Operating Agreement Llc Calif by nuv15430

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									Business Organizations
 2010-2009 Lectures


      PARTNERSHIPS,
      CORPORATIONS
     AND THE VARIANTS



    PROF. BRUCE MCCANN

        LECTURE 14
          REVIEW
               What are we talking about?

 Two Umbrella Types of Entities:
   Limited personal liability for owners
       Limited partnership
       Limited Liability Company
       Corporation

     No protection from personal liability:
       General partnership
       Sole proprietorship
                    Some Basic Terms

 Partnership
    Two or more persons (and by “person” we also mean other entities)
    Share power
    Share profits
    Share losses
    Partnership reports its profits and losses to the partners who each
     take their percentage on their own tax return (pass through)
    Partnership itself is not taxed
    Each partner personally liable
    Dissolves on death of partner or other
    No formal registration required with State
                         Corporation

 One or more owners
 No personal liability (assuming formalities met)
 Registered with Secretary of State
 Managed by its Board of Directors who are elected by
  the owners
 Board names officers who run day-to-day operations
 Separate existence from its owners (perpetual life)
    Pays taxes
    Distributes profits via dividends to owners
 AGENCY
PRINCIPALS AND AGENTS
                                                  AGENCY

 Elements of relationship:


 1. Principal manifests assent that agent act for
    principal and be subject to principal’s control

 2. Agent manifests consent or otherwise consents to
    act.




Lec. 2, pp. 31-74   Corporations   Prof. McCann
                           Scope of Authority of Agent
                                 Derived From
 Actual authority: that authority which principal has
    expressly granted to the agent or which agent
    reasonably believes was granted.

 Apparent authority: that authority which principal
    has informed third party has been vested in agent

 Implied authority: that authority reasonably
    required to accomplish the objectives of the agency


Lec. 2, pp. 31-74   Corporations   Prof. McCann
                                        Corp Code 313

 Subject to the provisions of subdivision (a) of Section
    208, any note, mortgage, evidence of indebtedness,
    contract, share certificate, initial transaction statement
    or written statement, conveyance, or other instrument in
    writing, and any assignment or endorsement thereof,
    executed or entered into between any corporation and
    any other person, when signed by the chairman of the
    board, the president or any vice president and the
    secretary, any assistant secretary, the chief financial
    officer or any assistant treasurer of such corporation, is
    not invalidated as to the corporation by any lack of
    authority of the signing officers in the absence of actual
    knowledge on the part of the other person that the
    signing officers had no authority to execute the same.

Lec. 2, pp. 31-74   Corporations   Prof. McCann
             Importance of Disclosure of Agency


 Example of Disclosed Principal:


 Alpha Corporation, Inc.

 By: ____________________
    George Smith, Pres.
 Other party aware of agency and principal.
 Principal alone is liable to third party.

Lec. 2, pp. 31-74   Corporations   Prof. McCann
              FYI : California and Agent Liability

 … California courts generally do not employ the Restatement
  analysis, but appear to hold the agent liable, regardless of his
  or her disclosure of the fact of agency, unless the name of the
  principal is disclosed so as to make it appear on the face of the
  instrument that the parties intended to bind the principal and
  not the agent. (See Patterson v. John P. Mills Organization
  (1928) 203 C. 419, 421, Gambord Meat Co. v. Corbari (1952)
  109 C.A.2d 161, 162, 240 P.2d 342 [agent liable on personal
  check sent in payment of principal's obligation];
 And a disclosure only of the principal's trade name is not a
  sufficient disclosure of identity to relieve the agent of personal
  liability. (W.W. Leasing Unlimited v. Commercial Standard
  Title Ins. Co. (1983) 149 C.A.3d 792, 796.)




Lec. 3, pp. 75-119   Corporations   Prof. McCann
                        Partially Disclosed Agency

 Aka “unidentified principal” in Restate. 3rd Agency
 Real estate agent represents anonymous purchaser.


 Why? To keep secret identity of purchaser because
  of publicity or in order to maintain negotiation
  advantage.
 Other party is aware of agency but not identity of
  principal.

 Both agent and principal liable to third party.


Lec. 2, pp. 31-74   Corporations   Prof. McCann
                                   Undisclosed Agency

 Real estate agent represents that she is purchasing
    the property for herself.


 Why? Take advantage of personal relationship with
  seller to get better price.
 Other party unaware of agency or existence of
  principal.

 Both principal and agent liable.


Lec. 2, pp. 31-74   Corporations   Prof. McCann
          Principal’s Liability for Torts of Agent

             Liable if agent has actual or apparent authority.
             Liable if principal ratifies the agent’s acts.
             Liable if negligent in selecting or supervising the
              agent
             Liable if agent negligent in performance of act
             Liable if agent is employee acting in course and
              scope.



Lec. 2, pp. 31-74   Corporations   Prof. McCann
                                   Agent Is a Fiduciary

 A fiduciary duty is the highest standard of care at
    either equity or law. A fiduciary is expected to be
    extremely loyal to the person to whom he owes the
    duty (the "principal"): he must not put his personal
    interests before the duty, and must not profit from
    his position as a fiduciary, unless the principal
    consents. The word itself comes originally from the
    Latin fides, meaning faith, and fiducia, trust.




Lec. 2, pp. 31-74   Corporations   Prof. McCann
PARTNERSHIP
  ENTITY V AGGREGATE, ETC
                     Aggregation vs Entity Theories

 Commonlaw (Aggregation)


       Partners held undivided but separate interests in property

       Partnership was not an entity distinct from its partners

       Withdrawing partner entitled to piece of each asset as is her estate

       Unanimous consent to admit new partner

       Partnership meant one exact constellation of partners. Any change
        resulted in dissolution.

Lec. 3, pp. 75-119   Corporations   Prof. McCann
                     Aggregation or Entity Theories

 Under Uniform Partnership Act, 1997


       Partnership is an entity distinct from the partners

       Withdrawing partner has no interest in partnership assets but
        only right to receive pro rata share of the value of assets

       Entity may continue on despite withdrawal or death of partner




Lec. 3, pp. 75-119   Corporations   Prof. McCann
                            Under Entity Theory

 CAL. CORP. CODE § 16502 : California Code -
  Section 16502
 The only transferable interest of a partner in the
  partnership is the partner's share of the profits and
  losses of the partnership and the partner's right to
  receive distributions. The interest is personal
  property.




Lec. 3, pp. 75-119   Corporations   Prof. McCann
               Under UPA, Modern P/S a Hybrid

 Still an aggregation of partners in sense that:


       Each partner individually (jointly and severally) liable for
        debts

       Pass through entity, invisible to taxing authorities – each
        partner pays on her own income from the partnership




Lec. 3, pp. 75-119   Corporations   Prof. McCann
                                              Formation

 CAL. CORP. CODE § 16202 :


 (a)Except as otherwise provided in subdivision (b),
  the association of two or more persons to carry on as
  coowners a business for profit forms a partnership,
  whether or not the persons intend to form a
  partnership. (Emphasis added.)
 ***




Lec. 3, pp. 75-119   Corporations   Prof. McCann
                   Establishing a Partnership

 Majority: Intent is key, as evidenced by conduct and
  circumstances.
 Minority: Requires finding all of the following:
      1. A community of interest in the venture
      2. An agreement to share profits
      3. An agreement to share losses
      4. A mutual right of control or management




Lec. 13, pp 529-576 Corps   Prof. McCann
              RECAP OF PARTNER LIABILITY

 Restatement of Agency
   A Principal is liable for torts of employee if they are
    committed within the course and scope of employment
   “Course and scope” requires that there be some intent in the
    mind of the agent to serve the purposes of the principal
 Uniform Partnership Act
   Partnership is liable if partner is carrying on in the usual way
    the business of the partnership and has actual or apparent
    authority
   NO REQUIREMENT that the partner is motivated to benefit
    the partnership


Lec. 4; pp. 119 -154 Corporations Prof. McCann
                                      “The Usual Way”

 American Rule: partner must be acting consistently
    with the way that particular partnership operates.

 English Rule: partner must be acting as do others in
    that type of business, whether or not usual for that
    particular partnership.

 UPA follows English Rule interpretation




Lec. 3, pp. 75-119   Corporations   Prof. McCann
                              California Corporations Code
                              Section 16404 [Excerpt]

 The fiduciary duties a partner owes to the partnership and the other partners
  are the duty of loyalty and the duty of care set forth [below]

 A partner's duty of loyalty to the partnership and the other partners includes
  all of the following: ***(3) To refrain from competing with the
  partnership in the conduct of the partnership business before the
  dissolution of the partnership.

 A partner shall discharge the duties to the partnership and the
  other partners under this chapter or under the partnership
  agreement and exercise any rights consistently with the obligation
  of good faith and fair dealing.

 A partner does not violate a duty or obligation under this chapter or
  under the partnership agreement merely because the partner' s
  conduct furthers the partner's own interest



Lec. 5 Corporations   Prof. McCann
                      The End Game of a Partnership

 Dissolution (or Dissociation)
   An event triggers the end of the partnership

 Winding Up
   The affairs of the partnership are concluded
          Assets liquidated or earmarked for distribution
          Taxes paid
          Creditors paid
          Partners are paid

 Termination
   All affairs are wound up




Lec. 4, pp. 119-154   Corporations   Prof.
McCann
                            Dissociating Partner

 Within Rights Under Agreement
   Share as per agreement or per UPA
            Price if all assets sold as of date of dissociation at greater of
             liquidation value or going concern value, with interest
 In Violation of Agreement or Wrongful
   Same less
          Value of Goodwill (discretionary)
          Offsets for damage caused by wrongful dissociation
          Any other amounts owed by departing partner




Lec. 3, pp. 75-119   Corporations   Prof. McCann
                     LIMITED PARTNERSHIPS

 Form allows limited liability to limited partners
  provided they do not manage
 1976 ULPA provided “safe harbor” if acts of limited
  confined to such things as:
      Consulting with general partner re partnership affairs
      Requesting or attending meeting of partners
      Voting on matter relating to business affairs if subject of vote is
       one allowing approval or disapproval of limiteds
      Serving as agent or employee of LP




Lec. 13, pp 529-576 Corps   Prof. McCann
        LLC
LIMITED LIABILITY COMPANIES
                           California Corporations
                           Code Section 17153




    The fiduciary duties a manager owes to
    the limited liability company and to its
    members are those of a partner to a
    partnership and to the partners of the
    partnership.



Lec. 5 Corporations   Prof. McCann
                  California Corporations Code
                          Section 17001

 (z) "Membership interest" means a member's rights
   in the limited liability company, collectively,
   including the member's economic interest, any right
   to vote or participate in management, and any right
   to information concerning the business and affairs of
   the limited liability company provided by this title.




Lec. 5 Corporations   Prof. McCann
      California Corporations Code Section
                     17001

 (n) "Economic interest" means a person's right to
   share in the income, gains, losses, deductions, credit,
   or similar items of, and to receive distributions from,
   the limited liability company, but does not include
   any other rights of a member, including, without
   limitation, the right to vote or to participate in
   management, or, except as provided in Section
   17106, any right to information concerning the
   business and affairs of the limited liability company.



Lec. 5 Corporations   Prof. McCann
                                           LLC Re-Cap

 Creature of Contract
 Variation between states as to what the operating
   agreement can do with respect to:
      Eliminating fiduciary duties, namely
         Duty of Care
         Duty of Loyalty

 California, for example,
   Cannot entirely eliminate duty of loyalty in operating
    agreement
           But can specify certain acts which will not constitute breach if not
            “manifestly unreasonable.”

Lec. 6 pp. 196-238   Corporations   Prof. McCann
                                       Duty of Loyalty

 Duty to account for property or profit or benefit
  derived by the member from LLC property.
 Duty not to appropriate an LLC opportunity
 Duty to avoid conflicts of interest
 Duty to refrain from competing


 Acts in violation require consent of the members.




Lec. 6 pp. 196-238   Corporations   Prof.
McCann
                                            Duty of Care

 Duty to refrain from grossly negligent or reckless
   conduct, intentional misconduct, or a knowing
   violation of law.

 Agreement cannot unreasonably reduce this duty of
   care.




Lec. 6 pp. 196-238   Corporations   Prof.
McCann
CORPORATIONS
  THE REST OF THE STORY
   Promoters and Pre-incorporation Liability

 Liability that of promoters until corporation adopts
  pre-incorporation agreements and other party agrees
  to novation, replacing promoter with corporation
 Contract language indicating promoter not to be
  personally liable may exonerate promoter




Lec. 13, pp 529-576 Corps   Prof. McCann
Overview of Corporate Structure
                  Incorporation Process Review




Lec. 7, pp 239-286 Corps   Prof. McCann
                  Incorporation Process Review

 Articles filed
 By laws prepared
 First meeting held of shareholders
   Elect Directors

   Make subchapter S election

 Directors meeting
   Adopt pre-existing agreements

   Appoint officers

   Authorize issuance of stock

   Authorize banking relationships



Lec. 7, pp 239-286 Corps   Prof. McCann
                  The Debt-Equity Relationship


                                           Control
                                           (Equity)


                   Liquidity
                    (Debt)
Lec. 7, pp 239-286 Corps.   Prof. McCann
                      Why Capitalize with Debt?

 You can keep (i.e., leverage) the cash you have.
 You retain ownership (control) of the business
 Interest payments are tax-deductible
 Generally easier to sell debt because you don’t have
   to convince someone that the company will grow,
   only have to convince them that they’ll get paid back
   (and they get paid first).
      Lender is first in line to get paid if must liquidate assets
      Have a good return on investment (ROI)



Lec. 7, pp 239-286 Corporations   Prof.
McCann
                    Advantages of Selling Equity

 Motivate buyer to pull for the success of the company
 Doesn’t use precious cash
 No obligation to re-pay
 Can “print” more when needed




Lec. 7, pp 239-286 Corporations   Prof.
McCann
                Disadvantages of Selling Equity

 Usually requires giving up at least some control
 Allows “camel’s nose under the tent”
 Dividends are not deductible from corporate tax




Lec. 7, pp 239-286 Corporations   Prof.
McCann
                                    Types of Equity

 Common Stock
 Preferred Stock
 Convertible preferred stock
 Warrants




Lec. 7, pp 239-286 Corps   Prof. McCann
                                    Status of Shares

 Validly Issued
   Board has authorized and Dept of Corporations has issued
    authorization
 Fully Paid
   All consideration has been received

 Non-assessable
   The holder of the shares has no obligation to honor any
    assessments against the shares




Lec. 13, pp 529-576 Corps   Prof. McCann
                                    Common Stock

 Required to be issued
 Usually carries voting power
 May or may not have “par” value
 First in line in terms of control, last in line in terms
   of getting paid on liquidation




Lec. 7, pp 239-286 Corps   Prof. McCann
                                    Preferred Stock

 Preference given as to
   Dividends

   Liquidation of the company’s assets

   May also allow certain rights if the dividends are not paid
    (such as electing a number of directors)




Lec. 7, pp 239-286 Corps   Prof. McCann
                     Convertible Preferred Stock

 Preferred stock that carries with it right to convert to
   common stock




Lec. 7, pp 239-286 Corps   Prof. McCann
                                          Warrants



 Are issued by the corporation
 Give the owner the right to acquire common stock in
  the future for a specified price
 Usually added as an enticement to lenders but may
  be sold independently




Lec. 7, pp 239-286 Corps   Prof. McCann
                     Capital Contribution Issues

 Watered Stock
   Shareholder liable to creditors to extent stock has not been
    paid for
   Measured by difference between share’s value and what was
    (was not) paid

      Comes up where:
        Did not pay par for the stock or
        Value of the consideration given was overstated




Lec. 13, pp 529-576 Corps   Prof. McCann
                                     Concept of Par

 Originally a tool to control maximum and minimum
  capitalization of the corporation
 Evolved into baseline reserve to protect creditors
 Today largely meaningless




Lec. 13, pp 529-576 Corps   Prof. McCann
                   THE PLAYERS, REVISITED

 SHAREHOLDERS
   Elect directors

   Usually must ratify certain acts of directors
        Resolution to dissolve
        Resolution to merge with another entity
        Resolution to sell principal assets
        Resolution to change corporate purpose
        Resolution to amend by-laws or charter




Lec. 8, pp 286-342 Corps   Prof. McCann
                                           VOTING

 Statutory (or Regular) Voting
   One vote per share, each directorship voted on independently
          i.e., Jim has 500 shares, there are 3 directorships up for election.
           Jim can vote his 500 shares for each of the 3, but cannot
           accumulate his “1500” votes and put all on one directorship.


 Cumulative Voting
   One vote per share multiplied by the number of directorships
    up for election. Total number of votes can be allocated as
    shareholder wishes
          i.e., Jim can cast all 1500 votes for one director.


Lec. 13, pp 529-576 Corps   Prof. McCann
                   THE PLAYERS, REVISITED

 DIRECTORS
   Charged with day-to-day operations of entity

   Hire and Fire Officers

   Bear ultimate responsibility for conduct and misconduct of the
    corporation




Lec. 8, pp 286-342 Corps   Prof. McCann
 The Corporation’s Foundational Documents

 Articles (Charter)
 By Laws
 Shareholder Agreements Between Themselves
   Buy-sell Agreements

   Aka Cross-purchase Agreements

   Survivor Purchase Agreement

 Corporations Agreements To Repurchase Stock
   Stock purchase Agreement

   Aka Redemption Agreement




Lec. 8, pp 286-342 Corps   Prof. McCann
    “Closely Held” vs Statutory Close Corporation

 Any corporation can be held by a small number of
  shareholders. One shareholder is not uncommon.
 A “closely held” corporation is a term with no
  particular legal significance other than to mean:
      Few shareholders
      Most of whom participate in management
      No general market for the stock (because of limitations on
       control and liquidity) and
      Some limitations on transfer of the stock
 Courts now widely allow shareholders to control
   management via controlling director’s powers.

Lec. 8, pp 286-342 Corps   Prof. McCann
                    Statutory Close Corporation

 Specifically so-identified in Articles
 Limited as to number of shareholders possible, usually
    30 or 35.
   Stock certificates must bear “legend” detailing that there
    are restrictions on transfer
   Prohibited from making a public offering
   If adhere to rules, statutes allow exemption from claims
    regarding improper limits on directors’ powers
   Delaware allows shareholders to manage directly without
    a board of directors.

Lec. 8, pp 286-342 Corps   Prof. McCann
    When You Need Shareholder Agreements

 To maintain exemption from securities registration
   requirements
      i.e., a restriction that shareholder cannot transfer to a citizen
       of another state (triggering interstate sales issue);
 To maintain subchapter “S” status
   i.e., a restriction that you cannot sell to a partnership or
    corporation which would exceed limit of 75 shareholders
 To maintain professional corporation status
   i.e., cannot sell to unlicensed person




Lec. 8, pp 286-342 Corps   Prof. McCann
    When You Need Shareholder Agreements

 To Maintain Effectiveness of a Pooling Agreement
   i.e., if parties pool shares under agreement to keep X off the
    board, important no one conveys their shares to X.




Lec. 8, pp 286-342 Corps   Prof. McCann
                                          Restrictions

 May be absolute:
   Prohibits transfer altogether (usually unenforceable)

 May require others consent
   Typically requires director or shareholder approval

 May limit class of possible transferees
   Must be family members

   Must be CPA

   Must be non-competitor




Lec. 8, pp 286-342 Corps   Prof. McCann
                           Examples of Restrictions

 Buy-Out Agreements
   Whereby anyone desiring to sell must offer to designated
    others on same terms, so-called “right of first refusal.”
   Whereby someone who may lose control of stock in a divorce is
    obliged to sell to other shareholders or to the corporation
   Whereby the estate of a deceased shareholder must sell to the
    others




Lec. 8, pp 286-342 Corps   Prof. McCann
                                 Pricing the Shares

 Three usual approaches:
   Book Value
          What do the accounts show the shares are worth if you divide the
           number of outstanding shares into the number you get when you
           subtract the liabilities from the assets?
      Liquidation Value
          What would you get if you closed the doors, sold all the assets,
           paid all the debts, and divided the money up?
      Cash Flow or Earnings
          What would an investor be willing to pay today to own a company
           that generates the profits your company generates?



Lec. 8, pp 286-342 Corps   Prof. McCann
              Recording the Corporate History

 All States Require Minutes be Maintained
 Calif Corps Code 314
   The original or a copy in writing or in any other form capable
    of being converted into clearly legible tangible form of the
    bylaws or of the minutes of any incorporators', shareholders',
    directors', committee or other meeting or of any resolution
    adopted by the board or a committee thereof, or shareholders,
    certified to be a true copy by a person purporting to be the
    secretary or an assistant secretary of the corporation, is prima
    facie evidence of the adoption of such bylaws or resolution or
    of the due holding of such meeting and of the matters stated
    therein.

Lec. 8, pp 286-342 Corps   Prof. McCann
                                          By Laws

 Must conform to the Articles
 Must conform to the law
   e.g., by-law prohibiting any transfer of interest would be
    unenforceable




Lec. 8, pp 286-342 Corps   Prof. McCann
                      California Corps Code 204

 The articles of incorporation may set forth: (a) Any
  or all of the following provisions, which shall not be
  effective unless expressly provided in the articles:
 ***
 (5) A provision requiring, for any or all corporate
  actions … the vote of a larger proportion or of all of
  the shares of any class or series, or the vote or
  quorum for taking action of a larger proportion or of
  all of the directors, than is otherwise required by this
  division.

Lec. 8, pp 286-342 Corps   Prof. McCann
      Calif. Corporations Code Section 603(d)

 (d) Notwithstanding subdivision (a), directors may
   not be elected by written consent except by
   unanimous written consent of all shares entitled to
   vote for the election of directors; provided that the
   shareholders may elect a director to fill a vacancy,
   other than a vacancy created by removal, by the
   written consent of a majority of the outstanding
   shares entitled to vote.




Lec. 8, pp 286-342 Corps   Prof. McCann
                           Postscript on Consents

 Model Act now allows electronic or other consents
   without unanimity and without notice to all
   shareholders if:
      Articles of Incorporation provide for passage by majority vote,
       and
      The action is approved by consents signed, even electronically,
       by a majority of eligible voters
 By default, Directors are to be elected by “plurality”
   (rather than cumulative vote or majority vote)
      True both under Model Act and Delaware law
      BUT, bylaws may provide for majority or other constraint

Lec.11, PP 436-478 Corps   Prof. McCann
                            Pillsbury v Honeywell

 Shareholders Rights
   Right to review corporate records is not unlimited

   Must be for “a proper purpose germane to his interest as a
    stockholder” Del. Code, Title 8, § 220.
        “Proper purpose” means a concern relating to “investment return”
        BUT investment return can include shareholder motivated by
         desire to take control of the corporation




Lec. 9, pp 339-395 Corps   Prof. McCann
 Who Has the Power to Act for Shareholder?

 Shareholder “of record”
 Proxy
 Assignee (Pledgee) if assignment or pledge so allows




Lec. 9, pp 339-395 Corps   Prof. McCann
           The Powers and Duties of the Board

 It is a Board, not a gathering of Generals
   No director has any power acting alone

   Their only power derives from decisions they make acting as a
    Board and which are recorded in the minutes of the
    corporation
   Power of directors is “original and undelegated.” Their powers
    are not granted by others but originate with their election to
    the Board.
   Directors’ power comes from the state, if anywhere.

   The relation of directors to shareholders is that of trustee to
    beneficiaries.


Lec. 9, pp 339-395 Corps   Prof. McCann
           The Powers and Duties of the Board

 May Delegate Some of Its Duties
   Where large board, usual to allow for subcommittees to
    operate with relative autonomy
      “Executive Committee” is common device, organized to handle decisions or
       required resolutions (such as approval of significant contract) when full
       board cannot be readily convened.
 In Public Corporations, Usually See “Inside” and “Outside”
   Directors
      Inside: are also officers of corporation
      Outside: are recruited from other corporations, public service, etc.




Lec. 9, pp 339-395 Corps   Prof. McCann
           The Powers and Duties of the Board

 Key Functions:
    Provide   advice and counsel
    Instill discipline in the decision-making of
     the corporation
    Oversee crises

    Monitor the conduct of Management




Lec. 9, pp 339-395 Corps   Prof. McCann
                    REMOVAL OF DIRECTORS

 Tension between treatment of shareholders who are
   also directors
      They want security against removal
 And treatment of directors who are not shareholders
   Shareholders do not want to have any impediment to voting
    such directors out.
 RULE: Under Model Act statutes, cannot deny
   shareholders right to remove with or without cause.
      May require supermajority to remove shareholder-director
       without cause, however.


Lec.10, PP 395-436 Corps   Prof. McCann
  Tools for Dealing with Deadlock or Misconduct

 Judicial Dissolution
 Buyout of dissenting shareholder
 Appointment of custodial director or manager
 Arbitration provision in bylaws or other contract




Lec.10, PP 395-436 Corps   Prof. McCann
                                 VOTING TRUSTS

              • Under Model Act, requires
                Writing
                Setting out provisions
                10 yr limit (can be extended
                 by some or all)
                Delivery to corporation’s
                 principal office
Lec.10, PP 395-436 Corps   Prof. McCann
                      POOLING AGREEMENTS

 Widely used to “pool” smaller stock holdings into a
  unit having power to influence Board or corporate
  actions
 Generally provide for process to “pre-vote” an issue
  put to the shareholders, then cast all shares in pool
  for winner of the internal vote.
 Agreements are contracts and enforced as such
      Equitable relief now available via statute
      Previously courts could only remedy breach by damages



Lec.10, PP 395-436 Corps   Prof. McCann
                           Shareholder Agreements

 Liberally construed in closely held corporations
 BUT, under Model Act,
   Must be included in writing filed with the corporation

   Must be unanimously approved by all shareholders at time of
    creation
   Must be included in articles or bylaws or in a separate writing

   BUT

   Cannot eliminate fiduciary duties of officers and directors,

   Are not binding on creditors or third parties

   Are not binding on shareholders without knowledge




Lec.11, PP 436-478 Corps   Prof. McCann
                              GALLER V GALLER

 Held: Shareholder agreement not violative of
   public policy unless
      Violates an express statement of policy or
      Is “manifestly injurious” to public welfare and
      Where corrupt or dangerous tendency clearly
       appears on face of agreement or is part of a corrupt
       scheme and disguised to conceal true nature of the
       transaction




Lec.11, PP 436-478 Corps   Prof. McCann
                                     Sea-Land Rule

 Corporate entity will be disregarded and veil of
   limited liability pierced if:
      There is a unity of interest and ownership such that the
       separateness of the personalities of the entity and the
       individual (or other entity) no longer exists;
      Circumstances must be such that adherence to the fiction of
       separateness would
            SANCTION A FRAUD
            PROMOTE INJUSTICE




Lec.11, PP 436-478 Corps   Prof. McCann
       Sea-Land Rule – “Promote Injustice?”

 Means more than that a creditor will go unpaid.
 There must be a wrong beyond creditor’s inability to
   correct, e.g.,
      Unjust enrichment to person or entity who looted corporation
      Scheme to move assets to one entity and liabilities to another
      Must be sufficient to “merit the evocation” of the court’s
       equitable powers.




Lec.11, PP 436-478 Corps   Prof. McCann
            Piercing Based on Agency Analysis

 Where person uses a corporation as a shield to
   pursue the person’s interests and activities,
   effectively same conduct as if used any other agent:
      Therefore, liability imposed on principal via respondeat
       superior
      No matter if agent’s wrongdoing arises in contract or tort




Lec.11, PP 436-478 Corps   Prof. McCann
                              Declaring Dividends

 Highlights the tension between creditors and
   shareholders
      CREDITORS do not want money taken out of the corporation
       until they have been paid
      SHAREHOLDERS like dividends because
        (a) represents a return on investment that is no longer subject to
         market forces;
        (b) declaring a dividend signals optimism about the future and
         often drives the share price higher.




Lec. 12, pp 479-528 Corporations   Prof.
McCann
 Basic Policy Objective: Protect the Creditor



 Limit so that dividends can only be paid from
   “surplus” after sufficient capital held in reserve to
   pay debts.




Lec. 12, pp 479-528 Corporations   Prof.
McCann
           Solely Within Authority of Directors

 Holders of common shares have no vested right to a
   dividend
      Some preferred shares carry right to a dividend and
       enforcement power (such as right to name directors) if
       required dividend is not paid to preferred shareholders
 Courts will not interfere with directors’ decision to
  declare or withhold dividend absent showing of
  fraud, bad faith or abuse of discretion by directors
 BUT once a dividend is declared, shareholders may
  enforce in court

Lec. 12, pp 479-528 Corporations   Prof.
McCann
                             TYPES OF SURPLUS

      Capital surplus
        Excess portion of price received by corporation for its stock after
         subtracting the par value
        Plus any amount directors deem necessary (sometimes required by
         creditors)
      Earned surplus
          Earning of the company from operations after subtracting liabilities
           and net of capital accounts
      Reduction surplus
          The amount directors vote to take out of Stated Capital (e.g., by
           reducing par or because augmented from capital surplus and now
           unwinding
      Revaluation surplus
          The amount of previously unrealized appreciation directors choose to
           recognize (and which moves into earned surplus)

Lec. 12, pp 479-528 Corporations   Prof.
McCann
                                    Stock Dividends

 Issue additional shares in lieu of cash.
 Reasons:
   Don’t want to spend the cash but want to appease shareholders

   Want to increase voting rights of pro-board shareholders in
    case of takeover bid
   Need to issue more shares to make an offering work and must
    issue stock dividends to keep voting rights intact
   Drives down stock price somewhat (because more shares over
    which ratios operate, such as “earnings per share”)




Lec. 12, pp 479-528 Corporations   Prof.
McCann
                           Directors’ Duty of Care

 Francis v United Jersey Bank:
   Director is fiduciary of the corporation and its
    shareholders
   And in the context of the business of the corporation,
    may be a fiduciary to its creditors
          Where there is constructive or actual trust
 Director must “discharge duties in good faith
   and with that degree of diligence, care and
   skill which ordinarily prudent men would
   exercise under similar circumstances in like
   positions”

Lec. 12, pp 479-528 Corporations   Prof.
McCann
                  Francis v United Jersey Bank

 Where director breaches duty, personally liable if
  negligence was a proximate cause of a loss to the
  creditor or shareholder or corporation
 Plaintiff has burden of showing loss would have been
  avoided if defendant had performed her duties
 Analysis includes determination of “reasonable
  steps” director should have taken
 BUT causation will be inferred where reasonable to
  conclude particular result from a failure to act and
  that result has occurred.

Lec. 12, pp 479-528 Corporations   Prof.
McCann
                                           Caremark

 Director liability can be grounded on several
   theories:
      Liability following poor decision by board because
       decision was negligent and ill advised
      Liability based on failure to act where due diligence
       would prevent the loss
 BUT, “absent cause for suspicion there is no
   duty…to install and operate a system of
   corporate espionage to ferret out wrongdoing
   that they have no reason to suspect exists.”


Lec. 13, pp 529-576 Corps   Prof. McCann
                                   Caremark cont’d

 There must be a system in place adequate to
  assure the board that appropriate
  information will come to its attention in a
  timely manner
 Failure to insist upon and maintain such a
  system may render a director liable




Lec. 13, pp 529-576 Corps   Prof. McCann
                                   Caremark cont’d

 Plaintiffs must show:
 Director knew or
 Should have known were violations of law
 Took no steps to prevent or remedy
 Failure proximately caused the loss




Lec. 13, pp 529-576 Corps   Prof. McCann
                   The Business Judgment Rule

 Applies when what is at issue is a business decision
  made by the directors
 Does not come into play where directors are accused
  of failing to monitor or similar derelictions of the
  duty of care, only when making a business decision




Lec. 13, pp 529-576 Corps   Prof. McCann
                                           The Rule

 Absent fraud, illegality or conflict of interest, a
   director who acts in good faith is not personally
   liable for mere errors of judgment short of CLEAR
   AND GROSS NEGLIGENCE
               • Shlensky v Wrigley 237 N.E. 2d 776 (Ill. 1968)


 Unless director(s) had an interest in the subject of
  the decision or
 Unless decision constitutes illegal conduct (e.g.,
  decision to pay a bribe)

Lec. 13, pp 529-576 Corps   Prof. McCann
                                           ALI Version

 No liability for a business judgment reached in good
  faith provided:
 1. Director or officer was disinterested
 2. Director or officer was informed as to the subject
  of the decision to a degree the director or officer
  reasonably believes appropriate; and
 3. Rationally believes decision is in the best interests
  of the corporation



Lec. 13, pp 529-576 Corps   Prof. McCann
                   SMITH V VAN GORKOM


 "Informed" within meaning of "due care" means
  board reviewed all material information reasonably
  available
 Liability under Business Judgment Rule
  arises only where there is a showing of gross
  negligence, meaning something more
  careless than ordinary negligence.
      E.g., failure to even read a report which was itself
       deficient


Lec. 13, pp 529-576 Corps   Prof. McCann
               Delaware Gen Corp Law Sec. 141


            (e) A member of the board of directors, or a member of any
            committee designated by the board of directors, shall, in the
            performance of such member's duties, be fully protected
            in relying in good faith upon the records of the
            corporation and upon such information, opinions,
            reports or statements presented to the corporation
            by any of the corporation's officers or employees, or
            committees of the board of directors, or by any other
            person as to matters the member reasonably
            believes are within such other person's professional
            or expert competence and who has been selected
            with reasonable care by or on behalf of the corporation.


Lec. 13, pp 529-576 Corps   Prof. McCann
                            Shareholder Ratification

 Shareholders may ratify acts of even interested
   directors PROVIDED shareholders are “fully
   informed”
      Burden is on directors to establish shareholders were fully
       informed




Lec. 13, pp 529-576 Corps   Prof. McCann
                                           Model Act

 SECTION 8.30. GENERAL STANDARDS FOR DIRECTORS
 (a) A director shall discharge his (sic) duties as a director, including his (sic) duties as a
  member of a committee:
 (1) in good faith;
  (2) with the care an ordinarily prudent person in a like position would exercise under similar
  circumstances; and
  (3) in a manner he (sic) reasonably believes to be in the best interests of the corporation.

 (b) In discharging his (sic) duties a director is entitled to rely on information, opinions, reports,
  or statements, including financial statements and other financial data, if prepared or presented
  by:
 (1) one or more officers or employees of the corporation whom the director reasonably believes
  to be reliable and competent in the matters presented;
  (2) legal counsel, public accountants, or other persons as to matters the director reasonably
  believes are within the person's professional or expert competence; or
  (3) a committee of the board of directors of which he (sic) is not a member if the director
  reasonably believes the committee merits confidence.

 (c) A director is not acting in good faith if he (sic) has knowledge concerning the matter in
  question that makes reliance otherwise permitted by subsection (b) unwarranted.
 (d) A director is not liable for any action taken as a director, or any failure to take any action, if
  he (sic) performed the duties of his (sic) office in compliance with this section.



Lec. 13, pp 529-576 Corps   Prof. McCann
                        Calif. Corp Code Sec. 309

 (a) A director shall perform the duties of a director, including duties
  as a member of any committee of the board upon which the director
  may serve, in good faith, in a manner such director believes to be in
  the best interests of the corporation and its shareholders and with
  such care, including reasonable inquiry, as an ordinarily prudent
  person in a like position would use under similar circumstances.
 (b) In performing the duties of a director, a director shall be entitled
  to rely on information, opinions, reports or statements, including
  financial statements and other financial data, in each case prepared
  or presented by [officers, consultants, etc].
 (c) A person who performs the duties of a director in
  accordance with subdivisions (a) and (b) shall have no
  liability based upon any alleged failure to discharge the
  person's obligations as a director. In addition, the liability
  of a director for monetary damages may be eliminated or
  limited in a corporation's articles to the extent provided in
  paragraph (10) of subdivision (a) of Section 204.

Lec. 13, pp 529-576 Corps   Prof. McCann

								
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