is wrongful if:
                                                  1.   Breaches express provision of pship agreement.
Instead, you buy-out the                          2.   It occurs before the expiration of a definite term.
partner that left and keep                        3.   It is before 90 days when someone else has withdrawn
the interest going.                               4.   Expelled by judicial determination- §601(a)(5)
                                                  5.   Partner is a debtor in Bankruptcy. §601(a)(6)
Buy-out is mandatory
under RUPA §701(a).                            A partner who wrongfully dissociates is liable other partners
                                RUPA §602(c)   for damages caused by the disassociation in addition to other
                                               obligations owed.
                                A partner who wrongfully dissociates is not entitled to buyout
                RUPA §701(h)    price until expiration of the term or completion of undertaking
                                unless court says payment will not hurt pship.

                RUPA §701 (b)   On the date of disassociation, the buy out price of the dissociated
                                partner’s interest is the amount that would have been
                                distributable if on that date the assets of the partnership were
Buy-Out Price                   sold at a price equal to the greater of the liquidation value based
                                on a sale of the entire business as a going concern without the

                                A disassociated partner is not liable for a partnership
                RUPA §703       obligation incurred after dissociation except:
                                    If within 2 years of disassociation at the time the other
DISSOCIATED                            party:
                                   1. Reasonably believed that the dissociated partner was
PARTNER’S                              then a partner.
LIABILITY TO                       2. Did not have notice of the other partner’s dissociation;
OTHER                              Note: Statement of Dissociation §704
PERSONS                            A dissociated partner may file a statement of dissociation.
                                   A person not a party is deemed to have notice of dissociation 90
                                   days after the statement of dissociation is filed.

                                A partnership is dissolved and its business must be wound up
                RUPA §801       only upon the occurrence of any of the following events:

                ONLY AT-           1. An at will partnership having express notice of another to
                WILL PSHIP            withdrawal.
                                   2. in a partnership for a definite amount of time.
                                   3. upon an event agreed upon in the partnership agreement.
                                   4. an event that makes it unlawful to continue partnership.
                                Partnership continues after dissolution: By Waiver of ALL of
DISSOLUTION                     the Partners
                §802 (b)
                                At any time after the dissolution of a pship and before the
                                winding up of its business is completed, all of the partners
                                (including any dissociating partner, but not one that is wrongful)
                                may waive the right to have the partnership’s business
                                wound up and pship terminated.
                                     Pship resumes carrying on its business as if dissolution
                                        had never occurred.
                RUPA          Unless partners otherwise agree:
                §401(b)          1. They share responsibility not only for the losses from
                                     operation of the pship but also partner’s losses from
                                     investments in the pship.
                RUPA             2. The amount of each partner’s loss from her investment in
                §401(a)              the partnership is determined from her pship account
                                     (how much is put in and taken out.).
                                 3. When a partnership ship is dissolved, the pship is legally
WINDING UP                           obligated to pay each partner the amount measured by
                                     the balance in her partnership account.
                RUPA             4. If at dissolution, the sum of the balances in pship accounts
                §807(b)              of the partners exceeds the pship assets remaining after
                                     paying creditors, the partners will have to contribute
                                     additional funds to the pship so losses from investments
                                     are shared appropriately.

                UPA §18 (a)   Profits and losses are shared equally.

                UPA §18 (c)   A partner who aids the pship and makes payment or advance
                              beyond the amount of capital agreed he agreed to shall be paid
                              interest from date of payment or advance (loan).

                UPA §18 (d)   A partner gets interest on capital contribution only from the date
                              when repayment should have been made.
CAPITAL         RUPA §401     Pship account includes profits minus liabilities -§401(a)
                              Profits and losses are shared equally-§401(b)
                                  Contribution of services rather than capital is not
                                      protected by §401 (Kovacik v. Reed). If you contribute
                                      services, it is not part of capital contribution, and you still
                                      share in losses equally. Comments to §401 state that
                                      parties should foresee application of default rule. To
                                      prevent this, a person contributing services can draw a
                                      salary, contract around it, or put it in the pship agreement.

                RUPA §601     Under RUPA §601-expulsion would be grounds for dissociation.
                              Nothing requires that it has to be for cause, but you can contract
                              around that.

                              A partner can be expelled:
                                     1. pursuant to the pship agreement
                                     2. by unanimous vote of the other partners if:
                                            a. it is unlawful to carry on business w/that ptner.
                                            b. Partner transfers all transferable interest
EXPULSION OF                         3. Judicial determination that partner has engaged in
A PARTNER                                conduct that hurts partnership.
                                     4. Partner violates partnership agreement by material

                              The obligation of good faith and fair dealing under §404(d) does
                              not require prior notice, specification of cause, or an opportunity
                              to be heard (Boatch v. Butler & Binion).

                              Cannot expel in bad faith or for personal gain.
             A situation in which a person who owns a majority interest in a
             business acts to compel a minority owner of the business to sell
             or otherwise give up her interest.

FREEZE-OUT   Page v. Page- Traynor says that you have a right to walk in at-
             will partnerships however you can not dissolve a partnership to
             gain the benefits of the business for yourself unless you fully
             compensate co-partners for their share of the prospective
             business opportunity.

                          MBCA §2.02   §2.02(a): Mandatory Requirements:
                                           1. Corporate name
                                           2. The # of shares the corp is authorized to issue
                                           3. the street address of the corp’s initial registered office; and the
                                              name of official registered agent
                                           4. the name and address of each incorporator

                                       §2.02 (b): Permissive Requirements:
                                           1. names and address of individual directors
                                           2. a par value for authorized shares of stock
                                           3. defining limiting and regulating the powers of the board and
                                           4. liability issues.
                          DE §102      §102(a): Mandatory Requirements
                                          1. The name of the corporation (must include one of the following
Articles of                                    words: association, company, corporation, club, foundation,
                                               incorporated, institute, society, union, syndicate, or limited).
Incorporation                              2. The address of corp and name of registered agent.
                                           3. The nature of the business or purpose to be conducted or
                                           4. The total number of stock the corp has authority to issue and the
                                              par value of each of such shares, or a statement that the shares
                                              will be without par value. If it the corp is to authorize more than
                                              one class of stock, the total number for each class and which
                                              shares are to be without par value, and which have par value
                                              and the value for each class.
                                           5. The name and address of each incorporator.
                                           6. If the powers of the incorporators are terminated upon filing
                                              certificate of incorporation, the names and address of those who
                                              will serve as board of directors until the shareholders vote at first
                                              annual meeting.

                                       §102(b): Permissive requirements

                          MBCA §2.06   §2.06(a): A corporation MUST adopt bylaws.
                                       §2.06(b): The bylaws may contain any provision for managing the
                                       business and regulating the affairs of the corporation as long as it
If the articles and                    is not inconsistent with the law or articles of incorporation.
bylaws are in conflict,
the articles win!         DE §109
                          Definition   A promoter acts on behalf of a corporation not yet formed.
Promoters                              A promoter purporting to act as or on behalf of a corporation
                          MBCA §2.04   knowing that there was no incorporation, is jointly and severally

                                       Promoters still remain liable under a contract until novation.
                 MBCA §6.03        A corporation’s sale of it’s own stock is an issuance.
                                   The articles of incorporation determine the number of shares a
                                    corporation has legal authority to issue- authorized shares.
                                   The shares that are actually issued are referred to as
                                    outstanding shares.

                                  Issuance rules only apply when a corporation sells stock, not
                                  an individual shareholder selling stock.
Issuing Stock
                                  Par Value- the minimum price for which a corporation can issue
                                  its shares. It is not applicable when an individual sells shares.

                                  Stated Capital- includes at least the aggregate par value of all
                                  issued shares of par value stock.

                                  Capital Surplus- funds received for issuance in excess of par
                 MBCA                                  MBCA               DE
                 §6.21(b)(c)                           OK- 6.21 any       OK- §152 (1)
                                   Land                tanagible          names real
                                                       property           property
                 DE §152                               OK- promissory NO-§152 does
                                                       notes named in     not list
                                                       §6.21(b)           promissory
                                   Promissory note                        notes- only okay
Things a                                                                  for the excess
                                                                          amount over
Corporation                                                               capital.
can and can                        Release of
                                                       OK (b/c it         MAYBE (may be
                                                       benefits co.)      an intangible
issue stock in                     obligation
exchange for.                      Good will           OK-                OK
                                                       OK- names          NO –152(1)
                                                       contracts to be    services
                                   Promise of future performed            rendered (past
                                   services            §6.21(b)           tense so future
                                                                          services are

                 General rule of MBCA §6.22(b) and DE §162 is that shareholders protected from
                 personal responsibility for the corporation’s liability.

                 PCV allows the creditor to skip going after the corporation and go after the
                 shareholders. This only happens in close corporations and there is no way to
                 predict when it is going to happen.
Piercing the     Alter Ego Doctrine/ Identity of Interest- the shareholder has failed to respect the
Corporate Veil   corporation as a separate entity. The stockholder has essentially equated himself
                 as a corporation and when there is no separation, the shareholder can be liable.
                       Factors to consider for PCV (Dewitt):
                          1. Whether the corp was grossly undercapitalized
                          2. Failure to observe corporate formalities.
                          3. Non-payment of dividends
                          4. insolvency of the debtor corp at the time.
                          5. siphoning of funds of the corp by a dominant shareholder.
                          6. non-functioning of other directors & officers.
                          7. absence of corporate records.
                          8. corp is merely a façade for operations of dominant shareholders.

                          1. Show factors
                          2. Demonstrate that the shareholder was operating under alter ego
                          3. Show the unfairness to creditors.

                       Fraud is a way to pierce the corporate veil:
                        Classic ex: individual is subject to a covenant not to compete. In order to avoid
                          covenant, the individual forms corp to shield from liability. This is fraud.

                       Corporations enganged in a given industry are an ―enterprise‖ that should be treated
                       as a single entity for purposes of liability. More often than not, a single large-scale
                       business is conducted, not by a single corporation, but by a combination of
Enterprise Liability   corporations controlled by a single holding company.

                       The enterprise liability pierces the walls of one corporation not to go after the assets
                       of a shareholder but after the assets of other related companies.
                          RUNNING A

                                     Directors are not agents for the corp. They cannot bind the
                                     corporation to anything.
                                     Officers are agents for the corp.

                                     Board of directors set the policy for the corporation. They do
                                     not make day-to day operational/micromanagement decfision.
Board of Directors

                                     Requires that every corporation have a board of directors
                     MBCA §8.01      except that a corporation with shareholder agreement under §7.32
                                     may dispose or limit the authority of the board of directors.

                                     Shareholders can enter into voting agreements to elect
                                     themselves to the board of directors. However, to select how they
                                     are going to bind themselves as officers and set their salaries is

Shareholder                          In a few states the shareholders can be empowered to select and
                                     remove the officers. Such authority must be put in the articles.
                                     An agreement among shareholders must be
                     MBCA            1. Set forth in the articles or bylaws and approved by all
                     §7.32(b)           shareholders at the time of the agreement; or
                                     2. In a written agreement signed by all the shareholders at the
(Continued…)                            time of the agreement and is made known to the corporation.

                                     The agreement is not grounds for imposing personal liability
                                     on any of the shareholders and is not a basis for piercing the
                     MBCA §7.32(f)   corporate veil.
voting                               The agreement has to be written among stockholders with a
                     DE §350         majority of the outstanding shares.
                                     The articles may provide that the shareholders rather than the
                     DE §351         board of directors shall manage the corporation, if all of the
                                     shareholders of record authorize it.
                                    Voting agreements among directors are void as being
                                    contrary to public policy. Directors cannot enter into voting
Director                            agreements. Directors cannot make an agreement to usurp
Voting                              management. This renders the board ineffectual and violates the
                                    public policy that the directors ae supposed to use their
Agreements                          independent judgment. (McQuade)

                                    Remember: Director voting agreements are contrary to public policy.

                                    REMEDY FOR BREACH OF AGREEMENT
                                    DE- The remedy for breach of the share holder agreement is to
                                    void the votes of the breacher.
                      DE §218(c)
                                    MBCA- §7.31(b): A shareholder agreement is specifically
Remedies for                        §7.31(a): Two or more shareholders may provide for the manner in
Violating                           which they will vote their shares by signing an agreement for that
                      MBCA §7.31    purpose.
Voting                              §7.32- involves a close corporation where the shareholders are
Agreements                          seizing management from the board.
                                    Voting Trust:
(Ringling Brother’s                 §730 deals with a voting trust. If you give share to a trust, you
Case)                               give up legal title and retain equitable title. The trustee that has
                                    legal title votes the shares in accordance with the voting

                                    You would have a voting trust in states like DE where you cannot
                                    get specific performance. In MBCA specific performance states,
                                    there is no need to have a voting trust.

                      DE §141(k)    With or without cause by a majority of shareholders entitled to
                                    vote- unless the board is classified (staggered- each year you
Voting to                           elect 3 directors for a 3 year term) you can only remove for cause.
Remove a
                      NY Bus Corp   Remove for cause only. However, if the articles say so, you can
Director from                       remove without cause.
office during
                                    May remove with or without cause unless the articles provide
her term              MBCA §8.08
                                    that the directors may be removed for cause only.

                      DE §141(k)    Majority of the shares entitled to vote.
The Number of         MBCA§8.08     The majority of the shares that actually vote.
Votes required to
remove a              NY Bus §706   Same as MBCA
director before                     Note: For any stockolder meeting, you have to have a quorum: a majority of the shares
                                    entitled to vote. If there are 3000 shares entitled to vote at least 1501 shares must be
term expires.                       present to vote in person or by proxy. Once you have a quorum, in DE you would have to
                                    have all 1501 votes to remove. Under MBCA & NY- you only need a majority of the number
                                    who show up.
                                A corporation keeps records of who owns its stock. The
                                corporation is required to send notice of annual and special
                                meetings to its record shareholders.

                                The corporation can fix a record date before the meeting and only
                                those record owners as of that date are entitled to notice and
                                a vote at the meeting.
that get to vote                When is the record date set?

                   DE §213(a)   No fewer than 10 days and no more than 60 days before the

                   MBCA         Cannot be more than 70 days before the meeting and there is
                   §7.07(a)     no minimum date.

                   MBCA §7.22   Can vote by person or proxy.
                                  May appoint a proxy vote by signing an appointment form.
                                  The proxy is good for 11 months unless another temporal
                                    time is noted on the proxy.

Voting by                       Can authorize another to act by proxy.
Proxy              DE 212(b)      You can do it orally, but it is stupid.
                                  The proxy is good for 3 years unless otherwise noted.

                                 Proxies are revocable even if they say they are not.
                                 A proxy coupled with an interest is irrevocable.

                   DE§220 (d)   Directors:
                                 The director shall have the right to examine the corporation’s
                                   stock ledger, a list of its stockholders, and other books and
                                 Once a director makes a §220 demand, the burden shifts to
                                   the corporation to show why the inspection should be

                   DE §220(c)    Shareholders:
Inspecting                       The shareholder makes the demand in accordance with
Corporate                          §220(b) (to look at ledger, list of stockholders, and books and
                                   records) and it is refused.
Records                          The burden will be on the corporation to show why the
Under the DE                       inspection is denied.
code.                           If the shareholder want to look at more than just the ledger
                                and is refused, the shareholder has the burden to show:
                                1. The demand is in the proper form and manner -writing and
                                     under oath.
                                2. The stated purpose is bona fide.
                                3. That the stockholder ought to have access because it is
                                     tailored to his purpose.

                  Courts are not going to second guess business decisions unless there is a
                  showing of fraud,
                  illegality, or conflict of interest.

                  Requirements for BJR To Apply:
                  1. Director must not be interested.
                  2. Director must be reasonably informed
                  3. Director must reasonably believe that she is acting in the best interests of the

                  Policy Reasons for Business Judgment rule:
Business          1. Buying stock is a voluntary act by the stockholder, there is an inherent assumption of risk
Judgment             that the stock might not do well.
                  2. After the fact litigation (post hoc) is a bad way to evaluate business decisions.
Rule              3. Profits are correlated to risks, and courts should not create incentives for caution.

                  BJR does not apply when the corporate decision:
                   Lacks business purpose
                   Is tainted by a conflict of interest
                   Is so egregious to amount to a no-win situation
                   Results from an obvious and prolonged failure to exercise oversight or
                    supervision. (Jay v. North)

                  Outside directors can be held liable when they blindly allow others to make decisions without

                  MBCA §8.30(a)      A director shall discharge his duties as a director in:
                                     1. Good faith
                                     2. With the care an ordinarily prudent person in a like position
                                        would exercise under similar circumstances
                                     3. In a manner that he reasonably believes is in the best interest
                                        of the corporation.

                  MBCA §8.30(b)      A director is entitled to rely on information, opinions, reports,
                                     or statements (including financial) if they are presented by:
                                     1. officers or employees of corporation (whom the director reasonably
                                         believes to be reliable and competent
                                     2. lawyers, accountants and others who the director reasonably
                                         believes are within the expertise and competence.
Standards of                             Reliance on expert is not reasonable when director is on
Care For                                     notice that the facts and circumstances indicate that the
                                             expert is wrong.
Directors                            3. a committee of the board.

                                                     RELIANCE MUST BE REASONABLE

                                     No liability if you are relying on information in good faith.

                  DE § 141(e)        However, a good faith reliance that you are acting in the best
                                     interests of the corporation does not abdicate duty to be
                                     reasonably informed.

                                     Special skills- if a director has special skills that go beyond what
                                     an ordinary director would have, he must use those skills.

Duty to Monitor
Exculpation       DE §102(b)(7)   Statute allows for articles provision to exculpate directors for
                                  liability on monetary damages cases. You can sue a director for
clauses for                       equitable or injunctive relief.
                                  Lack of good faith not covered-
                                  Intentional misconduct or a knowing violation of the law.

                                  DE allows protection from acts that are negligent, or grossly

                  MBCA            This will not allow a director to escape liability for negligence,
                  §2.02(b)(4)     gross negligence, or intentional conduct- there is nothing about
                                  good faith.

                                                 **** Intentional
                                                 *** Lack of good Faith
                                                 ** Gross Negligence
                                                 * Negligence

                                  MBCA is better protection for directors.

                  DUTY OF LOYALTY

                                  Generally three situations in which a director:
When does the                     1. Competes with the company
                                  2. Usurping a “corporate opportunity”
duty of loyalty                   3. Interested Director Transactions
                                  ALI Principles of Corporate Governance §5.06
Competing with                    Prohibits directors from engaging in competition with the
                                  corporation in order to realize a pecuniary gain.
the corporation
                                  ALI Principles of Corporate Governance §505

                  ALI §505(b)     Corporate opportunity is defined:
                                  1. An opportunity to engage in business that a director or senior
                                     executive becomes aware:
                                         a. In connection with a position in the corporation.
                                         b. Using corporate information or property.
                                  2. Any opportunity that a senior executive (not director) knows
Usurping A                           is closely related to a business that the corporation is engaged
Corporate                            or expects to engage.
Opportunity                       A director or senior executive may not take advantage of a
                  ALI §505(a)     corporate opportunity unless:
                                  1. they first offer it to the corporation and make disclosure
                                     concerning the conflict of interest
                                  2. The corporate opportunity is rejected by the corporation and;
                                  3. Either
                                        a. The rejection was fair to the corporation
                                        b. The opportunity was rejected by disinterested directors or
                                         senior executives
                                      c. The opportunity was rejected by disinterested

                             Burden of Proof:
                             A party challenging the taking of a corporate opportunity has the
               ALI §505(c)   burden except if it is established that notice and rejection were not
                             met, the director or senior executive has the burden of proving that
                             the opportunity was fair to the corporation.

                             Remedy constructive trust. It attempts to put the corporation
                             ina place it should have been had the director not usurped the

               ALI §505      Same as above.

Interested                   Good Faith Defective Disclosure- if liability rests on failure to
                             first offer an opportunity to the corporation,
Director                          §505(e)- allows relief from liability if the failure resulted from
Transactions                          good faith belief that the activity did not constitute
                                      corporate activity, AND

ALI Approach                         Within a reasonable time after suit is filed, the
                                      opportunity is offered to the corporation.

                             A corporate officer or director may not take a business
                             opportunity for themselves if the corporation is:

                             1.   financially able to exploit the opportunity.
                             2.   the opportunity is within the corporation’s line of business
                             3.   has an interest or expectancy in the opportunity.
Interested                   4.   by taking the opportunity, the corporate fiduciary will be
                                  compromising his duties to the corp.
Transactions                 A corporate officer or director may take advantage of a
                             corporate opportunity if:

DE Approach                  1. it is presented to the director of officer in his individual, not
                                corporate capacity.
                             2. The opportunity is not essential to the corporation.
                             3. the corp. holds no interest or expectancy in the opportunity.
                             4. the director or officer has not wrongfully used the recourses
                                of the corporation in pursuing or exploiting the opportunity.

               DE §144       There will be an interested transaction when there is a contract or
                             transaction between and corporation and one or more of its
                             director’s or officers that has a financial interest in that corporation.
Self Dealing                  Three choices that allow for conflict of interest:
Transactions   DE §144       1. Material facts as to the interest are disclosed or known to the
                                board or committee. All that is needed is a majority of
                                disinterested director approval even though disinterested
                                directors may be less than a quorum. §144 (b)
Under DE
                             2. The material facts are disclosed or known to the
Statute                         shareholders entitled to vote, and it is approved in good
                                faith by the vote of the shareholders.

                             3. The contract or transaction is fair to the corporation at the
                                time it is authorized, approved, or ratified, by the board,
                                committee, or shareholders.

                            The court will always look to fairness. The different standard
                            of fairness depends on whether Δ met §144(a)(1) or
                             If met, fairness is considered under the BJR- the
                                        burden is on the Π to show unfairness.

                               If not met, fairness will be assessed under the
                                 Entire Fairness Doctrine:
                                         Burden is on the defendant
                                         Must show fair dealing & fair price.

                            Conflict of interest if a director knows that he or a related person
               MBCA §8.60   has a financial interest linked to cause a conflict of interest.
Self Dealing                 This includes relatives.
Transactions                 DE statute does not include relatives.

                            You have to disclose relationship, interest, and all of the details
Under MBCA                  about the transaction (broader than DE).

                            Safe Harbor- if it is not a conflict situation under (§8.60) you
                            cannot be sued for it if it meets the definition under (b).
               §8.61(a)     You cannot be sued if:
                                  1. director approval
                                  2. shareholder approval
                                  3. the transaction is fair.
                            Approval by directors- must be a majority of the disinterested
                             A majority of all disinterested directors is the quorum.
                                   Ex: 9 directors, 4 disinterested directors, a quorum would be a
               §8.62(d)             majority of the four (under DE this would not be a quorum). If 3 show
                                    up and 2 voted, it would not be a quorum and would not pass.

                            Disclosure to directors prior to vote- director needs to disclose
                            everything if others do not know. If they know, no need to disclose.

                            Shareholder’s Action- must be a majority of disinterested
                            shareholders entitled to vote for a quorum.
                                   Ex: 50K shares; 10K are disinterested. 6K of 10K are preset at
                                    the meeting. 4K of 6K vote yes on the deal this is not valid
                                    under MBCA. 4K is not a majority of disinterested entitled to

               §8.63        Disclosure to shareholders prior to vote: Director has to make
                            the disclosure with the shareholder vote even if known. This is
                            different than to the board because of confidentiality issues of
                            telling things to the board.

                            Safe Harbor is not available for a shareholder action.
              Contemporaneous Ownership Requirement:
                Under both MBCA §7.41(1) and NY §626- the shareholder must have owned
                 stock when claim arose or the shareholder gets stock by operation of law
                 from someone who owned the stock at the time the claim arose.
                You have to be a shareholder at the beginning of the litigation.
Derivative    MBCA- you have to maintain ownership of the stock throughout the litigation.
              Not clear under NY if you have to maintain ownership.
              NY- Security for Expenses: the NY statute makes the Π put money up in a
              derivative suit so if the corporation loses, it has money to cover expenses. Covers
              reasonable expenses including attorney’s fees. (NY §627).

              The biggest requirement for a DS is a written demand on directors that the directors
              authorize the corporation to sue.
                 Exception- Shareholder need not make a demand if it would be futile. Different
                    approaches to futility.
              Three Approaches:
              1. DE Approach- Π must make a demand that there is reasonable doubt that
                 two things are true:
                   a. The directors are disinterested and independent
                   b. The transaction was not a valid exercise of the BJR.
                      o There must be particularized allegations as to why the demand is
                         excused that create reasonable doubt.
                      o If there is reasonable doubt it will be excused.
Must a                o Hard for Π to allege board misconduct in DE
Shareholder   A director whose independence is compromised by the influence of an interested party cannot exercise
Make a
Demand in a   2. MBCA Approach-
Derivative       o Must make a demand, there is no excuse.
Action?          o Cannot bring DS for 90 days unless bringing suit will cause irreparable
                   harm to the corporation.
                          Harm might mean that SOL will run, or that the directors will take all corp’s

              3. NY Approach-
                 o  If a demand is excused if it would be futile because majority of the board
                    is interested
                 o  Allege with particularity that:
                    1. Director failed to fully inform themselves about the transaction.
                    2. The conduct was so egregious that it is not sound business judgment of
                         the directors.
                 o If a majority of the board is not interested and S/H fail to make a demand,
                    then the demand is gone.
                §7.44(a): decision shall be dismissed on motion of the corporation after it is
Making the      determined by the court that a reasonable inquiry was conducted in good faith.
Decision to
                Who makes the decision?§7.44(b)
Dismiss a       1. A majority of the independent directors present at a meeting if the
Demand             independent directors constitute a quorum; OR

                2. A committed of two or more independent directors appointed by the
                   majority of independent directors at a meting whether or not such
                   independent directors constitute a quorum. (SLC).
                    - The MBCA rejects that structural bias makes it impossible for the tainted directors to
                    appoint an independent SLC.

Special         Special Litigation committee- they are going to decide whether to go forward with a suit via
                an investigation.
Committee       Structural Bias- the board has bias in selecting the SLC.

                What will the court do when the SLC decides not to pursue action?

                The court has the ability to second guess the selection procedures by the SLC

                1. The Δ has the burden to show that they have investigated in good faith.

Judicial        2. Court looks at procedures, methodologies, chosen by the SLC- completeness,
Review of          accuracy etc.
Rejected        Differences Between DE & NY Aproach
                DE- even if the committed passes the procedural inquiry into the investigation, the
                court may apply its own independent business judgment whether the suit will be
                dismissed. DE- SLC is not given the protection of the business judgment rule.
                NY- gives the committee the benefit of the BJR and will not inquire into substantive
                matters. NY only concerned about the adequacy of the investigation.

Demand on       Older statutes require that the Π make demand on shareholders as well as directors.
Shareholders    Modern statutes do not make this requirement.

Right to Jury   If suit is for damages- jury trial.
                If suit is for equity- no jury trial
                                    Cannot dismiss or settle a derivative suit without court
                MBCA §7.45          approval. Court can give notice to shareholders that are affected-
Court                               court can S/H get input on proposed settlement.
Approval of
Settlement or
              If the judgment is won, attorneys will get paid and the rest will come back to the
Recovery in   corporation.
Derivative    Lost
Suits         If the judgment is lost, S/H will have to pay costs of litigation and it is res
              judicata to vindicate the corporation’s claim a second time.

              MBCA §8.57        D & O Insurance
                                Allows corporations to purchase liability insurance for its directors
Insurance                       and officers.

              There are three situations when you look at Indemnification.

              1. Mandatory indemnification §8.52
                  The MBCA says that you have to be wholly successful.
                  Some states have provisions that say that you will be indemnified to the
                    extent that you are successful.
              MBCA- “On the merits or otherwise” allows you to win on the merits or on a
              procedural technicality.

              2. Prohibitive for the Corp to indemnify §8.51(d)
                  MBCA §8.51(d)- the corporation cannot indemnify a director:
                    1. in connection with a case by or in the right of the corporation (derivative
                        suit) except for reasonable expenses incurred if you meet 8.51(a).

Indemnity     3. Permissible for the Corp to Indemnify §8.51(a)
                  This is a catchall possibility that allows every other case that is not
                    mandatory or permissible.
                  §8.51(a): You must show that the director incurred the liability if he was
                    acting in good faith or in the best interest of the corporation.
                                   In a criminal proceeding, the director had no reason to believe
                            that his conduct was unlawful.

              o   If you meet the standard of §8.51(a), a director may be indemnified for
                  expenses for counsel fees and litigation fees, but not settlement fees or

               If you fall within §8.51(a) & (d) you do not have a right to indemnification,
                but you have a right to ask for it.

                                The right to purchase that number of shares of any new issuance
                                of shares that will enable the shareholder to maintain her
                                percentage of ownership.

              MBCA              Shareholders do not have preemptive rights except for to the
              §6.30(a)          extent that the articles provide for them.

Preemptive                      Majority View- if the articles are silent, you do not have
                                preemptive rights.
                                There is no preemptive right if the stock is sold otherwise
              §6.30(b)(3)       than for money.
Ways in which    1. Minority shareholders can seek dissolution on the the basis of oppression
minority            (may not be available in every state).
stockholders     2. Court ordered buy-out.
                     Timing for valuation of a buy-out is when suit is filed.
can deal with    3. Sue for Breach of Fiduciary Duty

                 The reason there is judicial review of salaries is that a corporation gets to deduct
                 salaries from its taxes as a reasonable business expense. Dividends are not

                 Often times, corporations disguise dividends as salaries.

                 To show self-interested dealing unprotected by BJR:
Limitations On   1. The shareholders object salaries.
Salaries         2. Indirect Market Test- the company would have been more profitable had there
                    not been excessive salaries paid.
                         Can be shown by Δ’s lack of expertise or part-time work. Evidence that
                           the business is not run very well.
                 When Δ set their own salaries they will have the burden of proof. Conflict of
                 interest, the BJR goes out the window.

                 The court will order a receiver to oversee the liquidation of assets.

                 The receiver will make sure that the money goes back to the corporation.
                 - this includes excess salary paid to officers/directors
Process of
                  Not all states allow for dissolution due to oppression.
Dissolution       Look to see if the statute allows alternative remedy to dissolution. It may allow buy-out in
                   lieu of dissolution.
                  In some states where the statute does not allow for a buy-out, some states will infer that it
                   is there to prevent dissolution of a corporation.

                 Three types of distributions:

                 1. Dividends (pro rata by share, payable by cash or property). Most close
                    corporations don’t pay dividends. Whether to pay dividends are management
                    decisions decided by the board.
Distributions    2. Repurchase- where the corporation buys back stock from stockholder. It is a
                    payment to the shareholder because they are shareholders.

                 3. Redemption- set up in the articles. It gives the corporation the right to force the
                    shareholder to sell back the stock to the corporation at a set price.

                 Dividends are payments to a stockholder because they are a stockholder.
Dividends        The corporation has to declare a right of dividends and whether they are going to
                 use the company’s money for dividends.
When Can A        1.    MBCA- Modern Approach

Corporation        A distribution is proper so long as the corporation is not insolvent, and the
                    distribution does not render the corporation insolvent.
Declare A          Whether to make a dividend is protected by BJR.
                  2. Traditional Approach- NY, DE, TX
                       Involves three kinds of accounts or funds that the corporation has to keep
                         track of.
                  a. Earned Surplus- comes from business activity that does well in the real world.
                     Also called retained earnings.
                      This is earnings(-)losses(-)distributions already paid.
                      CAN BE USED FOR DISTRIBUTION.
                  b. Stated Capital- relates to making money from selling stock. Relates to the par
                     value of the par issuance.
                      Par stock- minimum issuance price
                      If you have a par issuance, the par value (# of shares of issuance (x) par
                         value) of the issuance must go into stated capital.
                      CAN NEVER BE USED FOR DISTRIBUTION- the theory is that this is a
                         cushion to protect creditors.
                  c. Capital Surplus- relates to making money from selling stock
                      This is the excess over par value of the issuance.
                      CAN BE USED FOR DISTRIBUTIONS- some states impose additional
                        requirements such as telling the stockholders that the dividend is
                        coming from capital surplus.
                                o    When you are getting distribution on capital surplus, all you are getting is a return on
                                     what you paid for the stock.

                  Only when there is a showing of bad faith or oppression.
When Can A
                  If the Π’s only showing is that the corporation has money and won’t pay dividends,
Director Be       they won’t win because of BJR. Must be bad faith involved.
Held Liable for
Making            Π has burden of proving bad faith. BJR will cover decision unless there is
                  proof of illegality, or self dealing.
                  Director may be personally liable for distribution in excess of what was authorized.

                  Preferred Stock- gets paid first.
                  Common Stock- what is left over after the to be distributed after preferred
                  preference was made.
                      Ex: 1o,ooo common stock; 2,000 shares of $2 preferred stock= 4,000.
                      Directors declare a 40,000 dividend. The preferred stock gets paid first 40,000 – 4,000. There is
                       36 thousand left over for the remaining 10,000 shares of common stock.

Different         Preferred Participating Stock- not only gets paid first, but also gets paid again.
Classes of        Participating means that these shares also get paid along with the common shares
                  in everything that is left over after payment of the preference. Not only do your
Stock             preferred stock, but you get pro rata with the common stock.

                  Preferred Cumulative- dividend is adding up year to year. All omitted cumulative
                  dividends must be paid before any dividend is paid on common stock.
                      Stockholder is owed 4 years of a $2 preference. 4 X $2.0o= 8.00 per share. 2000 shares X
                       $8.00= $16,000. 40,o00 of distribution - $16,000= $24,000 for the common stock. They common
                       shareholders are going to get $2.40.
                         10-b 5 CASE
                In a 10(b)(5) case, need to show all of the following:

                1. Materiality – an omitted fact or stated fact is material if there is a substantial
                   likelihood that a “reasonable person” would consider it important in making his

                        Most of the time it is very easy to figure out if something is material
                        BUT in certain situations, we need to apply the Probability-Magnitude
                         balancing test. See Basic, Inc.
                        We only apply this in situations which are very speculative and we are not
                         sure about the outcome yet [potential mergers]
                        Defendant is sometimes protected by the “bespeaks caution doctrine”

                2. Reliance – this is really difficult to determine in a public market transaction
                        Thus, it is determined by the “Fraud-on-the-market theory,” but only with
                         regard to publicly traded companies. Reliance is presumed.
                        When there are face-to-face representations, reliance is much easier to
                         prove and fraud-on-the-mkt theory does not apply] – it becomes a jury
                        Bespeaks Caution Doctrine (safeharbor) misleading statements are not
                         considered to be material if there is enough cautionary language specific to
                         the misleading statements. And that the statements are forward-looking.

                3. Loss Causation – P has the burden of proving that the act (lie) or omission of
                   the defendant caused the loss [caused the P to buy the stock]
                    This is very closely related to Reliance
Elements of a
10b-5 case      4. Scienter – ―knowingly‖ – the statements or omissions must be made in a slimy
                   manner and NOT by accident

                5. Particularity - When alleging fraud in the pleadings, must always do so with
                   particularity (this is to avoid frivolous and cookie-cutter complaints)

                6. 10(b)(5) requires there to be interstate commerce

                10(b)(5) is really a criminal proceeding, thus, the SEC has the power to punish and
                fine D for violations (prosecuted criminally)

                BUT Cts have inferred that there is a private right of action for 10(b)(5) violations as
                To be a Plaintiff under 10(b)(5), the P must be:
                   a. seeking damages (NOT equitable relief)
                   b. Birnbaum rule – must be a buyer OR a seller of securities

                1. 10(b)(5) applies to both Public and ―Close Corp’s.”
                2. applies NOT just to re-purchases but issuances as well
                3. With respect to INSIDERS, 10(b)(5) imposes a duty upon them:
                    they either DISCLOSE the information OR ABSTAIN from buying it for
                     personal benefit.
                   The part of 10(b)(5) that is violated as a result of insider information, are provisions
                  (1) and (3), which talk about fraud, b/c we just expand the meaning of fraud.

                  We learn from this that 10(b)(5) is much BROADER then common law fraud, (b/c
                  insider trading is NOT common law fraud b/c don’t have to disclose and under special
How does 10b-     facts doctrine only have to disclose to S/H’s, and therefore it is limited), rather 10(b)(5)
5 relate to       is applying the federal meaning of fraud, which is much broader then common law
trading?          The federal meaning of fraud adopts the notion of the special facts doctrine, but
                  expands it and applies it even to people who are NOT merely shareholders, but
                  applies it to anyone that buys or sells securities.

                  10b-5 makes a requirement to disclose to fix the misstatement that has been

                           INSIDER TRADING
                  Approach to Common Law Insider Trading
                     1. There is no duty to disclose.
                     2. However, there will be liability if you trade on special facts.
                           a. Kansas Rule- if you have information you hold it as a trustee, it is like
                               property held in trust for the stockholders.
Insider Trading              b. Silence is actionable only if it is a face-to face transaction and you got
                                the information within your capacity as a director of officer.

                             c. Special Facts Doctrine- if the insider seeks out the shareholder for the
                                purpose of buying shares without making disclosure of material facts
                                with in his knowledge and not within the reach of the shareholder.

                  A tippee- is not himself an insider, but to whom an insider consciously gives inside
Tipping           Temporary Insider- people who have a special confidential relationship to conduct
                  the business of the enterprise and are given access to information soley for corporate

                  What do you have to do to be liable as a tippee under 10(b)-5?
                    1. There must be a tipper. Because the tippee’s duty is derivative of the
                        insider’s duty. The tippee’s duty is inherited from the tipper.
                    2. The tippee must trade on the tip. Under 10(b)-5 there must involve a
                        purchase or sale of a security.
                    3. That the tippee knew or should have known that the information was
                        from a breach by the tipper.
Liability of      What do you have to show to be a tipper?
Tippee Under       You have to have relationship of trust or confidence (Chirella criteria).
10b-5              Tipper must gain a personal benefit from tip.
                      o This is formed when tipper gets $-money, reputational benefit, or makes a
                          gift to a family member or friend.

                       o   Objective Inquiry- This requires the courts to focus on objective criteria,
                           they want to know whether the insider receives a direct or indirect personal
                           benefit from the disclosure, such as a pecuniary gain or reputational
                           benefit that will translate into future earnings.
                  Only applies to large corporations- registered under §12 of the ’34 Act.
                  Who is the Plaintiff?
                   The Corp is the plaintiff. This is a cause of action that belongs to the
                    corporation. If the Corp does not assert it, it can be asserted through a derivative
                  Who can be held liable?
                   Only officers, directors, and individuals who own more than 10% of shares.
                  What must you do?
                   You have to buy and sell your own corporation’s stock in less than 6 months.
§16(b) of the     Remedy
’34 Act            If violate 16(b), must pay to the Corp the profit earned – usually a derivative suit
                  Differences between 16(b) and 10(b)-5
                     16(b) is strict liability. The point is that it applies to transactions in which Congress
                      thought that there would be a high possibility of fraud. You do not have to show scienter, it
                      is strict liability.
                     This only applies to reporting corporations- these are big publicly traded corporations
                      (registered under 34 Act).
                     Only addresses insider trading with respect to equity trading. 10(b)-5 applied to any kind
                      of trading.
                     16(b) is very mechanical

                  Look at the level of ownership immediately before the purchase

                  Duty to reasonably investigate the person you are selling the stock to.
                  This is in response to corporate looting.
                  The duty to investigate runs to both the Corporation and Minority Stockholders
                  Damages arise out of tort liability:
Duties of             
                          Value of the corporation’s loss of assets
                          Loss of Going Concern Value
Controlling              Creditor’s claims against the business
stockholders      Direct Suit or Derivative Suit?
when selling          If Derivative- the corporation is going to get the benefit of the recovery and so
                         is the looter because of their ownership interest. This is a problem
their stock           If Direct- the shareholders that brought the suit are only going to get damages
                         that correspond to their personal loss.

                  You can be a controlling stockholder even though you don’t own a majority of
                  the stock.

                  Equal Access Rule- in ―close Corp,‖ the minority S/H’s must be given the same equal
                  opportunity to sell their shares as the majority S/H’s are given. (Donahue)
                      Close corporations are like partnerships. Partners owe each other the
                         utmost duty of good faith and loyalty.
To Whom Can           It is part of the director’s fiduciary duty to give minorities equal access to
A Shareholder         The court in Donahue was worried about oppression of minority S/H.
Sell His Shares   In Partnership- you can always dissociate. It might be wrongful, but you can walk.
In A Close        In Corporation- it is difficult to get Corporate dissolution. You cannot just walk at will.
                       MA court say that because you cannot just walk at will, minority S/H in Close
Corporation?              Corp need this type of protection from the court.
                  Wilkes Rule- the majority S/H can discriminate against the minority S/H if there is
                  a legitimate business reason for doing so. If there is a LBR, the Π can proffer
                  evidence that proves that the Corp can do the same thing with out harming minority.
                 A contract that requires the corporation or majority shareholder of the corporation is
                 obligated to purchase shares in specified situations, at a specified price.

Buy-Sell         ****Watch out for 10(b)-5 situations where there is not disclosure about something
Agreements       that will increase the price of the stock when the shareholder sells it back (like a
                 merger). ***** OR **** Breach of fiduciary duty for failure to disclose material


                 For a fundamental corporate change, you must have shareholder approval.
                     Merger
Types of FCCs        Amendments to articles of incorporation
                     Sale of assets

                 Three Approaches:

                 1. Traditional: 2/3 of the shares entitled to vote. This is a tough standard. (TX)
                     Ex: If you had 12,000 shares—8,000 would have to show up to vote.
                     NEW YORK – if Corp is formed on or before 2/22/99, then need 2/3. BUT if
Shareholder            Corp is formed after 2/22/99, then only need majority
Approval for
                 2. Other states: majority of the shares entitled to vote.
FCC                  Ex: If you have 12,000 shares—6,001 would have to show up to vote.

                 3. MBCA §11.04(e): a majority of the shares present at the meeting. This is a more
                    liberal approach.

                 Three ways to have dissolution:

                 1. Administrative Dissolution- Secretary of State revokes charter for abuse of
                    corporate form. This will happen for things that a corporation fails to do.

                 2. Involuntary Dissolution- someone goes to court to petition for the dissolution of
                    the corporation because it qualifies for judicial dissolution.
                         Can be based on oppression of minority stockholders
                         You have to be careful you must look at the statute to see if the court
                           has power to dissolve because of illegal oppressive or fraudulent acts by
                           the directors. If so, court may have the power to order a buy out of the
                           corporation rather than dissolution.
Dissolution of
                 3. Voluntary Dissolution- MBCA §14.02
a Corporation           The board of directors can propose it and approve it. Then you need
                           stockholder approval. Every stockholder gets notice of the vote. Even
                           non-voting stockholders get notice of the vote.
                        §14.02(e) You need shareholder approval at a meeting at which a quorum
                           consists of a majority is entitled to vote.
                        Who has to approve? It depends on the jurisdiction you are in. In the
                          MBCA all you need is shareholder approval. So you look at the number of
                          shares that actually voted. Once you have a quorum, you need a majority
                          of those that showed up.
                        §14.03(e) all you need is a quorum, and all you need is a majority of those
                          that voted on the deal.
                         Any merger must be approved by the boards of both corporations.

                         The surviving entity succeeds to ALL the ―rights‖ AND ―liabilities‖ of the
                         disappearing Corp.
                         The S/H’s of the disappearing Corp get whatever the merger plan gives them
                         (usually stock or cash buy-out).

                         Things a S/H can do to protect themselves.
                         1. Sue the directors who approved the merger alleging breach of common law or
   protection               statutory duty of care.
   during a              2. Vote against the merger.
                         3. Assert dissenting shareholder’s right of appraisal
                         MBCA § 11.04(e)&(g):

                         The disappearing Corp’s shareholders always must vote (3 different approaches)
                         (b/c it is a fundamental Corp change)
   Voting against
   the merger            11.04(g):
                         BUT if you are a shareholder of the surviving Corp, and as a result of the merger
                         your life as a shareholder does not change, then the shareholder’s do NOT get to
                         vote. (Ex: same # of shares, identical preferences . . .)
                                   Must meet all 4 of the requirements in the statute
Must meet all 4 of the
                         MBCA §13.02(b)(1); DE §262(b)(1)

                         This only applies to close Corp’s or Corp’s with less than 2000 S/H’s
                         Does not apply to publicly traded Corp’s, the value of the stock is well established
                         by the market.

                         DE (§262)- no right of appraisal. But makes an exception for cash mergers.

                         MBCA says this also does not apply to any Corp with more than 2000 S/H’s and
                         the stock is worth $20 mill.- [MBCA 13.02(b)(1)]

   Dissenting                    this is the S/H’s right to force the Corp to buy him out at “fair value.”
                                 This is NOT fair market value b/c there is No market
                         This right applies to Mergers (cash and stock mergers) and the Sale of the Assets
   Right To              (it can, but never really is applied to amendments of the Articles)
   Appraisal For
   Merger Price of       Requirements
                         There are 3 requirements that all must be satisfied for the S/H to get this right:
                         1. S/H must make a written demand to the Corp before the deal goes through
                            stating that you are against the deal and you want to be bought out if the deal
                            goes through
                         2. The S/H must abstain or vote against the deal
                         3. After the vote, S/H must make a formal written demand against the Corp,
                            saying that you have warned them and now you are making the demand.
                                 This must be made w/in 20 days of the deal
                         General Rule = can only make the demand if you are permitted to vote on the deal
                           1. Exception: Short Form Merger – this is 90% owned subsidiary is being merged into a parent. In
                               this case, the S/H do NOT have to vote b/c obviously they will lose, yet, they still have this right of
                     1. Π shows that there was a conflict of interest. The majority shareholder is sticking
                        it to the minority.
Can the court        2. The burden then shifts to the Δ to show Entire Fairness (fair dealing, fair price).
look at alleged       Rejects Legitimate Business Test
breach of
fiduciary duty in   MA:
                     1. The Δ must show that the deal has a legitimate business purpose (from
the context of an       Wilkes).
appraisal            2. Even if LBP is shown, they Δ still has the burden of entire fairness. Entire
proceeding?             fairness is viewed from totality of the circumstances.

                      1. The dissenting shareholder’s right of appraisal is exclusive. S/H cannot
                         challenge corporate action as breach of fiduciary duty unless it is unlawful or

                    Set the appraisal value by any generally accepted standard.
Setting the
appraisal value     If there is a conflict of interest in setting appraisal value, the BJR goes out the window,
                    and the standard is assed by the court with the entire fairness test:
                        3. Δ has the burden of showing fair dealing and fair price.

                               1. Tax consequences (less favorale than a merger) there is taxation on
                                  the asset sale at the corporate level, and there is taxation to the
                                  shareholders when the corporation dissolves and distributes cash sale

                               2. The notion of successor liability (better than merger). Generally,
                                  there is no successor liability. The purchaser can normally specify
                                  which liabilities that it does not specifically assume. Note that in a sale
                                  of assets for stock rather than cash, the purchaser will take the targets
                                  liabilities whether they want to or not.
Differences                    3. Determining who has voting power-
between                               Sale of Assets will have to be approved by at least a majority
                                        of the stockholders because it is a fundamental corporate
merger and                              change
sale of assets                        Merger
                                             DE: the shareholders of both corporations get to vote
                                                because it is a fundamental corporate change for both.

                                                  MBCA- S/H only gets to vote if they own shares in
                                                   disappearing corporation.

                                                  Most states- You have to get the boards of both
                                                   companies to approve it, and only the selling company’s
                                                   S/Hs need to vote.
                 When a company sells all or substantially all of it’s assets, and the assets are
                 liquidated into cash. There is no successor liability.

                 Four Exceptions to non-liability for Sale of Assets
                    1. The purchaser expressly or impliedly agrees to such assumption
                    2. The transaction amounts to a consolidation or merger (de facto merger
                    3. The purchasing corporation is merely a continuation of the selling corporation
                       (mere continuation doctrine).
                    4. The transaction is entered into fraudulently to escape liability for debts.

                       Inadequate Consideration: if the price of the sale was less than the value of
                       consideration of the assets, then there is successor liability.

                           Reason is Predictability: The reason we have the rule about sufficient
Sale of Assets              consideration is that we have to be able to predict the liabilities of the
                            parties involved in the sale of assets. In addition, it would be unfair to
                            creditors to make them go after the money from the sale when the value
                            was not sufficient.

                       De Facto Merger Doctrine- where the purpose and economic reality of the sale of
                       assets is equivalent to those of a merger, the court will treat it as a merger.
                       Includes inadequate consideration for the sale.

                       Mere Continuation Doctrine- the purchaser continued the same enterprise after
                       the sale. Includes both inadequate consideration for assets, and that one or more
                       persons were directors, officers, or stockholders of both corporations.

                        Note: Mere continuation & de facto merger doctrines are not applicable when
                        there was sufficient consideration for the sale of assets.
                    LIMITED PARTNERSHIPS
                  Limited Partnerships have:
                     1. Flow Through Taxation- no entity liability for income tax
                     2. Limited Partners are not liable for the debts of the LP
                     3. LP is an entity.

                  An LP has limited partners and at least one general partner
                      General Partner- jointly & severally liable for LPs obligations.
                      Limited Partner- no liability.

                  How do you avoid personal liability in an LP?
                     Have a corporation be the general partner.

                  What do you give up to have an LP?
Basics of an         Traditionally, limited partners could not engage in control of the business. As
                        soon as the limited partner engages in control of the LP with the GP, the LP is
LP                      liable.
                            o However, see safe harbor in MBCA §303(b). Lists things that do not
                                constitute control.

                  How do you form an LP?
                    There must be a public filing with the state (in GP you don’t have to file
                    anything) that includes the following:
                           1. Name of the LP
                    DE     2. Name & Address of Registered Agent
                           3. Name & Address of each general partner.
                             Requires the same things as DE and requires:
                               1. The address of the office
                               2. Any other matters the general partners determine to include.

Who Decides       The general partner decides.
                  Limited partners have no rights unless the limited partnership agreement allows
What in an LP?    them to vote.

                  A Limited partner will be liable if: (§303(a)).
                     1. LP participates in control of the business; AND
                     2. The 3P who transacted with the limited partner reasonably believed limited
                         partner was a general partner based on the limited partner’s conduct.

How do you
                  SAFE HARBOR (§303(b))
hold a Limited    A limited partner DOES NOT participate in control by doing one or more of the
Partner Liable?   following:

(Safe Harbor             1. Being a contractor, agent, or employee; officer, director, or shareholder of
Provision-RULPA             a LP that is a corporation.
§303)                    2. Consulting and advising a general partnership
                         3. Acting as a surety for the LP or guaranteeing or assuming obligations of
                            the partnerships
                         4. Taking action to pursue a derivative action
                         5. Requesting or attending a meeting of partners
                         6. Proposing, approving, or disapproving by voting on:
                             a. the dissolution, and winding up of LP
                             b. the sale of assets
                             c. incurring indebtedness
                             d. changing the nature of the business
                             e. admission or removal of a limited partner or limited partner
                             f. transaction involving a potential conflict of interest between general
                                 partners and the limited partners.
                             g. Amendment to the partnership agreement or certificate of limited
                             h. Winding up.

                  If the GP is engaged self dealing and breaching fiduciary duty, you can have a
                  derivative suit against the LP.

                  This resembles the role of the limited partner like those of a shareholder in a
                  corporation. Thus, right of derivative suit for S/H.
Suits in An LP    This mirrors trust law. The GP has legal title to the money or property of the LP.
                  There is a duty not to use control over the partnership’s property to the
                  advantage of the corporate director (GP). The directors of a corporation for which a
                  corporation serves as a general partner to an LP owe a duty to both the corporation
                  and the LP.

                  DE: Traditional fiduciary duties among and between partners are defaults that may be
                  modified by LP agreements. This is the reason many chose the LP form in DE.
                      DE§6.11- you can compete, but cannot usurp corporate opportunity.
Contracting           Considerations for usurpation in DE:
around                       a. the opportunity is essential to the corporation is one in which it has an
Fiduciary                       interest or expectancy.
                             b. the corporation is financially able to take advantage of the opportunity
Duties in an LP              c. the party charged with taking the opportunity did so in an official rather
                                than individual capacity.

                  RULPA §504 Distribution-
                  Distribtuion is done pursuant to agreement. However, if there is no agreement,
                  distribution is done in accordance with the value of your contributions.

                  RULPA §503- Profits and Losses
                  Take profits and losses pursuant to agreement. But if no agreement, profits and losses
                  are pursuant to contribution by each partner.

                  RULPA §702- Assignment of Limited Pship Interest
                   Partnership interest is assignable of whole or in part.
How Does An        It does not dissolve partnership
                   Entitle the assignee to become or to exercise any rights of a partner (different
LP Make             from regular partnerships under RUPA §502- which allows transfer only of
Money?              distribution and profits, not management).-
                   An assignment entitles the assignee to receive to the extent assigned, only the
                    distribution to which the assignor would be entitled.

                  Transfer of Ownership Interest to Limited Partnership
                   Under RUPA you have a right to walk, and that triggered a buy-out.
                   RULPA § 602- a general partner may withdrawl at any time (by giving written
                     notice to other LPs and GP), but if it violates the partnership agreement, the LP
                     may recover for damages.
                   RULPA §603- a limited partner may withdrawl upon not less than 6 months
                     prior written notice to each general partner.
                 The GENERAL PARTNER can withdrawl at will away from LP, but the LIMITED
                 PARTNER must give 6 months notice. Why?

                               The GP is the manager. It usually is not a major investor, not a source
                                of capital, but a source of expertise. The LP is a source of capital.
                               RULPA §602 & §603 recognizes that the LPs are the source of the
                                capital, and it is harder to get capital, than it is to get a GP.
                               GPs are more readily available than LPs.

                 RULPA §801 Dissolution

                 A limited partnership is dissolved and affairs shall be wound up when the first of these
                     1. a specified time
                     2. happening of events specified in the agreement
                     3. written consent of all the partners
                     4. judicial decree of dissolution
                     5. the withdrawal of the GP unless,
Dissolution of              a. at the time he walks there is at least one other GP and the written
A Limited                        agreement of the LP allows the limited partnership to continue with that
                                 other GP.
Partnership                           i. Must have multiple GPs
                                     ii. Must have provision in agreement about multiple GP taking

                        Safe Harbor
                        §801(A)(4) A Limited Partner will not dissolve if all of the partners agree
                        in writing to appoint a new GP within 90 days after the withdraw.


                 §103(a): All members of the LLC may enter in to an operating agreement, it does not
                 have to be in writing, to regulate the affairs of the company and conduct of its

                 §103(b): Everything here is a default provision. There is great contractual freedom.

                 §103(b): The operating agreement cannot:
                    1. May not unreasonably restrict a right to information.
                    2. Cannot eliminate the duty of loyalty in §409(b)- However,
Operating                  a. Can identify specific types of activities that do not violate the duty of
Agreement                     loyalty. Ex Ante
                           b. Can ratify by a specified number of percentage of members after full
ULLCA §103                    disclosure. Ex Post
                           c. Can contract around the duty of loyalty ex ante or ex post.
                    3. Cannot unreasonably reduce the duty of care
                    4. Eliminate the obligation of good faith and fair dealing, but the operating
                       agreement may determine the standards of performance.
                  In all states, you must file a document with the secretary of state.
                  DE- file a certificate of formation which includes:
                     1. name of the LLC
                     2. address of registered office.

                  ULLCA §203- Articles of organization:(cannot use DE certificate in a state that has
                  adopted ULLCA).

                     Unlike DE, ULLCA articles or organization must include:
                         1. Name of Company
                         2. Address of initial designated office
Requirements             3. The name and street address of initial agent
for creation of          4. The name and street address of each organizer
an LLC                   5. Whether the company is to be a term, and if so, the term specified.
                         6. Whether the company is to member-managed, or manager-managed, and
                            if so the name and address of each manager
                         7. Whether one or more of the members are to be liable for debts and
                            a. ULLCA 303(c)- can provide for liability of individual members

                  What words must be included in the document?
                      DE 18-102: shall include ―Limited Liability Company or LLC, or L.L.C.‖
                      ULLCA §105: shall include ―limited liability company, or limited company, or
                       L.L.C. LLC or L.C. or LC

                  ULLCA §303(a)- debts, obligations, and liabilities are those of the company, not the
Liability of      individuals. A member or manager is not personally liable regardless of whether it is
Members and       member managed, or manager managed.
Managers               This is like the corporation, not LP.
                       The entity is going to be liable.
                  DE §18-402: If there is no operating agreement, all of the members have
                  management rights in proportion to their ownership interest.

                  ULLCA §404(a): each member has equal rights in the management and conduct of
                  the business. The rights are in prortion to how many members (not ownership like in
Member-           DE).
                       Any matter relating to the business may be decided by a majority of the
Managed                  members. (Not a majority of those that show up)

                  ULLCA §301(a): each member is an agent of the LLC and actions of a member
                  binds the company unless the member had no authority and the person who the
                  member is dealing with had notice of the lack of authority

                      each manager has equal rights in the management of the business. If more
                        than one manager, business decisions are made by majority of managers.

Manager-              a manager holds office upon designation, appointment, election, removal or
Managed                replaced by vote, approval by all of the members.

                  ULLCA §301(b): the manager is the agent of the LLC, and members are not
                  charged with agency authority to bind the LLC.
                   In KS, you can waive fiduciary duties all together (Lynch).


                      §409(b) duty of loyalty runs to the entity and to other members limited to the
                      1. To account for property, profit, or benefit derived by the member in the conduct
                          or winding up of the company’s business or derived from use of the company’s
                          property- including appropriating of company’s opportunity.
                      2. Cannot go into competition with the company, and cannot have interested
                          deals that adverse to the company.
                      3. Cannot compete in the conduct of the business.

                      §409(c): in the conduct of winding up, the member is cannot engage in grossly
                      negligent or reckless conduct, intentional misconduct, or knowing violation of the
Fiduciary             law.
Duties in LLC
                      §409(d): Member shall discharge duties to member-managed business consistent
                      with the obligation of good faith and fair dealing.

                      §103(b): the operating agreement may not eliminate the duty of loyalty, but you
                      can identify specific types of conduct that do not limit the duty of loyalty or
                      care so long as it is not manifestly unreasonable. Cannot unreasonably
                      reduce the duty of care

                   Manager Managed §409(h)

                       A member, who is not a manager owes no duties to the company.

                       A manager is held to the same standards of conduct for members in a member-
                       managed company (above).

                   ULLCA §405- distributions are to be equal among the members.
Distributions in
an LLC             DE §18-503 & 504- distributions are determined by contributions of the members into
                   the firm.

                   DE §18-702- an assignee has no right to participate in the management of the
                   business and affairs of LLC except as provide in a LLC agreement.

Selling an         ULLCA §§502, 503- can transfer distributional interest. This is only a financial
                   interest. It does not entitle the transferee to exercise the rights of a member.
Interest in an
LLC                    §503(a)- operating agreement can allow transfer of member status. However,
                        if the agreement does not provide for it, you can transfer with consent of all the
                    What happens under ULLCA?
                              o   ULLCA provides for dissociation, and allows LLC’s purchase of the
Disassociation in                 dissociating member’s distributional interest at ―Fair Vlaue‖ unless the
an LLC                            operating agreement provides otherwise.

                    ULLCA §601: Events Causing Dissociation:
                            o Walking
                            o An event occurring in the operating agreement
                            o Transfer of all of a member’s distributional interest
                            o The member’s expulsion pursuant to agreement
                            o Unanimous vote of other member
                            o Member’s death

                    ULLCA §602: There is the Power to dissociate but it may be wrongful.

                    ULLCA §603: Effect of Dissociation
                              o   In an at-will company, the company must buy-out the dissociated
                              o   If it is a term company, member will get bought out on the expiration
                                  of the term (similar to RUPA).

                    Once the member gets bought out, their right in management terminates.

                    ULLCA §702: Determining Fair Value of Distributional Interest
                              o   Consider the going-concern value of the company, any agreement
                                  fixing the price, recommendations of appraiser, etc.

                              o   The default valuation standard is fair value (not fair market value)-
                                  because there is no market value. The court is free to determine the fair
                                  value using any method appropriate under the circumstances.

To top