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UBE Outline Agency

I.

The Agency Relationship:

a.

Definition: agency is i. the fiduciary relationship ii. that arises when one person (the principal) manifests assent to another person (the agent) iii. that the agent shall act on the principals behalf iv. and subject to the principals control, and v. the agent manifests assent or otherwise consents to so act

Restatement (Third) 1.01

b.

Elements: i. The principal consents for another person (agent) to act on his or her behalf ii. The agent consents to act on the principals behalf iii. The agent is subject to the principals control Consent: i. Objective Test: Consent is determined by the outward manifestations as perceived by a reasonable person in similar circumstances. On the Principals Behalf: i. It doesnt have to be exclusively for the benefit of the principal Principals Control: i. P must have some control or right to control. It does not need to be absolute control. It just has to be control to matters within the scope of the agency relationship.

c.

d. e.

II.

Formation Issues: i. A contract is not necessary ii. Consideration is not necessary iii. Restatement (Third) 1.02: The parties labeling is not controlling; the elements must be satisfied. Just because the parties refer to the relationship as an agency relationship doesnt make it so. All the elements must be present. Similarly, just because the parties disclaim the agency relationship does not mean that the relationship doesnt exist (although, it could help in disproving the consent element) Terminology:

f.

Restatement (Third) 1.04(2)(a): Disclosed Principal: 1. A principal is disclosed if a. When an agent and a 3RD P interact b. The 3RD P has notice that the agent is acting for a principal AND c. Has notice of the principals identity Restatement (Third) 1.04(2)(b): Undisclosed Principal: 1. A principal is undisclosed if: a. When an agent and a 3RD P interact b. The 3RD P has no notice that the agent is acting for a principal Restatement (Third) 1.04(2)(c): Unidentified Principal: 1. A principal is undisclosed if: a. When an agent and a 3RD P interact b. The 3RD P has notice that the agent is acting for a principal BUT c. Does not have notice of the principals identity

Restatement (Third) 1.04(8): Subagent: a subagent is a person appointed by an agent to perform functions that the agent has consented to perform on behalf of the agents principal and for whose conduct the appointing agent is responsible to the principal Restatement (Third) 1.04(1): Coagent: Have agency relationships with the same principal A coagent may be appointed by the principal or by another agent actually or apparently authorized by the principal to do so

III.

Liability of Principal to Third Parties in Contact:

Bind a.

TP

5 Methods by which an agent can bind the principal: i. Actual authority (express and implied) ii. Apparent authority iii. Inherent power iv. Estoppel v. ratification Binding The Principal: i. Restatement (Second) 144 General Rule 1. A disclosed or partially disclosed principal is subject to liability upon contracts made by agent acting within his authority if made in proper form and with the understanding that the principal is a party.

b.

c.

The Agents Authority: i. Authority: 1. is the power 2. of the agent 3. to affect the legal relations of the principal 4. by acts done in accordance with the principals manifestations of consent to him

Actual Authority Restatement (Third) 2.01 An agent acts with actual authority when (1) At the time of taking action that has legal consequences for the principal (2) The agent reasonably believes (3) In accordance with the prncipals manifestations to the agent, (4) That the principal wishes the agent to so act 2.02 Scope of Actual Authority: (1) Can take action designated (express) or implied in the principals manifestations to the agent and acts necessary or incidental to achieving the principals objectives, as the agent reasonably understands the principals manifestations and objectives when the agent determines how to act. 3.01 Creation of Actual Authority: a. Created by a principals manifestation to an agent that, b. As reasonably understood by the agent, c. Expresses the principals assent that the agent take action on the principals behalf Restatement (Second) 35: When Incident Authority is inferred: Unless otherwise agreed, authority to conduct a transaction includes: Authority to do acts which are incidental to it, usually accompany it, or are reasonably necessary to accomplish it

Apparent Authority Restatement (Third) 2.03 Is the power held by an agent to affect the principals legal relations with third parties when a third party reasonably believes the actor has authority to act on behalf of the principal and that belief is traceable to the principals manifestations (held out). The authority the agent is held out by the principal as possessing. It is a matter of appearances on which third parties come to rely. Does the third party believe that the principal wants the agent to act on his behalf? Is that apparent to him? Depends on agents interactions with third party. Principal holds out some other party saying that some person is acting on my behalf. Restatement (Third) 3.03: Creation of Apparent Authority: Created when a person manifests that another has authority to act with legal consequence for the person making the manifestation, when a third party reasonably believes the actor to be authorized and the belief is traceable to the manifestation. Inherent Agency Power Restatement (Second) 8A a. The power of an agent which is derived not from authority, b. apparent authority or estoppel, but solely from the agency relation c. And exists for the protection of persons harmed by or dealing with a servant or other agent

Apparent Agency Creates an agency relationship that does no otherwise exist or is not clearly demarcated, while apparent authority expands the authority of an actual agent. Authority Summary:

ii.

Actual: 1. Principal expressly gives Agent authority to act on principals behalf 2. Implied authority: circumstantial Apparent Authority: 1. Wendys corporation is holding out the people in uniform as their employees 2. Holding out that leads to reasonable belief Inherent Authority: 1. Certain relationships in which third parties will be left in a precarious state. Legal fiction so that 3RD P wont be left empty handed.

iii.

iv.

d.

Liability of Undisclosed Principal (compare Restatement Second and Third)

i.

Restatement (Second) 195: Acts of Manager Appearing to be Owner: 1. An undisclosed principal who entrusts an agent, Is subject to liability to third parties with whom the agent enters into transactions usual in such businesses and on the principals account, although contrary to the directions of the principal undisclosed principals are liable for actions of their agents regardless of scope of authority.

2.

ii.

Restatement (Third) 2.06 Liability of Undisclosed Principal: 1. An undisclosed principal is subject to liability to a third party who is justifiably induced to make a detrimental change in position by an agent acting on the principals behalf and without actual authority if the principal, having notice of the agents conduct and that it might induce others to change their position, did not take reasonable steps to notify them of the facts. An undisclosed principal may not rely on instructions given an agent that qualify or reduce the agents authority to less than the authority a third party would reasonably believe the agent to have under the same circumstances if the principal had been disclosed. the principal needs to be aware of the actions taken by the agent in order to be liable to third parties.

2.

3.

e.

Binding the Principal through Ratification:

i.

Restatement (Second) 82: 1. Ratification is a. The affirmance by a person b. Of a prior act, c. Which did not bind him d. But which was done or professedly done on his account, e. Whereby the act, as to some or all persons, f. Is fiven effect as if originally authorized by him Botticello v. Stefanovicz: Marital status cannot in and ofitself prove the agency relationship. So the wife is not bound unless she ratified it. Ratification requires acceptance of the result of the act with an intent to ratify, and with full knowledge of all the material circumstances. If the original transaction was not purported to be done on account of the principal, the fact that the principal receives its proceeds does not make it a party to it. Restatement (Third) 1. 4.01 Defined: a. Ratification is the affirmance of a prior act done by another, whereby the act is given effect as if done by an agent acting with actual authority b. A person ratifies an act by i. ii. Manifesting assent that the act shall affect the persons legal relations, or Conduct that justifies the reasonable assumption that the person so consents

ii.

iii.

c.

It does not occur unless i. The act is ratifiable as stated in 4.03 ii. The person ratifying has capacity 404 iii. It is timely 4.05 iv. It encompasses the act in its entirety as stated in 4.07

2.

4.02 Effect of Ratification: a. General Rule: it retroactively creates the effect of actual authority i. Exception (not effective): 1. In favor of a person who causes it by misrepresentation or other conduct that would make a contract voidable 2. In favor of an agent against a principal when the principal ratifies to avoid a loss; OR To diminish the rights or other interests of persons, not parties to the transaction, that were acquired in the subject matter prior to the ratification

3. 3.

4.03 Acts That May Be Ratified: a. A person may ratify an act if the actor acted or purported to act as an agent on the persons behalf 4.04 Capacity: 4.05 Timing: a. Not effective unless i. It precedes the occurrence of circumstances that would cause the ratification to have adverse and inequitable effects on the rights of third parties Those circumstances include i. Any manifestation of intention to withdraw from the transaction made by the third party ii. Any material change in circumstances that would make it inequitable to bind the third party, unless the third party chooses to be bound, and iii. A specific time that determines whether a third party is deprived of a right of subjected to a liability

4. 5.

b.

6.

4.06 Knowledge Requisite to Ratification a. A person is not bound by ratification made without knowledge of material facts involved in the original act when the person was unaware of such lack of knowledge 4.07: No Partial Ratification a. A ratification is not effective unless it encompases the entirety of an act, contract, or other single transaction 4.08 Estoppel to Deny Ratification: a. If a persons conduct manifests that he or she is ratifying anothers act and a third party detrimentally relies on that manifestation, the person will be stopped to deny ratification

7.

8.

f.

Binding the Principal through Estoppel:

i.

8B EstoppelChange of PositionRestatement (Second) 1. A person who is not otherwise liable as a party to a transaction purported to be done on his account, is nevertheless subject to liability to persons who have changed their positions because of their belief that the transaction was entered into by or for him, if a. He intentionally or carelessly caused such belief, or b. Knowing of such belief and that others might change their positions because of it, he did not take reasonable steps to notify them of the facts 2.05 Estoppel to Deny Existence of Agency Relationship Restatement (Third) 1. A person who has not made a manifestation that an actor has authority as an agent and who is not otherwise liable as a party to the transaction purportedly done by the actor on that persons account is subject to liability to the third party who justifiably is induced to make a detrimental change in position because the transaction is believed to be on the persons account if a. The person intentionally or carelessly caused such belief OR b. Having notice of such belief and that it might induce others to change their positions, the person did not take reasonable steps to notify them of the facts

ii.

iii.

Koos Brothers: 1. An imposter salesman was deemed the agent of the store through an estoppel theory because the store should have known or taken reasonable steps to prevent the imposter from holding himself ot as an agent.

IV.

Analysis Review: a. First establish the P/A relationship (mutual consent, on behalf of principal, control) b. Then establish what type of authority exists (actual, apparent, inherent) c. Sometimes there isnt a P/A relationship but a third party has been aggrieved. For those reason we have ratification and estoppel. Contracts and Other Transactions with Third Parties: a. 6.01 Agent for Disclosed Principal: i. When an agent acting with actual or apparent authority makes a contract on behalf of a disclosed principal, 1. The principal and 3RD P are parties to the K; and 2. The agent is not a party to the K unless the agent and 3RD P agree otherwise

V.

b.

6.02 Agent for Unidentified Principal: i. When an agent acting with actual or apparent authority makes a contract on behalf of an unidentified principal, 1. The principal and 3RD P are parties to the K and 2. The agent IS a party to the K unless the agent and 3RD P agree otherwise 6.03 Agent for Undisclosed Principal: i. When an agent acting with actual or apparent authority makes a contract on behalf of an undisclosed principal, 1. Unless excluded by the K, the principal is a party to the K; 2. The agent and 3RD P are parties to the K and 3. The principal, if a paert to the K, and the 3RD P have the same rights, liabilities, and defenses against each other as if the principal made the contract personally subject to 6.05-6.09

c.

Principal Agent TP

Disclosed X

Unidentified X X X

Undisclosed X X X

Water Waste and Land: An agent is liable on a contract entered ion behalf of a principal if the principal is not fully disclosed.

d.

6.04 Principal Does Not Exist or Lacks Capacity: i. Purported agent enters into K w/ third party ii. Purported agent represents himself as an agent iii. Purported agent knows there is no principal or principal lacks capacity iv. Result: purported agent becomes a party to the K

VI.

Liability of Principal to Third Parties in Tort:

a.

Servant v. Independent Contractor: i. Servant: a master (employer) is liable for the torts of its servants (employees). 1. A master-servant relationship exists where the servant has agreed: a. To work on behalf of the master AND b. To be subject to the masters control or right to control the physical conduct of the servant

ii.

Independent Contractor: 1. Agent-type independent contractors: one who has agreed to act on behalf of another, the principal, but not subject to the principals control over how the result is accomplished. 2. Non-Agent-type independent contractor: one who operates independently and simply enters into arms length transactions with the others.

iii.

General Rule: 1. Employer/Employee:

a. b. 2.

An employee is always an agent of employer Employer is always liable for employee actions w/ in scope

Employer/Independent Contractor: a. An independent contractor is not always an agent of the employer b. Generally, an employer is not liable for the acts of the independent contractor i. Exceptions: 1. If the principal behaves as if the Ind Kor was an employee (retains control over significant aspects of the work) 2. Principals that engage incompetent independent contractors Negligent hiring Authorized time and space. When someone in a principal like position delegates a nondelegable duty, they are still liable. If you contract out to an ind. Kor. For an activity that causes nuisance per se, youre not absolved from liability

3.

4.

b.

Restatement (Third) 2.04 Respondeat Superior: i. An employer is subject to liability for torts committed by employees while acting within the scope of their employment

ii. c.

Note: the actor also remains liable, despite being an agent or employee. Restatement (Third) 7.01

Principals Liability: i. Restatement (Third) 7.03: Principals Liability Generally 1. A principal is subject to direct liability to a third party harmed by an agents conduct when: a. The agent acts with actual authority or the principal ratifies the agents conduct AND i. The agents conduct is tortuous OR ii. The principal would be subject to liability for engaging in such conduct The principal is negligent in selecting, supervising, or otherwise controlling the agent The principal delegates performance of a duty to use care to protect other persons on their property to an agent who fails to perform the duty

b. c.

2.

A principal is subject to vicarious liability to a third party harmed by an agents conduct when a. The agent is an employee who commits a tort while acting within the scope of employment or b. The agent commits a tort when acting with apparent authority in dealing with a third party on or purportedly on behalf of the principal

ii.

Scope of Employment: 1. Restatement (second) 228 Scope of Employment Doctrine: a. Conduct of an employee is within the scope of employment if, but only if, i. Same general nature ii. It occurs substantially within the authorized time and space limits iii. Motive to serve employer AND 1. Appropriate within the scope when the agent is motivated by the purpose of serving the principal 2. Not within the scope when motivated by some external circumstances iv. Foreseeability b. Conduct of an employee is not within the scope of employment if it is different in kind from that authorized, far beyond the authorized time and space limits, or too little actuated by a purpose to serve the employer.

2.

Restatement (Second) 229 Kinds of Conduct Within Scope of Employment: a. To be within the scope of employment, the conduct must be of the same general nature as that authorized. b. If it is not within the same general nature, it can still be within the scope of employment if the conduct is incidental to the conduct authorized

c.

Incidental Factors: i. Commonly done by such employees ii. Time, place, and purpose of the act iii. Previous relations between employer and employee iv. Extent to which business of the employer is apportioned between different servants v. Act is outside the enterprise of the master or, if within the enterprise, has not been entrusted to any employee vi. Employer has reason to expect that such act will be done vii. Similarity in the quality of the act done to the act authorized viii. The instrumentality by which the harm is done was furnished by employer to the employee ix. The extent of departure from the normal method of accomplishing authorized result x. Whether the act is seriously criminal

3.

Restatement (Third) 7.07: a. An employee acts within the scope of employment when performing work assigned by the employer or engaging in a course of conduct subject to the employers control b. An employees act is not within the scope of employment when it occurs within an independent course of conduct not intended by the employee to serve any purpose of the employer

4.

Control as a factor: a. Principal liability usually turns on control. Distinguish control from influence. b. Control over the instrumentality that caused the harm i. McDonalds: who is in control over the instrumentality that caused the harm? The franchise agreement imposed substantial restrictions on the method of operation. Hypo: There are things that can be done to influence behavior w/o exerting control. Example: create a path so you will walk this way. Example: bathroom example. Fly sticker not control. Bathroom attendant control. There is a difference between overt contol and creating a path to walk on to influence your behavior.

ii.

5.

Bushey v. US A principal can be held liable for acts done by an agent even though the agent was acting outside of the scope of employment when the context of the act is within a foreseeable zone of risk of any damage, not specifically the foreseeability of the actual act. a. This is a move from the purpose test (furtherance of a purpose to principal) to a contextual, foreseeable zone of risk arising out of the scope of employment test. There is a distinction in where, how, why the damage was cause was it because of something in the context of employment? This test, due to its contextual requirement, has produced splits in various scenarious on of which is an off-duty cop believing to recognize someone as a criminal shoots and kills. Part of the analysis will thus involve how much control the principle has over the agent.

VII.

Duties of Agent and Principal to Each Other: Loyalty and Care

a.

Duty of Loyalty:

i. ii.

Restatement (Third) 8.01 General Rule: an agent has a fiduciary duty to act loyally for the principals benefit in all matters connected with the agency relationship. Breach of Duty: 1. 8.02 Material Benefit Arising Out of Position: a. An agent has a duty not to acquire a material benefit from a third party in connection with a transaction conducted or other actions taken on behalf of the principal or otherwise through the use of the agents position Reading: US soldier used his uniform to smuggle cargo across the border for a kickback.

b. 2.

8.03 Acting as or on Behalf of an Adverse Party: a. An agent has a duty not to deal with the principal as or on behalf of an adverse party in a transaction connected with the agency relationship.

3.

8.04 Competition: a. Throughout the duration of the agency relationship, an agent has a duty to refrain from competing with the principal and from taking action on behalf of or otherwise assisting the principals competitors. During this time, an agent may take action, not otherwise wrongful, to prepare for competition following termination of the agency relationship. General Automotive: Agent was a machine specialist working for General Automotive.. He was in charge of soliciting orders. When the orders could not be filled by General Automotive, Singer sent them to a competitor and took a fee. He did this without consulting General Automotive.

b.

4.

8.05 Using Principals Property; Using Confidential Information (can be nullified by industry standards, eg, Football coaches) a. An agent has a duty i. Not to use property of the principal for the agents own purposes or those of a third party; and ii. Not to use or communicate confidential information of the principal for the agents own purpose or those of a third party. (no grabbing and leaving) Reading: Agent used uniform to his own benefit. Town and Country: the clients were confidential because they were hard to obtain. The agents grabbed and left taking the clients.

b. c.

b.

Duty of Care, Competence, and Diligence:

i.

8.08: subject to any agreement with the principal, an agent has a duty to the principal to act with the care, competence, and diligence normally exercised by agents in similar circumstances. 1. Special skills or knowledge: these are circumstances to be taken into account in determining whether the agent acted with due care and diligence. If an agent claims to possess special skills or knowledge, the agent has a duty to the principal to act with the care, competence, and diligence normally exercised by agents with such skills or knowledge.

c.

Duty to Account for Profits Arising Out of Employment 388 Restatement (Second): i. Unless otherwise agreed, an agent who makes a profit in connection with transactions conducted by him on behalf of the principal is under a duty to give such profit to the principal.

VIII.

Severing the agency relationship

a.

Circumstances under which an agency relationship will be terminated

i. ii. iii. iv. v. vi. vii.

Fulfillment of purpose Mutual agreement At will Contractual clause (eg. temporal quality) Revocation: Principal rejects agent Renunciation: Agent rejects principal Operation of law 1. There is a legitimate enterprise and ex post the law changes 2. death

Partnerships What is a partnership? I. RUPA 101(6): Elements of a partnership a. An association of two or more b. Legal persons c. To carry on as co-owners d. In a business for profit Motives for Partnership a. Skills/knowledge b. Resources c. Tax benefits d. Control liabilities Two theories of partnership: Important mainly for tax purposes though liability is affected as well. a. Aggregate theory: i. There is no separate legal entity from that of its members. 1. Individual partners file separate tax returns and have joint and several liability b. Entity theory: i. RUPA 201 a partnership is an entity distinct from its partners ii. The separate entity can sue and be sued iii. Damages are collected from the entity and sometimes from the partners See exhaustion rule. iv. The entity owns the property not the partners. v. Entity files own tax return.

II.

III.

IV.

Entity selection: Tax A p/s is a passthrough entity. Pro

Liability Partners are liable for the acts of their partners. Agency concept. Con

Control Partners have less control because they have to agree with other partners Con

Knowledge One reason people start general partnerships despite the liability and control problems is a lack of knowledge

Flexibility Cant take the money and run. Locked in.

RUPA 201 Partnership Formation: I. Defining a partnership: a. Fenwick Factors i. Intention of parties ii. The right to share in profits iii. Obligation to share in losses iv. Ownership and control of the partnership property v. Community of power in administration vi. Language of the agreement vii. Conduct of the parties toward third persons viii. Rights of parties on dissolution b.

Textual analysis often fails because there are independent legal principles that are unmet behind the words in the text.

Fenwick: Employer claims employee is a partner so he doesnt have to pay unemployment compensation. HELD she is an employee who merely had a right to a bonus at the end of the year. She only had upside. Thus, she was not a coowner because she had nothing to lose. Assessing the elements of a partnership i. Co-owners 1. It is not co-management. Rather it is co-owners. This means each party must have a stake in the business. If the parties have nothing to lose (i.e., there is only upside) then they are not carrying on as co-owners. Contribution of capital goes to this element. 2. Different people can contribute different things. Someone can contribute money while another can contribute management. ii. Business 1. Distinguish between a hobby and a business.

c.

a.

HYPO: X is a gvt. worker living in Alaska. Xs son is a snow machine racer. X decides that son should form p/s with X. Reason: so I can get expenses deducted for repairing the machine and such. As lawyer, what questions would you have for X? i. How will you make a profit? Will the prize be split in half? How is control distributed? ii. IRS often asks if the individuals claiming partnership have full-time jobs. If so then more likely it is a hobby rather than a for-profit business. iii. Elements in business business formalitites, bookkeeping, reinvestment, concern for making profit

iii. Profit 1. iv. Intent 1.

Co-owners share in profits and losses. You cannot just have an upside. While a partnership can form regardless of what the parties intend, there must be a voluntary aspect. You cannot be coerced into starting a partnership.

d.

Partnership compared with employees: i. Fenwick v. Unemployment Compensation Commission: Beauty shop. HELD this is a profit-sharing agreement not a partnership. Although, she could share in profits, it was all upside for her and no downside.

e.

Partners compared with lenders: i. Martin v. Peyton: Creditor of debtor controlled aspects of business. Trustees are to be kept advised as to the conduct of the business and consulted as to important matters. They may inspect the firm books and are entitled to any information they think important. Finally, they may veto any business they think highly speculative or injurious. HELD: not partners. Creditor was just safeguarding its loan. They could not initiate any transaction as partners do. It makes sense to safeguard your investment. But be careful. If you exercise too much control, the court will call it a partnership.

f.

Partnership by estoppel: i. Just like in agency, if one party holds out another to the world that they are partners it is possible for a partner in a principal like position to become liable. ii. RUPA 308 Liability of purported partner: 1. A person becomes a purported partner if that person by words or conduct, purports to be a partner, or consents to being represented by another as a partner. 2. A purported partner is liable to a person to whom the representation is made, if that person, relying on the representation, enters into a transaction with the actual or purported partner. RUPA 202 Property Interests: i. Joint tenancy, tenancy in common, tenancy by the entireties, joint property, common property, or part ownership does not by itself establish a partnership, even if co-owners share profits. RUPA 202 Receipt of Profit Presumption i. A person who receives a share of profits of a business is presumed to be a partner, unless the profits were received in payment 1. Of a debt 2. For services as an independent contractor or of wages or other compensation of an employee 3. Of rent 4. Of an annuity

g.

h.

RUPA 203, 204 Partnership Property I. RUPA 203 General Rule: a. Property acquired by a partnership is property of the partnership and not of the partners individually RUPA 204 When is property partnership property: a. Property is partnership property if acquired in the name of i. The partnership; or ii. One or more partners in their capacity as partners if the name of the partnership is included in the instrument transferring title. b. Presumption i. Partnership property is presumed to be partnership property if purchased with partnership assets RUPA 501 Not Co-owners: a. A partner is not a co-owner of partnership property and has no interest in partnership property.

II.

III.

RUPA Article 3 Liability of Partners

I.

RUPA 301 Partner as Agent a. Each partner is an agent of the partnership for the purpose of its business RUPA 306 Partners Liability a. All partners are liable jointly and severally for all obligations of the partnership, unless otherwise agreed upon b. A new partner in an existing partnership is not personally liable for any partnership obligation incurred before the person became a partner

II.

III.

RUPA 307 Actions Against Partnership a. A partnership may sue and be sued in the name of the partnership. RUPA 307 Actions Against Partners a. A judgment against a partnership is not by itself a judgment against a partner. b. A judgment against a partnership may not be satisfied from partners assets unless there is also a judgment against a partner Exhaustion Rule: partnership assets must be fully exhausted before personal assets can be reached.

IV.

c.

Fiduciary Obligations of Partners: Partners owe to one another the duty of the finest loyalty I. Meinhard v. Salmon: a. S and M had a joint venture that was to last until the expiration of a lease agreement. When the lease agreement was nearing its end, the lessor approached S in hopes that S would renew. S renewed the lease on behalf of a corporation owned solely by S and did not divulge any of this to M. HELD this violated the duty of loyalty. It was a transaction similar in nature to the arrangement that S and M had. S derived benefit because of his position and did not share the benefit with M. partners owe to one another the duty of the finest loyalty. RUPA 404 General standard of partnership conduct a. The only fiduciary duties a partner owes to the partnership and other partners is the duty of loyalty and the duty of care b. Duty of Loyalty (BAC): i. Share benefits ii. Will not deal with the partnership or other partners as or on behalf of a party having an interest adverse to the partnership iii. Partner will not compete with the partnership Duty of Care i. Refrain from engaging in grossly negligent or reckless conduct, intentional misconduct, or a knowing violation of law Requires good faith and fair dealing when exercising rights vis--vis the partnership

II.

c.

d.

III.

Grabbing and Leaving a. Meehan v. Shaughennsy: Lawyer can send letters to clients stating that they are leaving. But they cannot disrespect the firm. If a client wants to leave on own volition and is not tied down by an engagement contract the client can. But you cant incentivize the client to leave. b. Permissible: i. Talking with firm is fine ii. Can explore office space iii. Can sign lease (but cant sign as some party affiliated with the new partnership) iv. Prepare client list v. Explore exit opportunities vi. Can take work product that is used generally for your own use of the or the firms so long as the p/s agreement does not restrict this. Not permissible: i. Cant steal clients ii. Cannot use old firms resources for new business iii. Cant lie about intentions. If asked if you are leaving, you must say yes. iv. Must maintain standard of care. v. Cant take work product created specifically for a client.

c.

Breach

No Breach

Duty of Loyalty

Competing w/ partners Acquiring clients Conflicted Dealings (benefit them and hurt benefit) Breach of contract in violation of civil law Put their name on PC letterhead Lying to partners

Just planning (we didnt do anything untl we left the firm) Still performing the work while at PC

Duty of care: grossly negligent violation of law

While still at the firm they maintained the standard and still conducted work well

IV.

Prohibition on opting out of fiduciary duties: a. RUPA 103(b)(1) .. b. RUPA 103(b)(3) Duty of Loyalty i. The partnership agreement may not eliminate the duty of loyalty. ii. The partnership agreement may identify specific types of activities that do not violate the duty of loyalty, if not unreasonable. iii. All of the partners or a number or percentage specified in the partnership agreement may authorize or ratify, after full disclosure of all material facts, a specific act or transaction that otherwise would violate the duty of loyalty. c. RUPA 103(b)(4) Duty of Care i. The partnership agreement may not unreasonably reduce the duty of care.

Partners Rights I. Economic Rights absent agreement saying otherwise a. Partnership Account RUPA 401(a): i. Plus: Money + (FMV of other property liabilities) that the partner contributes + partners share of partnership profits (see b) ii. Less: money + (FMV of other property liabilities) distributed by the partnership to the partner + the partners share of losses Profits/Losses RUPA 401(b): i. Partners are entitled to an equal share of the partnership profits and are chargeable with a share of the partnership losses in proportion to the partners share of the profits. 1. Regardless of labor and capital contributions ii. Rules for Profit/Losses in Service Partnerships (are pure form over function. 1. Partners share equally in profits and losses. 2. 3. 4. Service Partnerships: one partner contributes only capital and the other partner contributes only labor In service partnerships profits are to be shared equally, Losses are to be contributed only by the person who contributes the capital and it is assumed that the party who contributes labor already lost opportunity cost. a. Exceptions i. If labor partner gets compensated for labor ii. if a service partner makes any type of capital contribution

b.

5.

INPUTS v. OUTPUTS: Theoretically any money given by service partner makes service partnership a general partnership) a. Generally, share in outputs (profits and losses) equally regardless of what you input For service partnerships, the input becomes relevant. RUPA rejects this. But not all jurisdictions follow RUPA. Kovacik v. Reed: remodel kitchen partnership. Split profits 50/50. K contributes $10k. R contributes management. There was a dispute and now K wants R to contribute to losses. Default rules say share profits and losses equally. But where one partner contributes the money and the other contributes labor, neither party is liable to the other for contribution for any loss sustained.

6.

c.

Settlement of Accounts and Contributions Among Partners RUPA 807(b) i. Each partner is entitled to a settlement of all partnership accounts upon a winding up.

Profits and losses that result from the liquidation of the partnership assets must be credited and charged to the partners account. iii. If credits > charges, the partnership will make a distribution to the partner iv. If charges > credits, the partner will contribute to the partnership d. Reimbursement RUPA 401(c), (d): i. Partnership will reimburse a partner for payments made ii. Partnership will indemnify a partner for liabilities incurred by the partner in the ordinary course of business iii. A partnership will reimburse a partner for an advance to the p/s beyond the amount of capital the partner agreed to contribute

ii.

II.

Becoming a Partner RUPA 402(i): a. A partner may become a partner only with the consent of all the partners

III.

Management: a. General Rule RUPA 401(f): i. Each partner has equal rights in the management and conduct of the partnership business. Ordinary Course of Business Differences RUPA 401(j): i. A difference between the partners relating to the ordinary course of business may be decided by a majority of the partners. Outside the Ordinary Course of Business Differences RUPA 401(j): i. An act outside the ordinary course of business and an amendment to the p/s agreement needs unanimous consent Cases (Problems with Two Partner Partnerships): i. Nabisco v. Stroud: S and F had a general p/s to sell groceries. S told Nabisco that he would no longer be personally liable for bread. Nabisco still sold p/s bread at Fs request. Ordinary course: requires a majority. But we have a 2 person p/s so no majority. S could not restrict (ct looked at whether S could restrict entire p/s not if F could buy bread). Agency: also F had apparent authority to buy the bread. Ive been doing this for so long there is no reason for me to think it should stop now. ii. Summers v. Dooley: Garbage collection. D gets someone to replace him. S needs another person to help. D objects to hiring a new person. S pays new person out of own pocket. There was no majority action so Summers is not entitled to funds. Further, Dooley protested the entire time.

b.

c.

d.

iii. Partnership and Agency Principles Conflicting: 1. Agency Principle: all partners are agents of the partnership, so they have the power to bind the partnership . 2. Partnership Principle: all partners have an equal right to participate in the management of the partnership. 3. Disputes Between Partners and Third Parties: The agency principle controls because third parties have no knowledge of what goes on in a partnership. Similar to Nabisco. Disputes Between Partners: the partnership principle prevails. If there is some disagreement and some partner decides to act unilaterally, the one who acts will bear the cost. Similar to Summers. NABISCO` Challenged Action: Purchasing bread Ordinary course? Yes. agency Was F authorized? NO because he does not have majority vote. No (logically but not what happens) Alternative Challenged Action: Stroud objected to F buying bread. Ordinary course? Yes. But it requires a majority vote. Was there authorization? No. So Stroud looses.

4.

Summers/Dooley Challenged Action: hiring another person Ordinary course? Yes agency is there proper authorization? Was summers authorized to make decision? No. So Dooley wins. Dooley prohibiting Summers from management decisions Ordinary course? Yes. Is Dooley authorized to prohibit from management decisions? No. So Summers wins because D does not have authority to ban S and S has power to bind p/s. since there was no authority to ban from action S can do this because there was no authority to do this.

e.

HYPO: i. L&H (L 50% H 50%). stuffed animals. L wants to sell a different type of toy. L&J (L 10% J 90%) own a business that sells that toy. L says lets buy that toy for L&J. L does not tell H he owns part of that p/s. L wants to buy a lot and convinces H to buy 1,000. They dont sell. The invoice comes and H doesnt want to pay because H discovers L is a partner in LJ. What are Hs claims? Breach of duty of loyalty? Yes. L has to be full and honest. Also there is conflicted dealings. L is making a separate profit. What if H never asked L and H came up with the new toy idea? Also percentages are deceptive. 10% of 1 million is bigger than 50% of 100,000. S finds KL by herself and buys toy without L knowing. Does L have duty? Yes. Even if he didnt know? Even if you owe a duty you might not have breached it if you lack knowledge. You will breach duty if you are grossly negligent (i.e., take steps not to know/should know). Is there a duty for L to tell LJ that L has an interest in LH? Absent any external factors the buyer with a partner on both sides of a transaction will be more mindful and cautious.

IV.

Rights and Duties with Respect to Information RUPA 403: a. Books and Records: i. A partnership will provide partners and their agents and attorneys access to the books and records. ii. For former partners, the partnership will provide the records with respect to the period during which they were partners. iii. This right of access provides the opportunity to inspect and copy books during ordinary business hours.

RUPA Article 5 Transferees and Creditors of Partners I. RUPA 501 Not Co-owners: a. II. A partner is not a co-owner of partnership property and has no interest in partnership property. The property can be transferred voluntarily or involuntarily.

RUPA 502 Partners Transferable Interest in Partnership: a. The only transferable interest of a partner share of P/L and right to receive distributions.

III.

RUPA 503 Transfer of Partnership Interest a. b. Does not by itself cause a dissociation or a dissolution Transferee: i. Does not entitle the transferee to participate in the management or conduct of the partnership business, to require access to information, or to inspect or copy boos or records. ii. Does have a right to receive distributions

IV.

RUPA 504 Charging Order a. A judgment creditor of a partner exclusive remedy for satisfying judgment charging order (i.e., charge the transferable interest to satisfy the judgment) i. A charging order constitutes a lien on the judgment debtors transferable interest in the p/s.

RUPA Article 6, 7, and 8: How do partnerships end? Dissociation and Dissolution

I.

Partnership Dissolution a. RUPA 801 Four Methods of Dissolution i. in a partnership at will voluntary dissociation ii. in a partnership for a specific term or particular undertaking 1. the express will of all the partners (unanimous vote) 2. terms of agreement iii. operation of law 1. ex post the law changes making the undertaking unlawful 2. court order

b.

Three Phases of Dissolution i. Phase one dissolution ii. Phase two winding up and liquidation iii. Phase three actual termination RUPA 802 Partnership Continues After Dissolution: i. Continues only for the purpose of winding up RUPA 807(b) Settlement of Accounts and Contributions Among Partners i. Each partner is entitled to a settlement of all partnership accounts upon a winding up. ii. Profits and losses that result from the liquidation of the partnership assets must be credited and charged to the partners account. iii. If credits > charges, the partnership will make a distribution to the partner iv. If charges > credits, the partner will contribute to the partnership

c.

d.

II.

Partnership dissolution a.

When a partnership agreement allows the involuntary dissociation of a partner the expulsion must have been bona fide or in good faith for a dissolution to occur without violation of the partnership agreement. IC 23-4-131(1)(d) RUPA 601 Events Causing Partners Dissociation i. Express notice to partnership of partners intent to withdraw ii. An event agreed in the partnership agreement iii. Expulsion by unanimous vote (of all but the one partner being voted on) if 1. it is unlawful to carry on the partnership business with that partner 2. a partnership that is a partner is dissolved and is being wound up

b.

c.

RUPA 602 Power to Dissociate: i. General Rule: a partner has the power to dissociate at any time, rightfully or wrongfully. 1. Wrongful dissociation occurs when a. It is a breach of the p/s agreement b. In a partnership for a definite term or particular undertaking, if, before the expiration of the term or the completion of the undertaking (i) the partner withdraws by express will [unless 90 days w/in another partners death] see more pg 59 of statute. 2. Liability for wrongful dissociation damages caused by dissociation.

d.

RUPA 603: Effect of Partners Dissociation i. Rights and Duties 1. Partners rights to participate in the management and conduct of business terminate 2. Partners duty of loyalty [to refrain from competing] terminates 3. Partners duty of loyalty [to refrain from dealing adversely or acquiring material benefit 404(b)(2), (3)] and duty of care continue If Dissociation does not result in a dissolution and winding up: 1. The partnership must buyout the partnership interest. DEFAULT RULE EQUAL AMOUNT 2. Damages owed to p/s for wrongful dissociation must offset buyout price

ii.

iii. Can a dissociated partner still bind the partnership? 1. Yes if act would have bound partnership before dissociation and three elements: a. The party entering the transaction reasonably believed that the dissociated partner was then a partner b. Did not have notice of the partners dissociation c. And is not deemed to have known III. Judicial dissociation or dissolution: Policy concern for court ordered dissolution is that people could cash out unequitably (a moral hazard). a. RUPA 601(5) Judicial dissociation a court can order a partner dissociated if i. The partner engaged in wrongful conduct that adversely and materially affected the partnership business ii. The partner willfully or persistently committed a material breach of the partnership agreement or of a duty owed to the partnership or the other partners iii. The partner engaged in conduct relation to the partnership business which makes it not reasonably practicable to carry on the business with that particular partner RUPA 801(5) Judicial dissolution a court can dissolve a partnership if

b.

The economic purpose of the partnership is likely to be unreasonably frustrated Another partner has engaged in conduct relating to the partnership business which makes it not reasonably practicable to carry on the business in the partnership with that partner iii. It is not otherwise reasonably practicable to carry on the p/s c. Cases: i. Owen v. Cohen: bowling alley. It is an oral p/s, A partnership continues for an indefinite term when none is specified. C bullied O to the point where it was not reasonably practicable to continue a partnership between the two parties. ii. Collins v. Lewis: There is a p/s for a cafeteria. L will procure the lease and do management. C will provide money. Later they experience delays and as a result the expense grows a lot. As a result, C says this is not what I signed up for. I am going to stop funding. L says you cant according to our agreement. Ct. sides with L on the theory that had C continued to provide funding it would have become profitable so no Ct. order for dissolution. if dissolution is not granted you still have another means of getting out but it involves breaching contract.

i. ii.

IV.

Difference between dissolution and dissociation: a. b. Dissociation: terminates the former partners rights and requires the p/s to buy out the disassociating partner Dissolution: forces the p/s to be wound up and terminate. Sell assets.

Limited Partnerships Benefits -Tax benefits, only general partners have fiduciary duties, Disadvantages - limited partners lack control,

I.

Limited Partnership Defined: a. A limited partnership is i. A partnership ii. Having one or more general partners iii. And one or more limited partners

b.

General Partners: i. Control: have a lot of control. Right to control dayto-day operations. Need not take advice from LPs ii. Liability: exposed to liability of partnership in case partnership cannot satisfy the liability.

Most law firms are set up as limited partnerships. If there were GP then any partner could create liability. When LP liability from a LP does not attach to partnership

c.

Limited Partners: i. Control: not as many rights ii. Liability: they have limited liability (AGENCY: the more control you exert the more exposure to liability; the less control you exert the less liability) iii. Rights: can consult, vote, share opinions, Advise and opine on financing, dissolution, and other fundamental business issues (dissolution, key financial matters). IN order to reduce possibility to be held liable, LP are usually limited to be apart of things such as where and when meetings are held.

II.

Duties: a. Generally, only the general partners have duty of care and duty of loyalty. Formation: a. Most states require you need to file documents with the state Case/HYPO: a. Holzman: DRA p/s. D was a GP. R and A were LPs. Farm p/s. Ct says R and A exerted enough control over the business to make them general partners!!! Consulting and Advising is not control. b. HYPO: Campaign of limited partners to trade for tebow shows a lack of control of the ability to trade for him so not enough control to become a general partner

III.

IV.

Corporations General Overview I. Two Types: a. Public i. Characterized by a public secondary markets in which shares are traded. Private (closed) i. Absence of secondary market for stock; usually small # of SHs. May display many characteristics of a p/s.

b.

II.

Corporate Attributes: a. Limited Liability i. A SH is not personally liable for the acts and debts of corp except that he may become personally liable for his own acts Separate Legal Entity a legal fiction Perpetual Existence [MBC 302; DGCL 122(1)] Separation of ownership and control model i. Directors need not be stockholders unless so required. [DGCL 141(b)]. ii. The shareholders own; the board manages and control. This is unlike a partnership. See BOD III iii. Creates an agency problem because the owners cannot control the act of the corporation Separate taxpayer Formalities of formation Flexible Liquidity and Capital Structure i. Can sell bonds and shares in an easy way relative to private corps Constitutional rights 1 amend. for example
st

b. c. d.

e. f. g.

h. III.

Players: a. The Board of Directors (BOD) (control): i. General BOD Principles 1. Each corporation must have a BOD [MBC 801] 2. The BOD is elected by the SHs and runs the corporation 3. The BOD serves as a super agent to the corporation 4. A director can also be a shareholder and an officer (but the director need not be these thing) 5. Officers are hired by board to help them carry out the management duties of the corporation ii. BOD Functions 1. Select senior management and officer (MBC 8.40) 2. Oversee large strategic decisions 3. Approve and review major plans and financing transactions 4. Monitor competition iii. Number and Election of Directors: 1. BOD must consist of one or more individuals (MBC 8.03) 2. The number of directors may be increased by amendment or in a manner provided in the articles of incorporation or the bylaws b. The Shareholders (own): i. Voting Rights: 1. Election of directors [see MBC 804] 2. Amendments to agreements and bylaws 3. Fundamental transactions (e.g., merger) ii. Other SH Rights: 1. Receive dividends

2. 3. 4.

Inspect corporate books and records File a derivative suit on behalf of corporation May remove a director with or without cause unless the articles provide the directors may be removed only fro cause

c.

Officers (in most states one can be a director and an officer) {eg. of officers - CEO, COO, CFO, CIO, CLO} i. General Principles: 1. Act as agents of the corporation and of the board 2. The BOD may elect individuals to fill one or more offices of the corporation. 3. An officer may appoint one or more officers if authorized by bylaws or BOD [MBC 8.40] ii. Functions of Officers: 1. Each officer has the authority and shall perform the functions set forth in the bylaws or, to the extent consistent with the bylaws, the functions prescribed by the BOD. [MBC 8.41]

IV.

Steps for Corporate Formation: a. Step One: promotion and subscription i. Promoter: a person who identifies a business opportunity and puts together a deal, forming a corporation as the vehicle for investment by other people. 1. Duties: a. A promoter owes a fiduciary obligation to the corporation. The obligation is like that of an agent to a principal

b.

Step Two: choose a state to file articles and bylaws i. Delaware: favorable tax treatment; great corporate precedent. Get a mailing address there and an agent for service of process. This is all you need.

c.

Step Three: File Articles of Incorporation i. MBC 2.01: one or more person may act as the incorporator of a corporation by delivering the articles of incorporation to the secretary of state. ii. MBC 2.02 Content: must include (the name, number of shares, street address of initial registered office and name of its initial registered agent, name and address of each incorporator) may include the name and addresses of the individuals who are to serve as the initial directors, the purpose of the corporation, provisions defining, limiting, and regulating the powers of the corporation, BOD, and SHs, 1. Waiver of Limited Liability a. the imposition of personal liability on the SHs for the debts of the corporation to a specified extent and upon specified conditions , Elimination of Liability a. A provision eliminating or limiting the liability of the directors to the corporation or its shareholders for money damages for any action taken, or any failure to take action. b. Exceptions: cannot do it for (A) the amount of financial benefit received by a director to which he is not entitled; (B) an intentional infliction of harm on the corporation or its SHs; (C) liability for unlawful distributions

2.

d.

Step Four: hold first organizational meeting: MBC 2.05 i. Matters Addressed 1. Complete the organization of the corporation 2. Appoint officers 3. Adopt bylaws ii. If initial directors are named in the articles, this is done by them. If not, the incorporator shall hold the organizational meeting (to elect directors and a BOD who shall complete the organization of the corporation)

e.

Step Five draft bylaws

i. MBC 2.06 Bylaws: 1. The bylaws may contain any provision that is not inconsistent with the articles of incorporation. (Ultra veris- remedies of ultra veris actions is liability for those actions) V. MBC 3.02 General Powers of a Corporation: a. Perpetual duration b. To sue and be sued c. To have a corporate seal d. To make and amend bylaws, not inconsistent with its articles e. Property transactions f. To make contracts g. To lend money h. To promote i. To make charitable contribution Liability for Preincorporation Transactions: a. Corporate Liability i. MBC 2.04: all persons purporting to act as or on behalf of a corporation, knowing there was no incorporation, are jointly and severally liable for all liabilities created while so acting. Liability for those transacting with corporation (Corporation by estoppel): i. Southern-Gulf: CC was negating with SG. SG was not yet incorporated. CC tried to back out saying that there was no corporation. They were estopped from doing so.

VI.

b.

Why Delaware No minimum capital requirement Keep all books and records outside of Delaware Low taxes Highly competent judiciary Limited Liability and the Corporate Veil I. Limited Liability: i. Rule: shareholders of a corporation have limited liability (i.e., they will not be liable for debts of corporation) because of the corporate veil. The corporate veil is the legal fiction separating the shareholders from the corporation. Carlton. Purpose of Limited Liability and the Corporate Veil: Encourages people to invest in businesses that they wouldnt normally invest in

ii.

iii. Compare Partnership: in partnership, if the partnership does not have the funds needed to satisfy the debt, you can go after general partners. This is not so with corporations. II. Theories for Getting Around Limited Liability a. Agency Theory: One is unlikely to have a successful argument based on agency theory to get the shareholder if they are unable to prove that the shareholder is exerting control over the corporation. Recall that one of the elements of agency is control. For example, it would be difficult to get at the personal assets of an average investor who owns one share of Google since it would be very hard to argue that he is exerting control over Google's decisions. Enterprise Liability Theory: treat the whole thing as one enterprise (cross pierce.) Asserting that a corporation is a fragment of a larger corporate combine which actually conducts business would justify treating the corporation as an agent and piercing the corporate veil to reach the principal. However, only the corporate entity would be held financially liable. Piercing the Corporate Veil (PCV) (See III): this is how you get to the assets of the shareholders.

b.

c. III.

Piercing the Corporate Veil (PCV): a. b. General Rule: SHs have limited liability and cannot be touched. PCV is the exception to the rule. PCV TWO Elements: i. Unity of Interest: 1. Rule: There must be such unity of interest and ownership that the separate personalities of the corporation and the individual no longer exist (no separation of identities/ALTER EGO) AND

ii.

Sanction Fraud or Promote Injustice: 1. Rule: Circumstances must be such that adherence to the fiction of separate corporate existence would sanction fraud or promote injustice

c.

Four Unity of Interest Factors: i. Adherence to corporate formalities and keeping corporate records; ii. Comingling of funds; iii. Undercapitalization; iv. Corporation (or SH) treating the assets of another corporation (or the corporation) as its own Sanction Fraud or Promote Injustice: i. Not being able to satisfy debt is insufficient to meet this pong (otherwise, a SH will prevail in every PCV action) ii. it is helpful to show a pattern of fraudulent activity iii. it helps if some innocent third party is hurt Carlton: W gets hit by taxi. Cab owned by cab corp. Carlton is a SH in Cab Corp and 9 other Cab Corps W claims that Cab Corp is just a part of a bigger corporation. Minimum insurance $10k for cab corps in NY. Each cab is insured for that amount. HELD: no SH liability; corporate veil protection. Larger enterprise not liable, did not show that it was really one business, in which case the larger corporate enterprise would be liable through agency as the principal. SH not liable because it is not fraudlent for the owner of a single cab corporation to take out only the minimum required liability insurance. Sea-Land v. Pepper Source: SL is an ocean carrier. PS is a corporation that is undercapitalized and owned by M. M owns 5 other corporations. PS does not pay for the pepper that SL delivered. Element One: M did not run the corporations as separate entities. He ran each corporation out of the same office and with the same accounts. He borrowed money from the corps to pay for personal expenses. Element Two: not being able to satisfy the debt is insufficient to constitute fraud or injustice. Show a pattern of fraudlent activity.

d.

e.

f.

The Purpose of the Corporation and the Business Judgment Rule (BJR) I. The Role and Purpose of Corporations a. General Theme: i. the purpose of the corporation is to maximize shareholder profit

II.

The Business Judgment Rule (BJR): a. General Rule: Courts defer to judgment of business people so long as judgment is sound and not tainted with fraud. If you give some legitimate business reason, courts will defer to it. A.P. Smith v. Barlow: Smith Corporation makes a donation to Princeton University. SH files suit saying corporation did not have power to do this. SH says the articles of incorporation do not allow it and there is no express or implied power. The primary purpose of a corporation is to maximize shareholder profits. The contribution could have generated goodwill which will maximize shareholder profits. The court will not second guess the business judgment of the board. i. Limitations on Contributions: 1. Not excessive 2. No pet charity 3. Indiscriminatory

b.

c.

d.

Doge v. Ford: Henry Ford was majority SH. Corporation distributed regular and special dividends. Minority SH was Dodge. Ford is going to stop paying special dividends and use it to build a smelting plant. Ford says were making way too much, well give it back to the community. This is inconsistent with the purpose of a corporation (to maximize shareholder profits) RULE: it is a well-recognized principle of law that directors of a corporation, and they alone, have the power to declare a dividend of the earnings of the corporation, and to determine its amount. Courts will not interfere with the business judgment of the board, unless it is tainted with fraud. But, there needs to be a legitimate business reason; which, although Ford has such a reason, he did not give it and that is why Ford Corporation lost. Shlensky v. Wrigley: Cubs case. The cubs were the only team without lighting in stadium which prevents them from holding night games. Mr. Wrigley believes it will deteriorate surrounding neighborhood. ct says it is not the courts job to say how to run business; just because all the other teams are doing it is not reason enough. Rule: the directors are chosen to pass upon such questions and their judgment unless shown to be tainted with fraud is accepted as final. The judgment of the directors of corporations enjoy the benefit of a presumption that it was formed in good faith and was designed to promote the best interests of the corporation they serve. i. Compare Ford (ford only proffers a social reason; Wrigley offers a business reason and wins)

e.

BJR does not exist for partnerships because ownership and management is the same they dont need BJR because ownership and control are tied together) with a corporation, the ownership and management is separated and it leads to conflicts

III.

DCGL 102(b)(7): a. The certificate of incorporation may include: i. A provision ii. Eliminating or limiting iii. The personal liability iv. Of a director v. To the corporation or its shareholders vi. For monetary damages vii. For breach of fiduciary duty as a director The provision SHALL NOT eliminate or limit the liability of a director in any of the following four situations: i. For breach of the duty of loyalty to the corporation or the stockholders ii. For acts or omissions not in good faith or which involved intentional misconduct or a knowing violation of law iii. Unlawful distributions iv. For any transaction from which the director derived an improper personal benefit v. Acts or omissions occurring before effective date of provision

b.

The Limited Liability Company (LLC) I. General Overview a. b. c. d. A hybrid between a corporation (limited liability) and a partnership (tax). No shares or partners. But there are members. Governed by state regulation. Profits and Losses: i. Absent a contrary agreement most statues allocate profits and losses on basis of member contribution (Compare default partnership rules allocating profits and losses equally) Withdrawal: i. Members may withdraw and demand payment of interest upon giving notice specified in statute or LLC agreement Liability: i. No member is obligated personally for any debt liability of the LLC solely by reason of being a member or manager (like a corps shareholders)

e.

f.

II.

Formation a. Process: i. File articles of organization ii. Create operating agreement iii. Filing fees and franchise tax iv. choose and register a name with the state and the name must contain LLC as a suffix v. Must designate and office and agent for service of process Water, Waste, and Land v. Lanham: Company name not on business card and the LLC suffix was not on the business card either. RULE In order to get limited liability protections of LLC, you need to tell the world that you are an LLC. Partially Disclosed Principal Doctrine: if both the existence and identity of the agents principal are fully disclosed to the other party, the agent does not become a party to any contract which he negotiates . . . but where the principal is partially discloses (i.e., the existence of a principal is known but his identity is not), the agent is a party to the contract. AGENCY v, LLC Law the statutory notice provision applies only where a third party seeks to impose liability on an LLCs members or managers simply due to their status as members or managers of the LLC. When a third party sues a manager or member of an LLC under agency theory, the principles of agency law apply

b.

III.

Piercing the LLC Veil a. Kaycee v. Flahive: i. piercing the LLC veil applies to LLCs too. If the members and officers of an LLC fail to treat it as a separate entity as contemplated by statute, they should not enjoy immunity from individual liability for the LLCs acts that cause damage to third parties.

IV.

Choice of Law: a. If issue is about veil or liability corporate law b. If issue is about allocation of profits partnership law

V.

LLC Benefits: a. Easy to set up (low start up costs relative to corporations) b. Why (other than tax reasons) use an LLC over a corporation or partnership? If you want to grow an LLC or a p/s, the new investors will want to have a say!!! With a corporation, you can just issue shares Argument Against LLC: a. Hard to take public because its hard to have 2,000,000 members (need everyone to sign) b. Many states limit the use of LLCs c. BIG ARGUMENT: not much precedent for LLCs. Thus, most are litigated under partnership or corporate law

VI.

Duties of Officers, Directors, and Other Indsiders I. General Rules: a. Officers and directors are agents of the corporation. Two primary duties that agents owe to principals are the duty of loyalty and the duty of care b. Duty of Care: i. MBC 8.30(a): each member of the BOD, when discharging duties of a director, shall act: (1) in good faith; and (2) in a manner the director reasonably believes is in the best interests of the corporation. 1. Failure to exercise due care may subject individual officers and directors to personal liability. MBC 8.30(b): shall exercise duties with the care that a person in a like position would reasonably believe appropriate under similar circumstances.

ii.

iii. Defense: Business Judgment Rule. If claim is that director breached the duty of care, the director will assert the BJR as a defense. But, for that to hold up, you have to show (1) legitimate business reason for decision (Ford; Wrigley) AND (2) that you acted prudently in the procedure of reaching the decision (Van Gorkum) Duty of Loyalty: must put the corporations interests first i. Four ways to breach: 1. Competition with corporation 2. Exploitation of corporate opportunity 3. Insider trading 4. For majority shareholders (owe a fiduciary duty to minority shareholders) no transaction that is proportionally detrimental to minority SHs There is a component of good faith in this duty as well. It requires directors not to engage in 1. Conflicted dealings 2. Wasteful use of corporate assets (wasteful means actions so grossly irrational that there seems to be something done in bad faith) 3. Cant consciously or knowingly refuse to do your job.

c.

ii.

iii. Defense: 1. BJR is NOT a defense. The BJR yields to the duty of undivided loyalty. Inherent in the claim is a presumption of a conflict of interest, the judgment youve made is not a business judgment; it was a personal reason secondary to the purpose of the business II. The Obligations of Control: Duty of Care a. Kamin v. Amex: Amex, instead of selling stock at a loss, distributed the stock to shareholders. Shareholders say this is a waste of corporate assets. But BJR protects directors unless there is a showing of fraud, self-dealing, illegal conduct, or bad faith. The court will defer to the business judgment. Despite the possibility of a better alternative, the business judgment rule will not yield. It will yield, however, to to fraud, self-dealing, illegal conduct, or bad faith. Smith v. Van Gorkum: merger case. RULE although the court will defer to the business judgment of the directors, the directors must make an informed decision. Courts will now look at the process by which you reached your decision. Here, the board was grossly negligent in only conducting a 20 minute meeting and not reading the merger document. Thus, they were not afforded the benefit of the business judgment rule. Take away rule for the duty of care: i. Corporations get great deference from courts by BJR when it comes to duty of care, which deals with how you carry out decisions. Exception: fraud, illegality, self-dealing, or bad faith. Procedurally, ct will not second guess your judgment but it will look at the process by which you reached decision. If process is uninformed no

b.

c.

deference. No matter how favorable the outcome, if the process is bad, it is a violation!!!! Van Gorkum. You must show that you complied with formalities.

III.

Duty of Loyalty a. Bayer v. Beran: advertising case. SHs say there is conflicted self-dealing. HELD no breach of the duty of loyalty. There was nothing linking the advertising campaign to the promotion of her career. Practical tips: conflicted officer should excuses himself from meeting, cant try to inappropriately influence directors to vote for conflicted dealings, disclose all conflicts.

c.

MBC 8.31 Standards of Liability for Directors i. Director NOT liable to corporation or shareholders 1. General Rule: For any decision to take or not to take action, or the failure to take action, as a director When director will be liable: person asserting liability establishes that 1. Action was not in good faith 2. The challenged conduct was a result of a. A decision which the director did not reasonably believe to be in the best interest of the corporation or as to which the director was not informed to an extent the director reasonably believed appropriate in the circumstances 3. The challenged conduct was a result of a lack of objectivity due to the directors familial, financial, or business relationship with another person having a material interest in the challenged conduct.

ii.

IV.

Dominant Shareholders a. General Rules: i. Pepper: A dominant or controlling stockholder or group of stockholders owes a fiduciary duty to the corporation and to the minority shareholders. ii. LIN: when a minority SH is challenging a majority SH, the court applies a fairness test; the challenger will assert a breach of the duty of care and of the duty of loyalty. The SH is likely to fail on the duty of care claim because of BJR. 1. Intrinsic Fairness Test: whenever an objective third party can look at a transaction and see it as objectively fair. 2. 3. Analysis for Duty of Loyalty: look for self-dealing Can there be a conflict of interest with no breach of the duty of loyalty? YES! See Bayer (looking at the process) Parent-Subsidiary: a. Parent owes a duty to subsidiarys minority SH i. Majority owes duty because majority has significant level of control ii. if youre a minority SH it is unlikely that you have any control so no duty; iii. like agency, more control, more duty, more exposure to liability.

4.

b.

Sinclair Oil: Sinclair Corporation was the majority shareholder of both SinInt and Sinvin (i.e., Sinclair was the parent corporation). SinInt was a wholly owned subsidiary. Sinclair elected the BOD of both corporations. Sinvin brought three claims. (1) Sinclair forced Sinvin to pay a dividend so Sinvin couldnt expand (2) contract breach (3) corporate opportunity. HELD: Sinclair wins (1) and (3) but looses (2). i. (1) Sinclair wins because minority shareholder received a proportional benefit (protected by BJR) ii. (2) this is self-dealing (not protected by BJR) there is the same majority shareholder on both sides of the transaction 1. Sinclair owned 100% of SinInt but only 97% of sinvin. There are two groups of SHs in Sinvin. So they self-dealt at the expense of the minority shareholders. This problem would not arise if both subsidiaries were wholly owned. iii. (3) protected by BJR Intrinsic Fairness Standard: i. the parent must prove that its action was intrinsically fair to the subsidiary corporations minority shareholders (high degree of fairness and a shift of proof) ii. when it applies: 1. the standard will be applied only when the fiduciary duty is accompanied by self dealing the situation where the parent is on both sides of the transaction with its subsidiary

c.

2.

Self-dealing occurs when the parent, by virtue of its domination of the subsidiary, causes the subsidiary to act in such a way that the parent receives something from the subsidiary to the exclusion of, and the detriment to, the minority stockholders of the subsidiary.

d.

Zahn v. Transamerica Corp: AF has two different classes of stock: A, and B. Class A rights: at liquidation class A gets 2-1 compared to class B; dividend is double; A is convertible to B; Callable: corporation can buy back at any time. Z is a SH and he owned Class A stock. TM had gained control of AF by purchasing a lot of AF stock. AF calls class A stock and then liquidates the company. Class A could have gotten a lot more. Class A could have gotten $240 instead of $60. Directors knew of the appreciation in tobacco and didnt tell anyone. i. Agency: TM owes a duty to the minority SH because it had control over AF. Majority SH owes duty to corporation and to the SHs. ii. You withheld information from the SH and didnt tell the SH, and used it for your benefit (Similar to Meinhart v. Salmon partnership case) LIN. HYPO: SH in Exon. You dont know what they do for business. On the stock it says the stock is worth $10 (you can redeem for this amount). Exon directors decide to redeem shares. At time purchased it was trading at $2, now trading at $100. But you get offer to redeem at $10 and you do it because you dont know. Nobody told SH that it appreciated. Should they have told you in the letter of the appreciation? It depends. If the average person should know of the appreciation, no duty to disclose. Hire investment bank to give you a fairness opinion; objective third party to give you a fairness opinion.

e.

V.

Review of Duties: a. Limited Liability: i. One of the features of a corporation is limited liability. If owners behave properly and observe formalities, the owners will have no personal liability. This is different than a general partnership. BJR: i. This is a distinct feature of the corporation. Courts will defer to the business judgment of business people if the judgment is the result of a sound process and if there is no indication of fraud, self-dealing, gross negligence, conflict of interest, or bad faith.

b.

c.

Challenging Corporate Action: i. Shareholders will plead that the corporate action breaches both the duty of care and the duty of loyalty. The contest comes down to which of these duties is being analyzed. The corporate defendant wants the action to be contested, if at all, under the duty of care because there is the BJR protection. The plaintiff wants to contest the action under the duty of loyalty because there is no BJR protection. ii. Determining which duty to assess: 1. Is there a showing of self-dealing, bad faith, conflict of interest, or gross negligence? If yes, see (iv). If no, see (iii).

iii. Assess under duty of care: 1. Protection of BJR. a. Is the process sound? If yes, protection. If no, no protection. iv. Assess under duty of loyalty: 1. Was the decision in best interest of the corporation? 2. Was the decision intrinsically fair? Entity Selection I. Preferable Entities for Taxation: a. LLC (because it still gets the limited liability that partnerships dont enjoy) b. Partnerships (flow through taxation) c. Corporations (double taxation) Preferable Entities for Formation: a. Partnership is easiest to form (perhaps too easy because you can form one without even knowing it) Liability: a. Corporation or LLC b. Partnership is bad. But if youre going to do it, make it a LP. Transferability of Interest: a. Corporation is easier because you can just sell your shares b. If you own shares in a p/s you need to figure out with partners Continuity:

II.

III.

IV.

V.

a. b. VI.

A corporation has a perpetual existence (there is an open market for a public corp) With partnership, you need to find someone else that the partners like

Management: a. Corporations: centralized management; if you want the control, youd prefer corporation because the shareholders dont have control because of separation of ownership and control. Parttnerships: if you want some say, but not a lot, LLP. Limited partners can consult and advise and retain limited liability.

b.

VII.

Start up costs: a. Partnership is better Public Perception: a. Corporation is easier for public to understand. People more likely to invest in corporation. Securities, Mergers, and Acquisitions

VIII.

I.

Securities a. Federal Securities Laws: i. A cause of action for securities fraud is easier to establish than normal business fraud. ii. Goals of the 33 Act: 1. Mandate disclosure to investors of all material information t 2. Aims to prevent fraud iii. SEA Act of 1934 (the 34 Act): 1. Concerned with secondary markets of securities (i.e., securities already out there being exchanged) 2. Primary goal is for the public to have updated information. Defining a Security:

b.

i.

Securities Act of 1933 (the 33 act) 2(a)(1): 1. The term "security" means any note, stock, treasury stock, security future, bond, debenture, evidence of indebtedness, certificate of interest or participation in any profit-sharing agreement, collateral-trust certificate, preorganization certificate or subscription, transferable share, investment contract, votingtrust certificate, certificate of deposit for a security, fractional undivided interest in oil, gas, or other mineral rights, any put, call, straddle, option, or privilege on any security, certificate of deposit, or group or index of securities (including any interest therein or based on the value thereof), or any put, call, straddle, option, or privilege entered into on a national securities exchange relating to foreign currency, or, in general, any interest or instrument commonly known as a "security", or any certificate of interest or participation in, temporary or interim certificate for, receipt for, guarantee of, or warrant or right to subscribe to or purchase, any of the foregoing

ii.

Robinson v. Glynn: R loans $1 million to G to help Gs company. The loan was so that Gs LLC could run a field test. Upon successful completion of the test, R will loan more. R received what they called securities. 1. Defining an Investment Contract (Howey Test): a. Contract, transaction, or scheme b. Whereby a person invests his money c. in a common enterprise d. and is lead to expect profits e. solely from the efforts of others 2. CT found that this was not a security because he did not rely solely on the efforts of others. He was not a mere passive investor. He had a lot of control over the company. Going back to one of the essential themes of agency, more control exposes one to more liability. Thus, he could not gain the protection of the securities laws because he had a lot of control. 3. The solely requirement has since been relaxed. However, you cannot have any management role. 4. You need to own shares over which you have no control.

iii.

HYPO: sunflower painting. Collector buys painting. Collector chops it up into = squares and tells people that each of you can own a piece of the painting. Is this a security? Doesnt satisfy common enterprise because youre not owning the same thing; it is an investment in different portions.

c.

Assumptions of Security Markets: i. Participants are rational 1. Our collective wisdom is better than the wisdom of each individual ii. Perfect information iii. No dominant actor 1. Thats why there are special rule (i.e., fiduciary duties) for majority shareholders. iv. No barriers to exit and entry Purpose: securities laws tries to create a market that is fair. Rule 10b-5

d. e.

i.

SEA 10(b): it shall be unlawful for any person, directly or indirectly, by use of any means or instrumentality of interstate commerce or of the mails, or of any facility of any national security exchange to 1. Use or employ 2. In connection with the purchase or sale of 3. Any security 4. Registered on a national securities exchange or any security not so registered 5. Any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the Commission may prescribe as necessary or appropriate in the public interest of for the protection of investors. Rule 10b-5: it shall be unlawful for any person, directly or indirectly, by use of any means or instrumentality of interstate commerce or of the mails, or of any facility of any national security exchange 1. To employ any device, scheme, or artifice to defraud 2. To make any untrue statement of material fact or to omit to state a material fact necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading. 3. To engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person, in connection with the purchase or sale of any security. You have to buy or sell (you cant bring an action under this stating that the CEO made a statement which made you not buy). ****this is the most important corporate and securities statute. Why would a p/s care about a security? Because of the investment contract provision. Investment contracts can trip up the security laws for P/Ss, LPs, and LLCs, even though they dont necessarily deal with per se securities. This makes security fraud applicable to UBEs.

ii.

**very broad.

ELEMENTS

iii.

Materiality:

1.

Standard: An omitted fact is material if a. there is a substantial likelihood b. that a reasonable shareholder would consider it important in deciding how to vote (Alter vote) AND c. There must be a substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the total mix of information available.

i.

The total mix of information depends on the RELATIONSHIP (the relationship between a 3RD P and a corp will be different than the relationship between a Corporation and subsidiary because of the information available)

2.

Materiality for Preliminary Mergers: the probability/magnitude approach: a. Probability factors board resolutions, instructions to investment bankers, and actual negotiations between principals or their intermediaries may serve as indicia of interest.

b.

Magnitude facts size of the two corporate entities and the potential premiums over the market value

3. 4.

Puffery does not offend Rule 10b-5. If youre just talking about how great your company is, it is just an opinion and will not trigger this rule. Look at statements that are made, statements that are not made, look at the context (every company is different), remember it is substantial likelihood and significantly altered. Look if there is a material misrepresentation or a material omission.

iv.

Reliance:

1.

Fraud-on-the-market theory presumption: an investor who buys or sells stock at the price set by the market does so in reliance on the integrity of that price. Because most publicly available information is reflected in market price, an investors reliance on any public material misrepresentations may be presumed for purposes of a Rule 10b-5 action. a. Makes it easy relative to other fraud cases to prove reliance; you can just say you relied on the market price and there will be a presumption of reliance. Rebutting the Presumption: any showing that severs the link between the alleged misrepresentation and either the price received (or paid) by the plaintiff or his decision to trade at a fair market price, will be sufficient to rebut the presumption.

2.

a.

Examples: i. It the market makers were privy to the truth about the merger discussions and that the market price would not have been affected by their misrepresentations ii. If news of the merger discussions credibly entered the market and dissipated the efforts of the misstatements, those who traded the shares after the corrective statements would have no direct or indirect connection to the fraud.

v.

Basic Inc. v. Levinson: C wanted to buy B but didnt because of antitrust concerns but later it became ok so they engaged in preliminary merger discussions. Stock rose. B issued three statements that it was not engaged in any merger negotiations. Then they made the merger. SH owns stock in B and sold it based on the statements denying the merger. SH sues saying they can get more for the stock if they didnt sell because of the merger. SH must prove materiality and reliance. Was the omission material? Was there a misrepresentation when they said there were no merger discussions?

II.

Mergers and Acquisitions (M&A): a. Overview: i. Transactions that transfer or consolidate control of a corporation or other business entities. ii. Merger Route: one of the original companies survives iii. Consolidation Route: neither company survives (A wants to buy B, they create a new entity called C and transfer all the assets and liabilities into C) iv. Key players: 1. Acquieror 2. Target v. Steps:

vi. vii. viii. ix. x.


b.

Reaching out and a negotiation Merger agreement is signed a. Doesnt necessarily mean youre merging; just means youve reached an agreement in principle 3. BOD approves (of each side) 4. SHs approve (of each side) a. Because it is an extraordinary action 5. Make a filing (articles of merger) with the state 6. Appraisal Rights a. If you are a SH, and you dont want that price, the corporation picks an independent third party to serve as an appraiser. The appraisal right will usually be close to the sale price. 7. Closing Methodologies 1. Straight merger 2. Asset purchase In a MERGER the acquiring corporation assumes all of the acquired corporations liabilities, in an asset purchase, liability is not transferred. Mergers require SH approval and invokes approval rights; Asset sales just require . . . Taxes 1. Can me structured as tax free reorgs 2. Asset sales generally create tax liabilities

1. 2.

Methods of Combining Companies:

i.

Statutory Merger: 1. A combination accomplished by using a procedure prescribed in the state corporation laws 2. Terms are spelled out in the merger agreement 3. Some States: require approval by votes of the BOD and the SHs of each of the two corporations. In addition, SHs of each who vote against the merger would be entitled to demand that they be paid in cash the FMV of their shares appraisal rights 4. Other States: dont allow this Stock Purchase: 1. Acquire enough shares to gain control of the target 2. No votes by either companys BOD or SHs is necessary. 3. Neither would ther be any appraisal rights. 4. Once it gained sufficient control over the target (typically 90%), the acquiring company could use a specific procedure called a short-form merger to merge the two companies. Asset Purchase: 1. Buy all the assets 2. ONLY requires acquiring companies BOD approval. Need Target SHs approval. 3. No succession in unforeseen liabilities of the acquired company

ii.

iii.

c.

Practical Tips: i. Taxes ii. Management DE FACTO MERGER DOCTRINE

d.

i.

Farris v. Glen Alden Corporation: 1. When there is an asset sale there is no fundamental change; when you merge there is a fundamental change.