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Close Business Arrangements Outline
a. Martin v. Peyton:
1. Facts: KNK (GP) wanted Peyton to become partners, but instead
the got a loan of securities. Drafted loan agreement which looked
like a partnership. Veto power, right to inspect books, assigned
interest, etc. Plaintiff is creditor of the firm.
1. Was Peyton a partner?
iii. Decisions and Rationale: No. Partnership: An association of two or more
persons to carry on as co-owners a business for profit. Don’t want to
II. The Law of Agency:
i. If everyone did everything for themselves we wouldn’t need agencies.
ii. Companies aren’t people, they’re legal abstraction and they need people to
do things for them.
iii. Agents can affect existing contractual relationships. They can create
problems for the principle. You have to take the good with the bad.
iv. Respondeat superior. If the agent commits a tort the SP is liable.
v. Many legal questions grow out of agency relationship.
1. Principle to Agent.
2. Agent to Third Party.
3. Principle to Third Party through actions of Agent.
vi. Can have sub-agents and sub-sub-agents.
vii. The Restatement of the Law of Agency:
1. Was the agent really acting on the principle’s behalf?
2. Fiduciary Relationships tend to have a vulnerable party.
viii. Fiduciary Relationship: One of trust or confidence. A special relationship
more than just a contract.
ix. An Agent is someone who is controlled by a principle.
x. All Agents are servants or independent contractors.
1. Servant: Someone who acts on someone else’s behalf and who’s
physical conduct is subject to controlled by the principle.
2. Independent Contractor: Someone who contracts with another to
do something, but who’s physical conduct is not subject to control.
May or may not be an agent.
b. Inadvertent Agency Relationships
i. Generally: General Partners are agents of the partnership. They can
create debts for which they are liable.
ii. Simpson v. Ernst & Young:
1. Facts: Simpson was an accountant and the companies merged.
Power to management committee.
2. Issues: When the company fired all of the older partners, was he a
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3. Decision: No. He wasn’t a partner, he was an employee. ADEA
doesn’t apply to partners, so he’s ok.
iii. Gay Jenson Farms Co. v. Cargill Inc.:
1. Facts: Cargill loaned money to Warren, and creditors came after
2. Issue: Is Warren Cargill’s agent?
3. Decision: Yes. Creditor who takes over business becomes the
principle. Cargill controlled the grain and seed.
iv. To avoid an agency relationship
1. Become a full partner and watch the books.
2. Don’t loan a lot of money and ask why the bank wouldn’t loan to
c. Agency Law Basics:
i. The key to agency law is that a principle is liable to third parties on all
contracts and transactions entered into by his agent or subagent as
are within the agent’s power and authority.
1. A master is liable for a servant’s actions including torts.
2. But, a principle is not liable for torts committed by an agent who is
not a servant but rather an independent contractor.
3. A person is not liable for contracts or actions by independent
contractors who are not agents.
ii. Liability comes from these five theories:
1. Principle is liable to the third party because the principle gave the
agent Actual authority to go out on their behalf.
2. There is no actual authority. The principle leads the third party to
believe that the agent has authority. Apparent authority.
3. An Estoppel.
4. Inherent agency power arising out of the agency itself.
d. Actual Authority:
i. How do you create authority? Characterized as an agency or not in the
agreement between parties doesn’t matter.
ii. How do you manifest relationship? Written, spoken or other conduct.
1. There are some special statutes where they have to be in writing.
Like Statute of Frauds. Can’t sell property without a writing.
2. Partners are automatically agents. RUPA §301. In a general
partnership, the general partners are agents.
iii. Third Parties: How do you know that the agent is working for the
1. Transaction costs in figuring it out for yourself.
e. Authority to do what?
i. § 2.01 and 2.02. Key in actual authority is the manifestation from
principle to agent.
ii. §2.02 Scope: (1) Authority to take action designated. Express authority.
Some benefits are lost if you have to spell everything out. “implied” and
“acts necessary or incidental” - gives the agent a lot of slack.
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1. (2) Interpretation is reasonable if it reflects any meaning known
by the agent to be ascribed to the principle. What a reasonable
person in the agents position would think.
2. (3) What a reasonable person would draw from the circumstances.
f. Duties that the Agent takes on when they agree to act as an agent.
i. Duty to act with care and skill
ii. Duty to give information
iii. Duty to account for money
iv. Duty of obedience
v. Duty of loyalty to the principle’s interests
1. Don’t act adversely
2. Don’t compete
g. Duty of Loyalty:
i. Tarnowski v. Resop:
1. Facts: Plaintiff is principle and was damaged by
misrepresentations by his agent who got a secret kickback. Plaintiff
has been made whole and is suing for secret commission. Classic
2. Issue: Can the principle get the secret commission that was given
to the defendant when he lied about the purchase?
3. Decisions and Rationale: Yes. You don’t want the agents to be
able to keep their bribes. Extra-contractual duty is read into the
contract. We want the default rule to be that the agent has to be
h. Apparent Authority:
1. § 2.03 It has the appearance of authority, but in fact there is not
actual authority. Power held by an agent to effect a principle’s
relationship with third parties when the third party reasonably
believes that the agent has the authority which is traceable to the
ii. Lind v. Schenley Industries, Inc.:
1. Facts: VP sends Lind to sales manager, Kaufman, and he tells
Lind he will get a 1% commission with the promotion the VP
2. Issue: Did Kaufman had the authority to give Lind the 1%
3. Decisions and Rationale: Kaufman had no actual authority, but he
did have apparent authority because it was manifested from the
principle to the third party (Lind)
a. Apparent is a manifestation from the principle to the third
party. Herrfeldt had no actual authority to tell Lind to go
see Kaufman about his new job. Herrfeldt had the inherent
power to tell Lind to go see Kaufman and Kaufman has
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b. How did the corporation manifest to Lind that Lind should
listen to Kaufman?
c. The only way to explain Herrfeldt’s power is using inherent
agency power to manifest to Lind that Kaufman was the
person for him to deal with.
d. Apparent authority coming from power of position.
Created by appointment. Apparent authority to do the
things ordinarily done by a person in that position.
i. Not really different at all from inherent agency
ii. Authority is lurking and isn’t on a transactional
iii. Nogales Service Center v. Atlantic Richfield Company: (NCS v.
1. Facts: Agreement made for the building of a service station.
2. Issues: Did the agent have the authority to give a 1 cent per gallon
3. Decision and Rationale: No Apparent authority because there was
no representation by ARCO that Tucker had authority.
a. Inherent authority: he could take the action because its
actions that similar people could take in that situation.
Even though there was no manifestation of authority.
b. Who can best bear the burden? Easier for the principle to
tell people that the agent has no authority.
c. This is the same as apparent authority coming from power
d. Therefore we don’t need inherent authority.
i. § 2.05 Third Restatement: If principle knows that A is negotiating with T
but doesn’t stop it. Principle is liable to T for breaches.
j. Ratification and Adoption:
i. §4.01: Ratification. A person can ratify a prior act done by another with
1. With this you can pick and choose what you like about what they
did. It’s pragmatic. The effect of ratification is to relate back and
pretend like there was authority. You ratify the entirety of what
the agent did.
ii. Connecticut Junior Republic v. Dougherty:
1. Facts: Lawyer changes will and does it wrong.
2. Issues: Is the screw up valid?
3. Decision and Rationale: Testator seemed to act that he was ok
with the will. Therefore the will WAS ok.
iii. Could lead to authority through custom if people think that you have the
k. Undisclosed Principles:
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i. Principle doesn’t have to be identified. It could cause costs to go up.
Avoid costs, community outrage, etc.
ii. When TP has no notice that the agent has a principle.
iii. Principle is liable to the third party under actual authority.
iv. Agents are liable to the third party because they think the agent is the
v. There can be no apparent authority in an undisclosed principle.
l. Unidentified or Partially Disclosed Principle:
i. TP knows there is a principle involved, but doesn’t know who it is.
ii. Principle is still liable
iii. Agent is still liable too.
i. §3.06, 3.10 3.11.
ii. Actual Authority terminated: Death, principle can revoke authority, agent
can renounce authority (no matter if either is a breach of contract).
iii. Termination of actual authority doesn’t happen by itself end apparent
authority. You have to tell the TP’s that the agent is terminated. Be clear
III. General Partnership Agreements
i. Rouse v. Pollard:
1. Facts: Woman gave money to law firm to put in securities,
attorney embezzled the money and she wants to sue the partners.
They argue he wasn’t acting in the general business of the
2. Issues: Partnership liable for partner’s mistake?
3. Decisions and Rationale: No. The risk is left with the third party.
Lawyers protecting lawyers. The business has to be in the same
realm as the business of the partnership.
ii. Roach v. Mead:
1. Facts: Asked for advice from partner on investing money and
lawyer took the money and told him he would pay it back when he
got a windfall. Never did pay it back. Sued for negligence for
failure to disclose conflicting interests, fail to tell him to seek
independent legal advice and inform him of risks and tell him the
loan would not be legally enforceable. Plaintiff has to make it
attributable to the partnership by making it within what the
2. Issues: Partnership liable? Were the risks properly allocated or
was this a windfall for the plaintiff.
3. Decision and Rationale: Yes. The person thought the advice with
the business of the law firm. GP’s were not innocent in this
situation and can be held liable. Be aware of what other partners
do. Reasonable expectations of a third party.
iii. National Biscuit Co. v. Stroud:
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1. Facts: Stroud and Freeman make Stroud’s Food Center. In
February, Stroud said he wouldn’t be responsible for any more
purchases. Stroud was sued by plaintiff for balance of a purchase.
2. Issue: Partners liable?
3. Decisions and Rationale: Yes. Other partner did violate the
agreement, but the third party can still get to both partners. Third
party doesn’t have to seek out any weird side deals.
iv. Smith v. Dixon:
1. Facts: Classic patriarch.
2. Issues: Partnership liable?
3. Decision and Rationale:
a. Apparent authority? Sounds like it, but we’re not sure.
b. Actual authority? Estoppel? Course of dealing? =
v. RUPA: §301, subject to §303A2. File a statement of partnership
authority. There is a limitation on some or all of the partners to enter into
other transactions on behalf of the partnership and in any other matter.
1. It ends up not doing anything. It’s only for real estate. Does it
negate agency? No. Reduces some risk for real estate transfers
b. Estoppel Cases (Inadvertent partners)
i. Smith v. Kelly:
1. Facts: Partnership and this guy wasn’t in it. Later he came back
and asked for percentage of profits.
2. Issues: Was he a partner?
3. Decisions and Rationale: No. The held him out as a partner but he
got the liability and none of the credit. (might be apparent or
estoppel). Worst of both worlds.
ii. Young v. Jones:
1. Facts: Plaintiff is trying to get into Price Waterhouse US’s pocket
even though they dealt with PW Bahamas. PW World is an LLC.
PWUS is a general partnership and Bahamas is under another
branch. Brochure implied they are all together. Plaintiff says
stamp made them invest to their determent,
2. Issues: Partnership by estoppel?
3. Decisions and Rationale: No. No evidence that PWUS had
anything to do with this and no evidence that they relied on it. No
estoppel. Equity still apples.
c. Law Firm Partnerships
i. Greater sense that law has become a business. Becoming much more
bottom line focused. “Finder, binders, minders and grinders”
d. The Need for a Written Agreement
i. Why writing is good:
1. If you put something in paper and memories fade, then you still
have the document.
2. Proof. Think like a trial lawyer
3. It focuses attention on potential trouble spots
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4. IRS lets you have great flexibility in tax benefits for partnerships
5. Death and retirement of partners
6. Lend or give property to the partnership
7. To comply with statute of frauds if property or real estate includes
a term of more than one year.
ii. Why many don’t have agreements:
2. They know what the rules are and know there is something to fall
3. A fear that if you start asking certain questions then the deal will
e. Sharing of Profits and Losses
i. If you have a partnership without an agreement, the state writes one for
you: Uniform Partnership Act.
1. When you work in this area the most important thing to know is
where you don’t like the result under the partnership act. .
ii. Default: §18A of the UPA – repaid his contributions and share equally in
the profits and surplus remaining after all liabilities.
1. Capitol account: Business has assets and claims on those assets.
They might be claimed by creditors = liabilities. Everything not
available for creditors is available to owners. Lunch line where
creditors eat first. Owners are residual takers.
a. Partners have capitol accounts. Total of those add up to
Owner’s equity. (owner’s equity plus Liabilities = Assets)
i. §401 – each partner is deemed to have a capitol
account that is credited with an amount equal to the
value of property that they have contributed and is
credited with your share of profits.
b. §40D- Partners shall contribute the amount necessary to
satisfy liabilities. §18A – must contribute to losses.
c. §40B – If any are insolvent, the other partners should
contribute in portions they share profits.
d. §40F – Any partner shall have the right to enforce the
specifications in the amount he has paid in excess.
e. Taking out of the capital account is a distribution.
f. §18A – Each partner shall be repaid his contributions.
iv. Richert v. Handly:
1. Facts: (See notes for exact numbers) R contributed money and H
did not. H worked and had a negative balance and R had a positive
2. Issues: Doesn’t H owe money to R??
3. Decisions and Rationale: Yes. Contribution of labor is not a
capital contribution. Contribution and profit gives you credit.
Distributions and losses take away money.
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a. UPA is pro-capitalist and anti-worker. Workers want credit
in their capital accounts. You have to ask for it. But that is
compensation for services… and that is taxable.
f. Fiduciary Duties of Partners to Each Other
i. Meinhard v. Salmon:
1. Facts: Joint venture. Salmon rented a hotel, joined by Meinhard.
Salmon paid Meinhard a percentage for the term of the lease.
Gerry approaches Salmon about adding to the lease and he accepts,
but he is not an owner, he is a partner.
2. Issues: To what extent should the equitable interest to be allotted
to the plaintiff?
3. Decisions and Rationale: Salmon incorrectly didn’t go to
Meinhard with the new deal. Fiduciary duty is judge made law in
equity. Moral-sounding. You take on more than what is in the
statute or the contract. You take on a fiduciary relationship.
ii. §404 of RUPA addresses competing
1. Only fiduciary duties partners owe to the partnership are loyalty
and care. Duty to refrain from gross negligence. Duty of loyalty
includes bringing partnership opportunities to the partnership.
Refrain from self-dealing. Refrain from competing.
2. §103A – Partnership agreement overrides the statute, except in a
few areas: can’t cut off information, can’t eliminate duty of
loyalty. You CAN identify specific types or categories of
activities that don’t violate loyalty.
a. We don’t want to use this exception to swallow the
3. If fiduciary duties are founded in consent then you can ground in
what people want. It is more convenient for the court to provide
them. If you believe everything is contractual, then you should be
able to opt out.
4. If you believe there is a social aspect, if you let people opt out of
loyalty, then you shouldn’t be able to waive it. What people do in
business will leak out into society.
g. Partnership Property
i. Two Distinctions:
1. Conceptual distinction – partnership property from related property
interest which is a partner’s interest in partnership
a. Building vs. the interest that a partner has.
2. Factual Distinction – deciding whether a piece of property belongs
to a partner or to a partnership.
a. If A had a building, then is it considered given to
partnership or leased to partnership.
ii. Vlamis v. DeWeese:
1. Facts: Malin bough property and opened a garage. Conveyed ½ to
Deibert who died. Deibert’s daughter, Chlotilda, brought action
for some interest she might have in the property.
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2. Issues: Was the real estate a partnership asset or property of the
3. Decision and Rationale: If it is partnership, when Deibert died,
property went to the other partner and she has no claim. §25D. A
partner’s interest in the partnership is his share of the profits and
surplus, and the same is personal property.
iii. RUPA now: §204D – Property acquired in the name of one or more of the
partners, without an indication in the instrument transferring title to the
property of the person’s capacity as a partner or the existence of a
partnership and without use of partnership assets, is presumed to be a
separate property even if used for partnership purposes.
iv. An interest in a real estate partnership is personal property.
v. UPA §24: Property rights of a partner are:
1. Rights in specific partnership property
2. Interest in partnership
a. §26 tells us that is his share of the profits.
3. Right to participate in the management
a. This is a personal right to him and he cannot bequeath it.
4. Professor thinks right to inspect should be included here. Right to
see books and records.
vi. §27 – Conveyance doesn’t dissolve partnership or let the new party
interfere in management, or let new guy require information, but he does
get the profits to which the old partner would be entitled. Only economic
interest is assignable.
1. §17 You are liable for the debts you find when you come into the
partnership, but only out of partnership property, so you’re not
a. §306B – person admitted is not personally liable for
anything done before their admission.
vii. What is a partnership? This was a big deal in the past. Thing? Entity?
1. Entity: Separate from the persons who make it up. Class is
separate from the individuals
2. Professor says wrong question to ask. “Why do you want to
know?” This changes your analysis.
3. RUPA clearly says in §201 that a partnership is an entity. A
partnership is to be conceived of as a legal person separate and
distinct from the partners.
4. This comes up in criminal law. Do you go after the partnership or
h. Claims of Creditors
i. Can creditors get into partnership property? You don’t have possession of
the partnership property. That property is limited to use by the
partnership. It is not yours. They can get your interest in the partnership
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1. “Charging order” §504 RUPA You have to have a judgment.
“may charge the transferable interest of the judgment debtor’ to
satisfy the judgment”. Instead of discharging to the partner,
discharge to the creditor. Like garnishing wages.
ii. What can a partnership creditor get? Partnership assets plus, as long as
it’s not an LLP, general partnership assets.
1. What if claims exceed assets? 40H UPA- “Jingle rule” -
partnership creditors have priority on partnership property and
separate creditors have priority on partner assets.
2. Not partnership creditors have priority on partnership property and
it is share and share alike for all creditors to the partner assets.
i. Partnership Accounting: pg 89
i. Balance sheet v. income statement
1. Balance sheet is a snap shot of the financial health of the company
at a certain moment.
2. Income statement captures the results of business over a period of
ii. Figures on the balance sheet generally are historical figures, cost figures.
1. Books may have nothing to do with fair market value
iii. If you were considering buying this business: (Ex in book)
1. Equity is $160,000 that looks like what it is worth.
2. How much income do they make every year? $60,000. If you
paid $300,000 for this business and make $60,000 a year, you
make 20%. Valuing businesses you look at balance sheet and
3. You don’t end with a balance sheet. You want to know how much
this company is worth.
iv. For income tax purposes – income flows through to the partners. Each
partner will not necessarily have a distribution of cash to match the capital
account increase. You can but a hurt on your partners if you let them take
income, but no cash.
j. Partner Dissolution
1. Things get nasty in the end. What for us is a case, is trauma for
them. Don’t assume you understand what’s going on with them.
2. Learn from others mistakes when you litigate. Judgment comes
from experience, experience comes from bad judgment.
1. Dissolution: §29 the change in the relation of the partners caused
by any partner ceasing to be a partner in the carrying on, as
distinguished from the winding up of the business.
a. § 41 If you bring somebody in you have dissolved the
partnership and now you have a new, reconstituted one.
b. Dissolution is the beginning of the end.
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c. § 30 – on dissolution, the partnership is not terminated.
This isn’t death. The partnership continues until the
winding up is completed.
d. § 38 – they can wind it up by liquidating. When
dissolution is caused in any way, each partner may marshal
the assets and sell them to pay debts and distribute out to
the partners. Upon doing that you have terminated the
iii. Causes of Dissolution: §31
1. Without violating the agreement
a. Term is up or undertaking is over
b. When there is no term and it is a partnership at will.
c. By the will of all of the partners, even if there is a term.
d. By expulsion
2. In contravention of the agreement:
a. They have the power to get out, but they don’t have the
right. If someone wants out we let them out. By the
express will of any partner at any time.
3. Unlawful to carry on as a partnership
4. Upon death
6. Decree of court under § 32
iv. Dissolution by Decree of Court: §32
1. Unsound mind
2. incapable of performing partnership
3. Guilty of conduct that effects prejudicially the carrying on of
4. Other circumstances that make dissolution equitable.
v. Differences between 31 and 32
1. § 31 is more objective.
2. § 32 is softer.
vi. Collins v. Lewis:
1. Facts: Term partnership to build cafeteria is over budget. Collins
is putting up the money and Lewis is doing the work. Jury found
that Collins was not being reasonable. Collins leaving would
breech the contract.
2. Issues: Is this ok? Who is at fault?
3. Decisions and Rationale: Lewis met his obligation. Attorney
didn’t give them a back door out of the agreement, or a cap on the
funds, or a limit on control.
vii. Cauble v. Handler:
1. Facts: Handler in 50% partnership with Cauble. Cauble died and
his wife tried to get money. This was dissolution and she could
have elected to force the partnership to liquidate. She allowed the
business to continue under the assumption she would get profits.
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3. Decisions and Rationale: § 42 – she can compel liquidation or let
them continue. If she does liquidation then it is the value of
whenever they sell that she gets. If she says they continue, she
gets the value of the partnership when he dies and she gets the
choice of interest or profits until the other guy settles up. This is a
reason to push them to do something. They’re using her money to
run the business otherwise.
a. She was given a percentage of the book value and she
didn’t think it was a fair way of measuring.
viii. Adams v. Jarvis.
1. Facts: Doctor withdrew which caused a dissolution. He signed an
agreement that he wouldn’t get a share of accounts receivable and
now he is trying to change the deal. He says there was dissolution
when he withdrew.
2. Issues: Is he right? Can he get a share of the accounts receivable.
3. Decisions and Rationale: He’s right, there is a dissolution, not a
withdrawal. He can force liquidation unless there is an agreement
otherwise, but here he agreed that he wouldn’t. If other partners
want to go on then it is a new partnership.
i. The statutes give you the rules unless you change them. Remember that!!
ii. Same is true here in the end stage.
iii. Things to address in an exit strategy:
2. Bad conduct by a partner
iv. Once you identify them, you have to figure out what will happen in those
1. Upon death should the decedent’s estate have an obligation to be
bought out. How much should get paid? How do you determine
2. Should withdrawal be treated the same way as death? Should there
be a penalty.
3. Expulsion get FMV?
4. Where does the money come from to buy someone out? Death is
5. You’re inclined to make them fair since you don’t know which
side you’ll be on.
6. No guarantee that someone isn’t going to breach the agreement
anyway. You can’t make people stay partner if they want out.
v. Meehan v. Shaugnessy:
1. Facts: Lawyers in a partnership tried to snake clients away by
using company letterhead when they decided they were going to
leave. Partnership didn’t know there was a competition going on
for clients because they denied they were leaving.
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2. Issues: Breach?
3. Decision and Rationale: Yes, this was a fiduciary duty breach.
There were provisions about leaving, which included notice and
you could only take clients if the clients agreed and the partnership
got a cut. You have to pay for everything you take. Will have to
pay 89.2% of profits from those cases he took (lower court has to
determine if conduct was fair, with burden on leaving partner)
vi. Gelder Medical Group v. Webber:
1. Facts: Partner hired and they kick him out, which they can do, but
there is a restrictive covenant that he can’t practice within a 30
mile radius for 5 years
2. Issue: Is this ok?
3. Decisions: Yes, this was found to be reasonable. If they are
reasonable in scope and not harmful to public or others, then they
will be enforced. This is a contract issue about who they can
vii. Bohatch v. Butler & Binion:
1. Facts: Woman thinks something is bad and she brings it up. They
get rid of her.
2. Issues: Is anything wrong with this?
3. Decisions and Rationale: There is no duty to remain a partner.
Refuse to create an exception to the at-will nature of partnership –
but this doesn’t obviate the ethical duties of lawyers. Apparently
you can come forward, but you have to be right, because they can
viii. RUPA: 145-146
1. Just because members come and go doesn’t mean that the entity
goes away. The venture goes on.
IV. Limited Liability Partnership
i. LLP Created when lawyers urge lawmakers to make a less severe
ii. §306C: An obligation of a partnership incurred while the partnership is a
limited liability partnership is solely the obligation of the partnership.
1. General Partnership that has elected to act as a limited liability
2. This is to protect the innocent partners.
iii. How do you become one?
1. §1101 and 1102. If you want to be one, do a filing and tell the
world. 1202, in all of your communications use the abbreviations
2. Laypeople may still not have any idea what that means.
iv. All of the assets of the PARTNERSHIP are still available. It just puts up a
firewall to the partners.
v. This is the effective way for the partnership to put this out to the world.
ix. Different kinds of shields or firebreaks
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1. Narrow shield: Protect partners from torts. (this was what Texas
started with) Partnership has to buy a liability program of
2. Full shield: No liability at all.
x. The court will, sometimes allow the creditor to “pierce” the LLP and hold
the partners liable.
1. Principles of law and equity govern. Show it is equitable.
V. Limited Partnerships
i. Why not just have general partnership? Why have Limited partnerships?
1. Big problem is personal liability.
2. Can you have an arrangement where someone doesn’t have to put
their assets on the line.
a. No liability = no control.
b. Person is willing to give up control to get out of liability
beyond what they contribute.
ii. LP’s are partnership in which you have one or more general partners and
one or more general partners.
1. Gp’s are agents dealing with the tp’s.
iii. Gp’s are treated the same. Liability to tp’s and management rights.
iv. Lp’s are the people who put the money in. Generally, not always. They
don’t usually have management rights or any liability to tp’s beyond what
they have contributed.
1. They may have liability if they breach the trade off for no
liability… if they take some control. Act like a gp get treated like
a. Historically true… recently has changed radically.
v. Relationship between gps and lps is set out in an agreement. Mostly
vi. Limited Partnership governed by the statute, except when written.
vii. ULPA – 1916, revised in 1976 and 1985. Changed again last year. Most
recent is the ULPA of 2001.
1. §1105 says in any case not provided for in this act, the provisions
of UPA apply. UPA and ULPA are linked statutes.
2. In ULPA 2001 it stands alone – no linkage. Mean to be self
i. You have to file a document.
ii. § 201 – (RULPA unless specified) in order to form LP, a CLP must me
executed and filed with secretary of state.
iii. Put in the filing:
1. Name of partnership – shall contain Limited Partnership. Some
states let you use LP.
2. Address of the office and name and address of agent for service of
3. Name and business address of each general partner.
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a. Limited partners don’t have to have their information in
4. The latest date upon which they are to dissolve. Years, or
5. Any other matters they want to include. Often less is more here.
iv. § 201B - it is formed at the time of the filing if there has been substantial
v. §304 – Defective Formation Problem:
1. Person who makes a contribution and erroneously in good fait
thinks they are a limited partner is not a general partner and is not
bound by the obligations if, on finding out about mistake:
a. Causes CLP to be filed
b. Or withdraws from participation by filing a withdrawal.
2. Except is liable to any tp who transacts business before person
withdraws or files the right certificate, but only if tp believed in
good faith they were a gp, and not an lp.
a. Based on expectation of liability.
b. Doesn’t seem to contemplate the tort creditor.
vi. Holzman v. DeEscamilla:
1. Facts: Lps contributed to the decision making process and gave
advice that was sometimes followed. Fired the gp, wrote checks
and didn’t let gp do anything without consent.
2. Issues: GP or LP?
3. Decision and Rationale: GP. § 7 of the old ULPA. Lp doesn’t
become liable as a gp unless he takes part in the control. He is
vii. Generally: As an LP you can sit there and suck up the loss and not
exercise control or you can act, become a gp and then you are liable.
1. RULPA – decided that § 7 was too severe.
2. §303 RULPA – Limited partner not liable unless he is a gp or he
has control. If he does have control, he’s only liable to those tp’s
that believe based on lp’s conduct that he is a gp.
a. Can you really disavow being a gp if you ACT like a gp?
That is the issue.
3. § 303 B gives safe harbors. LP isn’t participating in control under
mean of A, by doing a certain list of things.
a. Limited partners are trying to have limited liability, even if
they participate in management.
b. The demarcation between lp and gp is not standing up.
4. UPLA of 2001 New § 303 – obligation of a gp is not the liability
of an lp, even if lp participates in control.
a. Goodbye to section 7.
b. Only difference is now that there is no liability as a limited
partner, but not quid pro quo with not having control.
c. The Big Picture:
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i. Ideally this is the perfect relationship where you assume an active partner
and passive partners.
ii. How much participation can the limited partner have before he is deemed
to have control and if he does have control is he liable to all or just the
ones who believe he is.
1. Statute has evolved here.
2. §303B says here are some safe harbors where you can have control
a. And even if you participate you are only liable to those
who thought you were a general partner.
iii. From the standpoint of general partner: He is willing to be liable.
1. What if GP doesn’t like that deal.
2. Can he form a corporation and make the corporation be the gp?
a. Creditor – who can he get to besides assets of corp? Can’t
get A as limited partner unless he does something wrong.
A is really running the show.
b. §303B7 - ? – because A is distinct from the A corp, that is
not control and therefore A is not liable. Can only get
empty shell corporation.
c. §404C – New Limited Partnership Act – general
partnership is not liable. You can have nobody personally
3. These still exist in family type situations. Or real estate or venture
capital. With strong leadership.
i. §6.22E – unless otherwise provided a shareholders is not personally liable
of the acts of a corporation, unless it was his own conduct
ii. A corporation is a separate legal entity.
1. Must do a filing
2. Capable of perpetual existence
3. Centralized management structure
4. Provides limited liability.
5. Has shareholders who’s functions are few. Mostly just to provide
capital. Also to vote on who the directors are on the BOD.
Shareholders vote on the “big changes” – amend articles, mergers,
asset sales, that’s it.
6. Directors are responsible for overseeing the direction of corporate
affairs. Overseers or stewards. Not agents. They elect officers.
7. Officers hire employees.
8. The corporation is the principle and the officers and employee are
ii. You can have a single person corporation.
iii. This is how you collect money and keep people out of the business – a
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i. Where to Incorporate
1. You can form a corporation anywhere, no matter where you are
going to conduct business. – Foreign corporation and qualify to do
business in state.
2. Normally between state you’re in and Delaware. Delaware is
friendly to the people forming. They do have a franchise tax.
ii. How to Incorporate
1. Basic group:
a. Shareholders – BOD – Officers.
b. Shareholders can be by majority or super majority if you
want to protect a 49% shareholder.
2. You have to file. § 2.03 of the model act. Some states require
local filing too.
a. Articles of incorporation
b. You have to let the public know that the equity participants
are no personally liable.
iii. Modern trend is to require very little in the filing.
a. Corporate name under §401, corp, inc, co, ltd, etc.
i. Number of shares authorized to issue.
1. Some states charge based on this
ii. Street addy of registered office. Lawyer or
corporation that serves this function
iii. Name of registered agent.
2. Don’t need to state:
a. Purpose – you are presumed in §301 to have lawful
i. Most don’t so they aren’t ultra vires down the road
b. Duration - §302 assumes perpetual.
c. Powers you have. Corp has the same powers as an
3. Can Add:
a. §202B anything else you want to include.
b. Who rules. Majoritar rule in these.
4. No minimum level of money is required in the Model act.
a. Some states required minimum capital – but there was
no rule about how long it has to stay there. Some states
still have it.
5. No published notice in the model act.
a. Some states still require it. Sometimes just in legal
b. Just communicate it in the name.
ii. Bylaws are required.
1. Constitution – statute – articles – bylaws – resolutions.
2. This is the document the client will actually have. Client can
simply look up the answers to many things.
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iii. Organizational meeting.
1. Adopt bylaws, appoint directors, etc.
2. People don’t have to play act so they write up resolutions in
lieu of a meeting.
3. § 2.05 B – don’t need a meeting.
a. §7.04 for Shareholders. Has to be unanimous.
4. Adopt Minute Book – to keep the records and minutes of the
5. Adopt bylaws
6. Adopt form of stock certificate
7. Adopt corporate seal.
8. Elect officers.
9. Determine salary of officers
10. Officers had to buy shares.
11. Pick a bank. – who can withdrawal funds and with how many
iv. Other things clients wont know:
1. Tax id number – get accountant involved.
a. Set up formalized system of books.
b. Sloppy books are the easiest way to pierce the corporate
2. Licenses, insurance, id numbers
3. How to sign documents.
a. Best way is the corporate name, by Jane Doe, It’s
President. <<sign>>. If you don’t specify it looks like
you have two obligors.
4. Cover letter to client saying what you have done, and tell them
if you are done. Tell them you are no longer doing anything
for you so they can’t say that they thought you were doing
a. Be clear what you are and are not doing.
v. It’s pretty easy to form one- that is the danger.
c. Ultra Vires.
1. This used to be a huge deal in law.
2. “Beyond power” – beyond your purposes or that you are doing
something for which you do not have the power.
3. History: Way to dilute the power of the corporation in the past.
4. Legislature got involved for § 3.04
ii. 711 Kings Highway Corp. v. F.I.M.’s Marine Repair Service Inc.:
1. Facts: 25 year lease with a security deposit of $5000 for a movie
theater, but they were into marine repair services.
2. Issue: Ultra Vires?
3. Decision and Rationale: Yes. Defendant was the lessor who
wanted out of the lease for a better offer. This let them out of the
deal, but we no longer let people out this easily.
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iii. Should the shareholder be able to object since they don’t support this new
1. § 3.04 B1 – Can be challenged by shareholder, a win is not
2. § 3.04 C – Shareholder- the court may enjoin or set aside the act, if
equitable and if all affected persons are parties to the proceeding
and may aware damages for loss suffered by the corp. or another
party because of enjoining the unauthorized act.
iv. Tests that we have now that ultra vires is mostly gone:
1. Reasonableness test. – the charitable donations have to be
reasonable in amount
2. Breach of fiduciary duty. – the loan would be a breach of duty to
the shareholders. Duty of loyalty to shareholder is breached.
Those who gave the loan breached their duty of care.
a. Shareholders are the ones who can complain.
3. Waste – you can’t waste corporate dollars.
i. Shareholder is not liable, except for their own personal wrongdoings. It
had nothing to do with corporate.
1. Shareholders are liable when:
a. Also liable for activities prior to incorporation
b. Defective formation
c. Post-formation and post-proper formation, court disregards
corporate-ness and impose personal liability.
ii. Promoters do whatever is necessary to form a business.
1. Finding people with money, finding supplies, finding a lease,
locating customers, etc.
2. Common to enter contracts on behalf of the future corporations.
iii. Premature commencement of Business
1. Promoters are fiduciaries to one another and to the corporation and
perhaps to shareholders, creditors, etc.
iv. Stanley J. How & Assoc., Inc v. Boss:
1. Facts: How is an architect that signed a contract on behalf of the
corporations. Boss signed for himself as an agent of the company
and they came after boss when the building wasn’t finished.
2. Issues: Who is liable? Promoter or the corporation?
3. Decision and Rationale: Boss is liable. Promoters are liable for
corporations. Signature line was ambigious, but probably the
corporation was liable in the future.
v. Quaker Hill Inc v. Parr: 278. Personal liability doesn’t arise from a
situation where the contract contemplated the corporation even though it
wasn’t formed yet.
vi. General rule is that the promoter is liable on contracts made on behalf of
the company. When the corporation is formed is the corporation is only
liable if it expressly or impliedly adopt the contract. It is easy to
impliedly adopt it. It is not automatic.
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1. Promoter remains liable unless the creditor enters a novation.
Where creditor can strike a deal to release the promoter and agree
to accept the corporation.
e. Defective Incorporation:
i. Here someone goofs up in forming the corporation. Either it isn’t formed
at all or it isn’t formed at the time that it is planned on.
ii. Robertson v. Levy:
1. Facts: Began operating business before incorporation was issued.
Robertson sued Levy for payment of lease.
2. Issues: Is Levy personally liable?
3. Decisions and Rationale: Yes. Robertson thought he was working
with a corporation, not a person. Levy is personally liable. We do
away with the de facto and de jure corporation distinctions. Its not
hard to form a corp, so you suffer the consequences if you screw
iii. Cantor v. Sunshine Greenery, Inc: Notes case 287. Mailbox-like rule.
They didn’t know that the incorporation wasn’t filed. We are more
inclided to protect the guy who didn’t know that he wasn’t incorporated
iv. Cranson v. International Business Machines Corp:
1. Facts: IBM thought they were dealing with a corporation when
they made a deal with Cranson. Cranson claimed defective
incorporation because the lawyer messed up.
2. Issues: Who is liable?
3. Decision and Rationale: IMB can’t hold him liable because they
though they were dealing with a corporation ever though they
a. Remember this has nothing to do with tort creditors,
because that has less to do with expectations
v. The Model Act Applied
1. §2.03A – unless you set a delayed date, corporation starts when the
articles are filed (there used to be a gap between filing and issuing
of a certificate.)
2. §2.04 – All purporting that they are a corporation when they know
there wasn’t one are jointly and severable liable.
f. Piercing the Corporate Veil:
1. Even if you successfully form a corporation, a court may over look
that fact and hold you liable.
2. These cases are the exception, not the rule. But you can’t tell your
client with certainty that they won’t be held liable.
3. Can try several layers of piercing if things are set up more
ii. Bartle v. Home Owners Corp.:
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1. Facts: Plaintiff is trying to pierce the veil of Westerlea to get to
Home Owners which is owned by veterans. Westerlea is a wholly
owned subsidiary of Home Owners – to protect from liability.
2. Issues: Can they pierce the veil?
3. Decision and Rationale: No. “piercing the corporate veil is
invoked to prevent fraud or to achieve equity.” There was no
fraud, misrepresentation or illegality here.
iii. DeWitt Truck Brokers v. W. Ray Flemming Fruit Co.:
1. Facts: Fruit company enters into contracts with growers to
distribute fruit. He was paying himself before the transportation
people got paid. District court pierced..
2. Issues: Can they pierce the veil?
3. Decision and Rationale: Yes. Creditors are supposed to be paid
before the shareholders. Shareholders eat last but they get
everything that is left. Here he ate first.
iv. §6.40 C- no distribution to shareholders if:
1. If the debts won’t be able to be paid afterward.
2. If Corp’s total assets will be less than their liabilities.
v. Baatz v. Arrow Bar:
1. Facts: Baatz were injured by a drunken driver. Suing the Aaron
Bar for whom three people are shareholders. The bar company
was formed and two SH personally guaranteed $150,000. Plaintiff
says they are liable because they guaranteed the money. No dram
2. Issues: Can they pierce the corporate veil?
3. Decision and Rationale: No. Undercapitalization: It has to be
adequate for the operation of the business. This business has only
$5000. These are involuntary creditors minding their own
vi. Radaszewski v. Telecom Corp.
1. Facts: Tort victim sues and tries to pierce the veil because
subsidiary Contrux, run by Telecom is poorly funded. “anemic
2. Issues: Piercing?
3. Decision and Rationale: No. They had insurance, they weren’t
acting recklessly. Thinly capitalized, but insured. They can’t help
that the insurance company is bankrupt.
vii. History and thoughts:
1. Everything comes down to: “on THESE facts, can we hold THESE
shareholders liable to THIS creditor” – looking for a bright line
2. Tort Creditors and Contract creditor distinctions?
a. Tort – sympathetic
b. Contract – self-help, not sympathetic.
c. Contract creditors get piercing more – against what you
would think. Perhaps because contract creditors will be
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smaller than HUGE tort creditors. Company got into a
i. Maybe there is self help, and you do investigate,
then there is more of a likelihood of fraud.
d. Undercapitalization is a factor more in contracts than torts
viii. Walkovszky v. Carlton:
1. Facts: Man had a bunch of different corporations and put 2 cabs in
2. Issues: Pierce veil?
3. Decision and Rationale: Case is dismissed for failure to state a
cause. These corporations are operated as a single entity, unity and
enterprise with regards to everything. “Theory of enterprise
g. The Piercing in Federal/State Relations
i. United States v. Bestfoods:
1. Facts: “Comprehensive Environmental Response, Compensation
and Liability Act” CERCLA Case. Company changes hands a lot
and pollution is found. Aerojet got wholly owner subsidiary
Cardova who created a wholly owned subsidiary in Michigan to
operate this plant in Michigan. Kept distance between land and
company. Under superfund you can only get “owners and
2. Issues: Who is liable?
3. Decisions and Rationale: They use the common definition of
operator and look at who has subsidiary control. Question is not if
you control the subsidiary, but if you control the operations
ii. Stark v. Flemming: Woman put her farm in a corporation, started paying
herself a salary. She wanted old age benefits. You can’t organize a
corporation to obtain social security.
h. “Reverse” Piercing
i. Cargill, Inc. v. Hedge:
1. Facts: Mrs. Hedge owns Hedge Farms and the creditor is Cargill.
Cargill thought they were doing business with Mr. Hedge.
Judgment against her and she tried to reclaim her interest in the
property as a homestead exemption.
2. Issues: Do the owners-occupants of a farm, by placing their land
in a family farm corporation, lost their homestead exception from
3. Decision and Rationale: No. Mr. Hedge wants the corporate veil
pierced. Insider reverse Piercing. If you disregard the
corporation, then the Hedges own the farm and there is a
homestead exception. (for 80 acres). Doesn’t matter if farm is still
in the family farm corp. Seems unfair to creditors.
ii. Outside Reverse Piercing:
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1. You can have a creditor of a shareholder say that they want what
SH has, which isn’t much, but the corporation does! The
shareholder does own stock. The creditor can go against the SH’s
iii. Pepper v. Litton:
1. Facts: Litton wipes out Dixie’s assets by saying he needs his
salary. Pepper wants the pay that Litton got put back in the put.
He wants the shareholder to be subordinated to the creditor.
2. Issues: Can the bankruptcy court disallow either as a secured or as
a general or insecured claim a judgment obtained by the dominant
and controlling stockholder of the bankrupt corporation on alleged
3. Decision and Rationale: There has to be a planned and fraudulent
scheme and the court thinks there is here. Test: whether or not
under all the circumstances the transaction carries the earmarks of
an arm’s length bargain. Use rigorous scrutiny. The burden is on
the insider to prove good faith (to advance the company’s interest,
not your own) and inherent fairness from the viewpoint of the
corporation and those interested therein.
a. This is equitable subordination. (not a pierce)
i. Management and Control of Corporation
1. Focus: who makes certain decisions and allocation of power
between shareholders, board of directors and officers and the
exercise of that power.
2. The basic model: Revised Model Business Corporation Act.
3. Who makes what decisions?
a. GP- a model of pure democracy.
b. SH – don’t do much – provide the capitol. They elect and
remove representatives and get to vote on fundamental
c. BOD – in the model these are diligent stewards of the
interest of SH, diligently making policy, directing affairs of
corporation, electing the officers that do the day to day.
Directors are no agent.
ii. The Board of Directors and Shareholders:
1. § 8.01 – you have to have a board!
2. § 7.28 A – Directors are elected by a plurality of the shares entitled
to vote at a meeting with a quorum.
3. § 8.03 C – Directors are elected at the first annual meeting and
every meeting thereafter. Every year.
4. § 8.08 A – Shareholders can remove directors with or without
cause, unless articles say otherwise.
5. § 8.10 A – Vacancy including increase in number of members,
(board has some power here to make more).
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6. § 8.08 A – Removal can be done by the shareholders. Grounds are
with or without cause. Common law rule is only with cause.
iii. Fundamental changes:
1. Board is generally running the show except:
a. §10.03 – Amending the articles of incorporation.
Shareholders have to sign off.
b. §11.04 – Board and Shareholders have to approve merger.
c. Sell out. Everyone has to approve it.
d. Disolving. §12.02 and §14.02. Everyone has to approve it.
1. § 8.40 – BOD pick the officers.
2. § 8.43 B – Can be removed any time with or without cause by
3. The shareholders have to input on officers, except through the
v. Approving Distributions:
1. Distributions are: Deciding dividends, repurchasing stock
2. § 6.40 – Board of Directors. Shareholders have no say on what
1. § 10.20 A – Shareholders can amend or repeal bylaws.
2. § 10.20 B – Board can amend or repeal bylaws, unless the articles
reserve the power to the shareholders.
a. B2 – Unless the shareholders have provided that the BOD
cannot amend. Keeps it from being a game.
vii. Fiduciary Duties:
1. Unless it is to be decided by the board, there may be some
limitations on how they exercise their lawful powers.
2. Hanging over the statutes are judicially imposed fiduciary duties.
1. In the past this was seen more in the sense of big public businesses
as good ways to get money from passive shareholders, so there was
a strict division between each level (SH, BOD and Officers).
2. This doesn’t fit as well for the small business that decides to
ix. McQuade v. Stoneham:
1. Facts: Stoneham, McQuade and McGraw own shares in the
Giants. They agree to make themselves as directors and officers
and decide how much they get paid. McQuade falls out and gets
voted off and he sues
2. Issues: Can you have a contract that keeps the BOD from doing
3. Decision and Rationale: No. The contract is illegal. You can’t
keep the BOD from doing their job which is picking officers. This
is public policy.
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a. There is a no trespassing sign between the Shareholders
and the BOD.
x. Clark v. Dodge: notes 467. 75/25 shareholders and 25% had a secret
formula so he got to be a manager. Here the contract is given credit
because there are no other minority shareholders, everyone who cared
signed the contract. Softens the no trespassing sign.
xi. Long Park v. Trenton-New Brunswick Theatres Co.: Notes 468. You
can’t strip the BOD of all of their power even if all of the shareholders all
agree. More power was stripped her than in Clark.
xii. Galler v. Galler:
1. Facts: Two brothers are partners – the Gallers. And they each fear
that the other won’t take care of his wife. They sell 6 shares each
to Rosenberg, but one brother buys them all back. The other’s
wife is asserting a right to half of the,
3. Decision and Rationale: The agreement has some problems.
Shareholders decides dividends (this is the BOD’s job) and salary
decusions (BOD’s job). The rule the appellant court uses is: you
can trespass if there is no objecting minority interest and no public
xiii. § 7.32 of the Model Act
1. Many legislature have adopted provisions specifically for close
businesses. Give them a flexible statutory model, but no one uses
a. Lawyers don’t like the new statute and they want
something under the old model that lets them do what they
want. They don’t want a close corporation statute scheme.
2. This is your best friend if you represent shareholders in close
3. § 8.01 – Need a board, and they do everything unless you have a
4. This is a purely contractual approach.
5. Everything you can do an agreement:
a. Eliminate BOD.
b. Restrict BOD power.
c. Govern distributions
d. Decide directors and officers and how picked and removed,
Voting power divisions
e. Compensation, bonuses
f. Shareholders can do BOD powers.
h. Anything else you want as long as you don’t violate public
policy. No one gets hurt.
6. All the shareholders have to sign this! Same as McQuade! - not
everyone signed in McQuade.
7. Valid for 10 years but you can say otherwise.
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xiv. Zion v. Kurtz:
1. Facts: Two stockholders. Had a shareholder agreement shifted
some power from the BOD to a few shareholders. Two classes of
stock. Board did something without asking Zion and he got upset.
Arguing that this agreement isn’t permissible under the Delaware
corporation laws, but they didn’t make the proper organization.
3. Decision and Rationale: When all stockholders of a Delaware
corporation agree that, except as specified in their agreement, no
business or activities of the corporation shall be conducted without
the consent of a minority stockholder, the agreement is, as between
the original parties to it, enforceable even though all formal steps
required by the statute have not been taken. State is trying to
accommodate them… but you have to do it right. Still let them
4. Dissent: Everything works better if you follow the rules. Don’t let
everything slide though.
j. Financial Matters: Distributions
i. Donahue v. Rodd Electrotype:
1. Facts: Two men work for subsidiary of a national typewriter
company and they have stock and pass it on through their families.
One party finds out the other sold back their stock and wants the
same right to sell at a really high price. She says you cannot make
a distribution non-pro-rata. She deserves the same offer.
a. Defendant concedes that the stock purchase was in good
faith and inherent fairness. They’re setting a high standard
2. Issues: Can you do this distribution or is it a breech of financial
3. Decision and Rationale: Court wants a higher standard for the
duty. It is a partnership-like duty – Trust, confidence and absolute
loyalty. Utmost good faith and loyalty. They seem to be
differentiate from good faith and fairness… and making it a higher
standard. Can’t let minority shareholder be totally driven out
because there is no market for their shares.
a. There needs to be a higher standard of loyalty because there
is the possibility of moving money to the control faction
and not the minority faction.
ii. Nixon v. Blackwell: Notes 451
1. “It would do violence to normal corporate practice and our
corporation law to fashion an ad hoc ruling which would result in a
court-imposed stockholder buy-out for which the parties had not
2. Garden variety duty of loyalty question
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a. Can’t totally disallow the deals. Burden is on shareholder
to show good faith. That it was a good deal. That it was
procedurally fair and economically substantively fair.
b. Duty is also on controlling shareholders. Don’t confuse
controlling shareholder with a majority shareholder.
Majority SH is a controlling SH usually, but not the
k. Shareholder Voting and Agreements:
i. Salgo v. Matthews:
1. Facts: Beneficial interest in stock but not on record as holders as
stock. Record owner went bankrupt and gave a proxy to the
interest holders. Company records didn’t show them as the owner.
Ignored their votes. Sought injunction to get their votes in.
2. Issues: Votes of proxies valid?
3. Decision and Rationale: Not in this case. The record holder of the
stock, no matter who has beneficial interest, is the only one who
can vote. Since they had the proxy their votes were valid.
Injunction was incorrect because plaintiff should have gone to
court seeking a record change – quo warranto (what is your
authority). Remedy is wrong because we don’t want court enjoinin
corporate elections. Whatever the election outcome is ok until
challenge of election inspector quo warranto.
l. Model Act
i. Record owner is the person who’s name shows up on the books on a
ii. § 6.25B – most companies have certificated shares – stock certificate. At
a minimum each share certificate has to have, company and name of who
it is issued to.
1. The model act, the corporation can only deal with the record owner
iii. § 7.07A – Record Date. You pick a date that you look at the records and
see who the owners are. Look at books of that date and give notice of
meeting. You don’t have to track down beneficial owners.
1. § 7.05 Defendant – if you don’t pick a date it is the day before
notice is delivered.
iv. § 6.40 B – Record shareholders for who gets dividend. If they don’t fix
the record date, it is the date of dividend distribution.
v. § 7.05 – Requirements for notice. Notify record shareholders of date time
and place of meeting no fewer than 10 or no more than 60 days ahead.
1. B. Notice of annual meeting need not include a purpose.
2. C. Notice of special meeting has to give purpose.
vi. § 7.06 – You can waive notice. Signed in writing.
1. B. If you show up and participate = waiver.
vii. § 7.04 – As long as everyone agrees, you don’t need a meeting if the
action is taken by all of the shareholders.
1. In Delaware you can do this on a majority. Other people won’t
even know what happened.
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viii. Small corp. with 40-50 SH. BOD wants proxies. SH can show up and
vote themselves, but they don’t have to, they can have another person as
their proxy. § 7.22
ix. § 7.25 A – Quorum has to be present. Can’t do business without it.
Unless articles provide otherwise, it’s a majority of the votes entitled to be
cast. Watch for low quorum requirements.
1. § 7.25 B What if people leave because they don’t like how things
are going? Can’t lose quorum. If you show up, and leave the
shares are still considered there.
x. § 7.25 C – Voting rules depends on what you’re voting on. If quorum –
action on a matter other than electing directors – action is approved if
votes cases in favor outnumber votes against. You don’t count
abstentions. Unless higher vote is specified in the act or articles.
1. § 7. 28 A – Directors are elected by a plurality of votes.
m. Cumulative v. Straight Voting
i. In straight voting you can never have the minority shareholder voting in
1. In voting for 3 spots with 100 shareholders you will have 300 votes
ii. Cumulative voting: Statutory possibility, some states are opt in and some
are opt out.
1. § 7.28 B – Model act is opt in.
2. § 7.23 C – Mathematical exercise. Multiply number of votes they
can cast by the number of directors and can spread the votes in any
way they want.
a. Shares voting total/(# of Directors + 1) +1 = number of
shares needed to elect one director.
3. § 7.28 D – required to give notice to use cumulative voting.
iii. Humphrys v. Winous Co.:
1. Facts: Divisions of classes of directors. A and B. Cumulative
voting but someone didn’t like it. Majority shareholder didn’t like
it. They made staggered voting – one director per class per year in
3 year terms so cumulative voting didn’t matter anymore.
2. Issues: What legal protection are there of cumulative voting.
3. Decision and Rationale: None for this. There is no guarantee that
you get representation on the board and the statute doesn’t protect
you here. Ohio later fixed this problem so they couldn’t negate
iv. § 8.06 Provides for classified board. Staggered terms for directors.
1. Changed 3 years ago so you can’t hurt the minority. You can only
classify if you have 9 or more directors. So then 3 in each class at
v. § 8.08 C – Removal: Can’t be removed if the votes to elect him are voted
against his removal.
vi. § 8.03 B – Number of directors can be changed by amending the bylaws
or the articles.
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1. But this is just a majority vote, so the minority can lose out here.
vii. § 8.05 C – A decrease in the number doesn’t shorten an elected director’s
1. Why not just not opt for cumulative voting. It is opt in, so you
don’t opt in.
viii. § 10.03 – Changes need to be adopted by the board – which is controlled
by the majority.
1. § 10.03 E – ? Voting rules.
2. In the past if cumulative was struck down the minority share
holder had the option to leave and be paid fair market value for the
shares, but this was struck down.
ix. § 8.25 Use of an executive committee could help the majority shareholder
to get rid of cumulative voting. Majority creates an executive committee
with only his people and the committee exercises the power of the board
1. § 8.25 – E lists things they can’t do.
2. Used to delegate responsibility.
x. Other reasons to have a classified board:
1. Anti-takeover device: new owner can’t throw the whole board out
2. Keep experienced people on the board.
n. Ringling Bros.-Barnum & Bailey Combined Shows v. Ringling:
i. Facts: Shareholder agreement is breached in a complicated case. She’s
upset because she wants her agreement enforced. She’s looking more to
preserving the agreement for the future than worrying about the current
election because she still has 4 of 7 directors in this election.
ii. Issues: What is the remedy for breaking a shareholder agreement.
iii. Decision and Rationale: The Supreme court doesn’t count the proxy vote
and causes only 6 directors to be elected and the 7th will be elected next
year Specific enforcement would have been best for the aggrieved party,
but it is not done.
o. Ways for Shareholders to Collectively act
i. Proxies - § 7.22
1. C. Valid for 11 months, but you can make it longer.
a. So you can vote in one annual meeting and not two.
2. D. Revocable. Unless it says it is irrevocable and is coupled with
a. “Coupled with an interest” – not the same as legal
i. Proxy to future owner of stock or bank makes sense
because they have the same interests as the stock
ii. Creditor or employee of corporation have different
interests than the shareholders.
b. Haft v. Haft: Notes 516 Proxy to CEO. The person
writing this opinion doesn’t like the idea of this. The vote
doesn’t line up with the residual risk bearer here.
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3. You can’t buy and sell
4. Schreiber v. Carney: Asked for money to change his mind. The
court said the loan was vote-buying, however the court didn’t
strike it down here. Both sides were getting what they wanted
here. Majority of disinterested stockholders were ok with this.
Court looked for intrinsic fairness.
ii. Voting Trusts - § 7.30
1. In Ringling they argued this trust was a pooling agreement – court
didn’t buy it.
2. Ownership (title) of the stock is conveyed to a trustee. Trustee
becomes record holder and then can vote.
3. You have to deliver the voting trust agreement to the corporation
so everyone can see it.
4. Only for 10 years but you can renew it.
5. Why this instead of a pooling agreement
a. Howard Hughes case – creditors might say that they will
make a loan, and we get to vote. We want to be sure the
company is run in a way that guarantees that the loan gets
b. Maybe there are several children getting parents stock. Set
up a voting trust where only one of them votes (or two) but
they all keep their ownership. Less dissention about
management. Let it run for a few years to see if child in
charge does well.
iii. Pooling agreement – Ringling - § 7.31
1. Not very heavily regulated.
2. Any 2 or more shareholders, you don’t need all of them.
3. A. Two or more can sign an agreement. Not subject to §7.30. Not
a voting trust.
4. B. Specific enforcement. Damages are not likely to be an
appropriate remedy. This prevents Ringling from happening again.
Often party seeking remedy will ask for legal fees as well.
iv. Use shareholder control agreement § 7.32
v. Classes of stock – Lehrman - § 6.01
vi. Lehrman v. Cohen:
1. Facts: Owners had class AC and AL stock and AD stock was
created, which could vote, but no dividends or distribution. AD
owner was elected director and then president. Committee looks
into it and decides that one of the 3 votes for him stinks.
2. Issues: Legality of stock having voting power but no dividend or
liquidation rights except repayment of par value and an alleged
unlawful delegation of directorial duties and powers.
3. Decision and Rationale: When officers are directors there is
inherent self-dealing. Creation of AD share was not a voting trust
because no one transferred their interest, they just diminished their
interests. Directors may not delegate their duty to manage the
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corporate enterprise. But there is no conflict with that principle
where, as here, the delegation of duty, if any, is made not by the
directors but by stockholder action under § 141A via the certificate
of incorporation. This is a good way to deal with the 50/50
problem, and no one is delegating their duties.
p. Getting Out:
i. Corporation – economic right and control can be transferred.
1. This is much more stable than the partnership. More deliberative
hierarchical way of doing things.
ii. Ling and Co. v. Trinity Savings and Loan Association:
1. Facts: Bowman secures loan with Ling stock and defaults. Stock
has notice that it can’t be transferred without approval of NYSE
and before offer of sale was made to other holders of stock.
2. Issues: Does this meet the conspicuousness requirement of Texas
3. Decision and Rationale No. This wasn’t conspicuousness enough.
Should have been in capital letters. “SEE RESTRICTIVE
LEGEND ON REVERSE SIDE”. Remanded to lower court to see
if they had actual notice.
a. Reasonableness. We don’t want to force people to own by
not transferring. Restraints on alienation are bad.
iii. Model Act:
1. § 6.27 – Restrictions on Transfer or Registration of Shares and
2. If you are lawyering and you don’t design an exit game, then
i. You either will have corporate paralysis and deadlock or someone will use
majority rule against someone else.
1. Paralysis: 50/50 and you need 51% or 80/20 and you need 90%
a. Can have this at the shareholder or board level, or both.
2. Oppression: 51/49 with no protections.
ii. Gearing v. Kelly:
1. Facts: Election for filling of a spot on the board. Mrs. Meacham
stays away to prevent a quorum. If she does go there will be 3-1
against her on the board, instead of 2-1 now, and they would have
a quorum without her. They have the election anyway.
2. Issues: Can you complain about the result when you don’t show
up and prevent quorum? Can you avoid a trap they’re setting for
3. Decisions and Rationale: No. You can’t complain about a lack of
quorum when it is your fault. Because she didn’t attend you can’t
invoke the equitable powers of the court.
iii. In Re Radom & Neidorff, Inc:
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1. Facts: Sibling directors can’t get along. He tries to dissolve while
she refuses to sign his salary checks. Buyouts didn’t work. She
says he’s enriched himself at the company’s expense.
2. Issues: Can he dissolver the corporation?
3. Decision and Rationale: Dismissed. Kicked it back to them to
work it out.
a. Write down a number on paper and hand it to her and say
“you decide… I’ll buy from you at this amount or you sell
to me at this amount.”
b. Could dissolution itself here be a means of oppression?
Sell off assents and the brother buys it up right away for a
c. Courts don’t like to dissolve corporations.
iv. In re Hedberg- Freidmeim & Co. Notes. 552. Built a partition in the
office. Dissolution because they “are so deadlocked that the corporation’s
business cannot longer be conducted with advantage to its shareholders.
r. Modern Remedies for Oppression:
i. Davis v. Sheerin:
1. Facts: Davis didn’t let minority shareholder see books or get
dividends, and used corporate money for legal fees.
2. Issues: Oppression?
3. Decision and Rationale: Yes, decreed a buyout. Look at case by
case basis and don’t opt for easy or hard exit.
a. §14.32 Codifies what we see here.
i. Means that when you ask for dissolution you are
letting them take the option of buying you out.
ii. What is Oppression?
1. Depends on the facts
2. Acts serve to frustrate the legitimate expectations of minority
shareholders or whether the acts are of such severity as to warrant
the requested relief.
3. Donahue v. Rodd Electrotype: pg 560 Tied to violation of
fiduciary duty of good faith and fair dealing imposed.
iii. The Model Act:
1. Doesn’t leave it to equity.
3. Recently bolstered it and added § 14.34.
a. A. In a shareholder dissolution, the corporation may elect
or if it fails to elect, one or more shareholders may elect to
buy the shares from the petitioning shareholders.
b. Dissolution means you grant the other side an option to buy
your stock at fair value and forgo dissolution.
c. Dangling dissolution over the majority shareholders head is
far less threatening.
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i. It gives minorities a way out, but its more the
ii. This is saying we can solve this through dollars,
which is kind of what he is asking for anyway.
4. REMEMBER: These rules create a lot of opportunities for
iv. Abreu v. Unica Industry Sales, Inc:
1. Facts: Provisional director is the remedy here appointed by court
to break deadlocks. Provisional director is plaintiff’s son-in-law.
a. Son-in-law a bad appointment?
b. Did the trial court err in refusing to remove the provisional
director for allegedly failing to carry out instructions and
c. Properly award attorney fees to plaintiff separate from
d. Injunction protecting company product formulas
e. Were damages properly awarded?
3. Decision and Rationale: Son-in-law was find because he knoew
what was going on, but he is scolded for doing things outside of
breaking deadlock – attorney fees.
s. Summary thoughts on Corporate governance:
i. The standard model is majority rule.
1. That rule remains intact.
2. Along side that rule there is a heightened likelihood that courts will
offer dissolution, exit option or may mandate a buyout of one party
or another or come up with some other sort of relief (provisional
3. Legislative relief. Can change rules.
ii. Shareholders themselves call each other partners – they think of
themselves as partners. – but why then are they in corporations. Limited
Liability and Stability!
1. Corporations are more enduring.
2. But control is a perk of the majority shareholder – there is a cost to
excessive minority control.
t. Action by Directors and Officers
i. How do boards act?
1. § 8.01 – the Board has to act. Best decision comes out of group
2. § 8.21 – they don’t have to physically assemble, unless the articles
require it. It has to be unanimous.
a. It gives each member the ability to call a meeting to have a
robust discussion if they aren’t sure.
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3. § 8.20B – can have a meeting through any means of
communication where they can all hear each other simultaneously.
i.e. conference call.
4. § 8.25 – lets you set up committee to do the work. Executive
committee, audit committee, etc.
ii. How do officers act?
1. Directors are not agents – agents are subject to the control of a
principle. Shareholders can’t control directors
2. Directors are not agents – Officers are agents to the corporation.
iii. Black v. Harrison Home Co.:
1. Facts: Mom tried to sell house, but the sale has to be conveyed by
the president and secretary and everyone else has died. She
changes her mind 12 days later claiming no authority.
2. Issues: Did she have authority to sell the property?
3. Decision and Rationale: No.
a. Expressed authority? No, because the secretary was dead.
b. Implied authority? Look at past.
c. Inherent authority? What can the president do AS the
president. No authority here according to court. This isn’t
normally what the company does.
d. Apparent authority? No evidence that the tp had reason to
believe she had authority.
e. Ratification? She revoked the contract.
iv. Mickshaw v. Coca Cola Bottling Co: Notes 572. President of bottling
plant said that they would pay the difference between government wages
in army and amount they would make at the plant. Three Directors:
Feinberg authorized publication Older Ackerman died. Younger took no
action. Is this enough for board action? None of them disavowed. Jury
rewarded money to plaintiff.
v. Lee v. Jenkins Bros.:
1. Facts: Pension was guaranteed by an officer of the company.
3. Decision and Rationale: Apparent authority by power of position–
Manifestation by the principle to the third party by putting this guy
in the position of president and endowing him with certain powers.
Ordinary vs. extraordinary duties that president can do.
a. Apparent authority is a question of fact, not a question of
law, so it needs to be remanded to find the answer.
vi. In the Matter of Drive-in Dev. Corp.:
1. Facts: Loan – we never guaranteed it because the board never
authorized it. They had a resolution and a certified copy.
2. Issues: What circumstances bind a corporation to a guaranty of the
obligations of a related corporation when it is contended that the
corporate officer who executed the guaranty has no authority to do
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3. Decision and Rationale: The doubt about the resolutions didn’t
matter when the secretary certified the copy. There was apparent
authority in the secretary.
i. LLC’s are a platypus. A little like a partnership and a little like a corporation.
1. Biggest complaint about being a GP is that you have personal
2. GP’s don’t get taxed but do have personal liability
a. Corps are taxed but don’t have personal liability.
ii. What they do:
1. They let people manage without personal liability. Directly and
immediately participate in the management of the business.
2. You can have a model like a corporation or a GP.
a. Member managed – GP modeled.
b. Manager managed – elect managers and they manage – like
b. Contractual Aspects of Limited Liability Companies
i. Elf Atochem North American, Inc. v. Jaffari and Malek LLC:
1. Facts: Elf has money and Malek has intellectual property. 70/30 in
Malek LLC. IRS cannot tax at the LLC level. Members get taxed, but
the LLC is taxed like a partnership. Arbitration clause, but Malek LLC
didn’t sign it; Elf and Malek Inc did. Claim fiduciary breech to person
and to LLC>
3. Decision and Rationale: SC said case didn’t belong there. The
contract they signed dictated what they did in the company. LLC has
very few requirements and is very big on freedom of contract.
c. The Basics of an LLC:
i. LLC Act – adopted by a handful of states.
ii. § 404 – Management - Two models
1. A – Member managed – very much like partnership
a. Very egalitarian – very flat.
b. They can appoint a management committee.
c. Each member has equal rights and majority rules. One person
2. B – Manager Managed
a. Each manager has equal rights
iii. § 301– Agency implications of management structure– Goes with 404
1. A1 – each member is an agent
2. B – Manager managed – member is not an agent.
a. Each manager is an agent – ordinary course of business of
iv. § 303 – Limited liability – liability is solely the debts of the company.
1. Member or manager is not liable solely by reason of being a manager.
2. Don’t confuse this with problems if you committed a tort.
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3. Same result as with shareholders.
4. B. Piercing problem.
a. The failure of an LLC to observe formalities or requirements in
how it manages is not a ground for piercing. Informality alone
v. Poore v. Fox Hollow Enterprises:
1. Facts: Owner of an LLC wants to represent the LLC in court.
2. Issues: Is an LLC more like a partnership or a corporation when they
want to go into court?
3. Decision: LLC is more like a corporation than a partnership, so it
needs a lawyer. Creature of contract, separate legal entity, interest of
members is like that of shareholders, members have no interest in
specific assets. Limited liability.
vi. Exchange Point LLC v. SEC: Notes 204 Privacy issues for customers. A
customer is a person which is an individual or partnership of 5 or fewer.
SMLLC doesn’t get privacy.
vii. Meyer v. Oklahoma Alcoholic Beverage Laws Enforcement Commission:
Notes 204. Corporation can’t have liquor license. Partnership can if all
partners were residents. What about LLC’s? Purpose of the statute was
personal responsibility. LLC’s don’t allow this. So an LLC can’t get a liquor
viii. § 201 – Organization. You have to file something. Articles of organizations
have to be filed.
ix. § 203 – Articles of Organization (instead of articles of incorporation)
1. The name (§ 105) – LLC or something like it has to be in it.
2. The address
3. If they are a term company – if you don’t specify it is at will and is
like a partnership.
4. Pick your management structure. To let people know about your
5. C. Operating agreement controls as to internal matters.
x. § 103 A – Operating agreement doesn’t have to be in writing.
xi. Not a lot of uniformity in these acts.
1. There is no mention of profits and losses. (often contributions)
xii. Voting – based on contributions.
xiii. § 502 – Transfers –Here a transferee if and to the extent that the transferor
gives him the right depending on the operating agreement. If the operating
agreement says you can’t, he’s not entitled to be a member, have effect or see
1. This effects your transfer options and exit options. You might not be
able to give management rights.
xiv. Piercing: Will judges be inclined to apply corporate law piercing rules? Not
much out there on this.
xv. Fiduciary Duties: Still very up in the air.
xvi. Cautions about LLCs:
1. There are recent so there is very little case law.
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2. There is complexity because they are found on freedom of contract, so
you had better have a contract. Without one you don’t have a clear
3. Lawyers are inexperienced with LLC’s.
4. Taxed like partnership
a. States are different on how they tax them.
xvii. LLC, LLP, LLLP: Why do we have them now and why didn’t we have them
1. You can’t understand the difference until you understand income
taxation of all of them.
d. Federal Income Taxation:
1. Partnership thought to be non-taxpaying entities. Corporations were
thought to be taxpaying entities.
2. S Election – elect to be treated as an S corporation. They don’t pay
income tax. Income of the S Corp, flows through to A and B. Net
result shareholders of S Corp are treated like partners, only a single tax
a. Limits. Can have up to 75 shareholders, can’t be non-resident
alien, can only have a single class of stock.
ii. Business is Losing money. In a partnership, losses flow through too, but not
in corporations. In corporations, losses sit in the corporation.
iii. Tax law drives you in profit and loss mode:
1. Partnership is better because of flow through of profit and loss.
2. Corporation is better because of limited liability.
3. Can you get best of both worlds? Make each partner a corp.
a. IRS came up with 4 characteristics to tell if an entity is a
partnership or corporation: If you flunk 2 then you’re a
i. Limited liability? If yes, corporate.
ii. Centralized management? If yes, corporation.
iii. Continuity of life? Sturdy, if yes, corporate.
iv. Freedom in transfer of interest? If yes, corporate.
b. LLC’s are designed to flunk 2 of the 4 points. No freely
transferable interest and no continuity of life.
i. You can get freedom from liability and flow through
mechanics of taxes.
c. When the IRS recognized it, every state wanted one.
d. Jan 1, 1997: IRS rolled over – said they could decide from
themselves how they would be taxed.
4. Look back:
a. Why are principles liable for Agents? Benefit and control.
b. LP’s the partner can’t have control.
i. §303 – limited partners aren’t liable if they don’t have
control. They are liable to those who think they are
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c. Corps, BOD and Officers control, but SH’s do too, but they’re
not liable. Founded on the fiction that it will be a big
corporation, even though in reality you can have a one person
d. LLC gets it all: Control, no liability and flow through taxes.
e. LLP because GP’s want protection. You can control without
f. LLLP when the LP’s want protection. You can control without
g. Sole Proprietor? Liability? Form a single member LLC.
h. End game: no one needs to have liability!!
VIII. Wrapping up the Course
a. Professional Responsibility:
i. It matters very much who you represent and who thinks you represent
ii. Make a fee letter that explains what you’re doing and how much and when
you get paid. Identify rights and possible conflicts and note that they all
can get separate counsel.
b. “Legal advice” v. “business/life advice”
i. What you can give your client advice about varies based on your
relationship with them and what is expected if you (be sure not to
c. Which CBA do you use?
i. What are the factors that should be considered:
1. Non-Tax Concerns:
a. Potential liability concerns
b. Control / Management / Voting
c. Size (?) / $$ needed
d. Ease of formation
e. Conversion ease
i. Easier to move into corporate form than out of it.
f. Simple or complex rules / clear rules
g. Duration/ Continuity/ Exit
j. Distribution of profits and losses
2. Tax concerns
SP GP LP Corp LLC
Control You’re the One person, Only gp’s. By shares Manager – like
(default rule) boss one vote. = Not lp’s corporate
Member – like
Can you Yes. Can Yes. Can Yes. We can Yes.
change the take control contract. make
management? away from shareholder
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Liability? Liable Liable GP liable No liability. No liability.
But third But third
parties know parties know
this and will this and will
contract around contract around
3rd parties get 3rd parties get
Continuity At will At will. You Very stable. More corporate.
and die or People leaving Members
Durability of someone has no effect. leaving doesn’t
Existence leaves, its An entity. So matter. An
over. RUPA durable, its entity.
is more like hard to get out.
Size Smaller Smaller. Do Smaller. Ok to have
you want Same as gp. 1000
partners and Could be small
Status Sole Partner Partner President? President?
Ease of Easy Easy. A Need to file More File articles of
formation handshake. certificate. complicated. organization,
No writing LP in name. Articles of operating
or filing. Let public incorporation, agreement.
(should draft know. bylaws,
a partnership governance
e. The Factors:
1. This one is a non-issue. You can tailor it how you want it. So it’s not
a big issue.
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1. Creditors contract around the rule in the parts where we have no
2. We can buy liability insurance. Protect ourselves.
3. You can go to your creditor and seek exculpation – pay higher rate for
no personal liability.
4. All things being equal you’ll prefer something with a limited aspect to
it – LLP, LLLP, Corp, LLC.
a. There is some difference here… GP’s are more liable.
iii. What is the difference between an LLC – member managed, taxed as a
partnership and an LLP.
1. Voting could be different – shareholder v. per person
2. Stability and duration – LLC more stable. More in old act.
3. Maybe not much difference
1. Right to dissolve v. power to dissolve
a. Partners always can break it up.
2. GP can’t assign control interest.
3. LLC is the same as gp
4. Corp – stock is transfer of everything
a. Is this a dispositive difference?
b. It is legally transferable, but who would want to buy a minority
position? Often there are restrictions on transfers.
5. Unclear which is best here.
1. When you’re one person ANY of them work well
2. When you’re many, Corp is easier.
1. Do you want to be a GP or a president of a corp?
vii. What matters?
1. Liability seems like one of the only ones that really matters?
2. Keep in mind that there are tax issues.
a. Generally flow through is better than non-flow through.
IX. Review Class
a. LLC vs. LLP:
i. LLP comes with RUPA and UPA and whatever you can contract around
1. Can’t contract apparent authority away from the partners.
2. Lots of decisions on the books
3. More personal service ventures - traditionally
1. Doesn’t have a lot of uniformity.
2. Management here can change – lots of models
3. No decisions on the books – very new.
4. Traditionally more industrial.
5. Strong philosophy of freedom of contract. ??
6. More like corporate model.
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iii. LLLP – everyone is limited. Even the gp’s are lps.
iv. Unless there is an agreement, a partnership will go through dissolution if a
1. Under RUPA more of a notion of a partnership as an enduring