I. General A. What kind of Business is this? 1.

Sole Proprietorship (SP) - a biz in which one person owns all the assets, owes all the liabilities, and operates in his or her personal capacity. a. PROS - Most common simplest structure; best if choosing to wor alone; easy to form, offers complete mana erial control ! "O# make all the decisions$ Bi% earnin s onl& ta'ed once (no dou(le ta'ation) b. )O*S o+ner is P,RSO*A--" -IAB-, for A-- financial o(li ations of (i%; places o+n assets at risk$ no lia(ilit& protection$ difficult to raise .$ must depend on o+n financin sources !loans, home e"uity, etc.#; Banks reluctant to make (i% loans !1# ,. . $ sells comic boo s to % !which is an &'#, (am in middle as an agent dealing w)*rd party on behalf of $ +. Partnership /O-#*0AR" association of 1 or more person2s who ,ointly own carry on a biz for profit. .gree to share in profits - losses of biz a. General Partnerships (GP) partners 3A*AG, the co. - assume responsibility for the '/s debts - other obligations; PROS4 (5) 0ood for + or more parties who want to be acti6el& in6ol6ed .1$ (1) ,asier to form b. -imited Partnership (-P) ser2e as I*/,S0ORS O*-"; )O* - *O )O*0RO- o6er the co.7 (ut PRO4 *O0 su(8ect to the same lia(ilities as GP2s c. PROS3 (5) Shared lia(ilit&; (1) 9Pass throu h ta': losses are passed through to report on indi2idual income ta4 returns d. )O*S3 (5) 0R#S0 ISS#,S4 One person can make decisions +;o consultin other partner7 (indin on P2ship$ (1) each p personall& lia(le for financial o(li s of the (i% !li e &'#; (<) ,'pensi6e to esta(lish (;c re=uires more e'tensi6e le al > acct2in ser6ices !1# *O0,3 'robably 1ot best choice for a new biz b)c of (5) all the re"uired filings - (1) admin comple4ities, #*-,SS &ou e'pect to ha6e 3A*" PASSI/, I*/,S0ORS *. )orp. an entity !usu. . biz# ha2ing authority under law to act as a sin le person distinct from the &5/s who own it - ha2ing rights to issue stoc - e4ist indefinitely6 a. PROS - (5) *o indi6idual lia(ilit& ! limited lia(ilit& !you/re only liable for the amt of your in2estment in the co., e.g. buy starbuc s for 7+, - it goes out of biz, all you lose is 7+#; (1) .bility to raise 7 by selling stoc s, (<) ?uration3 (orp/s e'ist I*?,@I*I0,-" e2en if shareholders die, sell shares, or become disabled !1# *O0,3 (S)orp) a2oids double ta4ation by allowing income or losses to be passed through on indi2idual ta4 returns, similar to a parship b. )O*S - (5) ?ou(le ta'ation ! ta'es on the profits (a) ?i6idends ets ta'ed too (1) 84pensi2e to create corp 9admin filings etc.: ;. A&(rids 'opular b)c they gi2e you limited lia(ilit& > less costl&3 <<(/s, <'/s, etc. B. Be& 0erms 1. ?e(t a specific sum of money due by agreement or otherwise +. )reditor one to whom a debt is owed *. ,=uit& - some ownership interest in an entity, property, esp. in a biz; e.g. 2alue in house, ;. Shareholder - e"uity ownersm- one who owns or holds a share or shares in a co. =. O+ner one who has the right to possess, use, and con2ey something
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>. Residual o+ner one who will reap the marginal dollar of the firm/s gain or suffer the marginal dollar of its losses a. 8.g. mortgage 2alue ? +@@A, biz owes 1@@A to creditors; what/s left is yours; but if (i% OW,S 3OR, than its WOR0A7 then "O# are the -OW,S0 ,*0I0" to et an&thin II. A enc& Relationship3 Rest. 1d CC 57 <$ Rest. <d CC 5.D5E5.D< !R<:# .. A enc& Structure4 %hree parties- 9P7 A7 (0)Fhird 'arty 1. *O0,4 ,/,R" AG,*0 IS A @I?#)IAR" ! owes a higher standard of care to the '; must a2oid (BC/s, self-dealing, disloyal acts, etc . B. )ommon Issues4 1. $oes an agency relationship e4ist between ' - .D +. Cs there a ', an ., - %D Ehat conse"uences to follow ' from interaction btwn . - %D *. Cs the problem btwn the . - the 'D ;. Cs % trying to hold the ' to an agreement based on ./s conduct or e4press agreementD a. .pparent, 8stoppel, Fatification =. $oes it in2ol2e a % trying to hold ' liable for ./s tortsD (. &%8'& 1. Is there are A enc& Relationship? 3A*I@,S0A0IO* a. R#-,4 R< C 5.D53 An a enc& rship e'ists +hen (5) P (1) 3A*I@,S0S ASS,*0 to (<) A for (G) A to act on P2s (ehalf > (H) su(8ect to P2s control and (I) the A manifests assent or other+ise consents to so act. !1# %hings ' didn/t say doesn/t stop the fact that ' e4pressed consent to . !+# . 'Gs manif. of assent to an agency relationship may be (5) informal7 (1) implicit7 > (<) nonspecific (. ?id P > A )A-- it JA enc&J? IRR,-,/A*0. (5) R#-,4 R< C 5.D1 ! As lon as a enc& elements of R< C 5.D5 are present7 it ?O,S *O0 3A00,R if the parties actuall& called it an A enc& Rship. !a# Whether an rship is characterized as agency in an agreement btwn parties or in the context of industry or popular usages is NOT controlling. c. Was ASS,*0 >;or I*0,*0 manifested? AOW? !1# R#-, ! R< C 5.D<H. person 3A*I@,S0S ASS,*0 or I*0,*0IO* through WRI00,* or SPOB,* WOR?S or O0A,R )O*?#)0. (a) We care a(out A2s state of 3indK !b# )O*?#)0 is S#@@I)I,*03 !i# R#-, E )mt )O*?#)0 (5) by a P,RSO*, that is (1) OBS,R/AB-, by B%58F& (<)which e4presses meaning !broader than communication#; the relevant state of mind is that of the P !"ON W#O O$" !% " or otherwise learns of the manifestation 9B,"3 it2s +hat the A (elie6ed the P intended$ +hat +ould a reasona(le person sa&: +. Who is an A? R#-,3 An AG,*0 is part& +ho a rees to act on (ehalf of the re=uestin part& > su(8ect to the re=uestin part&2s control. &orton v. 'oty. a. &orton v. 'oty. 9$oty offered her car to 5.&. football coach to ta e football team to game; (oach got in accident enroute to game in which player, 0orton was in,ured; (t. found agency rship e4isted, so $oty <iable:
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!1# @actors3 !a# )oach acted on ?ot&2s (ehalf the condition was that (oach dri2e car; no one else !b# )oach acted su(8ect to ?ot&2s control ct. focused on this; $oty 2olunteered her car ct. said she could/2e dri2en it herself; she didn/t ha2e to put this condition on him (c) )oach consented !+# ?o &ou a ree +ith the ?ISS,*0? E B#?G, .gency means more than mere passi6e permission$: in2ol2es re"uest, instruction, or command. 5ere, $oty simply loaned her car to coach to enable him to transport players to the game. %he condition of coach dri2ing car was a mere precaution so that the car would not be dri2en by any of the young players. $oty made a ind gesture to help coach - the team. !*# Polic& +ho should (ear this cost? - $oty has insurance she can pay this; (. ?o &ou need a +ritten B for a enc& rship OR )ompensation? *O. !1# R#-, ! R< C 5.D5 cmt. d E *O$ +ritten B or )ompensation is not essential. Lust need a 3,,0I*G O@ 0A, 3I*?S %5.% ' wants . to act on '/s behalf sub,ect to '/s control doesn/t need to be formal or 2erbal; !gratuitous acts don/t mean there/s an enforceable A can still create .-rship# c. Ad6ice @OR 'OT(3 !1# Cnstead, say any adult staff)school faculty can dri2e the car; don2t 8ust desi nate one person; But B, )AR,@#-4 the more &ou tell him to;+hat *O0 to do7 looks more controllin $ 8ust sa&7 9here2s m& car$ do +hat &ou +ill.: !+# -oan 6. Borro+ need clearer loan language; suggest doing a <oan A, saying IBJ act in 8K(<J&CL8 to your BE1 control B#0 remember R< C 5.D1 e6en thou h &ou B2d in that &ou are *O0 in an AErship7 the ct. looks at )O*?#)0$ so this is a #S,@#- fact7 (ut *O0 )O*0RO--I*GK d. Mact, (ontrol, - <east (ost .2oider; (lient ob,ecti2es, means, - cost-benefit analysis *. Who is a P? ,M),P0IO* 0O 0A, R#-, +;-enders > )reditors3 a. R#-,3 A E rship can (e esta(lished +;o a B (ein formed OR +;o the parties intendin to (e (ound (& the le al o(li ations of that rship. )ensen v. *argill b. )ensen v. *argill - )O*0RO-; (argill -Grain ,le6ator; ( loaned 7 - capital to E re2ol2ing line of credit e2en during E financial deterioration, - in turn, ( had right of 1st refusal to buy grain, E shipped most of it to (; ( too o2er daily ops, responded to farmers concerns abt. payment, had name on E/s chec s; E defaulted on 7+M A/s w)farmers, who sued both E - (; E was insol2ent, so farmers sued (; ( liable ct. finds .-rship !(ontrol# !1# *O0,3 %hey might/2e started out in a lending rship, but as indebtedness increased, they got more in2ol2ed in daily operations; !+# *argill @A)0ORS3 !a# (5) )2s constant recommendations to Warren (& phone7 (H) )2s correspondence > criticisms re ardin W2s finances7 (I) )2s determination that W needed 9stron paternal uidance: ? P#SA 0OWAR? AEP rship !b# (<) E/s inability to enter into mortgages, to purchase stoc , or to pay di2idends w)o (/s appro2al; (G) (/s right of entry onto Earren/s premises to carry on periodic chec s - audits, - (N) (/s power to discontinue the financing of E/s
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operations3 A-- AR, I*?#S0R" S0A*?AR? 0O?A" in lendin rships7 doesn2t create lender lia(ilit&7 state ri ht to protect their interest$ (<) Was W actin as )2s a ent on )2s (ehalf? !a# "es; )O*0RO-; ( resp. to Marmers, right of 1st refusal, N@O of grain !b# Residual o+ner ar ument3 ( is mortgage holder - is owed more than E/s 2alue - ( basically owned it, so e2erything E did was for benefit of ( !;# AAR*,R3 .rgument that ) +as protectin their in6estment;mana in credit proacti6el&$ ,ust doing what e2ery good lender does; C get to watch what you/re doing, - a little closer when you/re not a good steward w)my 7 ( protecting interest, industry standard to help them understand their finances - help them ha2e the resources to turn it around (ut ct. said the& crossed the line !=# Wh& *argill is the ,M),P0IO*D (t. relied on C 5G O of R1 GO*, in R< !a# )O33,*0 @(5)7 R< 5.D5 in the debtor+creditor context, most cts are reluctant to find rships of a on the basis of provisions - agreements that protect creditor interests. *argill is the Exception, NOT the rule. !i# PO-I)" on -ender -ia(ilit& when in R,),SSIO*;)RISIS, cts. will go w)*argill; little more li ely to find lender liability; watch funds closer; B#0 WA,* 0I3,S AR, BOO3I*G7 the& don2t +atch as closel&; could sa& that the inconsistenc& hurts (i% (;c lacks certaint&, but it2s hard to find optimal (alance (t+n allo+in (i% to (e entrep > let markets do their thin > to make sure their not e'ternali%in costs too much (I) Ad6isin )ar ill in the future? !a# Set up a separate affiliate for financin , and be sure to respect the differences between your + mechanisms. MranchiseHassume liability, but ha2e more control. (() If thereOs a default on a line of credit &ou e'tended7 shut do+n the loan7 collect +hat &ou can7 and miti ate &our risk. !c# Act more like a creditor ind of rally the farmers !d# @inancial hardships +ere o(6ious ! shouldn2t ha6e (een le6era in more .$ be more proacti2e w)management of credits; saw writing - ignored it to their detriment ne4t time, see it - respond immediately !e# %hough they li e Ma ing money now, they/ll be paying it out on the bac end !P# PO-I)"3 Was )ar ill in the (est (or (etter) position to miti ate the harm in the future;least cost a6oiderD !a# ( could go after E for bad conduct !falsifying documents#, but that/s e4pensi2e - unli ely b)c ,udgment proof A*? ?O,S*20 ,M)#S, P2S -IABI-I0" 0O 0K (() What could farmers ha6e done? If not )7 then farmers (earin risk ! +hat is the disad6anta e +hen &ou ha6e a roup of people tr&in to do somethin 6s. 5? (i) /aried interests7 hard to consolidate P )O--,)0I/, A)0IO* pro(lem$ ettin claimants to act coherentl& > to+ards the same o(8ecti6es !ii# More e4pensi2e)transaction cost for farmers !iii# ( could ha2e acted li e true creditor get farmers together; catalyst
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collecti2e action, so could cost the ris better (c) Was )ar ill the (est least;cost a6oider? ",S. !i# ( could/2e3 (5) changed the lending rship, (1) too action when E defaulting, (<) cost the risk (etter than farmers c. *O0,3 #se A enc& la+ to et to deep pocket ?2s$ to pro6e case > et dama es III. A enc&4 -IABI-I0" of Ps to 02s in B ! IS 0A,R, A B B,0W,,* A > 0? .. < Primar& +a&s to esta(lish lia(ilit&3 5. A)0#Aa. Actual ,MPR,SS (. Actual I3P-I,? 1. APPAR,*0 <. #*?IS)-OS,? B. BOP4 Part& alle in A enc& has B#R?,* O@ PRO/I*G A rshipK (. ,=uit& concepts3 5. RA0I@I)A0IO* 1. ,S0OPP,?. S0,PS 5. 5st7 is there A enc& Rship (a(o6e)? 1. 1nd7 WAA0 BI*? O@ A#0AORI0" IS 0A,R,? a. ?id P tell A to do somethin ? A)#0A- A#0AORI0" !1# R#-, E R< C 1.D53 when7 at time of ta ing action that has legal conse"uences for the ', the . reasonably believes, in accordance with the P/s manifestations to the ., that the ' wishes the . so to act.: !a# Eas it ,MPR,SS? A)0#A- ,MPR,SS- ' tells . to do K; . does K; ' is bound !b# &omething you can S,, or A,AR; /,RBA-, PA"SI)A-, 3A*I@,S0A0IO* of authority !+# Was it I3P-I,?? A)0#A- I3P-I,?!a# R#-, - Cf, in order to do K, . must ta e some other steps, ' is bound. !i# R< C 1.D5 cmt. (3 Whate6er else is R,ASO*AB-" necessar&7 #sual7 > Proper to et the 8o( done$ or act in a way that . belie2es ' wishes, based on ./s reas. Cnterp. of '/s manif. Cn light of '/s instructions - other nown facts (<) Steps @or I3P-I,?4 (a) Is there a 3A*I@,S0A0IO*? (i) R#-, R< C 5.D< E WRI00,* or SPOB,* WOR?S OR other )O*?#)0$ 3ust (e R,ASO*AB-, I*0,RP E A2s state of mind !b# @A)0ORS Satisfied? E R#-, R< E C 1.D1 S)OP, of Actual Authorit&3 !i# PAS0 or PR,S,*0 )O*?#)0 of the P that the ' wishes him to act a certain way 1. ?id A R,ASO*AB-" B,-I,/, that he)she had auth. to take action7 (ased on past? Cs such action )#S0O3AR" for this role? 1. ?id P kno+ that A mi ht do this? 0illstreet. !ii# 0he *A0#R, or 0ASB of the 8o( 5. *,SS,),SSAR" 0O A)AI,/, P2S OBL,)0I/,S? C1.D1(5)
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!i# AI*03 ?o &ou ha6e to do somethin else to et the 8o( done? 1. Is A2s interpretation of P2s 3A*I@,S0A0IO*S R,ASO*AB-,? R#-, R< C1.D1(1)4 !i# Eould a reasona(le person in A2s position interpret the Manif. %he same way, in light of the conte4tD !ii# $oes A kno+ some other meanin of P2s manifD Cf so, then . has reason to now that ' wanted something else, so not a reasonable interp; e. . ' says, C now we usually buy 'in cars, but this time C want you to buy a red one unreasonable to do something else *. Is A2S interpretation of P2S OBL,)0I/,S R,ASO*AB-,? !i# R#-, R< C1.D1(<)4 Eould a reasona(le person in A2s position interpret the Manif. %he same way, in light of the conte4tD !ii# AI*03 Cf you wanted me to paint the law school, is there no way for me to do this other than getting help or can C do this by myselfD !;# Ao+ to Pro6e I3P-I,? in )t.? !a# )IR)#3S0A*0IA- ,/I?,*), to indicate that the ' intended to delegate powers to the . that are necessary for carrying out the ./s duties, and !i# PRIOR WORB performed (& A for P. 0ill "treet *hurch v. #ogan *hurch 9Qill 5ogan hired to paint (hurch; '!church# prefers 0ary, but not mandatory, so Qill hires Qro li e he/s done before; Qro gets hurt wor man/s comp; Implied based on 'ast conduct - nature of tas , .1$ Apparent b)c Qro thought it was Qill had auth to hire him b)c had done it in the past: !ii# 0ill "treet 0,S03 .nalysis)(onsiderations3 1. ?id the& detail all that he needs to do to complete the +ork? *O. ,MPR,SS A#0A to hire someone else7 B#0 I3P-I,? as to WAO3E no 3andate$ what . reas. Qelie2ed was necessary to get the ,ob done. +. Was it reasona(le for A to assume he could hire 0? (G @A)0ORS) !i# PAS0 )O*?#)03 Cn past, Qill was allowed to hire someone when he needed assistance was usually his Qrother, &am (ii) )#S0O3AR" for this Role !iii# P2s Bno+led e3 (hurch new Qill might hire someone else !i2# *ature of the Pro8ect clear that 1 person couldn/t paint church !2# 3andates (hurch didn/t mandate hiring a specific person; was only what they preferred, so they didn/t rule out other people (6i) 02s kno+led e (Apparent authorit&) *. Apparent Authorit& &am !%# was aware that Qill !.# was hired by church, - reasonably belie2ed that Qill could hire someone else)had the authority to hire him for this pro,ect as he had done so in the past; so it was reasonable for &am to belie2e that Qill was '/s .; to now claim that $ill couldn1t hire "am when $ill had never been told this fact would be very 2N3.4! to "am. !i# Ct was reas for &am to thin Qro auth b)c linka e of Past manif (ack to the church !<.D< cmt.#; had no reason to thin this would be any different from last = times Qro hired &am G. Ad6ice for )hurch?
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!i# &hould/2e mandated one wor er in order to rule out ./s brother =. *O0,3 Apparent authorit& is often hidden7 so A-WA"S tr& to make the ar ument +hen 0 is holdin P lia(le (ased on A2s actionsK !=# A"PO 5 Paul o+ns an apt (uildin . Ae hires Ann to mana e it. Paul tells Ann to hire a co. to cut the rass. Ann does it. Is Paul (ound (& the B? 0illst test3 !a# $etailed re"uestD .uth. to hire co. to cut grassD "es ! Actual ,'press for rass to (e cut; Implied for WAO she found to cut rass, b)c if he wanted co. . - not Q, he should/2e said it !com(o of ,MPR,SS > Implied (& 0illstreet#. !># A"PO 1 Paul SA"S *O0AI*G to Ann a(t. cleanin the (uildin . Ann hires a 8anitor to clean to the (uildin . Is Paul (ound (& the emplo&ment B +;the 8anitor? !a# Implied R< 1.D13 ?id Ann reasona(l& (elie6e that she had authorit& to hire a 8anitor? Is such hirin customar& for this role? Cf so, .nn probably had Actual implied authorit&. !b# Would &our ans+er chan e if (uildin had a separate Sanitar& director? Ies b)c .nn wld. ha6e a reason to kno+ that it/s not her ,ob to hire sanitary ppl. !P# A"PO < Paul specificall& instructed Ann *O0 to hire a 8anitor7 (ut that local custom i6es apt. 3ana ers the po+er to hire 8anitors. A hires 0 the 8anitor7 (ut +hen 0 tries to et check7 P doesnOt pa&. Ann still ha6e authorit&? !a# Apparent Authorit& ! R< 1.D< go2erns; 'aul liable b)c it/s what % thin s here. !i# ?id Lanitor (elie6e that Ann +as Paul2s A +;authorit& to act? Reasona(le (elief$ manifestation 1. @A)0ORS3 !i# Ranitor went to meet w).nn, went to apt building, si n said 3? apts mana ed (& Ann; 9'/s 5olding out as . of ': !ii# .nn/s office says 9(uildin mana er$: (iii) Pu(lic kno+led e that co. o+ned (& Paul. !ii# Is such hirin customar& for Ann2s roleD !<ocal customD I8&.# (iii) ,6en thou h +e ha6e a ro ue A doin (ad thin s7 not oin to penali%e innocent 0 if the& can esta(lish 1.D<. !i2# Cf so, .nn probably had APPAR,*0 authorit&. (. APPAR,*0 A#0AORI0"4 ?id POs conduct cause 0 to think A had authorit&? !1# R#-, R< C 1.D<4 (5) % ! ."ON.$5( believes, (1) that . or other actor 6means .gency doesn1t have to exist7 applies to .PP .! ' actors8 has authority to act on behalf of the ', b)c (<) that belief is T!.* .$5 to P/s manifestations . (1) R#-, R< C 1.D< ! < re=uirements !a# P holds A out as his A which cause 0 to reasona(l& (elie6e that A has auth7 !b# A takes #*A#0AORIQ,? step;transacts +;0 which is )#S0O3AR" to A2s role7 !c# 0 R,ASO*AB-, R,-IA*), in GOO? @AI0A (0RA),AB-, to P2s manif.)$ P2s Bound (i) *O0,4 R,ASO*AB-,*,SS O@ R,-IA*), ! ?oes 0 ha6e a reason to kno+ other+ise?
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!ii# <oo at ' - % 5ow did ' ma e % belie2e that . was agent for ' (iii) AI*04 APPAR,*0 often comes in +hen A is e'pressl& told *O0 to do somethin $ (ut &ou need a sho+in of 3anif for 0 to (elie6e A had auth (<) Is AG,*)" RShip necessar& for Apparent Authorit&? !a# R#-,E )mt. A7 1.D< - *O$ ?O*20 *,,? AER2SAIP for APPAR,*0K Onl& matters ho+ it APP,ARS (& 0. 4t1s about appearance. .pplies to actors who .PP .! to be .1s but aren1t - .1s who act beyond their scope of auth. !b# PO-I)"3 *rd party fairness; protect the innocent %3 encourage transactions (G) Ao+ to )reate Apparent Authorit&? SIG*S;)O*?#)0 !a# R#-, R< C<.D< > cmt. <.D<: POs manif does *O0 ha6e to (e a direct statement$ could (e Si ns;)onduct T!.* .$5 to manif (& P$ need a -I*BAG, of Statements Of Authorit& B& A > 3anif Of Assent (& P !i# ,. . 'hone call from $, to %, - $ said, this is my . manif. under 5.D<; % can reasonably rely on it #*-,SS he sees somethin in ne+spaper that ? > A (roke up (so unless 0 kno+s other+ise), this is a strong case for % !ii# ,. . Statement (& A that he has auth. has to link (ack to P; . must rep. himself as an . for '; referring to $, but it would be better if there was publicity all o2er the industry about $ - .; now who the reps are; Cndustry standard to ha2e the blue shirt, or tie in the Ehite shirt for 0ee s"uad, or red (omcast shirt; standardize uniform - could wor , but still a hard case !=# R#-,3 .bsent contrary 9nowledge on the part of T , An A has APPAR,*0 authorit& to do those thin s that are #S#A- > PROP,R to the )O*?#)0 of the (i% he is emplo&ed to conduct. )#S0O3AR" to his role;Past practice. Three:"eventy 5easing 9.mpe4 !Aays# to deli2er - install to *P@ !Royce ? %#, finance - down payment; .mpe4 says that Royce only sent offer b)c .mpe4 didn/t sign it they say deli2ery dates - confirmation was by unauthorized person; AOs dealin +; 0 +as enou h to (ind P despite lack of POs si nature ! P demonstrated A)),P0A*),F !a# ;<= @A)0ORS3 (i) Ampe'2s 3anifestations 1. 3eetin +;Ba&2s Super6isor (3ueller)7 Ba&s7 > Lo&ce 3 Might wor in .mpe4 fa2or nowing that Aays was ,ust a salesman, (ut Lo&ce did sa& he +ants to onl& +ork +;Ba&s and no one disputed this Aays solely communicated; internal memo designating Aays as 'B(; (o. on notice that Royce wanted Aays to be the . for co., - co. did nothing to dissuade this !i# *O0,3 .mpe4 didn/t deli2er the computers b)c they probably wanted to sell later for higher price !did a (elo+ market B, so they/re loo ing for a way to get out of it; Royce wants to stic to cheap deal 1. ?eli6er& dates > confirmation (& Ba&s *. Reasona(le for Lo&ce to think Ba&s +as actin on P2s (ehalf (;c althou h Ampe' sa&s onl& super6isors ha6e authorit& to enter in B2s7 this +as ne6er communicated to Lo&ce7 > he had *O R,ASO* 0O B*OW O0A,RWIS,. 0M)Feas. Qeliefs that co. was going to comply w)Royce/s re"uest - Royce relied in 0M on all correspondences coming from Aays; Aays was a salesperson for .mpe4; Ct is reasonable for a *rd party to
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assume that a salesperson has authority to bind his employer to sell. 'lus it was put in a memo that Aays should be 'B(. So 0 can assume A has apparent authorit& for acts in ordinar& course his emplo&ment7 #*-,SS thereOs kno+led e to the contrar&. (() What could Ampe' ha6e done? !i# ,mplo&ee hand(ook +asn2t (indin on 0 (;c Lo&ce had no reason to kno+ that; &hould ha2e e4plicitly said to Royce that salesman ha2e no authority to sign)authorize 'ut it in A or gi2e employee handboo to Royce >but might be waiver if they allowed ?ays to be sole PO*@ !ii# 3ake B clear so that onl& certain ppl can si n it$ Put President2s ;ke& mem(er;o+ner name under si nature line;mem(er$ (iii) Ampe' +as in a (etter position to do a (etter 8o( > thus incur the cost c. Was P #*?IS)-OS,?? R#-, for -ia(ilit& of #*?IS)-OS,? P4 R< C 1.DI (5) R#-, R< C 1.DI(5) ! P lia(le if4 (a) *o 3anifestation of P ! A rship to 0 R (() 0 L#S0I@IAB-" made ?,0RI3,*0A- chan e R (c) A had no authorit& R (d) P had notice R (e) P did nothin . (a) 3#S0 SA0IS@" 1.DI(5) B,@OR, GOI*G 0O 1.DI(1). !+# R#-, R< C 1.DI(1) #ndisclosed P )anOt use an JI didnOt kno+ (;c I thou ht heOd rel& on m& instructionsJ defense or 9I told him not to.: Watteau. !a# R#-,4 #ndisclosed P is lia(le for acts of an A taken in ordinar& course of (i% ,/,* I@ P did not authori%e A to act7 nor held A out as A ent. ! Watteau. 9Aum(le7 )i ars7 > Bo6ril$: 5 owned bar, - although he transferred ownership to Menwic , he continued to act as manager; <i"uor license was in 5/s name, - A2s name +as painted o6er door$ Jnder .greement w)M, 5 only had authority to buy bottled ales - mineral waters for the bar; but 5 2iolated agreement - ordered cigars - Qo2ril from Eatteau which 5 didn/t pay for. 5 disappears - E sues M; (i) Wh& not Apparent? (;c *o manifestation of P > A to 0 5. *O0,4 the ro ue A +ould (e lia(le under R< C S.DT if "ou can @ind him > Ae had .;collecti(le !ii# PO-I)"3 )oncept of )heapest )ost a6oider. Who2s in the (est position to miti ate the cost? It2s not ok to Aide (ehind shado+s7 Gi6e Secret instructions > escape lia(ilit& +hen actor doesn2t follo+ instructions 5. We ha6e a social loss here ! a (usted B$ Ao+ do +e a6oid such losses in the future? !i# Step 54 Mind the actor who can achie2e the greatest reduction of the accident costs w)the lowest e4penditure of precaution costs (ii) We seek to minimi%e total social costs (includin admin. )osts) !iii# Step 14 place liability on that indi2idual, so . is liable unless otherwise stated in A. (<) When 02s Breach7 can #*?IS)-OS,? P sue? ",S. (1 +a& street). #*?IS)-OS,? P2S RIGA0S4 !a# R#-,4 R< C I.D<7 A ent for #ndisclosed Principal4 Ehen an . acting w)actual authority ma es a A on behalf of an undisclosed ', (i) #nless e'cluded (& the B7 the P is a part& to the B
9

(ii) 0he A > the <rd part& are parties to the B$ and (iii) 0he P7 if a part& to the B7 and the <rd part& ha6e the same ri hts7 lia(ilities7 and defenses a ainst each other as if the P made the B personall&7 su(8ect to C C I.DHEI.DN. UA ent lia(ilit& to P +hen *O0 authori%ed7 I@ &ou can find them ! R< C S.DT ! so Aum(le +ould (e lia(leF 1. *O0,4 ' can/t in2o e 8stoppel; 8stoppel is one way street !i2# PO-I)" ! P has a +a& to protect themsel6es$ 02s held to the B the& ne otiated$ &ometimes they ha2e good biz reason to breach ,. AG,*02S -IABI-I0" O* 0A, B4 A2s lia(ilit& on a B depends on the status of the P. 1. ?isclosed P ! R#-,4 R< C I.D5 . not liable J1<8&& otherwise pro2ided in A. +. #nidentified;#ndisclosed;Partiall& ?isclosed P E 0 nows . is wor ing on someone else/s behalf, but don/t now who ' is; might ha2e legal reason not to disclose a. R#-,4 R< C I.D1 E If P is #*I?,*0I@I,?7 P>A are lia(le as parties to the B #*-,SS A a rees other+ise +; 0 ()O*0RA)0 O#0). b. R#-,4 R< C I.D< E If P is #*?IS)-OS,?7 P>A -ia(le as parties to the B #*-,SS e'cluded (& the B. >so A can be LIABLE under A.=< if ! can find hi".# *. Principal ?oes *ot ,'ist ! R#-,4 R< C I.DG ! J1<8&& % agrees otherwise, an A +ho B2s +;a 0 claimin to (e an A on (ehalf of a P is lia(le to the B CM the supposed . B*OWS or AAS R,ASO* 0O B*OW that the P doesn2t e'ist BF lacks capacit& to be a party to the A. %o a2oid liability the . must $C&(<B&8 that he is acting in a representati2e capacity .1$ the C$81%C%I of the '. .tlantic "almon .+" v. *urran : $ held himself out as . for unidentified ' !for co./s that were dissol2ed#; $ owed o2er 7+=@A; $ liable b)c it/s his ?#0" 0O I*@OR3 the other party of who the ' is; 0he fact that the Pl2s could26e determined the name of the P (& searchin the cit& clerk2s record is IRR,-,/A*0 S# I/. RA0I@I)A0IO* > ,V#I0AB-, Principles Of Reco6er& 4 )hapter G of R< A. WAS B RA0I@I,?? I.e. ?id P i6e afterEtheEfact acceptance? 5. )AARA)0,RIS0I)S a. Aa6e to ha6e the a(ilit& to sa& ",S or *O to the B7 and if so, wea er case for ' !i.e. ' gets home right b; they cut grass; she must in"uire b)c she didn/t re"uest it# b. A acts +;*O A#0AORI0" (of an& kind) - 1B 0FBJ1$& MBF 8&%B''8< c. P +ill onl& (e (ound if P RA0I@I,S the B +. Ratification ?efined R#-,4 R< C G.D5(5) $atification is the affirmance of a prior act done by another, %hereby the act is &i'en effect as if done by an A actin& %ith actual authority.( <. AOW does a person ratif& an act? a. R#-, C G.D5(1) A person ratifies an act (&4 !1# (a)9,MPR,SS affirmation: 3A*I@,S0I*G ASS,*0 that the act shall affect the 'Gs legal relations, BF !+# (() 9I3P-I,? Affirmation: )O*?#)0 that 8ustifies a reasona(le assumption that the person so consents. !a# Acceptin (enefits at a time +hen itOs still possi(le to decline the benefits !b# Silence or inaction when affirmati2e action e4pected !c# Qy filin a la+suit to enforce the B
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G. WAA0 *,,?S 0O AAPP,* in order for Ratification to Occur? R,VS4 a. C G.D5(<) Ratification does *O0 occur #*-,SS (1) (a) . A)0,? or P#RPOR0,? to act like an AG,*0 C G.D< !$oticello Mary - Ealter agree to sell farm; E <eased farm to Qotticello, w)option to purchase; Qotticello see s to e4ercise option, E - M refuse; Eife didn/t agree to sale didn/t sign nor was her name put in A; 3 al+a&s si ned her o+n B2s in the past7 W ne6er si ned for 3 in past7 > W ne6er purported that he +as 32s A$ (t. says $/s wife didn/t gi2e authority to act as her . 3ARRIAG, alone does *O0 pro6e A enc&. 0hou h A handled man& of (i% aspects of farm7 is not dele ation of po+er to A as an A$ W (ound for his undi6ided interest. (a) I*0,*0 to RA0I@" !i# $otticello, M only thought Qot was renting it !though he made substantial impro2ements to land#; more than doesn/t mean e"ual to. (() @#-- B*OW-,?G, O@ 3A0,RIA- @A)0S;)I)R#3S0A*),S !i# (laim that M was recei2ing financial benefit can only be 2iewed .M%8F meeting prere"s, - wasn/t satisfied here. ?idn2t kno+ of financial ains. !ii# W had po+er to lease his undi6ided W interest in propert& , so reasonable for M to thin he was renting it out, not selling it; no kno+led e of the nature of the transaction !c# PO-I)" maybe ct. punishing pl for not doing his legal hw; was an e4perienced biz man but didn2t do a title search; had 7; ct. isn/t 2ery sympathetic !+# (() Fatifier has )APA)I0" C G.DG 9.-rship e4isted at time of the act;: (a) *O0,4 If P lacked capacit& under C <.DG7 then P can defeat ratification claim (& sa&in that he lacked capacit&F !*# (c) Fatification is 0I3,-". C G.DH R#-, - no circumstances occurred that would ha2e an ad6erse effect on the ri hts of 0, no 3A0,RIA- )AA*G, in )IR)#3S0A*),S that +ould make it I*,V#I0AB-, to (ind 0 #*-,SS 0 chooses to (e (ound, % doesn/t try to withdraw#, !a# E581 did intent to ratify ta e placeD !b# Would ratif&in the deal hurt the 0? !A"PO - P7 A sells house to 07 (ut house (urns do+n then P sa&s 9ok7 ratified:$ 0 +ill +in (;c ct. not oin to let &ou ratif& a B if its to &our (enefit alone > ine=uita(le to (ind 0 # (c) "ou can2t ratif& a deal +hen &ou ha6e no option to sa& "es or *o7 e. . the&26e alread& cut &our rass !;# (d) Fatification encompasses the act in its entirety C G.DT !self-e4planatory#. (. R#-,4 C G.DI S#@@I)I,*0 B*OW-,?G,4 *ot (ound (& ratification made +;o kno+led e of 3A0,RIA- @A)0S +hen the person is #na+are of such lack of kno+led e (5) 0,S0 !a# $id ' ha2e all the 3A0,RIA- @A)0S needed to agree to the dealD !b# $id ' ha2e R,ASO* to B*OW or R,ASO* 0O B*OW 0AA0 he;she ?O,S*20 B*OW (WA") material factsD !e.g. get chec in mail, u dunno y# !c# ' use Eait - &ee .pproach if so ? ratif. !+# PO-I)"3 $oesn/t let ' hide from facts they now BF doesn/t now; e. . Eoman gets chec in mail from .Q( publisher w)no prior relationship, she kno+s
11

that she doesn2t kno+ WA" she ot that check# c. A&pos p. 1S (5) P2s a +riter7 her hu((&7 A enters B +;AB) Book pu(lishers for her ne't (ook$ P et check from AB)7 ad6ance on the B. She cashes7 spends. -ater she tries to sell her (ook to another pu(lisher7 (ut AB) claims (ook. P sa&s A had no authorit& to act as her A. AB) sa&s she ratified B. +ho +ins? !a# P ar ument - ' probably wins b)c, li e Mary, !1# no kno+led e of materials facts !at least unable to pro2e#, and !+# intent !none there, only acceptance of benefits#; though 5 act on her behalf, 'am still wins !b# AB) ar ument she too the chec but had no reason to now that she was due the chec , but has some o(li ation to kno+ +here it +as comin from; BF Vuantum 3eriut (un8ust enrichment)$ she doesn2t kno+ WA" she +as ettin check !+# P sa&s she thou ht check +as for ro&alties of her pre6ious (ooks7 +hich AB) pu(lished. She sa&s she didn2t kno+ nor had reason to kno+ that it +as an ad6ance on her ne't (ook. !a# %his is better for 'am b)c she thin s its from pre2ious boo s3 C ha2e multiple boo deals, C didn/t now what my husband was doing. (<) A pretends to (e P2s (utler7 asks co. to cut rass$ P ets home ri ht after the& finish$ P thanks them > oes inside. )o. sues her for refusin to pa&. P sa&s A had no authorit& to enter this B. 0he co. sa&s she ratified (& acceptin > retainin (enefits. !a# 1o appearance of authority, so we go to Fatification; 'am can/t put the grass bac ; she li ely wins. Aa6e to ha6e chance to sa& *OK (G) Paula P in6estor +ho opened acct at local (rokera e$ 0ells A7 her (roker to O*-" purchase #.S. treasur& (ounds for the acct$ A ?ISR,GAR?S instructions > (u&s stocks in a ne+7 6er& risk& hi hEtech co.$ P doesn2t learn a(t this til after her 5st monthl& statement arri6es. She decides to take a 9+ait > see: attitude. When her ne't monthl& statement arri6es she notices that the stock2s price dropped rather drasticall&. She calls A > demands that he close the acct > reim(urse her for the . loss. Sa&s A had no authorit& to (u& the stock. A closes the acct7 (ut refuses to make P2s losses ood. A sa&s P ratified the purchase (& +aitin . Who2s ri ht? !a# Mirst, no authority whatsoe2er, so this is ratification. &econd, go to timin in G.DH3 'aula used wait - see approach, so she could ha6e said no; she did ratify the A by sitting on A and doing nothing; there would be ad2erse)ine"uitable effects if A 2oided; $espite G.D1(() 2oidable A the ' didn/t ha2e to 2oid it, the person who has the legal right to 2oid the A can completely ignore and ,ust perform the A; &ou /OI? B" 6oicin &our o(8ection$ 0herefore7 P didn2t act in a timel& manner. d. AAR*,R3 FatificationGs two basic re"uirements3 (5) . 6alid affirmation by ', (1) to +hich the la+ +ill i6e effect. e. S#B R#-,4 C G.D1 ,@@,)0 of Ratification !1# Fatification is 1B% effecti2e3 !a# Cn fa2or of a person who causes it by 3ISR,PR,S,*0A0IO* or other
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conduct that +ould make a B /OI?AB-,; (*ot (& SAA3;ROG#, A?) (() In fa6or of an A a ainst a P +hen the P ratifies to A/OI? A -OSS$ or !c# 0o diminish the ri hts or other interests of persons , not parties to the transaction, that were ac"uired in the sub,ect matter 'FCBF to the ratification. (1) *O0,S4 Vuestions to ask in a ratification case4 !a# Eas it on '/s behalfD !b# Ehat types of acts constitute an affirmation by the 'D !c# Ehat effect should we gi2e to that affirmation Q. ,S0OPP,- to ?en& ,'istence of A enc& Relationship3 5. R#-,4 ,S0OPP,-4 Rest. <d C 1.DH a. 5.F18F3 ,lements3 !1# ' )R,A0,S, through I*0,*0IO*A- or *,G-IG,*0 or )AR,-,SS WOR?S7 A)0S or O3ISSIO*S7 actor APP,ARA*), of A#0AORI0" !+# ' on *O0I), that his acts+omission might induce others to change their position - ' ?I? *O0 0AB, R,ASO*AB-, S0,PS to *O0I@" them of facts !*# % R,ASO*AB-" and in GOO? @AI0A R,-I,S on APP,ARA*), of A#0AORI0" !;# % ?,0RI3,*0A--" )AA*G,S her POSI0IO* in R,-IA*), on APP,ARA*), of A#0AORI0" b. ?oos $ros - ?ut& of )are; p conducted transaction w)imposter salesman at furniture store; p paid cash but got no receipt; 71>T.=@; Murniture ne2er deli2ered; $ liable b)c of estoppel)duty of care; ?2s 9dereliction of dut&:;lack of sur6eillance$ not a lot of 7 being fought o2er, but p wasn/t rich !1# 5ow can you ma e an argument that it mi ht be .pparentD !a# 1on-agent dressed li e an employee, 2isible to owner, in '/s store no one/s stopping him, e2en after *@-;@ min. transaction (1) Wh& is it not Apparent? !a# R#-, E C 5.D< ! cmt. - 1eed a S0RO*G,R -I*B when there/s no ' assent; I3POS0,RS ?O*20 )O#*0; QJ% rogue . does b)c ' . rship 3#S0 e4ist (<) On remand7 +hat +ill she ha6e to pro6e? !a# %hat biz was turning a blind eye to floor !b# 1otice, - QJ% 1B reasonable steps to notify !was on floor for *@min# !c# ' will argue that Aoos brothers were careless (G) What could Boos ha6e done? !a# $istinct Jniforms !b# &igns that say, 'lease ensure you get a receipt !c# 5a2e security guards; round the cloc sur2eillance (H) PO-I)" !a# S&mpath& for the poor or less fortunate)+orkin class !b# Slap (i% on hand for insufficientl& runnin the (i%; the fact that you don/t now that there are e4tra people on your floor acting li e salesmen deser2es a slap on the hand encoura e due dili ence; Reasona(le care to protect customers !i# )O#*0,R3 B#0 (i% +ould ha6e to +atch floor at all times$ . (urden ! cost of doin (i% mi ht out+ei h the (enefits$ R,SPO*S,4 Spend no+ to
13

sa6e later !># *O0,3 %hough this dispute wasn/t abt a lot of 7, it was important for Aoos to fight b)c don/t want bad precedent +. ?I@@,R,*), (t+n APPAR,*0 and ,S0OPP,-? a. Cn .''.F81%, there has to be manifestation from ' to *rd party that . is connected to '; '-. rship; loo to C 5.D< regarding the linka e - how strong it has to be; 3A*I@,S0A0IO* -I*BAG, IS*20 0A,R, W; ,S0OPP,- (?oos $ros.) (. C 1.DH focuses on I*0,*0IO*A- or )AR,-,SS-" caused such (elief or has *O0I), of the issue c. *eed <rd part& to chan e his;her position$ detrimental reliance;chan e in position (. Pro(lem p. 1G Professor P has a student RA7 A. A is a(t to raduate and P asks her to hire a successor. P sa&s that she is +illin to pa& .N;hr for 5DD hrs of +ork. A finds another student7 Q7 +ho +ants the 8o( (ut sa&s she char es .5D;hr. A sa&s7 9Well if that2s the oin rate7 that2s ok. "ou ha6e the 8o(.: After7 P tells Q that she +ill onl& pa& .N and Q (+ho has turned do+n other 8o( offers) seeks to enforce the B that she thinks she has for .5D;hr. Who +ins? Wh&? 5. @irst7 is there an A enc& Rship? C 5.D5 a. Ies, there is '.%. 1. *e't7 if A rship7 then +hat t&pe of Authorit&? a. Actual ,'pressed focus on what . thin s, through e4press manifestation of '; ' said it b. Implied Actual Authorit& 1one here - <oo at what . thin s is implied; loo at whate2er needs to be done to get the ,ob done; %here/s no wiggle room here; it/s contrary to what ' professed. c. Apparent authorit& *rd party/s perception, U; ' holds . out as agent, U thin s . has authority; d. Wh& +ould it *O0 (e apparent? Is it customar& for RA2s to hire professors? !1# Cf past practice to let F./s hire successors, then .pparent. If &ou can sho+ that it2s *O0 past practice of RA2s hire successors7 then it2s unreasona(le to think RA can hire their successor. Goin to destro& apparent authorit&. <. If *o A rship7 does ,=uit& appl&? a. Ratification no argument for this b)c &he had authority; . didn/t pay it. b. ,stoppel need to show detrimental reliance; ' nows . is out there, so maybe ' is being careless in monitoring what . is doing out there, and U detrimentally relied b)c she turned down other ,obs $. Se=uential Anal&sis of B lia(ilit&3 1. Is there an A rship (t+n P > AD 9e4press, implied, apparent: a. If no7 apparent7 estoppel7 or ratificationD +. If &es7 +hat t&pe of authorit&D *. If &es7 is P lia(leD Cs . liableD /. -ia(ilit& of P to 0hird Parties in 0OR0 .. General Principles typically in2ol2es employer-employee rship 1. 3asterEser6ant Morm of agency rship which that in2ol2es a ser2ant who, under
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control of her master, renders some sort of ser2ice. ,. . employer-employee rship. a. B," - )O*0RO-; %he employer retrains control o2er the manner in which the employee performs ser2ices !1# Respondeat superior R#-,3 C T.D< - ,3P-O",R is -IAB-, for all 0OR0S committed (& an emplo&ee actin +;in the scope of their emplo&ment ; in,ured party can sue both the 8mployer .1$ the 8mployeeHQJ% the ,3P-O",R is /I)ARIO#S-" -IAB-,; ,3P-O",, is '4! *T5( liable; &trict liability on employers +. Independent )ontractors Ehen ' retains someone to do a certain ,ob or achie2e a specific ob,ecti2e; B," P R,0AI*S *O RIGA0 O@ )O*0RO- o6er the independent contractor as to ho+ the +ork is performed$ I) determines for themsel6es ho+ the& +ill achie6e the end Goal. a. R#-, Respondeat superior ?O,S *O0 APP-"S !1# ,M),P0IO* - employer/s own *,G-IG,*), BF P#B-I) PO-I)" !a# ,. . employers may be held liable if they are negligent in selecting an C( or if the contractor is to perform highly dangerous acts !e.g. blasting# B. R#-,4 Rest. <d C T.D< POs -ia(ilit& E In General 1. (5) ' is sub,ect to ?IR,)0 lia(ilit& to a *rd party harmed (& AOs conduct when a. (a) as stated in C T.DG, .Gs conduct is within the S)OP, of his .*T2.5 authority BF !.T434 ' by P, !. Fship# .1$ !1# (i) .Gs conduct is 0OR0IO#S, BF !+# (ii) .Gs )O*?#)0, if that of the ', +ould su(8ect the P to tort lia(ilit&; BF b. (() P is *,G-IG,*0 in S,-,)0I*G7 S#P,R/ISI*G, or otherwise )O*0RO--I*G .081% UC T.DHF$ BF c. (c) the ' ?,-,GA0,S performance of a ?#0" to #S, )AR, to PRO0,)0 other persons BF their property to . who @AI-S to P,R@OR3 the ?#0" UC T.DIF. (5) C T.DG ,,;,R rship E ,. . E P tells ? to deli6er ne+spaper durin ice storm7 kno+in that dri6in conditions aren2t safe and ? 6ehicle not e=uipped for such conditions. While deli6erin pprs7 ? skids on ic& road7 in8urin 0$ !a# P is su(8ect to lia(ilit& to 0 (;c P2s instructions to ? directed ? to act in a ne li ent manner$ $ also sub,ect to liability to % (C T.D5#. (() ,. . Other A rships not ,,;,R ! P o+ns apt (uildin 7 leases it to 07 (ut no+ +ants to lease it to S$ P tells S to o into 02s apt > remo6e > destro& 02s personal propert&. S does it. ,nterin 02s apt > remo6in > destro&in 02s propert& +as tortious. P is su(8ect to lia(ilit& to 0. S is also su(8ect to lia(ilit& to 0 +hether or not S acted as P2s A ent. +. (1) . ' is sub,ect to /I)ARIO#S -IABI-I0" to a % harmed by an .Gs conduct when a. (a) as stated in C T.DT, the . is an employee who commits a tort while acting within the S)OP, O@ ,3P-O"3,*0 )is it an e*e or i*c relationship )no% i*c none"ployee A '. i*c non+A ser'ice pro'ider,- BF b. !b# as stated in C T.DS, the . commits a tort when acting with APPAR,*0 A#0AORI0" in dealing with a % on, or purportedl& on, behalf of the '. ). Who2s an ,3P-O",,? 1. S#BER#-,4 R< CT.DT ?efinition of ,3P-O",,4 9.:n employee is an A +hose P )O*0RO-S or has the RIGA0 0O )O*0RO- 0A, 3A**,R and 3,A*S of the
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AOS P,R@OR3A*), O@ WORB: a. R< @A)0ORS cmt4 !1# 84tent of )O*0RO- the . - ' ha6e a reed the ' may e4ercise o2er the ?,0AI-S of the +ork U,F !+# Ehether the . is engaged in a ?IS0I*)0 O))#PA0IO* or BIQ !*# Ehether the t&pe of +ork done (& the A is )#S0O3ARI-" done under a P2s direction U,F or +;o super6ision U*E,F !;# %he SBI-- re=uired in the ./s occupation 9*E, if reat skill re=uired; , if unskilled +orkF !=# Ehether the A U*E,F or the ' 91: S#PP-I,S the 0OO-S and other instrumentalities re"uired for the wor and the place in which to perform it !># %he len th of 0I3, durin +hich the A is en a ed (& a P Uthe lon er the time7 the more ,F !P# Ehether the A is paid (& the 8o( U*E,F or (& the time +orked;hr U,F !T# Ehether the A2s +ork is part of the P2s re ular (i% U,F !N# Ehether the P and the A (elie6e that the& are creatin an ,mplo&ment Rship U,F$ .1$ !1@# Whether the P is or is not in (i% U,7 althou h here (i% means an& on oin enterprise that deals in the commercial +orld7 includin nonprofit enterprisesF $. S#BER#-, R< C T.DS /I)ARIO#S -IABI-I0"4 ' is sub,ect to 6icarious lia(ilit& for a tort committed by an A in dealing or communicating with a % on or purportedly on behalf of ' when actions taken (& A w)APPAR,*0 A#0AORI0" constitute the tort BF enable . to )O*),A- its commission. 9,. . @raud7 ?efamation, etc.: 8. $ifference btwn C T.DT ?IR,)0 -IABI-I0" - V T.DS /I)ARIO#S -IABI-I0"D 1. Cn C T.DT ?IR,)0 -IABI-I0"- @A#-0 on part of the P ; ,. . ' ga2e instruction or direction, had nowledge of ./s actions; +. C T.DS /I)ARIO#S -IABI-I0" 1B M.J<% F8WJCF8$ B1 '.F% BM 'S It2s +hether the A is lia(le7 and if A is lia(le7 then P is lia(leK a. Applies to A2s e6en if *O0 emplo&ees (. Applies A2s +ho AR, emplo&ees ,/,* I@ 0ortious conduct IS*20 +;in scope of emplo&ment c. Applies +here A APP,ARS to deal or communicate on (ehalf of a P and the A2s appearance of authorit& ena(les the A to commit a tort OR conceal its commission (5) @RA#?7 *,G-IG,*0 3ISR,PR,S,*0A0IO*S7 ?,@A3A0IO*7 0ortious Institution Of -e al Proceedin 7 A*? )O*/,RSIO* O@ PROP,R0" o(tained (& an A purportedl& at the P2s direction @. 0,S0;Anal&sis of 0ort -ia(ilit&4 1. Cs there and .gency relationship between ' - . 2. Cs ' sub,ect to direct liabilityD 3. Cs ' sub,ect to 2icarious liabilityD a. Cs . 'Gs employee or nonemployee .D G. PO-I)" 5. Risk Spreadin a. 3aster;,R can4 !1# .nticipate ris s inherent in enterprise
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!+# &pread ris though insurance !*# (onsider the cost of insurance in setting the price for goods or ser2ice !;# &pread ris to customers or those who benefit from goods or ser2ices (. Risk A6oidance ! protects societ& from dan erous occurrences (5) Better positioned to pre6ent ,,;ser6ant from en a in in careless or improper conduct (1) Stron incented for ,R;3aster to use his position of control to achie6e risk a6oidance c. ?eep Pockets 0heor& A. ?eterminin ,mplo&ee;*onemplo&ee A;*onA Ser6ice pro6ider 1. &er2ice &tation (ases3 a. #umble Oil8mployer)Master 9Bil (o: ? '; 8mployee)&er2ant 9&tation Bperator: ? .; &ubordinate)&ub-ser2ant 9&tation wor er)tortfeasor: ? &ub-.gent !1# 3acts - <o2e dropped off car for repair car ran off hill - hit Martin - his daughters; 5umble says &chneider independent contractor, so 5umble shouldn/t be held liable; Mactors ct. considered3 Aum(le had control o6er finances7 ey was that there was P=O commission to &chneider part& (earin the risk of loss +as Aum(le; 5umble - <o2e R)& liability (t. finds master)ser2ant btwn 5 - &; !a# B," Eho was the real economic partyD %hey will ha2e 3OR, )O*0RO- b)c ha6e more incenti6e to do the ri ht thin ; 3ore capital P more control !+# #umble @actors !a# $ owned station !b# $ set hours of operation !c# $ pro2ided its BE1 automoti2e products for sale !so pro2ided the tools# !d# $ set the price for the products !e# $ paid P=O of utility bills !f# $ pro2ided the station and e"uipment !g# $ pro2ided ad2ertising media and the products sold !h# $ paid substantial part of station/s operating costs !i# .lleged subcontractor had 1B biz discretion 8K(8'% for hiring, salaries b. "un Oil' 9Bil (o.: Master; 9C(: 9Qarone: ? .; &ubordinate .9&tation wor er)tortfeasor: !1# 3acts : Sun Oil *O0 lia(le (;c Barone had more control ; had more discretion, (ore the risk of loss7 hours of operation; !a# Opposing .rguments : QJ% thin here3 B +as termina(le (& an& part&, and &un ma es su estions that Barone 8ust happens to follo+, on the face of that deal, it appears that Qarone had a lot more discretion QJ% there/s a lot of I*@-#,*), here, (;c if Sun doesn2t like the hours Barone is operatin then the& could 8ust terminate the a reement$ (t. might not ha2e focused on substance enough so this could ha2e ended up li e 5umble; QJ% the one thing that was different3 +ho (ore the ultimate risk of financial failure ! Barone did . c. Qottom <ine--these two were close calls, but the focus is on )O*0RO- and le2el of financial risk. %he more control, the more li ely to be found liable. I. @ranchisor -ia(ilit&
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1. 0eneral Cnfo3 a. Cn a franchising arrangement, the franchiser supplies the franchisee w)a brand identification or biz identity, and controls the distribution of its goods or ser2ices in order to achie2e standardization. b. Mranchisee has the ri ht to profit A*? (ears the risk of loss from operation of the franchise c. Mranchise agreements usually ha2e some regulatory pro2ision indicating how the biz is to be run in order to pro2ide a standard le2el of ser2ice upon which customers rely. d. R#-, - I@ @ranchiser a reement i6es the franchiser too much control o6er the da&Eda&Eoperation of the (i%7 an a enc& rship arises such that franchiser ma& (e held responsi(le for torts of the franchisee. +. R#-, - A B doesnOt matter4 A B sa&in the parties are *O0 PEA (or masterE ser6ant) does not matter if the P (in this case franchiser) re ulates the A +ith such control as +ithin the definition of a enc&EEthe a enc& relationship arises e6en thou h the parties e'pressl& den& it.J Usee R#-,4 R< C 5.D1 ! as lon as a enc& elements are met7 characteri%ation in a reement or conte't of industr& doesn2t matter$ see also R#-, ! R< C 5.D5 cmt. d E +ritten B is not essential. Lust need a meetin of the mindsF 0urphy v. #oliday 4nns 9$, 5oliday Cnns, Cnc. is a franchiser; pro2ided name, "uality assurance, national ad2ertising, and a system of operation, in return for fees from franchisees; Mranchisees own - operate the motels; pl, 3urph&7 slipped and fell at Aolida& Inn o+ned (& Bets&E-en 3otor Aotel )orp$ ct. said 1B .gency Fship b)c 5oliday Cnn didn/t ha2e a lot of control; (ottom line4 Bets&E-en (ore risk of loss: a. #oliday 4nns @actors$ #oliday 4nns had *o po+er toX !1# (ontrol daily maintenance of premises !+# (ontrol Qetsy-<en/s current biz e4penditures, fi4 customer rates, or demand a share of the profits !*# 5ire or Mire Qetsy-<en/s employees, determine employee wages - wor ing conditions, set standards for employee s ills or producti2ity, super2ise employee wor routine, or discipline employees for nonfeasance or misfeasance b. )O#*0,R ARG#3,*0S - employees were trained through 5oliday Cnn, - Qetsy<en had to ha2e certain employees, - gain consent before constructing other locations !1# (ommon sense says that if Qetsy-<en stopped following factors, 5oliday Cnns would ha2e pulled the license agreement L.0ort -ia(ilit& and Apparent A enc&Y 1. R#-, E C T.DS - ' /I)ARIO#S-" lia(le for acts of an APPAR,*0 A if P held A out as such and 0 relied. 0iller v. 0c'onald/s 9Appear to hold A out for particular conduct that causes harm$ 0 Reasona(le reliance tracea(le to P2s manifestations $ ' in,ured when she bit into heart-shaped sapphire in Qig Mac .% *A francisee; Mc$onald/s defends on independent owner)franchisee grounds; ' testifies that she went to restaurant b)c she thought it was owned - operated by Mc$onald/s. a. One who reps that another is his servant or other agent and thereby causes a third person Bustifiable to rely upon the *.! or "?455 of such apparent a&ent is sub.ect to liability to the third person for har" caused by the lac/ of care or s/ill of the one appearing to be a servant or other agent as if he were such .( b. 0c'onald1s Mactors
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!1# Actual A enc& Rship )O*0RO!a# .greement detailed - laid out how restaurant was to be operated !b# 'eriodic inspections to ensure conformity w)$/s standards (1) Apparent A enc&; ,,E,R @A)0ORS !a# &.M8 M81J !b# $esign was the same as Mc$onald/s (c) ,6er&thin a(out the appearance of the restaurant identified it +;3c?onalds and the common ima e for all of 3c?onald2s restaurants$ created this ima e +;national ad6ertisin 7 common si na e7 menus7 and uniforms$ P reasona(l& relied on that representation (;c she said she +ent to the restaurant under the (elief that it +ould ha6e the same =ualit& of ser6ice and care as other 3c?onald2s restaurants !i# )O#*0,R - Mc$onald/s says that they shouldn/t be liable b)c si n that sa&s independentl& o+ned > operated (& <B$ pl didn2t see it thou h 1. Plannin Pro(lem7 p. H5 a. 1H hotels +ant to 8oin forces$ 0rade name (9@inest 3otels )orp.:)$ #niform standards$ same lo((& and emplo&ee uniform desi ns7 etc. Su estions? !1# %here is actual agency based on sufficient control, but we ad,ust the amt of control in the agreement; *,,? A#G, SIG* that sa&s 9I*?,P,*?,*0-" OW*,? > OperatedK: !+# ' Minest Motel (orp, and we care b)c they share ownership, so if @inest 3otel )orp. ets socked +;lia(ilit&7 then e6er&one else is hit too !*# . is any of the other location hotels, li e .naheim !;# % %hird 'arty is the guests !=# Potential lia(ilit& e.g., if there/s a memo saying we/re short on funds, lets delay repairs. that2s a (i% decision made from the P !># Ee/re on tort liability '.% triangle !a# P.@; direct liability or A liability !b# P.@P 2icarious liability conduct is such that its employee)employer relationship control all aspects of day to day operations, in scope of employment !c# P.@T - limited scope)apparent agent; control the instrumentality of the harm !d# Cf those don/t wor , then go to !+.@*, etc.# .pparent - 8"uitable doctrines (. BO00O3 -I*, ! 3ake &our a reement look like Aolida& Inns > Sun OilK /I. A ents as @iduciaries .. 0eneral 1. ?ut& - A legal obligation that is owed or due to another and that needs to be satisfied; an obligation for which somebody else has corresponding right +. @iduciar& - . person who is re"uired to act for the benefit or another person on all matters w)in the scope of their relationship *. @iduciar& ?ut& - . dut& of utmost GOO? @AI0A, 0R#S07 )O*@I?,*),, and candor owed by a fiduciary6to the beneficiary; a duty to act w)the highest degree of honesty and loyalty toward another persona and in the best interests of the other person. a. "O# P#0 0A,IR I*0,R,S0S B,@OR, "O#R OW*K (. BIG fiduciar& duties (5) ?#0" O@ -O"A-0"
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(1) ?#0" O@ )AR, c. Other ?uties !1# 0ood Maith !+# $isclosure !*# (onfidentiality !;# &elf-$ealing)1B conflicts G. General @iduciar& Principle a. R#-,4 R< C S.D5- An A has a fiduciar& dut& to act -O"A--" for the POs B,*,@I0 in A-- 3A00,RS )O**,)0,? +;the a enc& relationship. B. ?ut& of -O"A-0" 5. 3aterial Benefit Arisin Out of Position4 a. R#-,4 C S.D1E *O #*L#S0 ,*RI)A3,*0;ac=uire material (enefit (& usin &our A ent position. !1# S#BER#-, - An& PRO@I0 A earns +hile 6iolatin dut& of lo&alt& to P (elon s to P (+hen he earns the . solel& throu h his position). !eading v. !egem 9S.D1 > S.DH 2iolations; Soldier escorting goods while wearing uniform to a2oid inspection, - was '.C$ to do this; he +as onl& a(le to do this due to his militar& status; by enlisting and becoming an . of the crown !' is army, . is soldier, % is those harmed by ./s smuggling#, . is using property of the ' to earn 7 using position: (1) 3ore on !eading !a# .lso an S.DH 2iolation b)c uniform is militar& Propert& > therefore usin propert& for o+n purpose > purpose of 0 !b# ?oesn2t matter that cro+n didn2t lose an&thin $ b)c ' got the 7 solely by reason of his position as a ser2ant of the crown b. )onstructi6e 0rust the for"ula throu&h %hich the conscience of eCuity finds expression. 0here property has been ac1uired in such circu"stances that the holder of le&al title "ay not in &ood conscience retain the beneficial interest, e1uity con'erts hi" into a trustee. 1. Actin As Or On Behalf Of An Ad6erse Part&4 a. R#-,4 C S.D< E A )A*20 B, O* BO0A SI?,S O@ 0A, ?,A-. (an/t deal w)your ' when you/re also wor ing for another party that is a party to the transaction !1# An A has a duty not to deal with the P as or on behalf of an .'% !" P.!T( in a transaction connected with the agency relationship . b. !ash v. )%4* !+@@P# .gent !Fash# was doubling up; Fash was hired by RL to subcontract, then Fash formed his own company !%C'&# and began subcontracting w)them; Fash was same party on both sides of the table; Fash breached his fiduciary duty b)c he did not notify RL of what he was doing; 5e was competing w)his principle (5) Rule /iolations4 !a# S.D1 was materially benefiting from the transactions; used his position at RL for his benefit paying his company - getting that 7 similar to !eading; !b# S.D< can/t be on both sides of the deal as Fash was !c# S.DG (an/t (ompete w)' - assist competitor; Fash/ co. was also a competitor <. )O3P,0I0IO* a. R#-,4 C S.DG $uty *O0 to )ompete +;P > assist competitor U!ashF; *an
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however, prepare for competition b+c of near the end of .gency !ship G. #se Of POs Propert&$ #se Of )onfidential Info !?O,S*20 S0OP I@ AERSAIP ,*?SKKK a. R#-,4 C S.DH4 .n . has a duty !1# (5) *O0 to use PROP,R0" of the P for the AOs o+n purposes or MBF % 9!eading militar& #niform:; .1$ !+# (1) not to use)communicate )O*@I?,*0IA- I*@O)0RA?, S,)R,0S of ' for .Gs OW* purposes or those of a *rd party. Town - *ountry #ouse - #ome "ervice v. Newberry 9(leaning biz de2eloped customer list7 disgruntled employees who left too list and solicited customers, and %( mo2ed for in,unction b)c they too 1* of their customers; (t. grants in,unction b)c T.@= 2iolation: (a) Town - *ountry 3.*TO!" !i# (ustomer list ? 0RA?, S,)R,0; de2eloped o2er years of e4perience reputation; propert& ri ht !ii# Rationale (ustomers identified through considerable effort - e4pense by employer (. )mts C S.DH !1# ./s duties for confidential info ?O*20 ,*? when Fships ends !+# . can2t use or disclose P2s 0RA?, S,)R,0S or other confidential info 2ia +ritten;ph&sical record BF in memor& !*# Cf the info is a trade secret or confidential, if . uses it later, doesn1t matter #OW he misappropriated or disclosed it, it1s the fact that . misappropriated (G) "our memor& shouldn2t (e used for dislo&al conductKKK =. Ehat about )O*S,*0 from 'D a. R#-, C S.DI )O*S,*0 )#R,S A-- - .ctions by . that would normally be a breach of T.@1-T.@= won/t be a breach if ' consents, as long as . acted in 0BB$ M.C%5, M.CF 'FB(8&&, - ga2e full $C&(<B&JF8 of all M.%8FC.< M.(%& nown or had reason to now to get consent 2unless P says+shows he already 9nows these facts or P doesn1t want to 9now # I. ?uties Of )are7 )ompetence7 And ?ili ence4 a. R#-,4 C S.DS E &ub,ect to any agreement with the ', an . has a duty to the ' to act with the )are7 )ompetence7 and ?ili ence normally e4ercised by ./s in similar circumstances. !.Gs special nowledge)s ills will be factored in#. ). In court7 +h& +ould +e prefer to esta(lish a (reach of @iduciar& ?ut& instead of a Breach of B? 1. ,ASI,R to ,S0AB-ISA a (reach of fiduciar& dut& than of A duty a. Burdens are often shifted a ainst the classified fiduciar& +. Possi(l& GR,A0,R R,3,?I,S than of a A duty a. 0ort remedies, not ,ust A remedies, are often a2ailable for breach of fiduciary duties !1# Cncluding puniti6e dama es (. Reco6er& of S,)R,0 Profits c. Rescission of 0ransaction d. )onstructi6e 0rust $. PO-I)" of Miduc. $uty <aw 1. Intent mista es under breach of A, whereas intent in breaching a fiduciary duty;
21

1. Shouldn2t (e a(le to skirt &our duties <. ,ncoura e correct and trust+orth& (eha6ior ,. A&pos 1. Macts the same as Feading, but soldier had been dischar ed. a. A still has a dut&$ ,M0,*?S ,/,* 0AO#GA RSAIP ,*?,?K; S.D1 > S.DH; comment (; it/s not your coat, still the old principles !1# ,. . S0,A- uniform? ! well *O AG,*)" b)c there was ne2er an Fship +. Ehat if permitted to +ear uniform for <D da&sD a. Pro6ision is still e'tended; material (enefit !S.D1 > S.DH does not stop, cmt. B, dut& to R,0#R*; S.DG )O3P,0I0IO* helps further e4plain that why end of the relationship doesn/t stop duty# *. Ehat abt. A0A-,0,S !especially pros# who earn frame in playing for their teamsD a. Eho gets the FBI.<%C8& from the boo or restaurantD !1# %he athlete; playing w)that team ga2e him the fame - opportunity to write the boo B#0 this is somethin he did on his o+n, the uniform of the crown and the position of the p as a ser2ant of the crown were the O*-" reasons why he was able to get this 7, which ma es him liable. $ifferent from cases where the ser2ice merely gi2es the opportunity of ma ing 7. . ser2ant may, during his master/s time, in breach of his A, do other thin s to make mone& for himself7 such as am(lin 7 (ut he is entitled to keep that . himself. 3aster has a claim for dama es for (reach of B7 (ut he has no claim to the ..: !+# %he ,ersey isn/t why they/re buying the boo !i.e. he promoting his boo at Qoo store while wearing his uniform#, it/s his story that he wrote; athlete earned fame !*# Wuestions to as 3 Cs it b)c of .-position or some other reasonD Eho owns whatD @. A enc& Recap;)hecklist4 5. @or PEA relationship7 need4 a. (onsent by ' to ha2e . act on his behalf b. (onsent by ' to ha2e . act sub,ect to his control c. (onsent by . to so act 9&ordon v. 'oty: 1. P lia(le on B7 if4 a. .ctual !e4press or implied# authority 90illstreet express, implied > apparent: b. .pparent authority was there a manifestation from ' to %, that . was to act on behalf of ' 9.mpex+?ays: c. Jndisclosed ' Wattaeu; should the ' ha2e nown or did they now that . was out there an ppl were going to detrimentally rely on .D OR d. Fatification (hapter ; $otticello e. 8stoppel +.@= - ?oos <. A lia(le on B if$ a. $isclosed ' .1$ e4pressly stated in agreement. b. 'artially disclosed or undisclosed ')doesn/t e4ist !if collectible# ! .tlantic "almon# G. P lia(le in 0OR07 if4 a. $irect liability b. 8mployer-88 !control# .1$ w)in scope of emp 9"un Oil contra $arone: c. 1onemployee .gent !or 8mployee outside scope of emp# w)apparent authority and apparent authority permits wrongful conduct ! #oliday 4nns contra 0c'onalds#
22

H. A has fiduciar& duties to P. a. 'rimary duty is duty of loyalty b. Qasically, . !li e all fiduciaries# must act honestly !includes disclosure#, in good faith and w)o conflict !i.e., loyalty#. 9!ash, !eading: c. ./s duty of performance includes duty to act w)care, competence, and diligence U,*? O@ AG,*)"F /II. Partnerships A. General4 1. ?efinition of Partnership4 a 2oluntary association of +X persons to carry on as coowners a business for profit; both share losses !same in #PA (5N5G)7 #PA (5NNT)) +. ?ifference from )orps? 'artnerships a. 8ntity is *O0 ta'ed7 ains > losses ta'ed at partner le6el 6. (orp ? %a4ed; di2idends not deductible - ta4ed at &5 le2el-double ta4ation, but &corp ? 1o double ta4 b. %ypically ha2e a -imited -ife 2. (orp. ? Cndefinite c. #nlimited lia(ilit& 2. (orp ? <imited <iability d. Interests nontransfera(le 2. (orp ? transferable *. Parship as ,ntit& ! R#-,4 #PA (5NNT) C1D5(a)3 . 'arship is an entity distinct from its partners. ;. Parship PROP,R0"4 R#-,4 #PA (5NNT) C 1D< E 'roperty ac"uired by a partnership is Propert& of the PARSAIP - 1B% of the indi2idual partners. B. Who is a PAR? R#-,4 #PA (5NNT) C 1D1(c) 1. . person WAO R,),I/,S A SAAR, O@ 0A, PRO@I0S of a biz is PR,S#3,? to be a partner in the biz, #*-,SS the profits were recei2ed in payment3 a. Bf a ?e(t by installments or otherwise; b. Mor ser2ices as an I) BF of Wa es or other )ompensation to an emplo&ee. 93enwic9. written YparshipY agreement at salon:; c. Bf Rent; d. Bf an Annuit& or other Retirement OR Aealth benefit to a beneficiary, representati2e, or designee of a deceased or retired partner; e. Bf Interest BF other )har e on a loan, e6en if the amount of pa&ment 6aries +ith the profits of the (usiness . . . 90artin v. Peyton:; BF f. Mor the sale of the ood+ill of a (usiness or other property by installments or otherwise +. *O0,3 .bo2e factors are not e4hausti2e; ct. loo s at 0O0A-I0" O@ 0A, )IR)#3S0A*),S. Eere they acting li e 'artnersD <. B," ,lements of Partners ! association of 1 persons7 a. @ormin a Parship? ?,@A#-0 S0A0#0OR" Rules or Eritten .0F88M81%D b. (5) Profit Sharin R,B#00AB-, PR,S#3P0IO*, really strong case, QJ% totality of circumstances may prove otherwise7 BOP on person claiming 'arshipD i. (reates e2identiary ad2antage 9comment on R#PA C 1D1(c)F c. (1) Shared -osses d. (<) )ontrol of Partnership Propert& and mana ement of the biz e. (G) I*0,*0 - Whether &ou2re holdin &ourself out as partners in front of third parties (,stoppel)
23

i. @iduciar& ?uties? ii. Miling federal or a state Partnership 0a' ReturnD 3enwic9, "outhex iii. Parship Propert&? "outhex f. (H) ?uration ! If no term specified7 then A0EWI-- Parship$ if term specified7 more e6idence that it2s *O0 a Parship7 (ut not determina(le "outhex i. ?issociation > ?issolution 5ow do you end a 'arship G. S#BER#-,S4 a. Is a WRI00,* a reement necessar& to create a partnership? *o. 3enwic9 !dicta#. i. ?o &ou need an ORA- a reementD 0artin v. Peyton says "es, Meeting of the Minds, but 3enwic9 says 1B agreement is necessary; it/s about )O*?#)0 ii. *O0,4 Written a reements are a ood idea (;c &ou can help parties clarif& e'pectations of (i% a reement; B#0 if you don1t have a written agreement, a S0A0#0, o6erns &our Rship, - if you don1t li9e what the statute says, "O# )A* )AA*G, I0 2ia #PA C 5D<; QJ% there are things that you can/t change 9#PA C 5D<(a)F b. Is callin the arran ement a 9Partnership: determinati6e D 1B. 3enwic9. c. Is the e'istence of a +ritten a reement determinati6e? 1B. 3enwic9. i. 3enwic9 - Menwic operated a (eaut& shop at which (hesire wor ed as a receptionist; &he wasn/t putting in capital, but agreement was called partnership !not determinati2e#; (hesire demanded a raise; Menwic countered w)an offer to ma e her a partner, w)a right to +@O of the profits; (hesire accepted; &o basically she was doing the same ,ob, no more control o2er the business, she didn/t bear the burden of losses, so onl& thin chan ed +as her salar&$ *O0, !? +anted Parship (;c +as tr&in to a6oid donatin to emplo&ee compensation fundF ii. 3enwic9 (ourt loo ed at multiple @A)0ORS (first S)3 1. I*0,*0IO* of the parties a. 3enwic9 Cntent was an issue but while Menwic was filing 'arship ta4es, ct. said that/s not determinati2e b)c it was clear that he only intended to pro2ide (hesire w)the possibility of a pay increase CM biz was going good in 8K(5.108 for retaining her ser2ices; protected $ from an obligation to pro2ide additional compensation if $ couldn/t afford it: b. "outhex 'l/s trying to get 2iolation of fiduc duty but ct. found no parship b)c fi4ed renewable term, no share in losses, no filing of parship ta4 returns, no parship property etc. +. Fight to SAAR, I* PRO@I0S a. U3enwic9 ! condt/l +@O increase if biz going well; not determinati2e: *. Bbligation to SAAR, I* -OSS,S a. 93enwic9 ( didn/t share in losses: ;. O+nership - )O*0RO- of 'arship property - biz a. 93enwic9 $ had complete control of biz; no changes
24

=. >. P. T.

N. d. A&pos p. T*3 i. Z+ - What +ere the deal points (important terms of the economic relationship) (et+een 3r. @en+ick and )hesireD 5. RiskEReturn Relationship ii. Z* Ao+ mi ht the la+&er ha6e drafted the 9partnership a reement: to make it appear that )hesire had control consistent +;the #PA7 +;o in fact depri6in @en+ick of the dominant position that he +ould no dou(t insist upon as a matter of (i% 8ud ment? 0hese mi ht (e helpful7 (ut not completel& determinati6e 5. Sho+ her amount of control$ flo+er the lan ua e in a reement a. (hesire Bffice Manager b. Menwic Qusiness Manager 1. Gi6e )hesire 1DZ 6ote7 and @ESDZ 6ote$ <. @or dissolution7 ha6e to ha6e 5DDZ or unanimous consent a. %rying to implement ris -reward ob,ecti2es iii. ,MA3 0IP4 Cf a "uestion has a written agreement saying Y'artnershipY second guess itS 0B %5FBJ05 M.(%BF& to see if it/s really a 'arship H. Partnership or -ender? a. R#-, Sharin of Profits is *O0 conclusi6e e6idence of a Parship 90artin v. Peyton: i. 0artin v. Peyton - ''M ga2e 7+.= million loan in mar etable securities to A1A, so allowed them to use things as collateral for a loan b)c A1A didn/t ha2e any collateral of 2alue; in e4change, A1A gi2ing di2idends to ''M !;@O of profits-capped#; option to buy e"uity inspection and 2eto rights; )t. found *o Parship7 +as onl& a loan; .greement said3 1. 1o 'arship intended !not conclusi2e# +. Jntil loan repaid, $/s get ;@O of profits !typical interest# *. $ recei2ed speculati2e securities as collateral !typical in loan# ;. .ll di2idends on securities to be paid to $ !typical# =. $/s were to be ad2ised of and consulted on all important matters affecting firm !"uestionable, but ct. said its o b)c needed to ma e sure A1A being good stewards w)their 7#
25

w)agreement: (ommunity of power in administration !ri ht to in6est7 or 3AB, O0A,R 3A*AG,3,*0 ?,)ISIO*S# 93enwic9 1one for (: -A*G#AG, in the a reement !not ,ust word Ypartner9ship:Y but also what the rest says about the ri hts;duties of each - 3enwic9 only had term partnership but delegated no duties to ( )O*?#)0 of the parties toward third persons a. 93enwic9 didn/t hold themsel2es out as 'ars: Fights of the parties on ?ISSO-#0IO*. a. 93enwic9 )2s ri ht to lea6e +as t&pical to that of an ,,;,R rship ! 5D da&s2 notice; need more li e process for client list, potential trade secrets, paying bills, etc.: ?uration !"outhex - fi4ed, but renewable#.

>. $/s could inspect the boo s - re"uest info !"uestionable# P. $/s could 2eto any of A1A/s biz deemed speculati2e - !ct. said monitoring was passi2e control; not directly controlling# T. A1A pars assigned their interest in A1A to $/s as security for the loan !typical# N. $/s had option to ,oin firm ! ind of shows no intent yet# 1@.Fesignation at any time to be submitted to $/s 11. B," ?2s could *O0 initiate A*" A)0IO*S for the firm7 *OR (ind the firm (& their actions ii. Wh& is 0artin important? B;c of pa&in (ack creditors on Parship ?ISSO-#0IO*K 1. R#-, #PA (5N5G) C GD ! 4n "ettling accts btwn the pars after dissolution, the liabilities of payment !.N? as followsD a. )reditors (other than partners) (. Pars other than for capital > profits 1. R#-, #PA (5N5G) C 5H ! All Pars are lia(le a. (a) L;S lia(ilit& for e6er&thin char ea(le to the Parship under C 5< > 5G i. ,. . 0OR0S and (reaches of fiduc. ?ut& (. (() Lointl& for all other ?,B0S > o(li s of the Parship i. ,. . B2s >. Partnership (& ,S0OPP,-4 creates a liability to *rd parties who rel& upon representations that a partnership e'ists. PriceWaterhouse 9Cn2estors for PW), but it went belly up; 'E( issued un"ualified audit letter saying in2estment good; pl sues 'EQahamas .1$ 'E( EBF<$EC$8 b)c Qahamas has no 7, - ,urisdiction: . a. R#-, - Cn order to establish a partnership by estoppel, G elements must (e pro6en3 i. (5) ,'press or implied Jholdin out: of Parship, ii. (1) Aoldin out of 'arship made (& one sou ht to (e char ed as a partner BF +;Ais consent, iii. (<) Reasona(le Good @aith reliance (& 0, i2. (G) )han e in Position (& 0$ ?etrimental reliance b. Pricewaterhouse issues i. 'l/s argued actual parship, but no sharing of profits or losses, no control, intent was "uestionable, duration unclear ii. 'l/s also argued 8stoppel, but ct. doesn/t buy it b)c the pamphlet cited w)logo was found during litigation, so you can/t say you relied on it to ma e financial)detrimental reliance)decision iii. )t. didn2t consider4 being a massi2e global enterprise; .d2ertising, name and trademar , being a global leader, common nowledge; there +as so much 9holdin out: as some t&pe of Parship i2. )an tr& PEA riship lia(ilit& for 0OR0? %ry to argue that they controlled the instrumentality that causes the harmD %his is a negligence, fraud case T. What is the primar& difference (+n PAR0*,RSAIP > Partnership (& ,S0OPP,-?
26

a. 'arship re=uires PROO@ of )O*S,*S#A- AGR,,3,*0 to share profit > control. b. 'arship by estoppel re=uires a R,PR,S,*0AI0O* (& the ? > reliance (& 0. ). PAR0*,R2S A#0AORI0"4 1. Is there a dispute (t+n P(s) > <rd Part& as to +hether a Par acted +; Authorit&? &o % is suing based on acts of a 'ar. a. *O0, ! PARS )A* )O*0RA)0 O#0 O@ 0A,S, ?,@A#-0 R#-,SKKKK (. R#-,4 C <DI(a) ! Pars are L;S lia(le for o(li ations of Parship #*-,SS )laimant;0 lets &ou off the hook OR pro6ided (& -AW. c. R#-, 4 #PA 5NNT C<D54 Partner is A ent of Partnership ! !1# 8ach PAR0*,R is an A of the Parship7 and AAS 0A, A#0AORI0" to do BIQ on (ehalf of the Parship !+# %he acts of the Par Bind the Parship !including the e4ecution of an instrument in the partnership name# so lon as it2s apparentl& for carr&in on in3 !a# the OR?I*AR" )O#RS, of the 'arship Qiz, BF !i# Industr& practice to do thisD 8.g. do ppl buy bread all the time !ii# Past ?ealin s w)%D (iii) *ot ,'tra Ordinar&D ,. . is it routine that a grocery store buy bread from 2endorD 1. *O0,3 What2s outside of 9Ordinar& )ourse?: (i) 3er ers7 *e+ Partners7 hi h le6el positions !b# Bi% of the 0"P, carried on by the 'arship !i# #*-,SS3 1. (5) PAR had *O A#0AORI0" 0O A)0 in the particular matter, A*? +. (1) <rd Part& 9new or had received a notification that the partner lacked authorit&.: Nat/l $iscuit v. "troud. 9&troud - Mreeman 'arship MBF grocery store. B1<I Stroud told *ational Biscuit that he +ould not (e personall& lia(le for an& more (read it sold to the store , QJ% Mreeman ordered more bread, 1ational Qiscuit deli2ered it, and 1ational biscuit sued &troud for payment Q)( &troud says he wasn/t going to be responsible for the bread supplied, QJ% Mreeman agreed; -ia(le (;c &ou need a ma8orit& of the parts to make a decision on matters in the OR?I*AR" )O#RS, of (i%$ Aere7 this is 1 Pars7 and Stroud is not a ma8orit& (8ust 5 of 1 so ,V#A- PARS)7 so +ould need (oth Stroud > @reeman to inform creditors > A-- PARS amend Parship a reement$ So @reed still had authorit& (CGD5 L)F. !i# &troud/s letter doesn/t wor b)c need a ma,ority to change the default. (ii) *O0, ! Aad ? dissol6ed the Pship > i6en Pl notice prior to the order7 ? +ouldn2t ha6e (een personall& lia(le for the parship de(t +. Vuestion of Par2s Authorit& as (et+een PAR0*,RS? Means that 'ar is suing, 1B% %; %/s been ta en care of. a. R#-,4 #PA (5NNT) C GD5(f) - ,V#A- RIGA0S I* 3A*AG,3,*0 > )O*?#)0 of PARSAIP b. R#-,4 #PA (5NNT) C GD5 (i) 1eed )O*S,*0 of A-- PAR0*,RS for a person
27

to (ecome a PAR0*,RK 0his isn2t in the ordinar& course of (i%. c. R#-,4 #PA (5NNT) GD5 (8) ! !1# $ifferences on matters that are in the OR?I*AR" )O#RS, of Bi% may be decided by 3ALORI0" (H5Z) of pars !absent a 'arship agreement#. 9"ummers v. 'ooley, !+# Acts O#0SI?, the OR?I*AR" )O#RS, of parship (i% > )AA*G,S to the PARSAIP AGR,,3,*0 can be made O*-" +;consent of A-- PAR0*,RS (a) *O0,4 What2s outside of 9Ordinar& )ourse?: (i) 3er ers7 *e+ Partners7 Ai h le6el positions7 Assi nin parship propert& !*# "ummers v. 'ooley - &ummers - $ooley had e=ual stakes in a 0RASAE )O--,)0IO* 'arship. &ummers decided that they needed a *rd man, but $ooley disagreed. Summers +ent ahead > hired a <rd man an&+a&7 > tried to (ill the Parship for the cost. ?oole& 6ocall& kept disa reein ; ?oole& +ins$ !a# R#-, ! Ordinar& )ourse Parship matters (a(sent an a reement to the contrar&) are ?,)I?,? B" 3ALORI0" /O0,$ this re"uired a ma,ority 2ote, - &ummers didn/t control a ma,ority. !b# $ifferent from Nabisco b)c *rd party was already satisfied, - the *rd party thought that &ummers had the authority to hire, so <D5 is irrele2ant b)c this isn/t about binding the parship decision for a % (c) 0his +asn2t for the (enefit of the parship7 (ut rather for the (enefit of one partner !d# Polic& @oundational Go6ernance - tr&in to protect the partners from each other$ don/t want one partner to be able to change something, and then the other can ,ust change it bac b)c there would be bac - forth, - nothing would get done <. A&pos a. Ao+ do +e sol6e ?,A?-O)B? !1# 0I, BR,ABI*G A#0AORI0"3 (a) Bindin ARBI0RA0IO* !b# <et party K ma e the decision !desi nate someone that the& (oth trust, well respecti2e in biz community, is cost effecti2e, - generally what biz does# (c) Identif& chan in the procedure if that part& dies (1) Ordinar& course ! the normal routine in mana in a trade or (i% (. A(el7 Baker > )harlie form partnership7 ha6e e=ual 6otin ri hts$ A(el and Baker 6ote to hire secretar&$ )harlie 6otes no. Who +ins? !1# .bel - Qa er do b)c ma,ority; use GD5(L)7 Administrati6e assistance is in ordinar& course of (usiness (a) If this +as a hi her personnel position7 +ould (e different$ need to anal&%e thin s like industr&7 ,'pectation of market7 +hat do &our peers do7 etc. (1) Baker and )harlie 6ote to admit ne+ partner$ A(el 6otes no. Who +ins? !a# .bel; GD5(i) b)c this is not in the ordinary course; this is e4traordinary (<) Baker and )harlie 6ote to increase their dra+ contrar& to partnership a reement$ A(el 6otes no. Who +ins? !a# .bel-GD5(8). .mendment to the 'arship agreement re"uires consent of all 'ars. ;. Is there a limit on POs Authorit&? 'B&&CQ<I QI (5.10C10 %58 $8M.J<%S a. R#-, E . PAR0*,ROS A#0AORI0";,V#A- RIGA0S in PAR0*,RSAIP )A* B, -I3I0,? (& a Parship a reement to certain e4tents. "idley - .ustin v. 'ay.
28

(1) R#-, E ,. . 'ars can ?,-,GA0, ?,)ISIO* 3ABI*G A#0AORI0" for )onduct of Bi% to E *2T4% *O004TT (common; centralize management of the biz in a handful of people# 2ia Parship a reement (cts. Allo+ parship a reement to dero ate from statute) "idley - .ustin v. 'ay. !+# R#-, ! 'ars )A* )AA*G, A3O#*0 O@ APPRO/A- to less than #nanimit& for things outside of ordinary course !e.g. merger# 6ia Parship a reement. 9"idley .ustin v. 'ay E ' agreed to merger, but didn/t now that he would be co-chair; Bruised e o: (<) A??2- thin s Pars can chan e 6ia 5D<(a)4 !a# Fe"uire Superma8orit& 6otes for Important decisions !i# 8.g. Ma,or financial commitments !b# (reate a Ri ht to ,'pel partners !c# Fe"uire partners to see appro6al (efore makin certain kinds of commitments on behalf of the 'arship (d) ?ele ate a 3ana ement or ,'ecuti6e )ommittee the Ri ht to Bind Parship to an& si nificant O(li ations (. R#-,S4 ?IS)-OS#R, !1# #PA (5N5G) C 1D U-,SS S0RI)0F4 'artners shall render on demand true and full info of all thin s affectin the partnership to any partner or 9his rep.F.(Re=uires demand) (1) #PA (5NNT) C GD<(c) US0RI)0$ 3#S0 PRO/I?, it +;or +;o demandF4 ,ach partner and the Parship shall furnish to a partner (or his rep)4 !a# w+o demand, any info about the 'arships biz+affairs reasonably reCuired for the proper exercise of the partner/s rights and dutie s under the ' agreement or this 9.ct:; A*? !b# On demand, any other info concerning the partnershipGs biz)affairs, J1<8&& the demand)info demanded is unreasonable)improper under the circumstances. (i) *O0, ! What did ?a& kno+? 5. In "idley7 he kne+ deal +as oin on$ 1. Was in6ited to the meetin B#0 didn2t Go <. )t. said no (reach of fiduciar& dut& for not ?isclosin (;c didn2t result in a profit for the other partners7 nor financial loss to Parship $ Other partners didn2t ain an&more in the firm ?. 0he Partnership I*0,R,S0 5. G,*,RA- R#-, a. Pars ha6e 1 kinds of interests4 (5) ,)O*O3I) (1) 3A*AG,3,*0$ &ou can con6e& an ,conomic interest7 (ut the transfer of Whole interest is limited. +. R#-,4 #PA (5NNT) C GD5(i)4 a person ma& (ecome a PAR onl& +;)O*S,*0 of A-- PARS *. R#-,4#PA (5NNT) C HD5 E a '.F is ?O,S *O0 AA/, A 0RA*S@,RAB-, I*0,R,S0 4N P.!TN !"#4P P!OP !T(S 1B% a co-owner of partnership property ;. R#-, #PA (5NNT) C HD1 E PAROs O*-" 0ransferra(le Interest IS SAAR, of the PRO@I0S;-OSS,S > ri hts to recei6e distri(utions. 0he interest is P,RSO*APROP,R0". Putnam v. "hoaf U'utnam con2eys interest to &hoaf; &hoaf - remaining partners find out old boo eeper embezzled, so they sued - were able to reco2er damages;
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'utnam tries to get a portion of these damages saying she con2eyed less than her whole 8conomic interest, but ct. doesn/t buy it; said it +as clear she con6e&ed her ,)O*O3I) interest to Shoaf$ Putnam not entitled to portion of dama es: =. R#-,4 #PA (5NNT) HD<(a)(<) E .n ASSIG*3,*0 or SA-, of a partnership JU,)O*O3I)F interestJ does NOT ma9e the .""4&N a P.!TN !. a. *O0, E assi nee has *O RIGA0 0O PAR0I)IPA0, I* 3A*AG,3,*0 of Parship$ only has rights to share of profits - capitalYB#0 ORIGI*A- PAR is S0I-- L;S lia(le for A-- Parship o(li ations >. R#-,4 #PA (5NNT) C HD<(a)(1) - 0RA*S@,R of an 9I*0,R,S0 does *O0 effect a ?ISSO)IA0IO* or ?ISSO-#0IO* of the partnership. a. A PAR0*,R WAO AAS 0RA*S@,RR,? AIS I*0,R,S0 R,3AI*S A PAR0*,R$ Still has 3A*AG,3,*0 RIGA0S (1) Par is still mana er7 still L;S lia(le7 6otin 7 decision7 da&Eda&$ smart thin to do is to a ree +;Assi nee to I*?,3*I@" from losses (. In order to 0ransfer the ,*0IR, PAR0*,RSAIP I*0,R,S07 Includin 3A*AG,3,*0 RIGA07 *,,? )O*S,*0 O@ A-- PARSK >unless stated otherwise in the Parship agreement@ T. A&po2s a. .lice is a partner in a threeEpartner la+ firm +ho +ishes to cash out and retire. )an Alice sell her mem(ership in the partnership to Bo(? (#PA 5NNT GD5(i)) !1# Cf the other + partners agree, then yes. b. )an Alice sell her 5;< of partnership assets to Bo(D (#PA 5NNT7 HD5) !1# 1o, she doesn/t ha2e a *rd of interest; it/s all on the partnership)management le2el; if it all were sold, then she/d ha2e 1)* of the proceeds)profits (1) If &ou are transferrin somethin less than &our +hole7 &ou2re still stuck in the partnership (;c &ou ha6e mana ement ri hts c. ?oes Alice ha6e an& transfera(le ri hts in the partnership? #PA CHD1 !1# Ies; share in the profits - losses - right to recei2e distributions. ,. What is PAR0*,RSAIP PROP,R0"? 5. R#-, #PA (5NNT) C 1DG codified the )-7 la&in out < rules U*otice these are not in same order in statuteF4 (5) An& asset ac=uired in the name of the partnership is partnership propert& if4 !a# . transfer ?IR,)0-" 0O 0A, PAR0*,RSAIP I* I0S OW* *A3, !b# a transfer to one or more PAR0*,RS A)0I*G I* 0A,IR )APA)I0" AS PAR0*,RS .N' the *A3, of the PAR0*,RSAIP APP,ARS O* 0A, 0RA*S@,R (1DG(a)(5)7 (()) !+# If the partnership is *O0 named, property ac"uired by one or more partners is partnership property 43 the document transferring title indicates the B#",R WAS A)0I*G I* AIS )APA)I0" AS A PAR0*,R. C 1DG(a)(1) !*# 'roperty P#R)AAS,? W; PAR0*,RSAIP @#*?S is presumed to (e partnership property. C1DG(c) b. Related Rule4 #PA (5NNT) CGDG(()(5)4 ' is 0R#S0,, of PAR0*,RSAIP PROP,R0". !1# Bwes ?#0" O@ -O"A-0" to *O0 use PARSAIP PROP,R0" for misappropriation of Parship opportunit&S
30

!a# %his pro2ision that can be 2aried by agreement, C5D<(a). 1. What2s *O0 Parship Propert&? a. R#-,4 #PA (5NNT) C 1DG - 'roperty ac"uired in the name of one or more partners C& *O0 Parship propert& if4 !1# $oesn/t indicate that title was ac"uired under partnership capacity .1$ !+# 1B% purchased with 'arship funds - ,/,* I@ #S,? @OR PARSAIP P#RPOS,S M. @inancin the Partnership4 problem of addGl capital is often highlighted in partnership conte4t b)c there are -I3I0,? SO#R),S @OR A??O- )API0A- and *O ABI-I0" 0O S,-- *,W I*0,R,S0S7 .$" NT *ON" NT. 1. Partnership )API0A- E %he total assets of a biz, especially, if it generates a profit a. )API0A- A))O#*0E #PA (5NNT) C GD5(a)4 a runnin (alance reflecting each partnerGs o+nership e=uit& [2alue in the assets after you/2e paid creditors:; S*APSAO0 of ,)O*O3I) life of (i% at an& point in time !1# 8nsures that you now what the 2alue is; trac ing what you own)contributed as (apital to the partnership, what/s being ta en out, 2alue of economic interest !+# .llocation of PRO@I0S I*)R,AS,S capital acct !*# .llocation of -OSS,S ?,)R,AS,S capital acct !;# 0akin a 9dra+: (distri(ution) ?,)R,AS,S capital acct 1. BOOB /A-#, P fair market 6alue (ori inal 6alue) a. 1ot going to settle for boo 2alue; it/s an in2estment to grow from 1@yrs ago, use +@1* 2aluation (re6alue it)$ (5) *an of course, wor9 against you in a ! * ""4ON <. PAR0*,RSAIP PRO@I0S a. R#-,4 #PA (5NNT) C GD5(() UparaphrasedF E profits and are di6ided e=uall& among 'ars - losses follo+ in proportion to the Pars share of the profits.9*O0, can (e chan ed in Parship a reement 6ia #PA 5D<(a)$a(sent a reement7 split e=uall&F (5) A chan e in SAAR, O@ PRO@I0S effects losses as +ell$ the person +ho contri(uted more is +illin to lose up to their capital in6estments7 > can also et the ma8orit& of profits$ &ou put in less7 &ou lose less7 unless chan ed in a reement (1) If there is an a reement for profit (ut not for losses then losses are split in the same +a& profits are. #owever this doesnOt +ork the other +a& around. If there is an a reement to split losses (ut not profits7 profits are not split the same +a& losses are$ split +ill (e ,V#A- (unless changed by agreement). (<) When &ou add 0I3,7 not .7 that PARS capital acct (alance is Q,RO7 B#0 it still ro+s +ith profits$ B#07 if &ou tr& to cash out B,@OR, the profits ro+7 "O# G,0 *O0AI*GPDK G. A&pos a. If one partner contri(utes IDZ of initial capital7 ho+ are profits shared? (5) R#-,4 #PA (5NNT) C GD5(() ! a(sent an a reement 6ia 5D<(a)7 Profits shared e=uall&. (. What if one Partner does IDZ of the +ork? (5) *o chan e in result$ a(sent an a reement 6ia 5D<(a)7 profits are shared e=uall&. AOW,/,R7 if that partner tries to cash in B,@OR, the& accrue profits7 then that Par ets Q,ROKKK
31

c. What if Parship a reement pro6ides profits to (e di6ided NDZ to Alice$ 5DZ to Bo($ A reement silent on losses$ ho+ are losses allocated? (5) R#-,4 #PA (5NNT) GD5(() ! 0he default is e=ual share of profits > losses$ AOW,/,R$ since in the parship a reement7 Alice incurs more of a loss than Bo($ she is +illin to lose up to the amount she put in7 so she +ill incur NDZ of the losses. Bo( has less to lose and +ill incur 5DZ of the losses. d. What if partnership a reement pro6ided for profits to (e di6ided NDZ to Alice$ 5DZ to Bo( and for losses to (e di6ided e=uall&. ,nforcea(le? (5) ",S$ I don2t kno+ +h& Bo( +ould do that7 (ut it is clear Alice +ants )ontrol > Po+er. "ee #PA (5NNT) 5D<(a) e. Ao+ can Bo( a6oid lia(ilit&7 seein as thou h he put in time7 *O0 mone&? (5) Bo( can make sure that <rd part& kno+s or has reason to kno+ that he is not lia(le for an& partnership o(li ations 6ia <D5 > GD5(8)7 so onl& sue Alice$ (ut if not7 the L;S lia(ilit& applies to Bo(7 and Bo( +ould 8ust ha6e to seek )ontri(ution from Alice. G. Partnerships4 @I?#)IAR" ?#0I,SEE?ut& of )AR, and ?ut& of -O"A-0" >can be limited by 2N.N40O2" informed consent of Pars@ 5. R#-,4 #PA (5NNT) C GDG ! PAR2S ha6e 1;< main duties a. (5) ?ut& of )AR, (. (1) ?ut& of -O"A-0" (5) ?ut& of GOO? @AI0A > @AIR ?,A-I*G 1. )an @iduciar& ?uties (e limited? a. R#-,4 #PA (5NNT) 5D<(() !)A**O0 ,-I3IA0, 0A, ?#0" O@ -O"A-0" A-- 0OG,0A,R7 B#0 @iduciar& duties can (e limited;identif& acts that +ouldn2t constitute a 6iolation7 as lon as it2s *O0 3anifestl& #nreasona(le7 +hich means4 (5) *ot standard approach in industr& (1) Pre6ious dealin s (<) Sophistications of parties ! parties that ha6e done this o6er and o6er (G) Attorne& consultation? Added 6alue (H) Goes a ainst pu(lic polic& (a) S#B E R#-,4 All Pars7 OR [;Z specified in Parship a reement7 ma& authori%e;)A* )O*S,*0 0O a specified act;transaction that +ould other+ise 6iolate ?ut& of -o&alt&7 AS -O*G AS4 (i) @#-- ?IS)-OS#R, of A-- 3A0,RIA- @A)0S <. Remedies (,asier to Pro6e$ don2t ha6e to pro6e dama es) a. ?is or e profits (. )onstructi6e 0rust c. Rescind B2s G. ?ut& of -O"A-0" a. R#-,4 #PA (5NNT) C GDG E A(sent consent of fello+ Par(s)7 A par is PROAIBI0,? from4 !1# )O3P,0I*G +ith the Parship 9e. . client pays 'ar double for separate wor , usually done by 'arship - poc ets this for himself; competin w)other pars: !+# (#S#RP);0ABI*G BIQ OPPOR0#*I0I,S from +hich the Parship mi ht
32

ha6e (enefited OR needed Ue. . .lice is a par in biotech parship, - parship is loo ing for a new building for office; .lice finds one, but decides to buy it herself lease it to a co. that doesn/t compete w)the parship, - later resells for profit; .lice has to acct for the profits made to the parship e2en though not directly competiti2e b)c the building could/2e been a good opp for parship. &he new they were loo ing for one so she depri2ed them of the opp. .lternati2ely, .lice could/2e presented the opp to the parship - had the parship 2ote on .lice ta ing the opp herself:. !a# R#-, E A partner has a ?ut& to ?IS)-OS, Parship OPPOR0#*I0I,S to allo+ other partners e=ual opportunit& to take ad6anta e of it. 0einhard v. "almon 9)ardo%o - 'ars in Loint /entures for Bristol Aotel; &almon did new lease w)someone else - didn/t tell Meinhard, - M wanted a part of the deal; (t. treated them li e 'artners: 9*O0, +hile S had 6alid ar uments that it +as a limited scope en a ement that +as to+ard the end of its term , Pub policy shows that " was in a better position to 9now what was going on7 he had more control+was managing the property: !i# )ardo%o RL/s li e copartners owe the dut& of @I*,S0 -o&alt& b)c they are trustees held to something stricter than the morals of the mar et place. 1ot ,ust honesty, but the 'unctilio of an honor the most sensiti2e, is then the standard of beha2ior. 1. *O0, : . L/ is similar to a partnership but is more limited in scope and duration; usually for a single transaction as opposed to parship which is a series of acts directed to an end. !ii# ?issent - this doesn/t ma e sense, if they wanted more, they could/2e said so; limited period, no right of renewal (<) #sin PARSAIP PROP,R0" @OR P,RSO*A- GAI* (G) ,n a in in )OI ;SelfEdealin U+orkin +;0 that has ad6erse interestsF "andvic9 v. 5a*rosse >F==A@60op -eases$ L/$ Par on (oth sides of the deal$ didn2t i6e other Pars Bi% opportunit& to partake in other leaseF H. ?ut& of )AR, a. R#-,4 #PA (5NNT) C GDG (c) Cn winding up parship biz, 'ar has duty to refrain from engaging in grossly negligent or rec9less conduct, or rec9less, intentional misconduct or violation of law. !1# *O0,3 More than mere negligence. I. ?ut& of GOO? @AI0A and @AIR ?,A-I*G a. R#-,4 #PA (5NNT) C GDG(d) - . partner has a duty of GOO? @AI0A > @AIR ?,A-I*G when e4ercising rights of parship agreement. !1# *O0, #PA cmt. (haracterizes this obligation as B (ased; applies +hene6er a partner dischar es a dut& OR e'ercises a ri ht under the Parship a reement OR the default #PA rules. b. S#B R#-,3 . '.F can act in his own best interests when plannin to lea6e the partnership QJ% is still sub,ect to his duty of GOO? @AI0A A*? -O"A-0", and canGt lie to the other partners about lea2ing or use the partnerships resources !(<C81%&# to start his other company. 0eehan v. "haughnessy 91 la+ firm partners that +ant to lea6e, start tal ing to associates and as if they want to go w)them; the loo for 2acant lots to build firm, they start informing clients of their departure - as ing then to wor
33

w)their new firm; 3eehan > Bo&le ?ra ed their feet on pro6idin the list of clients the& thou ht +ere theirs7 mean+hile the& had alread& drafted letters O* PARB,R;)O#-0,R letter head !conveying approval, when there really wasn1t, so deception@7 Ct/s the client/s decision who they/re lawyer is, QJ% you can/t unduly influence them; )t. said can2t act in secrec& > o(tain an unfair ad6anta eF !1# All Pars are fiduciaries7 > here7 the& 6iolated dut& of lo&alt& in usin Parship propert& (client list P trade secret7 entitled to propert& ri ht #PA (5NNT) CGDG(()(5)) for their o+n (enefit. @iduciar& duties don2t stop e6en +hen Rship ends. R< of A enc& S.DH, Town - *ountry: !+# *O0,3 <etters should ha2e been more neutral; pro2ide option to stay wor ing with firm, BF wor with new firm; probably shouldn/t be on letterhead; le2el the playing field by also ha2ing firm send separate letter !a# -a+ doesn2t like S,)R,)" +hen &ou2re a fiduciar& !recall !eading case c. S#B R#-,3 *O )A#S, ,MP#-SIO* pro2ision in a partnership agreement is OBA", and 'artners e4pelling another partner act in BO*A@I?,, GOO? @AI0A, regardless of moti2ation, +hen the& do not +ithhold . or Propert& le all& due the e'pelled partner. 5awlis !drunk la+&er e4pelled after other partners tried to see him through his addiction#. !1# 5awlis issues !a# 'ar e4pulsion wasn/t dissolution !b# 'lan to impro6e -a+&er to Partner ratio did not e6idence PR,?A0OR" P#RPOS,; C1 M.(%, same memo said not to immediately e4pel <awliss !c# Mirm wor ed w)'ar e2en though he 2iolated his second chance, and &%C<< ha2e him add/l T months as par, sharing in profits - insurance co2erage !d# ,6idence su ested that P e6en still considered himself SR. partner at time, and firm was still treating him as such T. A&pos a. 3ark > *orma are la+ partners$ Peter approaches 3ark a(out person in8ur& case$ 3ark determines that PI case is a ood one7 +;potentiall& lar e fee$ 3ark also determines at that moment to end partnership +;*orma; if he does so7 +hat are his o(li ations to *orma +;respect to the representation of Peter2s (rother? !1# &ince we/re in partnership fiduciary, you ha2e a higher duty; B1<I +hen &ou ha6e a (ad actor as &our par7 do &ou ha6e more le6era e in ho+ to split ; QJ% 58F8, 1orma/s a good person. !+# Mar has to disclose to 1orma - 5as to disclose to the client you ha2e a choice; you can stay here, or you can come w)me !*# 1orma should ha2e the opportunity to send a letter about the client/s options (. If Peter sa&s7 I +ant to o +ith &ou 3ark7 can he 8ust take it +;o i6in *orma an&thin ? !1# Qut how do you 2alue what/s to be gi2en to 1ormaD !a# %hey could ha2e established a formula in the A, Ehen lea2ing firm, partner can ta e any client matter ta en w)the partner shall be 2alued at K, and the firm gets I Br IBJ (.1 %.A8 cases that you generate, but firm gets *O (b) &o he can lea2e, as long as he gi2es her the appropriate share of the property)case !see p. 1+1 in 5awlis case# 9Good @aith: if that act does not cause a +ron ful
34

+ithholdin of mone& or propert& le all& due the e'pelled partner at the time he is e'pelled. A. Is the Partnership -ia(le? 1. C<DH(a)4 . partnership is liable for loss)in,ury caused to a person, for a penalty incurred, as a result of wrongful act or omission, or other actionable conduct, of a 'ar acting in the ordinary course of biz of the 'arship BF w) authority of the partnership 1. C<DH(()4 If7 in the course of the partnershipOs (i% OR +hile actin +; authorit& of the partnership7 a P recei6es or causes the partnership to recei6e . or propert& of a <rd part&7 and it is misapplied (& a P7 the partnership is lia(le for the loss. *. Cs the partner liableD a. C<DI4 (a) 's are all LOI*0-" and S,/,RAB-" lia(le for all obligations unless changed by agreement, or (() 'ar entered 'arship after the obligation was incurred I. ,ndin a Partnership4 ?ISSO-#0IO* or ?ISASSO)IA0IO* 1. ?ISSO)IA0IO* 0o remo6e from association QJ% doesn/t cause the partnership to go away; "ou can lea6e7 > not necessaril& cause it to o into +ind up;dissolutionK a. Is this a #PA C ID5(1E5D) E?issociation? !1# Cf "es, then by $8M.J<% C% means !unless otherwise agreed# that it2s up to the remainin partners;the& ha6e the option to continue the (i% 2ia TD5 !purchasin the dissociated partner2s interest# (a) B#0 the dissociated partner is *O0 automaticall& released. C TD< (() Pars ha6e the OP0IO* to do CSD5 dissolution. (1) CID1 (1E5D) dissociation e6ents include4 (a) ,6ent in parship a reement that caused dissociation !b# ,'pulsion pursuant w)'arship agreement !c# ,'pulsion 6ia unanimous 6ote (ille alit& b)c unla+ful to be pars w)that 'ar, transfer of practicall& all of his interest, (ad conduct, intentional material breach, ?,A0A, termination# 1. ?ISSO-#0IO* E4 ?ISSO-#0IO* IS *O0 0A, SA3, AS GOI*G O#0 O@ B#SI*,SS$ 9the termination of a previously existing parship upon occurrence of an event specified in the parship agreement, O! "P *434 ' $( 5.W a. It is si"ply a *#.N& in the ! 5.T4ON of the partners caused by any partner ceasin& to be associated in the carryin& on 3of the business. #PA (5N5G) C 1N (. Is this a CID5(5) situation +here Par i6es ,'press notice that he is +ithdra+in ? !1# Cf &es, then ?,@A#-0 ne4t step !absent of agreement# is R#-,4 #PA C SD5 +indin up: of biz, e. . li=uidation7 sell off assets7 etc. !a# Windin #p4 0he process of shuttin do+n postEdissolution !i# ?efault that partnership +ill *O0 (e continued assets distributed to the partners based off of the partnership agreement 1. If partnership *O0 dissol6ed, technically a new partnership is created among the remaining partners recall Putnam v. "hoaf +. Cf new partnership created, creditors )ARR"O/,R to ne+ Parship see #PA (5NNT) C G5 c. What happens +;Parship Propert&?
35

!1# Iou can S,-- I0, and proceeds go to3 (a) Senior Secured > Lunior Secured )reditors7 (() General #nsecured )reditors7 (c) -oans (& Partner7 )apital Accts7 > former partners !+# Iou can purchase &our partner2s interest in the propert& assuming you/re not a bad actor; interest includes (5) mana ement ri hts > (1) economic ri hts; d. R#-,4 #PA 5N5G C<1 ?issolution (& ?ecree of )O#R04 !1# on application by or for a partner the court shall decree a dissolution whene2er3 !a# (c) 'ar uilt& of conduct that pre8udiciall& affects continuing biz a !b# (d) 'ar +illfull& or persistentl& commits a (reach of the parship agreement, or it/s not reasona(l& practica(le to continue (i% +;Par due to par2s conduct 1. Owen v. *ohenE)al. [Bo+lin alle&; Bwen brought suit against (ohen b)c (ohen was bad actor; ( had not wor ed yet in ;P years and did not intend to start now; B in2ested PA - was to be paid bac by profits; Eanted to ma e sure that ( didn/t get more than what he deser2ed; 0his +as a partnership for a term (I3P-I,? 0,R3) until O+en is paid (ack from profits ?o &ou ha6e the le al ri ht to lea6e (at +ill or term)? *o7 (reach of B > ?ama es$ (ut e'ception here (;c (ad actor is +h& (i% had to end. +. (t. said (ohen/s conduct +as so (ad that it +ould (e impossi(le for the pars to carr& on (i% to make profit in order to repay B for his in2estment, so here, it was ,=uita(le to dissol6e; )ohen P BA? @AI0A )O*?#)0; (t. made (ohen repay loan; &old assets !i# PO-I)" bad actors can/t see e"uity when their conduct is the root of the harm !c# (f) Bther circumstances render dissolution ,V#I0AB-,3 R#-, E But for claimant2s (eha6ior7 the (i% +ould create profit . 0herefore7 mere (ad (lood (t+n &ou > par isn2t sufficient to dissol6e parship. *ollins v. 5ewis. (t. said you ha2e the power to do dissol2e in 'arship for I3P-I,? 0,R3 !operate until loan repaid; period of time allotted to pay bac the loan# B#0 no le al ri ht, so would face penalty ha2e to pay damages. 9)A@,0,RIA BIQ; Qad actor 'ar is trying to foreclose - dissol2e, but BA? @AI0A (;c he coa'ed -e+is into default to tr& to collect (;c Bad par +as on (oard of (ank$ Qad 'ar didn/t get along w)competent par; Qad par demanding profits, - ct. said 0ood 'ar was competent to bring in profits. (t. ultimately said Qad par can either continue parship - perform on the agreement or sub,ect himself to damages for breach of agreement in dissol2ing; o *O0, E BA? @AI0A )O*?#)0 in forcing <ewis into default b)c (ollins was on board of ban but con2inced <ewis to ta e out another ta e out another loan, then )ollins asks the (ank to call for the notes (;c it a6e )ollins the ri ht to tr& to dissol6e the partnership (;c it created a default +;a reement >cross default G if you default on one creditor, you default on another G so defaulted under *ollins - thus $an9 as well@ o *O0, Options3 (5) he could26e (ou ht -e+is2 interest in the
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(i%, (1) findin someone to (u& his position, (<) <ewis had the most bargaining power here)bigger ad2antage o What could )ollins ha6e done (etter in hindsi ht? Put a cap on lia(ilit& C will in2est 71@@,@@@ ma4, at which point C will re2iew if need to add more. Benchmarks allow parties to terminate relationship if benchmar s not met be careful; need to clearly articulate Bu&out a reement li e a prenup; can do a formula, or an appraiser; /aluation of (i% R#-, - Po+er to dissol6e su(8ect to fiduciar& duties ! Par2s ma& not in (ad faith seek dissolution7 e. . to ain (enefits of (i%. Qut if 'arship is at will, you can dissol2e w)1otice - 0M intent. Page v. Page 9'age Qro./s in linen suppl& (i%; 8ach in2ested capital no written agreement; biz lost 7 for T yrs, QJ% +hen it started makin profit7 one (ro sou ht to dissol6e it7 statin it +as a Parship at +ill. (t. found that there was no intention for parship to continue for a term to repay debt, so at will. %hus, 'ar had power to dissol2e the 'arship upon e4press notice to $. o Qut ct. doesn/t find this to be a A for term, so AB can 8ust lea6e sell assets as long as it/s not in contra2ention to duty of good faith o So as a la+&er7 &ou need to tell AB to compensate Geor e for share of perspecti6e (i% (& ettin a recei6er appointed for market 6alue (fairness)$ Get an appraiser7 ha6e an auction7 make sure &ou2re the hi hest (idder 0akea+a&s o Partnership at +ill 6. partnership for a term o Al+a&s ha6e the po+er (ut not necessaril& the ri ht to dissol6e o Ine=uita(le conduct ma& support 8udicial dissolution o Bad (lood not enou h o B pro6isions enerall& enforced 5. Recap E )onse=uence of ?issolution a. If WI--7 can &ou lea6e? !1# Ies, at any time for any reason (. If A0 WI--7 dama es for lea6in ? !1# General rule 1o, but6 (1) ?ama es ma& flo+ from (ad faith conduct c. If 0,R37 can &ou lea6e? !1# General rule 1B <80.< FC05%, but !+# .lways ha6e the po+er to lea6e +;P,*A-0" d. If 0,R37 dama es for lea6in ? !1# ",S, #PA 5NNT CID17 CTD5 !+# May include anticipated dama es flo+in from future (i% operations e. If &ou lea6e7 lia(ilit& to creditors? !1# ",S, for e'istin o(li ations
37

(a) #PA (5NNT) CTD< !+# General Rule ? no liability for future obligations but6 !a# Cf for 0,R3 and +ron ful departure, dama e calculation ma& consider future o(li ations of (i% <. ?issolutionOs ,ffect on partnership4 a. ?,@A#-0 R#-, - .fter dissolution, the partnership must (e WO#*? #P, absent agreement among the Ps to carry on the biz. !1# .ssuming that the business will NOT be continued, the winding up process generally contemplates that the firm2s assets +ill (e distri(uted to the Pars. (. RIGA0@#- ?issolution ! #PA (5N5G) <S(5) !1# <i"uidation is default, J1<8&& otherwise agreed c. WRO*G@#- ?issociation leads to ?issolution E #PA (5N5G) <S(1) !1# %he 0ood pars can continue biz !+# 'ars ha2e right to get ?A3AG,S from Qad par #PA (5NNT) ID1(c) !*# Qad par has *O RIGA0 to participate in WI*?I*G #P SD<(a) d. A#0AORI0" of Pars (RIGA0@#- dissolution) !1# R#-,4 #PA (5NNT) C SDG ! Pars don2t ha6e authorit& to act on (ehalf of partnership ,M),P0 in connection +ith +indin up of partnership (usiness . e. )ontinuation per A reement4 ,ffect on Partnership !1# %echnically creates a *,W partnership !+# )R,?I0ORS of former partnership A#0O3A0I)A--" B,)O3, )R,?I0ORS O@ *,W partnership. #PA (5N5G) C G5(G) (<) 0ust consider the rights of the departing partner (a) R#-,4 #PA (5NNT) TD< ! Acts of ?epartin Partner (ind Parship if4 !i# % reasonably belie2ed disoc. 'ar was still a member !ii# % didn/t ha2e notice or reason to now of member/s dissociation G. 0,R3 PAR0*,RSAIPS4 a. ,MP-I)I0 0,R34 !1# ?#RA0IO*S SP,)I@I,? in partnership agreement !+# SP,)I@I) P#RPOS,;OBL,)0 SP,)I@I,? in partnership agreement (. I3P-I,? 0,R3 !1# Cn Owen, the court found an I3P-I,? 0,R3 where one partner loaned 7P@@@ into the partnership to (e R,PAI? out of the prospecti6e profits as soon as it could reasonably be paid. !+# Cn Page, the court held that a 7;*A distribution by each partner did *O0 constitute an implied term to e4pire when obligations were paid, instead it was at will, b)c there was no e6idence of I*0,*0 to end +hen the o(li ations +ere paid ; %here was only a common hope: that parship earnings would pay the e4penses. c. Ao+ do &ou kno+ if &ou ha6e an A0 WI-- or 0,R3 partnership? !1# R#-,4 #PA (5NNT) C ID1 ! 84plicit term or Cmplied term established by ! 54.$5 %4' N* of ON O! 0O! "P *434* 2N' !T.?4N&" to (e accomplished PRIOR 0O ,*? of (usiness relationship. !i# Cf at will, a partner can lea6e at an& time. Jsually w)o damages #*-,SS BA? @AI0A )O*?#)0. 5. PO-I)" G *an1t form a partnership to benefit from essentially inside
38

information then exit the partnership to the detriment of copartners. !ii# Cf term, generally can/t lea2e w)o penalty, but can al+a&s lea6e +;penalt& 1. <iable for ?A3AG,S3 #PA (5NNT) CC ID17 TD5 !i# May include A*0I)IPA0,? ?A3AG,S flo+in from @#0#R, B#SI*,SS operations. !iii# Cf you lea2e !at will or term# lia(ilit& to creditorsD 1. Ies for e4isting obligations CTD< +. Generall&7 no lia(ilit& for @#0#R, o(li ations, QJ%, if for term and WRO*G@#- ?,PAR0#R,, damage calculations may consider @#0#R, OB-IGA0IO*S O@ B#SI*,SS. =. After ?issolution (OP0IO*S;R,V#IR,3,*0S)3 a. Remainin Pars can ac=uire assets;(u& the (usiness !1# R#-, Partners can B#" B#SI*,SS A@0,R it is ?ISSO-/,? !in GOO? @AI0A# Prentiss v. "heffel.9+ of * 'ars got permission from ct. to continue biz - file for dissolution; ct. appt. a recei2er to sell off assets; 'ars were the highest bidders; 'ars said *rd par was derelict in his duties; R#-, as lon as e'clusion of other par +as *O0 done for +ron ful purpose of o(tainin parship assets in (ad faith. Aere7 <rd par +as (enefitted (& Pars purchase of propert& (;c Pars hi her (ids increased the 6alue of <rd Par2s interest. !a# Prentiss R#-, Remainin pars can ?ISSO-/,7 insist on an A#)0IO*7 > BI? for propert& 0A,3S,-/,S7 #SI*G their I*0,R,S0 AS PA"3,*0. Pa&;B#" O#0 +ron ful dissol6er @OR his 6alue of interest (Parship assets) Hif sold at a price eCual to the greater of the liCuidation value or the value based on a sale of the entire biz as a going concern w+o the dissociated partner7: 3I*#S dama es. Balance sheets7 income statements etc. !i# *O0,4 Better to ha6e auction (;c &ou can start the (iddin at the current 6alue of the (i%7 (ut can possi(l& et more . for it7 +hich increases &our interest. ?on2t take +hat other pars offer (;c their 6alue mi ht not (e official$ et a recei6er;appraisal7 (ut ultimatel&7 (u& out is (etter. !+# (ontinuation following WRO*G@#- dissolution3 !a# R#-, E #PA (5N5G) C<S(1)4 !i# (5) %he Good pars can continue biz. Pav:"aver v. %asso 6P.T NT"7 'ar +ron full& terminated parship b)c was for term !permanent#; $ permitted to continue biz - possess assets, but dispute o2er '/s PA0,*0S; 'arship agreement said return of patents, (ut ct. said (i% +ould not (e a(le to continue +;o the patents, - b)c wrongful termination, J'. go2erns right to possess parship property - continue biz: 1. Pav:"aver R#-, If terms of parship a reement conflict +;purpose of #PA upon dissolution7 #PA o6erns. If a (i% cannot (e continued (;c of terms in parship a reement re ardin dissolution7 then it runs afoul of the purpose to 9cover comprehensively the problem of dissolution and to stabilize the biz.: !ii# (1) May a ree to indemnif& +ron ful dissol6er against present or future parship liabilities w)indemnity bac ed by a court-appro2ed bond, and !iii# (<) If (i% is continued7 )an cash out +ron ful dissol6er immediatel&
39

!minus damages# for the right to his interest , BF 1. *O0, - old #PA doesn/t consider 2alue of good will of the biz; ne+ #PA TD1 no reduction for 2alue of good will. Pav:"aver v. %asso 9PA0,*0S; ' tried to attest to 2alue of it 2ia testifying good will; Bld J'. doesn/t consider it; so here, ?ale2s interest had to either (e paid or secured (& (ond7 (ut 6alue of trademarks > patents +ere e'cluded as 9 ood +ill:$ under ne+ #PA7 6alue of assets +ould26e (een included.: !i2# (G) A ree to pa& the cash out amt at some later date and o(tain a courtE appro6ed (ond to secure the pa&ment (. ?istri(ution of Assets;Pa&in )reditors !1# R#-,4 #PA (5N5G) C GD(()4 sub,ect to contrary agreement, upon dissolution partnership assets should be distributed as follows3 !a# (5) (reditors who aren/t partners !b# (1) 'aybac to partners !loans, etc.# that doesn/t include capital or profits !c# (<) 'artners w)respect of capital !d# (G) 'artners w)respect of profits !+# R#-,4 #PA (5N5G) C GD(d)4 'ars will contribute amt necessary to pay off liabilities, QJ% !i# ?ovaci9 R#-,3 Jpon loss of the 7, the party who contributed it is not entitled to reco6er an& part of it from the part& +ho contri(uted onl& ser6ices . each would lose his own capital the one his 7 and the other his labor. o ,M),P0IO*S4 (ourts do not apply the 4o'aci/ rule where !1# the ser2ice partner was compensated for his wor , or !+# the ser2ice partner made a capital contribution, e2en if it was nominal #PA (5NNT) CGD5 )omments4 the default !profit)loss# rules apply where one or more of the partners contribute no capital, although there is case law to the contrary 9citing ?ovaci9:. U,*? O@ PAR0*,RSAIPF /III. -I3I0,? -IABI-I0" > P)/ A. 0&pes of limited lia(ilit& entities4 1. )orps !&ee point CK# +. -imited Partnerships4 9R#-PA: 'arship formed by + or more persons - ha2ing as its members one or more 0'/s and one or more <'/s. . person can be both at the same time. *. General Partners .ssumes management responsibilities - full personal liability for the debts of the parship ;. -imited Partners R#-PA C<D<(() - 'assi2e in2estors; lose what you put in; no management control, so generally no personal liability. 9 3rigidaire &%FJ(%JF8, respecting the corp form; M - Q were <'/s of commercial as well as officers, directors, and &5/s of (ommercial/s B1<I 0', Jnion; )t. said the& did a ood 8o( of separatin corp from personal7 > ne6er mislead Pl into (elie6in that the& +ere actin outside their corp acti6ities$ nothing that pre2ents M - Q from creating an <', where 0' is a corp. form in which it/s an officer and director; no e2idence that 'l mista enly assumed that M-Q were 0'/s;:3ere undercapitali%ation is no reason to open lia(ilit& to -P2s$ Would pass #owey 0est P in6estment P Securit&.
40

a. ,M),P0IO* - <im 's can be held liable as 0's if the& e'ercise si nificant )O*0RO- of the (i%. #olzman 9)ROPS; labeled themsel2es as <'/s, but they dictated what (FB'& were planted, their names were on chec s, and they were running day-day operations; liable; 0heir in6estment B;-P interest +ould fail the #owey test (;c of )ontrol > +ouldn2t (e considered a securit& : b. ,'ception4 R#-PA4 <im ' only liable to those *rd parties who reasonably belie2e . . . that the limited partner is a 0'. =. 0&pes of #*I*)ORPORA0,? limited lia(ilit& entities4 --)s (-imited -ia(ilit& )ompanies)4 5ybrid3 ta4 ad2antages of partnership w) limited lia(ilit& of corp; 1B restrictions on Z - type of &5/s; 'rofits follow in2estments; (an structure to loo li e a corp a. ?ifference from Parship? !1# &plit profits by O of in2estment 2s. 'arship is e"ual mgmt. rights - profits !+# Bnly managers ha2e fiduc duties; mems don/t if they/re not managers 2s. 'ars who all ha2e fiduc. duties (. General4 !1# @undin 4 !a# 3ems contribute one or more forms of capital. #--)A C GD5. !i# (ontribution may be cash, property, ser2ices rendered, a promissory note, or other obligation to contribute cash, property, or to perform ser2ices 5. ,asier to attract in6estors !+# -ia(ilit& Members stand to lose capital contributions, but their personal assets are not sub,ect to attachment (<) 0a'es !a# Cncome passes through to members !b# <<( does not pay ta4es c. Is 3em lia(le? !1# R#-, E Bnly for loss of capital contrib, not personal assets, E* PT under A enc& law if --) status #*?IS)-OS,?. Westec v. 5anham U% thought (lar was doing biz on behalf of <anham b)c of failure to disclose; (lar ga2e % the (i% card for PII, which is the <<( for which he - <anham represented; <anham argued constructi2e notice, but difficult to now that 'CC was an <<(; Jndisclosed .gency law; <anham liable as a 'rincipal; should26e clearl& stated PII +as --): d. Add2l formalities of --) !1# @ormation E Mile .rticles of Brganization in designated state. #--)A C1D1(a), choose name !include Y<<(#, office for ser2ice of process, draft operating agreement. !+# 3em(erOs Ri hts4 ma& include4 !a# financial interest, i.e. right to distributions and li"uidation participation, .1$)BF (i) (an be ASSIG*,?but assignee gets other rights if admitted as member by )O*S,*0 O@ A-- O0A,R 3,3B,RS or by pro2ision of the operating agreement. !li e partnership rules#. #--)A CC HD5ED<. !b# 3ana ement ri hts. !*# Profit and -oss Sharin 4 absent contrary agreement, most statutes allocate based on 2alue)O of memsG contributions. !a# Jnder #--)A CGDH(a), distributions must be made in e"ual shares
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!;# Withdra+al3 Mem may E$ and demand payment of his interest by gi2ing ade"uate notice !see statute or <<(Gs operating agreement#. !=# 3ana ement Ri hts3 !a# 3em(erEmana ed (default rule #--)A C GD5(a)(5) E Absent contrary agreement, each member has ,V#A- RIGA0S I* 0A, 3A*AG,3,*0 of the <<(#, !i# 3ost matters decided by 3ALORI0" /O0,, #--)A C GD5(a)(1) !ii# Si nificant matters re"uire #*A*I3O#S )O*S,*0 #--)A C GD5(c) !b# 3ana erEmana ed --) option #--)A C GDG(()4 !i# (an be structured as Bd of ?irs7 ),O7 or (oth (centrali%ed m mt.) 1. Manager!s# can ma e all decisions other than those in GDG(c) w)o member 2ote +. Manager!s# added or remo2ed by ma,ority 2ote of members. !ii# Must be specified in .rt of Brg. (I) ?issociation 6. ?issolution4 (a) ?issociation4 +ithdra+al or e'pulsion of a mem(er. #--)A C ID5 !i# <i e FJ'., not J'.. --) can (u&Eout dissociated mem(ersO interests. (() ?issolution !i# Einding up of <<( triggered #--)A C SD5. (ii) ,6ents of dissolution (& la+4 1. (5) ,/,*0 SP,)I@I,? in operating agreement, (1) /O0, of members !as specified in operating agreement#, BF (<) if #nla+ful to carry on the business (iii) ,6ents of ?issolution (& )O#R0 OR?,R4 1. ,conomic purpose frustrated, BF 3IS)O*?#)0 by members e. @reedom of B in --) A reements E R#-,4 <<(Gs Bperating .greement !A# controls #*-,SS it e4pressly 2iolates a statute. lf v. )affari !1# @orum Selection )lauses are OB !as long as it doesn/t 2iolate statute# !+# ?ispute resolution clauses are OB !arbitration, etc.# !*# *ot si nin Operatin A reement is not dispositi6e; )O*?#)0 is S#@@I)I,*0 !a# NOT 5he wanted to sue in 'el - not *al b+c 'el I biz friendly laws !;# S#B R#-, E 3ere disa reements on the (est approach for promotin the co.2s (est interests;financin options do not 6iolate the Operatin A reement > do not 6iolate )o6enant of GOO? @AI0A > @AIR ?,A-I*G. 3is9 %entures, 55* v. "egal 9(lass Q members had 9P#0 OP0IO*:; (t. said no e2idence of Qad Maith b)c ?,)ISIO* 3ABI*G BAS,? O* /O0I*G RIGA0S I* OP,RA0I*G AGR,,3,*0$ Sho+s their intent ! the& thou ht a(out it: f. R#-,S for Piercin the --)4 !1# P)/ can (e used in --) )onte't4 %here is no law or policy saying '(L should be different for <<(s than (orps. ?aycee case. !e2en though no statute e4pressly calls for '(L w) <<(s# !a# YA "e"ber or "ana&er is not personally liable for a debt, obli&ation, or liability of the co"pany solely by reason of bein& or actin& as a "e"ber or "ana&er.6 #--)A C <D<(a)
42

!+# P)/ Re=uires 3ore 0han 3inor 0rans ressions4 %he failure of an <<( to obser2e the usual company formalities or re"uirements relating to the e4ercise of its powers or management of its biz is not a ground for imposing personal liability on the members or managers for liabilities of the company. #--)A C <D<(() . @I?#)IAR" ?#0I,S4 !1# 3A*AG,RE3A*AG,?4 M.1.08F& ha2e ?#0" O@ )AR, > -O"A-0" !usually mems have no duty to 55*+other mems# !+# 3,3B,RE3A*AG,?3 A-- 3,3B,RS ha2e a ?#0" O@ )AR, > -O"A-0". (<) @iduciar& o(li ation a(sent a reement to the contrar&4 #--)A C GDN(() (a) (()(5)4 ?ut& *O0 to #S, an& of --) PROP,R0" for P,RSO*AB,*,@I0;OPPOR0#*I0"$ if so7 3#S0 acct for profit of Opp (() (()(<)4 ?ut& *O0 to )ompete W;--) in conduct of its (i% Before dissolution !c# S#BER#-,4 Members of an <<( )A* AGR,, 0O -I3I0 0A, S)OP, O@ 0A, @I?#)IAR" ?#0" they owe to the <<(. !i# #))-A 5D<(()4 operating agreement 0.( NOTD 1. >F@ 5404N.T '2T( O3 5O(.5T(, QJ% ma& call for procedures to determine +hat does;doesnOt 6iolate it; +. (<) 2N! ."ON.$5( ! '2* '2T( O3 *.! ; BF *. (G) ,-I3I*A0, o(li ation of GOO? @AI0A > @AIR dealin 7 B#0 3A" ?,0,R3I*, AOW that OB-IGA0IO* IS 3,AS#R,? as lon as the& are *O0 3A*I@,S0-" #*R,ASO*AB-,. (i) 0c*onnell v. #unt 9Aocke&; .oBrg pro2ision said mem )O#-? )O3P,0, +;--)$ *A- approached 3c)onnell (Good @act (;c if it +as 3 s+eepin in sa&in 9I26e ot a (etter deal7: +ould26e (een different)7 and he O*-" si ned lease > o(tained franchise A@0,R A said *o7 so he +asn2t (ein secreti6e or for personal ain$ A declined se6eral times7 after +hich 3 stepped in$ *o interference +;A2s prospected (i% rship$ 5unt counters emphasizing Bther saying can only compete in any other biz 2enture is something outside of 15< sphere, but ct. said that he was adding words; !ii# 91B%83 Lery Lery &imilar %o (orp Miduciary $uties: I. -imited -ia(ilit& > Piercin the )orporate /eil (JP)/J) P )R,?I0OR Remed& a. P)/ defined 5olding &5 liable for co. debts; Re6erse pierce ? holding (o. liable for &5 debts; bumps you up in distribution scale b. -imited -ia(ilit&4 3B)A C I.11(()4 Jnless otherwise pro2ided in the .oC, an &5 of a corp is NOT personally liable for the acts or debts of the corp E* PT that he "ay beco"e personally liable by reason of his OWN .*T" O! *ON'2*T c. P)/ Rule4 1 re=uirements4 !1# #nit& of interest and o+nership Jalter e oY3 !a# @actors3 (i) )ommin lin of funds !ii# #ndercapitali%ation 9Wal9covs9y minimum insurance for )AB co. is o , but still "uestionable; 'issent said its insufficient capital to meet liabilities:
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!iii# 0reatin assets of corp as those of the pri6ate person or other corp , or 5.#sin funds for personal affairs 1.#sin corp to transact personal (i% (i) *O0, E Asset mana ement isn2t ille al4 takin out mone& from each corp. > sa6e +hat +as necessar& to maintain the insurance polic& (takin di6idends7 e6idence of SA takin out +hat +as minimum under la+) !i2# ?isre ard for corporate formalities;structure 9not maintaining corp. records, re"uired meetings not held, no art. of incorp or bi-laws: 9 "ea 5and: (2) Adherence to limited lia(ilit& would &anction a @RA#? or 'romote I*L#S0I),. !a# @RA#? - Jsing corp in a way that was not in furtherance of purpose takin mone& out so creditors +on2t et it, is fraudulent con2eyance !b# Cn the absence of proof of fraud, pro2ing in,ustice re"uires more than proof that some creditors will go unpaid. "ea 5and 64nBustice satisfied here7 factors below8 !i# ,. . of I*L#S0I),3 un8ust enrichment, intentional scheme to put assets into a liability-free corp - heap liability on an asset-free corp, parent corp causes a subGs liability - the subGs limited assets allow them to escape the liability. 5.Blatant ta' fraud 1.Personal e'penses as deducti(le *. )orp as o+n (enefit manipulate corp funds to insure there would not be funds to pay debts; countless benefits, including loans and salaries paid in such a way as to insure his corp. had insufficient funds w)which to pay their debts !*# S#BER#-,;OP0IO* - R,/,RS, PI,R)I*G '(L is holding &5 liable for co./s debts, Fe2erse is holdin co. lia(le for SA de(ts; usually invo9ed when there1s no formality in the corp. !re6erse hurts SA2s A*? creditors (;c it (umps &ou up in line for dama es; cts. chec if (5) re2erse is warranted, and (1) if there should be any restrictions# (4) S#BER#-,4 --,*0,RPRIS, -IABI-I0" - '(L can be effectuated against a person !&5# or larger corp !if the corp that harmed you was one of se6eral small corps controlled by a bigger corp#. Wal9ovsz9y v. *arlton 9multiple 0AMI co.2s; 'l in,ured by dri2er; Eanted to do '(L b)c co. only had 1@A insurance; ct. says ( wasn/t using corp as his play thing - no e2idence as fraud, (ut &ou mi ht (e a(le to smush em all to ether to make them lar e corp$ ,*0,RPRIS, -IABI-I0" could ha6e (een claimed7 (ut pro(a(l& +ouldn2t ha6e pro6ided P +;+hat the& needed (;c restrictions on +ho can (enefit from insur. policiesF (a) Polic& implications of Wal9ovs9y !i# ?issent ! if the co./s ha2e ability to award minimum auto insurance, then they should; minimum is ,ust a minimum +e ha6e to pre6ent tortfeasors from comin into our state and committin tortious conduct$ !ii# But 3a8orit& sa&s if the& +ant to up the insurance7 then the& can7 le islature hasn2t (;c the& are creatures of the state, so ct. not touching it- proE(usiness7 tr& to attract corp. dollars to state at the e'pense of citi%ens (() A&pos;*otes (i) ,*0,RPRIS, -IABI-I0" ! if the& share same ara e7 use same (ank acct7 same dispatcher7 same ca( dri6ers7 same (oard of directors$ failin to respect the corp. form of each indi6idual corp entit& (ii) Is it improper to incorp &our (i% for the e'press purpose of a6oidin personal
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lia(ilit&? *O. But pro(lem dra+in line (t+n personal assets > (i% profit$ P)/ (iii) Is it improper to split a sin le (i% enterprise into multiple corp2s so as to limit the lia(ilit& e'posure of each part of the (i%? *O ((ut potential enterprise lia(ilit&). d. S#BER#-,S for ParentESu(sidiar& Alter , os4 !1# use a totalit& of circumstances test to determine if sub is alter ego of parent3 !a# (5) common $irs)Bffs, !b# (1) common biz departments, !c# (<) file consolidated financial statements and ta4 returns, !d# (G) 'arent finances the sub, !e# (H) 'arent caused the incorporation of the sub, !f# (I) &ub operates w) grossly inade"uate capital, !g# (T) 'arent pays the salaries)other e4penses of the sub, !h# (S) &ub recei2es no biz e4cept from the parent, !i# (N) 'arent uses the subGs property as its own, !,# (5D) $aily operations of the + corps are not ept separate, ! # (55) &ub doesnGt obser2e the basic corp formalities. !i# 4n !e $reast 4mplants : +holl& o+ned su(sidiar& of Bristol no other &5; ind of li e (arlton, but Qristol is a corp; tort cause of action BR,AS0 I3P-A*0S leakin ;products liability that M8( manuf; M8( has no 7)no assets; ' trying to '(L and get to Qristol as the parent co.; Qristol hid behind M8(: 1. Polic& ! we/re see ing to hold another corp. liable, no re=uirement of sho+in of fraud Urela'ed standard for su(s in tortsF (;c there2s somethin different a(t this rship a(use is more temptin ; Second, in tort cases, it/s different competing policy that goes against << b)c we want to hold tortfeasors liable, and corp is in (etter position to pa& 1.?o &ou think usin Bristol2s name +as a factor in P)/? 3a&(e$ T.D< direct lia(ilit&$ )ould &ou pierce 6eil +;o? Pro(a(l&. <.)ould &ou think of A enc& theor& +here ha6in name on there +ould help? "es7 Apparent Authorit& ! /icarious lia(ilit& ! connectin alle ed Principal +;instrumentalit& of the harm !l# 5owe2er, Parents are e'pectedYindeed re=uiredYto e'ert some )ontrol o6er their su(sidiaries. 5imited liability is the exception, not the rule . !m# Y1o respondeat superior among subs.Y !.*. .rchbishop of "an 3ran !i# Some ,uris rela4 the +nd element of '(L, particularly w)parent-subs. e. Wa&s to protect a ainst P)/4 !1# (anGt '(L to officers of corp that acts as 0' for an <' e2en where some of the <'/s are the officers in the corp, thus limiting their liability and allowing them to control the 'arship at the same time. 3ridgidaire case. !+# Ad6ice to person startin corp and +antin to a6oid P)/ 3 !a# A6oid Personal lia(ilit&3 respect the corp formalities - ta e out the min insurance !b# A6oidin ,nterprise -ia(ilit& (more difficult)4 1eed separate boo s and ban accounts for each corp, plus careful acct/ing for supplies, borrowing of prop, etc IM. )orporations
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A. General 1. ?efinition4 )orporation4 .n entity !usually a business# ha2ing authority under law to act as a single person distinct from the &5s who own it - ha2ing rights to issue stoc e4ist indefinitely. 1. Pu(lic ! (pu(licl& held) &ou sell &our stock or de(t on the pu(lic market a. )O*S E 5a2e time consuming reporting obligations)filing fees; double losses !ta4ed on di2idends - profts# <. )haracteri%ed (& a pu(lic secondar& market in +hich shares of the co. are listed for trade a. ,. . *"S, or *AS?AV G. Benefits a. Shield for personal lia(ilit& (limited lia(ilit&) b. Great 6ehicle for in6estors ! boo s are standardized; records, corp. minutes, annual meetings (transfera(ilit& of interests) c. /er& eas& to form (5) ?raft articles of incorp (3B)A 1.D5 ! 0he incorporator) (1) @ile +;secretar& of State7P Inc. 3B)A 1.D< (a) PostEIncorp !i# $raft bylaws !3B)A 1.DI#, Brganizational meeting !3B)A 1.DH# 91ame directors, if necessary, .dopt bylaws, .ppoint officers, Cssue stoc s: d. )an et out 6er& easil& e. Indefinite life f. )entrali%ed mana ement H. *o B a. *O0,4 it2s dan erous to draft (& B7 (;c &ou mi ht not co6er e6er& possi(ilit& I. )ritical Attri(utes4 a. -e al Personalit&, -imited -ia(ilit& Separation of o+nership > control 3B)A C S.D5(()3 Qd of $irs e4ercises powers - manages; li=uidit& secondary trading mar ets !1I&8, etc.# b. @le'i(le capital structure can issue)pac age securities in many ways. c. @I?#)IAR" ?#0I,SEE(Ehen &ol2ent# @-OW @RO3 B? O@ ?IRS 0O OW*,R& B. -ia(ilit& of Promoter E -ia(ilit& for PreEIncorporation Acti6it&4 5. Promoter -ia(ilit& ! )O*SI?,R AG,*)" RSAIP (;c )orp acts throu h PromoterK a. General Rule ! If &ou2re not a corp7 Promoter is personall& lia(le on a preE incorporation B a(sent a contrar& intent$ it/s li e agent liability for undisclosed '/s (5) 1E+a& street$ Promoter > 0 can (e lia(le (1) Prom can (e released (& si nin a B +;)orp A*? 0 !*# Jsually don/t ha2e this problem b)c promoter is usually on board !;# (orp 1ot bound by a A until board of directors adopts it and ratifies it 1. 1 instances +hen ct +ill reco ni%e corp e'istence +hen not officiall& formed a. ?e facto corp ! based in e"uitable notions of GOO? @AI0A > @AIR ?,A(5) In G@ made (est efforts to Incorp (1) Actual use of corp. form
46

!a# ,. . carried on biz as copr or A/ing in corp name; 5eld themsel2es out as being corp - others thought they were (() -ack of corp status has nothin to do +;their conduct (not (ad actors) (. )orporation (& ,stoppel !1# R#-, E % is estopped from using lac of corporate e4istence as a defense b)c % in dealing w)the entity, % (5) thought it was a corp all along - treated it as corp, .1$ (1) +ould earn a +indfall if now allowed to argue that the firm was not a corp. *amcraft 9% not permitted to escape performance of A based on lac of corporate e4istence b)c both parties relied on the A - %/s rights weren/t affected by 8ntity/s de facto status: *. Wh& incorporate? Pros3 limited liability; )ons3 more formalities, rules, - double %.K a. Pros for SAs3 a2oid personal liability, minimize monitoring costs M. @I?#)IAR" ?#0I,S in the )orporate )onte'tE General .. General R#-,4 3B)A C S.D5 all corp powers, management and ownership are 2ested in the B? O@ ?IRS. 1. (orp $irectors owe 1 primar& fiduciar& duties a. $uty of )AR, (5) ?ut& to 3onitor (*aremar9) b. $uty of -O"A-0" !$o<# !1# GOO? @AI0A is a su(part of ?o- in ?, !"tone v. !itter#, but is a separate duty in some courts. +. Eho are the B,*,@I)IARI,S of the dirsG fiduciary dutiesD a. Cf SO-/,*0Primaril& SAs$irsG duty to 3AMI3IQ, SA /A-#, b. Cf I*SO-/,*0 primarily )R,?I0ORS c. Cf in YQO*, O@ I*SO-/,*)"Y'epends7 usually "#1s !1# !ecall Residual O+ner who/s at the bottom of the totem pole when 2alue of co. stops; but if it drops7 and there isn2t enou h mone& to o to SA2s7 then it stops short$ SO-/,*)" SAI@0I*G; need to put e"uity bac into 2aluation so it can flow down to &5/s !a# &enior (reditors !b# Runior (reditors !c# &hareholders *. ?irs 3ust4 maintain @AIR*,SS to emplo&ees - competiti6eness in the marketplace G. AG,*)" Principle4 ?IRS AR, As O@ 0A, )ORP7 WAI)A IS A P MI. @iduciar& ?uties in the )orporate )onte'tE ?#0" O@ )AR, (?O))4 .. 3B)A C S.<D(a) Standard of )onduct U.spirationalF4 $irs shall act3 (5) in GOO? @AI0A, - (1) in a manner the $ir reasonably believes to be in the best interests of the corp. 1. Must e4ercise the ?,GR,, O@ SBI--7 ?I-IG,*), and )AR, of a R,ASO*AB-" PR#?,*0 B#SI*,SSP,RSO* a. !similar to ne li ence, but different b)c itGs a reasonably prudent Ybusiness personY and tempered by the QRF.# b. S#BER#-, for WI0AAO-?I*G ?I/I?,*?S4 . court wonGt interfere in $irsG business decisions re di2idends J1<8&& it would ? @RA#? or breach of GOO? @AI0A. !1# 'odge v. 3ord Mord wasn/t going to pay di2idends b)c wanted to ensure ppl
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could afford cars - employees paid more, but problem b)c priority is to benefit &5/s, - this didn/t benefit them; $oo gooder; can/t do charity at e4pense of co.; (t. defers to Mord BLR on e4pansion though. c. BLR4 9.: presumption that in ma ing a business decision, the $irs of a corp acted on an informed basis, in good faith - in the honest belief that the act ta en was in the best interests of the corp. !1# %he ?#0" O@ )AR, tells directors don/t be negligent !a# Qiz ,udgment rule insulates directors form negligence liability liability only for fraud or self-dealing or gross negligence (1) What must &ou plead to re(ut BLR? !a# Mraud, Cllegality, 0ross 1egligence !b# Qad Maith 9$o<: Mailure to monitor 9$o<: !c# (BC)&elf-$ealing 9$o<: !d# $ecision was 8gregious, J1CMBFM8$, Easteful 9$o(:, BF !e# Mailure to $ecide 9$o(: (i) PO-I)"3 *eed a BA? actor$ +ill protect the Aonest (ut S0#?PI? ?IR,)0ORS (;c +e +ant to encoura e people to do (i%7 +ant them to use (est efforts7 (ut in hindsi ht honest (ut (ad (i% decision7 not oin to penali%e !*# R#-, - P has no ri ht to sue7 unless BLR is re(utted +;a(o6e claims$ mere disa reement in decision does not suffice There has to be a clear dereliction of duty. Wrigley 9&hlens y was minority &5 that owned the (5C (ubs; Erigley ma,ority)controlling &5 of T@O of stoc ; Erigley refused to install lights in Erigley field b)c said baseball was a day sport - wanted to preser2e neighborhood so no night games; &hlens y night games would increase profits, but ct. doesn/t agree b)c Wri le& has more to lose as controllin SA > no alle ation that not ha6in ni ht ames is intended to suppress profits$ despite the fact that other teams ha6e ni ht ames > the&2re makin .. !;# R#-, Merely alle in that Board made (ad decision;sa&in that a different course of action +ould ha6e (een more ad6anta eous does not re(ut BLR. ?amin v. .mex 9&5/s mad b)c stoc 2alue dropped - Qoard agreed to distribute di2idends; but &5/s say would get more 7 if share sold on mar et; (t. says decisions +ere deli(erati6e7 and in ood faith, so protected; that corp met7 thou ht a(t it7 (oard of directors +alked throu h the ta' proposals cons and pros , - decided against it for other reasons3 immediate loss would ha2e made .me4 stoc price to drop, so wanted to maintain stoc price of .me4: !a# .mex ct. on ?ut& of -o&alt& self-interest; officers of corp on board of directors - part of their comp. is stoc of ame4, they didn/t want stoc in compensation pac age to drop in 2alue, so the& didn2t +ant to take a personal hit$ but ct. says that1s only J of F= so still a maBority that didn1t have this interest 6$2T if you could prove that the J had a lot of influence on the rest then maybe8 !b# .mex ct. =uote on the ?#0" of )AR, > BLR, directors room rather than the ct. rm is the appropriate forum for thrashing out purely biz K1s which will have an impact on profits, mar9et prices, competitive situations, or tax advantages.
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(H) When is it #*I*@OR3,?? !a# R#-, E $irs must (5) GA0A,R7 R,/I,W A-- 3A0,RIA-S J! ."ON.$5( .%.45.$5 ; (1) $ecisions must be W,--EI*@OR3,?3 ask =uestions > hire counsel > ,MP,R0S$ ?,-IB,RA0IO* 0I3,. %an &or9om. PRO),SS > ?IS)-OS#R,. !i# %an &or9um @actors 1. $id the Qoard GA0A,R - Re6ie+ A-- materials 9R,ASO*AB-" A/IAI-AB-,?: +. WA,R, did the& ather;read documentsD !Lan 0or um read them at an Bpera not concentrating carefully#. *. Were the& W,--EI*@OR3,?D !i# Vualified ,MP,R0 opinionsD R#-, ?G)- 5G5(e) can rely on 'rofessional Bpinion, QJ% still owe due diligence; Wise to hire 4nvestment ban9ing firm to give opinion as to fairness of price offered. !ii# S0#?" PR,@OR3,?)re2iewedD !iii# PR,S,*0A0IO*SD !Lan 0or um ga2e a +@ minute speech - bad# !i2# I*0RI*SI) /A-#, O@ SAAR,SD !Lan 0or um suggested a price w)o consulting the board or an e4pert or doing a study# !2# ASB,? V#,S0IO*SD !2i# PA"I*G A00,*0IO* A0 3,,0I*G? *O ?IS0RA)0IO*S li e phones, etc. G. ?eli(eration 0I3,? !># What Aappens *,M07 after presumption is re(utted;Pl B*O)BS ?OW* BLRD !a# $/s must pro2e G@, @ull& Informed !%an &or9um# - ,*0IR, @AIR*,SS of the transaction (0,S0)3 (i) 0imin (ii) *e otiation (iii) Structure of the transaction (i6) ?isclosure > su(se=uent appro6al (& directors (6) ?isclosure to and appro6al (& SA2s 1. Cf $ satisfies $o( Qurden, shifts to ' to show waste !unli ely#. !P# B#0 What happens if ct. decides7 (ased on Pl2s compound e6idence of (reaches7 that the decision +as *O0 +ellEinformedD !a# %hen ?2s )A*20 sho+ entire fairness (;c ct. sa&s it +ouldn2t +ithstand the testYso )orp is lia(le, QJ%6 !i# $irs probably arenGt !in ?,# b)c3 ?G)- C 5D1(()(T)4 AoI can eliminate ?o)K )an include pro6ision that ?irs are not lia(le for (reaches #*-,SS ?o-7 or Bad @aith (?o) 6iolations not onna cut itK) (8) R#-, E BLR protects decisions (to act;not act) (ut not a complete failure to make an& decision. ?ir has a dut& to understand (asics of the (i% i norance is no e'cuse. 3rancis 9Iou ha2e to ma e a decision to get benefit of Qiz Rudgment; you can/t ,ust do nothing; you ha2e responsibility to find out what you don/t now, hire e4perts, ma e an decision: !N# ?o) > *aremar9 ?#0" 0O 3O*I0OR4 (5) sustained)systemic failure to
49

e4ercise o2ersight, BF a (1) failure to implement an o2ersight system. *aremar9. !1@# Reconcilin ?o) and BLR4 $o( tells $irs J?O*O0 B, *,G-IG,*07J and QRF insulates $irs from negligence liabilityHliable only for fraud or self-dealing or gross negligence. (55) BLR O6er6ie+4 (a) Cs there e2idence of fraudD Cf yesQRF Febutted; Cf no(ontinue (b) Cs there e2idence of &elf-$ealingD (onflict of CnterestD Cf Ies Febutted; Cf 1ocontinue (c) Cs there Cllegality, 8gregious decision, uninformed decision, Easte, no decisionD Cf 1o, QRF .pplies, (ourt abstains; Cf Ies QRF Febutted$id $ 2iolate $o(D Cf Ies, calculate damages !%an &or9om#; Cf 1o, $ wins. d. 3B)A C S.<5 Standards of -ia(ilit& UC S.<D is +hat +e +ant ?irs to do (ASPIRA0IO*A-)7 S.<5 determines +hether the&Ore lia(le in courtF4 Qasically codifies the QRF and says that $irs only personally liable if ' noc s the QRF wall down through one of the methods mentioned abo2e .1$ there is no 5D1(()(T)Etype pro2ision !or 3B)A C1.D1(()(G) which is 2ery similar to 5D1(()(T) precluding liability. (5) 0hus7 if there is a 5D1(()(T)Elike pro6ision7 ?irOs +onOt (e personall& lia(le for ?o) 6iolations. e. What to ask +hen &ou2re *,ARI*G I*SO-/,*)"? (5) ?irectors E What duties to consider other than ads? )onsider alternati6es (a) )ounsel ! no electronics$ think a(t. ?uties to SA2s #*0I- "O# AR, I*SO-/,*0KKK )ompletel& Insol6ent P then dut& to creditors$ (1) ?o +e need to hire an APPRAIS,R? What do +e ha6e left? (<) )an +e make decisions a(out emplo&ee ! hirin ? )an +e pa& them? (G) WA,* do +e ha6e to make this decision? AOW V#I)B-"? (H) ,mer enc& situation (a) SA2s are onna +ant &ou to tr& to et them mone& someho+7 so tr& ad campai n$ )reditors are oin to +ant &ou to shut it do+n (() *O0,4 "ou +ant a ?ISS,*0,R to ha6e a ROB#S0 ?IS)#SSIO*7 0AO#GA0@#-7 I*@OR3,? decision MII. @iduciar& ?uties in the )orporate )onte'tE ?ut& of -O"A-0" .. Is there a ?o-? - . person/s duty not to en a e in selfEdealin or otherwise use his or her position to further personal interests rather than those of the beneficiary. 1. S,-@E?,A-I*G - dealing in a way that benefits oneself instead of another who is owed a fiduciary duty +. *O0, QRF not a defense to $o<S $ecisions maybe, but 1B% (BC; ha2e to show ,*0IR, @AIR*,SSS B. Is there a )OI;S,-@E?,A-I*G ! I*0,R,S0,? ?IR,)0ORS? 5. )onsider4 a. S0R#)0#RA- BIAS ! influence of Interested ?irs on ?isinterested ?ir !1# %he S3A--,R the group of directors, the more interconnected)influence; tight- nit group +. R#-,3 ?G)- 5GG - Cf so, it Bop &hifts to ? to 'ro2e (5) GOO? @AI0A, (1) ,*0IR, @AIR*,SS or (<) RA0I@I)A0IO*. $ayer v. $eran 90,**"SO*$ WI@,PSI*G,R; (oC didnGt e4ist ,ust b)c $irGs wife was in2ol2ed--$ showed entire fairness; Ehether or not
50

(8B was using co. to promote career of his wife: a. $ayer used @ull& Informed(%an &or9um) - the below ,*0IR, @AIR*,SS factors3 (5) 0imin !+# *e otiation !a# 'aid her normal compensation w)industry standard !b# 'aid less than other artists !*# Structure of the transaction arm/s length !a# Arms len thD; negotiated through 'rofessional .gent !industry standard# !;# ?isclosure > su(se=uent appro6al (& directors ! board well-informed 9%an &or9um:; chose Eife - other singers (a) Would anything show that a different option would1ve enhanced the programK !b# *o )OI;SelfEdealin ;Personal Benefit Eife was well- nown before that; commercials weren/t designed to foster her career, only to mar et the co./s product; !c# Was the cost of the pro ram disproportionate to industr& standard D !i# 5ere - (ost of the program to co. was rational - they benefited !d# Was there (enefit to corp. +hen it +as decidedD (i) ?id part& recei6e undue prominence;(enefit? 1. 5ere, wife was &ubordinated to ad2ertisement of products 2s. singing her own written songs !ii# Cf there was e2idence that it was going to lose money, and wasn/t going to further the ob,ecti2es of the co. then breach; B#0 if it looked like there could (e a (enefit7 ad consultant7 thou ht a(out ima e7 issues and then it turned out to (e a (ust7 then it +ouldn2t matter ! (;c BLR protects the innocent (ut stupid (oardK (H) ?isclosure to and appro6al (& SA2s !a# PO-I)" BLR tries to (alance A))O#*0ABI-I0" +;A#0AORI0"$ +illin to i6e (i% dirs. (enefit of the dou(t$ desi ned to a6oid fraud > temptation of selfEinterest. (I) *e't step ! RA0I@I)A0IO* of $ayer or 4nterested transaction (. *O0,4 Proof of ,*0IR, @AIR*,SS e'tin uishes A*" ?o- or ?o) )laimF <. Ao+ else to Put Burden Back on P2s? *,M0 S0,P is for ? to sho+ RA0I@I)A0IO*4 ?irs OR SA Appro6al7 OR ,ntire @airnessK) . Are +e in ?, > Was there RA0I@I)A0IO*? ?G)- C 5GG UShifts Burden Back to P to sho+ WAS0,F a. Was there a V#OR#3? Was there ?ISI*0 ?IR;SA RA0I@I)A0IO*? Was it other+ise @AIR?U@irst7 5G5 anal&sis7 1nd 5GG anal&sisF (5) R#-, ! ?G)- 5G5(a) ! V#OR#3 in eneral P a 3ALORI0" of 0O0A[ O@ ?irectors$ includes interested directors (a) ,. . H (oard mem(ers7 5 interested$ < out of H is a =uorum (1) R#-, ! ?G)- 5G5(() ! ?ISI*0,R,S0,? 3,,0I*G R#-,S > /otes (a) 5st7 need a Vuorum of 0otal ?irectors (() 1nd7 need 3ALORI0" /O0, of ?irectors at meetin (A must (e satisfied (efore B)$ So &ou need a =uorum of a =uorum for ?ISI*0,R,S0,? 6ote
51

(<) So7 mi ht (e appro6ed for 5G5 purposes7 (ut +e don2t stop there7 *,,? to o to 5GG for an interested director anal&sisK b. I*0,R,S0,? ?irs. 0RA*SA)0IO* ! R#-,4 ?G)- 5GG protection7 then (ounces (all (ack to P to sho+ WAS0, - 9. deal between a (orp - one of its own $irs)Bffs !or a biz they own)manage# won/t be 2oid)2oidable ,ust b)c (i) (BC, or (ii) (onflicted $ir.)Bfficer was present)participated in deal meeting, BF (iii) (onflicted $ir)Bff/s 2ote was counted in the deal, CM3 !1# (a)(5) ?IR,)0OR APPRO/A-D - All material facts +ere disclosed and a ma8orit& of 0O0A- ?ISI*0,R,S0,? ?irs (not 8ust those present) 6oted to authori%e the deal in GOO? @AI0A, e2en though the disinterested $irs be less than a "uorum; OR !a# *O0, ! if you can/t satisfy !a#!1#, then you can/t bac end by !a#!+# &5/s !+# (a)(1) SAAR,AO-?,R APPRO/A-? - All material facts +ere disclosed to the !2ote-capable disinterested# SAs - they 2ote in good faith to appro2e; OR 9*O0,3 Fatification illegitimate if a ma,ority of all &5s are interested parties. 3leigler: !*# (a)(<) ,*0IR, @AIR*,SS 9$ayer test:- %he deal is @AIR as to the corp. as of the time it is authorized, appro2ed or ratified, by the Qd of $irs, a committee, or the &5s. (a) @AIR 0RA*SA)0IO* E W;in the ran e of terms that parties (ar ainin at arm2s len th mi ht reach. Test above. 1. to ratif& +hen3 !i# (5) no re=uisite ma8orit& of disinterested ?irs;SAs, or !ii# (1) thereGs defecti6e disclosure of material facts. !b# Rule in a nutshell need a Vuorum of A-- 0O0A- ?irs. @irst7 then a 3ALORI0" /O0, of 0O0A- ?ISI*0,R,S0,? directors (e'clude InterestedEdir 6ote) for Ratification$ )A-- 0A,3 #P I@ 0A,"2R, *O0 PR,S,*0 U?G)- 5G5(i)F. !i# #sed *O0,4 3.452! TO !.T43( does NOT mean a failure TO .2T#O!4L !?G)- C 5G5#, QJ% the A#0AORIQ,? 0RA*SA)0IO* +ill (e /OI?AB-, - thus more su(8ect to liti ation later. !ii# *O0,4 )udicial review is NOT precluded by ratification , 8ust less reasons for a deal to (e 6oid or 6oida(le. 0here still can (e an 9interested director: challen e. (i) Wh&? (;c A-WA"S AA/, 0O )O*SI?,R S0R#)0#RA- BIASK ! 0i ht knit7 small roup of directors$ e6er&one kne+ each other$ EEB#0 counter could (e that +e +ork on multiple companies7 +e2re +ell educated > can think throu h these cases +;o (eholden to the lone interested directorK !c# $enihanas !9Bd. Appro6al > ,ntire @airness; A(do on BO0A SI?,S O@ 0A, B@) ?,A- Une ot > ?ir. for B@) > on other Board to transactionF7 (ut ct. sa&s entirel& fair > informed decision (;c he didn2t 6ote;stepped out +hen the& +ere 6otin 7 (oard +as a+are7 > it +asn2t to dilute 6otin control7 (ut to find (est financin 6ehicle for reno6ations. 'l/s say .bdo misappropriated confid. %erms sheet to dilute 2oting control; 'l/s argue that board
52

didn/t now .bdo negot. deal for QM(; (t. F8R8(%&, says se2eral board members new he was presenting on behalf of QM(; they had the info; it was understood the& kne+7 (ut the& appro6ed; .lso, deal wasn/t to dilute 2oting control; but to find (est financin 6ehicle for reno6ations. c. (() (onflicted $irs may be counted toward a "uorum. !a# Vuorum ? ma,ority of total $irs, unless .o4 or bylaws reCuire more !b# *O0, - PR,@,RR,? S0O)B 6. )O33O* S0O)B in Qenihana/s, they hired consultant to de2elop financing alternati2es, opted to sell Preferred stock 9get a set di6idend, which are paid out priority 2s. common stoc - higher place in line during li"uidation, but don/t ha2e much of a say)2oting rights:; )ommon Stock type of e"uity or security; no set di6idend7 not paid until preferred are paid in full; last in line during ban ruptcy)li"uidation ! residual o+ners# so usually get 1B%5C10; FC&A of getting nothing but ad2antage of getting more CM it does well; but usually carries 6otin ri hts for electin (d. !there are some non2oting classes#; So &ou mi ht con6ert to common stock for for lar er e=uit& in stock > lar er sa&$ influence corp. throu h 6otes on esta(lishin corp. o(8ecti6es > polic& > electin Board) ). Was there A )ORPORA0, OPPOR0#*I0"? )orporate Opp. ?octrine ()O?)4 1. O(8ecti6e4 to deter appropriations of new business prospects Ybelonging toY the corp +. 0ar ets4 $irs)Bffs - $ominant &5s who ta e dominant role in managing the corp *. *O0, ! 0his is a S-I?I*G S)A-,;totalit& of the circumstances test$ the more factors satisfied7 the (etter &our case a ainst ?K 3eetin 5 factor isn2t conclusi6e. 0artha "tewart. G. S0,PS4 a. Is Prospect a )orp. Opportunit&? $roz. 0est (elo+. (. ?oes @iduc. U@ull&F ?isclose? !1# 1o $isclosure, then .ppropriate ? Qreach. c. ?oes )orp. PROP,R-" R,L,)0? (";*$ not 93a&(e:) !1# Cf 1o - Miduc. .ppropriates ? Qreach =. R#-,4 0he $roz 0,S03 . (B e4ists where3 a. )orp is financiall& a(le to take the opportunit& ! at the time opp was actually presented)a2ailable !1# 0I3I*G ! when - where was opp presentedD b. Opportunit& is in the corpOs line of (usiness !fundamental nowledge, practical e4perience and ability to pursue#. (1) 4n re e$ay - In6estin was Ya line of businessY of eBay, e2en though not their main purpose b)c they in2ested a lot - eQay buys securities, and in2ests, which is part of their biz model =TO of re2enue was generated through standing mar et in2estments. Qut not in line of business of 0artha "tewart (1) What a(out RISB" OPPOR0#*I0I,S? !a# 4n re e$ay G e2en though the common stoc s would/2e been RISB" in2estments, ct. said irrele2ent b)c eQay ne2er gi2en OPPOR0#*I0" to )O*SI?,R the RISBS7 especiall& if the& had the& +ere financiall& a(le. !*# Are +e definin opp too *ARROW-" or (roadl&D can/t define opp narrowly to indi2idual or biz niche3 what would help co. grow - succeedD 84pansionD
53

(G) Is this a completel& separate niche? c. )orporation has an interest !firm has a legal right 8.&C8F %B 'FBL8# or ,'pectanc& (+ould come to the corp in the ordinar& course of thin s )7A$8E$ TO 9$O:E than an interest:# in the opportunit& Cn $roz, no interest or e4pectancy where corp was3 o R,),*0-" I* -,G0A" I*SO-/,*)" reorganization period)Minancial difficulties, getting out of that biz, had sold off similar franchises, o 0 didn2t consider corp. a 6ia(le candidate nor offer it o )orp 0urned ?o+n Opportunit& E ? presents to Bd. > Bd. Sa&s 9*ot interested: e6en if financiall& sta(le - Aey players for corp told Qroz it was o . B#0 if there was a list of primary - secondary sellers - they were on it, then this would be different b)c Qroz would ha2e in,ected himself early; "ou ha6e to sho+ that ? +as usurpin an opportunit& that P +as WI--I*G > AB-, to pursue. o ? learns of Opp. In his I*?I/I?#A- capacit& E Cn Bro;, Qroz found out a(t the opportunit& in his I*?I/I?#A- capacit& ! 1B% in his (orporate capacity, e.g. not told at a board meetingS9 A enc& theor&: o *o ,'pectanc& +hen 9After the fact: Cn $roz, corp. was initially insol2ent so not interested, but while Qroz already negotiating the deal, 'ri(ellular thereafter proposes ac"uisition of insol2ent corp !(C&#. Qroz under no duty to consider 'ri(ellular/s )O*0I*G,*0 > #*),R0AI* plans for ac=uisition of near insol6ent corp. ()IS) Was ,'pectanc& @oreseea(le? ,. . Was he a tech en ineer +ho should reasona(l& kno+ of the ne't (i thin in the market as to help corp. tech. e'pand OR is he 8ust a marketin consultant? bay %here was e4pectancy b)c in2esting was a significant aspect of co./s biz Is corp (5) in *,,? of7 (1) seekin OR (<) e6en Remotel& interested in the opp? 0artha "tewart d. ,m(racin the opp +ould create a )oI (et+een the ?irs > the )orp 4n re e$ay. C'B shares created )OI b)c they were basically a ic bac from 0oldman &achs to the $irs for bringing their business to 0oldman. o (ommon stoc became immensely 2aluable - 0oldman rewarded fa2ored clients by gi2ing them thousands of C'B shares at the intial offering price, resulting in 5J08 profits; Ga6e ?irs. e'tra (i% opp for somethin unrelated$ concern that directors +ould create loyalty circles, so not findin (est professionals for (i% or (est prices- (BC for corp in ta ing this ad2antage before presenting it to corp; o AG,*)" -AW ARG#3,*0 ./s under duty to acct for profits obtained personally in connection w)transactions related to the co. Jni"ue mar et price in2estment gi2en as reward for dealings w)0oldman &achs while $irs. in their (orp. capacity-li e !eadingY(ut for their position7 the& +ouldn2t ha6e otten the opp.
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 0artha "tewart E (ourts may allow $irs)Bffs to buy)sell stoc in their corp at will as long as in good faith. ?. ?ut& of -O"A-0" for SAs 1. &5s acting as &5s owe one another no fiduciary duties, QJ% )O*0RO--I*G SAS o+e duties to the 3I*ORI0" a. 1 t&pes of controllin SAs4 !1# =@.1OX of stoc , BF !+# <ess than =@.1O but ?ominates throu h actual )ontrol +. )orp as SA4 ?G)- C51<4 . corp can own some or all of the shares in another corp a. if YsomeY is GR,A0,R 0AA* HDZ ? 'arent - ma,ority-controlled subsidiary !minority-owned if less than =@O# !1# other stoc owners are minority &5s b. if YA--Y ? 'arent - wholly-owned subsidiary c. Is there a ?eal Bet+een Parent > Su(? 0est for ?omination4 !1# If S,-@E?,A-I*G (& Parent3 Qo' on 'arent to &5BE I*0RI*SI) (J,*0IR,J) @AIR*,SS. U+here ma8orit&7 (& domination7 causes su(sidiar& to act in such a +a& that the parent is (enefitin to e'clusion > detriment of minorit&$ e. . causing corp. to pay di2idends only on the preferred stoc ; li"uidating subsid. b)c ma,ority &5 corp wants opp. %hat was offered to subsid. F "inclair Oil ! 9no self-dealing in paying e4cessi2e di2idends b)c proportionate share to minority &5/s; on 84pansion, no (orp. opp usurped b)c none were presented to &in2en that &inclair too , - &in2en usually did biz in Lenez - &inclair focused on other countries; &inc didn/t step in the way: !a# *O0, if claiming e4cessi2e payout of di2idends, would ha2e to show E.&%8 !b# "inclair Breach of B +;3inorit& SA - &inclair didn/t pay &in2en for crude oil !2ia their A# - didn/t purchase fi4ed minimum ? &inclair recei2ed products to the detriment of &in2en/s minority &5/s. !+# If *O S,-@E?,A-I*G3 BLR is used, - ' has burden to show gross o2erreaching. 9e.g. deciding to li"uidate: "inclair Oil ! deciding on e4pansion: !a# *O0,3 <oo for self-dealing separately in each transaction if there/s more than one. !*# If (oth S,-@E?,A-I*G > ?,)ISIO* test both Intrinsic @airness - BLR (G) RA0I@I)A0IO*4 !a# R#-, ! /ia ?G)- 5GG7 If there is no re=uisite 3a8orit& of ?isinterested SA2s (especiall& +hen Interested ?irs are also )O*0RO--I*G SA2s)7 Ratification is I--,GI0I3A0,$ ?irs are then re=uired to pro6e ,*0IR, @AIR*,SS. 3liegler 9.gau mining co.; $irs were also (B1%FB<<C10 &5/s, so interested transaction; Same ?irs +ho +ere also )O*0RO--I*G SA2s ratified 6ia SA 6otes$ Eere still able to pro2e entire fairness b)c .gau had serious financial problems, - Qd/s decision was potentially profit-generating; Cnterest to &5/s was a fair price: !b# Wheelabrator. 9Easte wasn/t a ma,ority &5, so QRF is standard of re2iew: (i) R#-,S4 ,@@,)0 of SA Appro6al 1. Interested ?irector transactionsD
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!i# Appro6al (& @ull& informed7 ?isinterested SA2s in6okes BLR protection for $uty of (are claims 1. ?ut& of lo&alt& USelfE?ealin F claims a ainst directors? !i# @ull& informed SA 2ote shifts burden of proof to ' to show Waste !BLR# (<) )orporate Waste UAlmost I3POSSIB-, to pro6eF (a) 90o reco6er on a claim of corp +aste7 the P2s must shoulder the (urden of pro6in that the e'chan e +as so one sided that no (i% person of ordinar&7 sound 8ud ment could conclude that the corp has recei6ed ade=uate consideration.: (() 9A claim of +aste +ill arise onl& in the rare7 unconsciona(le case +here director irrationall& s=uander or i6e a+a& corp assets: i. Basicall& sa& that ? +ins$ P P hard time pro6in <. ?ut& of lo&alt& claims a ainst controllin SA? !i# Mully informed disinterested &5 2ote shifts burden of proof to ' to show #*@AIR*,SS !=# S#BER#-,E for SAs ?omination E ?#0" 0O ?IS)-OS,4 E Ma,ority &5s !indi2s or (orps# owe a fiduciary duty to the minority ,ust li e directors when they control corp decisions. Lahn v. Transamerica 9? didn2t disclose intention to li=uidate7 (ut redeemed the stock at the lo+er 6alue to ?2s (enefit > P2s detriment (;c P could26e otten hi her 6alue for shares had P (een informed prior to li=uidation; Mar et 2alue of -,A@ 0OBA))O had risen e4ceedingly high, and $ wanted that benefit but didn/t tell '/s b)c '/s could/2e recei2ed 7+;@)share rather than 7T@ when it was called.: ,. ?ut& of -O"A-0"Y?#0" O@ GOO? @AI0A (?ut& to 3onitor7 Intent7 etc.) 1. @ailure to Act in Good @aith- where the fiduciary3 a. (a) I*0,*0IO*A- act w)purpose other than ad2ancing QC of corp. b. (() .ct w)I*0,*0 to 2iolate law c. (c) I*0,*0IO*A--" fails to act in the face of a nown duty to act; demonstrating a )O*S)IO#S ?ISR,GAR? for his duties by3 !1# !5) Jtterly @ailin 0o Implement An& Reportin Or Information S&stem or controls, BF !+# (1) 5a2ing implemented a system or controls, )O*S)IO#S-" or S"S0,3A0I)A--" failing to monitor or o2ersee its operation thus disabling themsel2es from being informed of ris s or problems re"uiring their attention. !a# ?ut& to 3O*I0OR !i# *aremar9 9(o. was bribing positions - gi2ing ic bac s to physicians. Ehere was the boardD: !ii# "tone - R#-, ! Breach of GOO? @AI0A re=uires sho+in that ?IRS B*,W the& +ere not dischar in their @iduciar& o(li ations$ re=uires I*0,*0IO*A- failure to pa& attention > dereliction of ?ut&. Gross *e li ence +ill not suffice.
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5. Is ?ut& of G@ a separate dut&;triad of @iduc duties? !i# *OK Ct is a subset of $o<-b)c $o< isn/t limited to financial or (BC, which brings in 0M. . director cannot act loyally towards the corp unless she acts in the &3 belief that her actions are in the corp1s best interests.("tone refrencing &uttman v. #uang. 2. .llegations that .m&outh failed to file &uspicious .cti2ity Feports !&.F as re"uired by Qan &ecrecy .ct !Q&.#; '/s claim that directors breached duty of 0M b)c they had not installed or monitored a reasonable information and reporting system to pre2ent the &.F)Q&. 2iolations 3. )t. found that the& did *O0 6iolate dut& of lo&alt& for G@ (;c 0A," AA? monitorin s&stem A*? annual reports. #nfortunatel& s&stem did not ade=uatel& pre6ent or detect emplo&ee a(use. +. 'isney R#-, ! Breach of GOO? @AI0A re=uires I*0,*0 to conduct misdeeds that don2t ad6ance BI of corp. *e li ence +ill not suffice. 'isney 98isner hires B2itz, but after 1; months, B2itz terminated for cause b)c he - B2itz can/t get along; &5/s sue on se2eral counts; )ompensation committee appro6ed O6ti% emplo&ment B; Qoard did not formally appro2e A, but elected B2itz as 'resident; (t. said no 2iolation of 0M:. a. Airin of O6it% improper? ct. said Ok (;c appro6al (& )ompens. )ommittee lawful under $el. <aws - in $isney Qilaws; permits boards to delegate auth. b. #ninformed decision (& )ompens. )ommittee > ross *e . in appro6in emplo&ment B? !%an &or9om factors# !1# (t. said e6en thou h it +asn2t (est practices (;c +asn2t presented to full (oard, little slopp& in documentation Usummar& sheets7 less detailedF7 (ut didn2t rise to le6el of inade=uate process$ record showed that committee was familiar w)option economics, b)c it had wor ed on options for 8isner - Eells; they new about se2erance payment - downside protection b)c B2itz was lea2ing his lucrati2e, secure position to come to $isney. !+# 84ecuti2e compensation consultant was in2ol2ed in process)e4perts !a# Bad faith not esta(lished$ Aere7 (5) no intent other than (est interests of corp. (;c there +as a pressin need to find President (;c ,isner +as sick7 ,isner 6ouched for O6it%7 > the& kne+ O6it% +as hi hl& =ualified c. 0ermination ! said ,isner didn2t ha6e authorit& to terminate O6it%7 > Board (reach dut& of care and dut& of ood faith (& failin to act !1# (t. disagrees; ,isner > other ),Os had done this in the past)o2er the years, - corp docs - bilaws said they had authority to manage day to day affairs w)o interference $isney/s certificate of incorp. - bylaws contemplate that ),O > (oard +ould ha6e concurrent authorit& to terminate an officer such as B2itz; 'lus 8isner/s counsel told him he didn/t ha2e a cause termination so would be best to terminate w)o cause - a2oid further litigation d. Pa&ment to O6it% +as WAS0, of corporate assets? !1# $ecision was made in 1NN=; the& couldn2t ha6e anticipated that O6it% +ouldn2t +ork out > S0O)B OP0IO* +ould26e appreciated .N5 3 !a# 1o waste payment pursuant to 2alid - binding A; %he facts that later on e2ol2e that ma e payments outrageous, doesn/t count as waste, b)c at the time you did it in 0M was 2alid and binding when he entered into it.
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e. Ad6ice to 'isney3 Ao+ could this 5D &r liti ation ha6e (een a6oided? !1# $ocumented &tudy by (ompensation (ommittee w)detailed report and spreadsheet showing contingencies show all possibilities o2er time of stoc opt. appreciation; but b)c they didn/t do it '/s had colora(le claim of breach of duty !+# &hould/2e had wee s - wee s of deliberation; there was a time crunch here !*# Eritten bac -up by e4ecuti2e compensation e4pert !;# 'resentation of committee/s report to full board !=# $eliberation by board and report incorporated into formal minutes f. <ac of good faith is more than gross negligence !$o(#; it is a subset of $o<. g. 0ood faith is the other route to $o< when thereGs no apparent (onflict of Cnterest. h. ?isne& 0akea+a&s3 we want corps to use best practices, but de2iation from those will not result in liability unless there is other e2idence of breach of $o< <. *O SA@, AARBOR for ?ut& of G@K MIII. ?eri6ati6e -iti ation4 O6er6ie+ and ?emand Re=uirement A. ?G)- C 11D E SA Aas a RIGA0 to Inspect corp. (ooks > records !SO A-WA"S @I-, a C 11D re=uest for info +hen makin ?emand Q. ?,RI/A0I/, 6. ?IR,)04 Tooley 0est4 1. (5) Who suffered the alle ed harm4 the corp or the suing stoc holders, indi2iduallyD a. %ypes of ?irect Suits !1# $CF8(% in,ury to &5/s rights. &5 brings indi6 suit or class action. !+# *O0,3 Cf its nonmentary relief, li e in,unction, 2oiding a , something that wouldn/t cause co. to pay out dollars, cts. tend to say direct !a# $ilution of 6otin ri hts constitutes direct in,ury to &5, thus direct suit. isenberg 9mer er resulted in biz ops being confined to wholly owned subsidiary; *o 6oice in biz ops.: (() 3iscalculation in di6idend distri(ution (c) B ri ht ! such as ri ht to inspect (ooks E taken a+a& +;o a proper 6ote (<) Benefits P ,asier process (a) ?on2t ha6e to post a (ond (() ?on2t ha6e to file ?emand ! o strai ht to ct. to fileK b. %ypes of ?eri6ati6e Suits !1# Qrought by &5 on (orp./s behalf (B. belongs to the (orp. as an entity !a# &omething that in,ures the (BF' as an entity; e. . ?irs. SelfEdealin ;)OI !b# &omething that ?,)R,AS,S )ORP2S /A-#,;lowers 2alue of stoc s. (1) Wh& e6en (rin a deri6ati6e la+suit if not oin to ain an&thin directl&? !a# (o. has allegedly done something bad that caused the price of the stoc to drop, - therefore indirectl& impacts the SA (stock 6alue, deri2ed from corp.# !b# Money still underlies this though, e2en though not going in their poc ets now but will effect in the future !c# "ome bring it when their trying to get board seats etc . 1. (1) Who +ould recei6e the (direct) (enefit of an& reco6er&;remed&7 the corp or the SAs7 indi6iduall&? a. Is in8ur&4 directl& to corp7 not SA? (5) If in8ur& is to the corp4 SA canOt sue directl&7 (ut can sue ?,RI/A0I/,-".
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(. )omplainant must (e a SA. )reditors remed& is P)/. C. If ?IR,)0 ?raft )omplaint$ D. If ?,RI/A0I/, ?oes 3& )lient 3eet Re=uirements? 5. S0A*?I*G? a. Was 3& )lient a SAX !1# At time of +ron doin D (3B)A T.G5) !+# When suit (e anD (3B)A T.G1) !*# Willin to hold on to Shares throu h final 8ud ment? (some states) b. Is m& client a fair > ade=uate rep. of corp2s interest? (3B)A T.G1)? (5) ?oes he ha6e a Personal;AI??,* AG,*?A? 1. S,)#RI0" @OR ,MP,*S, Statute? Is it State or @ed )ase? rie Issue4 a. Mederal law go2erns procedural issues)&tate law go2erns substanti2e issues. *ohen. UAI*0 ! if in *L7 then S,)#RI0" @OR ,MP,*S, ! P must pa& cost of suitKF !1# &o if state claim in Med court for di2ersity, state la+ (for the state that the @ed. )t. is sittin ) re=uirin pa&ment for suit is 6alid b)c it is substanti2e !i.e. creates ne+ lia(ilit& for PEEto pa& cost of suit) b. *O0,3 ?el. ?oes *O0 ha6e a Securit& for ,'pense StatuteSSS c. PO-I)" )O*),R*S !1# $eri2ati2e suits allow &5/& to hold directors accountable !a# &cotus called it a remedy born of stoc9holder helplessness G passive investors !+# 'otential abuses3 !a# Strike suits3 suit a person +;small stake in residual 6alue ()om. Stock SA) of biz might bring for purpose of being bought off; Securit& for e'pense deters !b# 1uisance suits brought for settlement 2alue !*# Meritorious suits !a# &ettled too easily d. Is &our client a ?ir;Off of )orp > Scared of ?eri6ati6e Suits for thin s other than ?o-;@raud? -e al Ad6ice4 !1# ?G)- C 5GH - 3an& ?irectors can (e Indemnified from costs > lia(ilities !+# )an et ?>O Insurance e2en if can/t indemnify, but typically e4pensi2e (a) 0&picall&7 doesn2t co6er fraud7 selfEdealin 7 etc. e. $eri2ati2e - $emand recap !1# Ehat ind of suit isD $eri2ati2e ? re=uest dis or e of profits for &elf-$ealing !+# Cs demand futileD &how biased conduct small roup of ti htEknit directors, though only one interested, say that the interested dir. has influence o2er all; they 2oted for the personal interest transaction; if not, QRF protects !a# Cnterested $/s - .ppro2al)Fatification ' must then show waste !hard#. !*# 1e4t, actually ma e $emand <. ?oes m& client ha6e to make ?,3A*?? ?emand Re=uirements4 R#-, E ?emand Re=uired #*-,SS ,'cused ! ,'cused +hen @utile a. S0RA0,G"4 ARG#, for @#0I-I0" 5st, b)c if it fails, you get a +nd bite at the apple - can ma e demand after, if it failsS (. @#0I-I0" !1# WhatOs the Re=uirement? R#-,4 @R)P 1<.5;?el. R)P 1<.5 - (omplaint
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shall allege 9P 3#S0 P-,A? W;PAR0I)#-ARI0":3 !a# (5) %he 8fforts ' made to obtain the action desired from the (orp)$irs)9if necessary: &5s, and !b# (1) (a) Feasons why ' couldn/t obtain the deri2. .ction ! b+c of interested '1s# BF (() for not trying)ma ing the effort !b+c of interested '1s@ (i) ?o I ha6e a Bd. of ?irs in place no+7 +hen ser6in this demand7 +hich can independentl& assess the merits of m& alle ations? !ii# Who +as there? *e+ (oard? @utilit& there +hen Bd. is the same +hen the (ad acts took place6'isney had different claims against dif. boards (iii) ?o I ha6e an o(8ecti6e7 un(iased (od& that can decide +hether or not to (rin this suit? ?ispro6e this (& sho+in conduct of (ias producin nature All &ou need is a 3ALORI0" O@ (oard +ho2s interested %hey/re obviously not going to want to sue themselves; Cf members that are in2ol2ed in wrongdoing, then you would ha2e futility; they were the bad actors we/re complaining about; they/re going to be interested in demand of course they/re not going to agree (1) @utilit& Standards4 P can claim @#0I-I0" if4 !a# @IRS0, @ind out info. B,@OR, &ou ar ue futilit& (& filin C11D re=uest for info;statutor& ri ht to inspect (ook > recordsK !i# Wh& C11D re=uestD Ee don/t e4pect s-holders to no e2erything in board room, but ha2e to ha2e some nowledge about domination, - its '/s burden to find that out before he files. !%ools at hand, s-holder can in2o e statutory right to get boo s - records# !b# ?, Standard (&rimes)4 'lead w;PAR0I)#-ARI0" R,ASO*AB-, ?O#B0 as to3 !i# (5) Ma,ority of Qd. has 3A0,RIA- financial) familial interest, BF !ii# (1) Ma,ority of Qd is incapa(le of (ein indep b)c of reason li e domination;control, BF !iii# (<) %he underl&in transaction is not the product of a 6alid e'ercise of (i% 8ud ment. !c# *" Standard (0arx)4 !i# (5) 3a8orit& of ?irs interested, BF !ii# (1) $irs failed to inform themsel6es, BF !iii# (<) )hallen ed transaction could not ha6e (een product of sound (i% 8ud . !d# Primar& differences (t+n *" > ?,3 *" has no reasonable doubt re"uirement, P 8ust has to plead 5 of the < +; particularit&, .1$ Z+ differs in each test. c. When @utilit& *O0 ,'cused4 ?id P 3ake ?,3A*?? letter from SA to Bd. of ?irs askin to (rin suit for alle ed )oA4 !1# 3inimum Re=uirements4 !a# (5) I? the alle ed +ron doers (Bd. Of ?irs.), !b# (1) ,'plain +ron ful conduct that ?2s did to harm the corp, .1$ !c# (<) Fe"uest R,3,?";relief UWhat do &ou +ant? ?is or e of profitsD Fescission AD:
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!i# (a) Must be S#@@I)I,*0-" SP,)I@I) to inform Qd. of the nature of the (o. !ii# (() Qd. Must ha2e R,ASO*AB-, OPPOR0#*I0" to R,/I,W) e2aluate its merits. (2) If P can2t succeed on futilit&7 then make demand Bd can sue or refuse to sue If Bd refuses to sue7 P can ar ue +ron ful refusal Bd sho+s Indep. of S-) OR process for BLR in refusal If court finds no +ron ful refusal ! BLR E no suit$ B#0 If court finds +ron ful refusal7 P can sueK ,. ?,3A*? ,M)#S,? at @#0I-I0" S0AG,?4 S-)s U@or Bd to Re ain )ontrolE Sho+ Independence > BLRF R#-, ?G)- C 5G5(c)(1) 1. &pecial committees - Aelp insulates their directors from lia(ilit&$ standard practice ; R#-, ?G)- C 5G5(c)(1) 2. P ar ues futilit& (;c assumes Bd. Is interested mean+hile7 ? appoints disinterested S-) (thou h could26e filed 3ot to dismiss for failure to file demand) to sho+ disinterested Bd. UInstead of liti atin re ardin failure to file demand7 Shorter;smarter;)ostEsa6in Route is for ? to file mot. 0o dismiss (;c S-) finds no 6alue in pursuin ?eri6. suit.EBLR in decisionF UWhen futilit& une'cused7 > P (rin s demand7 ? refuses > sho+s BLR in refusal 6ia ?isinterested;independent S-)F (.uerbach) ! <. < Standards of Re6ie+ for Refusin ?emand 6ia S-)4 a. *" Standard (.uerbach)4 &how that your &<( is !1# (5) ?isinterested;independent, !a# Eho are these ppl, howd you find themD 5owd you determine they/re "ualifiedD CntelligentD (onnection to bad conductD (ompetentD (ollegial tiesD !Oracle#D !b# Cssue in .uerbach3 Cn2estigation shows that dirs gi2ing monetary bribes to political parties in foreign countries; they 2oluntarily filed w)the &8(, then &5/s deri2ati2ely sued; Qoard could/2e filed motion to dismiss for failure to file demand, but didn/t; created an S-) +;< disinterested (oard mem(ers that W,R, *O0 around +hen improper pa&ments occurred$ issue +as the S-) relied on audit report to determine that liti ation +ouldnOt (e in the (est interest of the corp.7 (ut the A#?I0 )O33I00,, +as created (& the Bd. +ho2s in6ol6ed in the improper pa&ments !+# (1) Aas a PRO),SSU%an &or9umF ;BLR +;respect to S-)2s decision? <ogical methodology that lead to conclusion. Cf yes, IBJ EC<< Q8 .Q<8 %B F8MJ&8 $8M.1$ (a) .uerbach: &<( was disinterested b)c they were added to the Qd after the challenged transactions, - &<( too substantial steps !process# b; dismissing deri2ati2e suit. G0, +as a(le to stop liti ation (& sho+in thorou hness (. ?, Standard (Lapata) > Oracle UApplies in ?, O*-" +here ?,3A*? ,M)#S,? > S-) seekin 3O0. 0O ?IS3ISS$ if ?emand R,V#IR,?;3A?, > Refused7 use .uerbach lo+er form of scrutin&F 0WOES0,P 0est4 !1# (5) (ourt should in"uire into (a) the Independence and G@ of the &<(, .1$ (() the (ases supportin the S-)Os recommendations U(a)R(() essentially ? Independence - :an <or/u" Process of .uerbach %est:, A*?
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!+# (1) (t. may go on to apply its own biz ,udgment as to whether the case is to be dismissed. !a# (t. loo s at su(stance of the decision; did committee really ma e right decisionD !b# #nder step 13 (ourt may decide that Pu(lic Polic& calls for suit to go forward e2en if (orpGs &<( seemed to satisfy criteria in step 1. !*# 0he )orp has BoP to sho+3 I*?,P,*?,*),7 GOO? @AI0A, and R,ASO*AB-, I*/,S0IGA0IO*. c. ?IR,)0OR Independence ! ?, R#-,! 9P must demonstrate that through Personal or Other !ships, the 'irectors are $ #O5' N to the *ontrolling person.: .ronson v. 5ewis !1# ?, R#-, for4 whether a $ir is, for any substantial reason, incapable of ma ing a decision with only the best interests of the corporation in mind. %hat is, 6 focus on impartiality and ob,ecti2ity. Oracle. 9too many collegial)other connections between &<( - $s ? not independent$ ties +ere too su(stantial that the& raised reas. 'oubt abt. "5*1s decision on whether '1s should face suit7 *ommon #uman nature for social influences to direct behavior .: !a# S0R#)0#RA- BIAS e.g. Mriendship, relational ties that affect sound, ob,ecti2e ,udgment; (ogniti2e bias impacts Qd. decision-ma ing in a way that may harm &5/s; this bias may lead to Qd./s systematically underestimating the ris9s of *O4 transactions. Burch7 The 0yth of the 2nbiased 'irector. !b# Ad6ice -a+&ers ha6e to do more due dili ence to unco6er relational ties ; drill boards on their relation to the &<( members (2) Su(Erule4 Oracle standard onl& applies +here demand +as alread& e'cused. 0artha "tewart : ,as& to pro6e independence at futilit& sta e7 than after MI/. Securities3 A. General4 5. Be& Statutes4 a. O<< Securities Act Fegulates offerin ;sale of *,W securities (PRI3AR" 3arket); ?IS)-OS#R, based !1# %ransactional to raise capital - Eas it registeredD 84empt from regD &hould it ha2e been registeredD b. O<G Securities ,M)AA*G, Act - secondary mar et acti2ity-when securities are changing hands; trading that goes on .M%8F they issue stoc ; resale of stoc ; ?IS)-OS#R, A*? SO3, S#BS0A*), (5) Onl& re=uired of R,GIS0,R,? co.2s 1. ?ra+(acks a. %edious, time consuming, e4pensi2e !internal - e4ternal time - 7# b. B2erburden on small co./sD but you don/t ha2e to ma e your co. public *. Goals a. (5) %o promote @ull disclosure !ma e sure that in2estors ha2e all the info they need to ma e informed decisions# - (1) Pre6ent fraud !for both# ;. #ni6erse of )orp Go6ernance3 a. @ed -a+4 $isclosure - &ome 'rocedures !pro4y contest - tender offers#
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b. State -a+4 Most Bther CssuesHMiduciary $uties, Loting Fights, <imited <iability, $issolution Q. Is the thin in =uestion a Securit&? 1. Sec. Act C 1(a)(5) - &ecurity ? Y.ny note, stoc 6bond, debenture,6I*/,S03,*0 B6or, in general, any interest or instrument commonly nown as a Gsecurity.GY 2. Sometimes7 the thin is a per se securit&7 e. . a stock7 B#07 other times itOs not that clear7 so usuall& includes di6idends7 6otin ri hts7 etc. a. If itOs somethin like an I*/,S03,*0 B or S)A,3,7 use the #owey Test to see if itOs a securit&4 !1# a B7 transaction or scheme +here(& a person in6ests mone& 7 !+# in a )O33O* ,*0,RPRIS,, !a# Aori%ontal commonalit&4 ?id SA2s of a corp POO- their I*0,R,S0S? Fe"uires 'ooling of interests. <oo s to the Rship (et+n the Indi6id. in6estor > the Other In6estors +ho put . into the scheme; e.g. &5/s of a corp. !b# /ertical )ommonalit&4 Were the in6estor > promoter of the scheme in a common enterprise? <oo s to Rship (t+n I*/,S0OR > PRO3O0,R of the scheme. Fe"uires that in6estor > promoter of scheme +ere in6ol6ed in common enterprise, $2T no pooling of interests by multiple investors; !*# A*? is led to e'pect profits (4) Solel& 9or Su(stantiall& !added by courts#: from the efforts of the promoter or a ;rd party 9i.e. is the in6estor passi6e; helpless passi6e in6estor ! has no means to control +hat co. does > relies on 0F !a# R#-, on 9 *ONO04* ! .54T4 ":! A Passi6e in6estor relies on the in6estment of others7 > is left una(le to e'ercise meanin ful control o6er his in6estment. In6estment B2s in --)2s are enerall& *O0 securities (;c the mem(ers tend to (e A)0I/, (ha6e )ontrol). Since the& are not passi6e7 the& do not recei6e protection under Securities la+. !obinson v. &lynn. 9Ro(inson +as not a passi6e in6estor rel&in on the efforts of others7 (ut a kno+led ea(le e'ecuti6e acti6el& protectin his interest > position in the co .; Fobinson said he was defrauded under /*; act for in2estment A in 0eo'hone <<( technology, but ct. said his in2estment A wasn/t a security b)c !i# 5e was on the Bd. !managed# so not acting li e a passi2e, helpless in2estor, 1. 5e +as in6ol6ed7 lookin at (ooks new what was going on in the co. +. Fobinson argued that he didn1t 9now what was going on b+c he didn/t have technological expertise, when at meetings, he didn/t understand what they were tal9ing about; Our response AIR, A* ,MP,R0 0O ,MP-AI* I0 0O "O# OR ASB 0A,3 0O ,MP-AI*$ can2t ar ue that &ou didnOt ha6e control o6er fate of &our in6estment +hen in m mt. seat !ii# 5e +asn2t ettin di6idends li e a normal in2estor, here he +as ettin a 5DDZ of profits;. (() AI*0 @OR ,MA3 ! Whene6er &ou see --)2s or -P2s7 think SecuritiesKKK ). Purposes of Securities -a+s4 ?isclosure > @raud Pre6ention4 5. IS 0A,R, ?IS)-OS#R,? B," V#,S0IO* @OR A-- S,)#RI0I,S
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PROB-,3S a. O<< ActEEWas there ?IS)-OS#R, in the R,GIS0RA0IO* S0A0,3,*0? (. O<G ActEEWas there ?IS)-OS#R, in 0RA*SA)0IO*S? ?. Are +e dealin +; I*I0IA- SA-,S of the Securit&? O<< Act Issues > ?IS)-OS#R,4 1. ,M,3P0IO*S3 Pu(lic Offerin s 6. Pri6ate Placement a. R#-, ! 2<< Sec. Act C G(1) ! 'ri2ate offerings are ,M,3P0 from registration under the \<< act. ?IS)-OS#R, ?4 +ere offerees i6en7 or had access to7 all rele6ant info that +ould ha6e (een in the re . statement if it +as a pu(lic offerin ?: (5) Pri6ate Placement 0est ('oran) !a# (5) [ of Offerees and Rship to Issuer Small [ of ppl +;)lose relational ties, the more pri6ate it looks; if unrelated)don/t now each other, then loo s public !i# 'oran S in6estors, QJ% Cuestion on rship btwn issuer - offerees; ct. remanded b)c offerees need to ha2e info readily a2ailable)easy access to them by 2irtue of the rship to issuer. !e. . create a pri2ate website# 1. 1eed to ha2e info of Hwhat an average prudent investor ought reasonably to be informed before purchasing the security registered. !b# (1) [ of #nits offered ! limited num(er of shares; but if many small units in small denomination, i.e. 71 per share, then it shows security was meant to be readily mar etable to the public !c# (<) Si%e of the Offerin -o+er the dollar amt, the more pri2ate; the bigger the $ollar amt, the more 'ublic it loo s !d# (G) 3anner of Offerin no pu(lic ad6ertisin or solicitation for pri2ate ; i.e. can/t be in the Eall &treet ,ournal or some widely publicized media !e# Cf sec. fails the test, then it indicates that issue was made w)intent to distribute securities to the public, - therefore would 1B% be e4empt under /** act - liable. 1. @RA#? in the Re istration Statement4 a. ?e(enture debt instrument; turn debt into e"uity; offered in bad times to gi2e &5/s MJ%JF8 right to di2idend, repayment at maturity, and con2ert when times are co. is financial stable; usually used for trouble co. b)c no one/s going to in2est otherwise b. O<< Act C 55(a) ! lia(ilit& for #*0R#, or O3I00,? 3A0,RIA- facts in Re istration statement$ lar e pool of potential ?2s7 (ut possi(le ?ue ?ili ence ?efense 9(laim that you did e2erything you could to ensure that registration statement was accurate; try to show that errors weren/t material:. (5) Who2s potentiall& lia(le? !a# $irectors and e4perts in2ol2ed in creating the reg statement can be sued as indi2 $s.; ,/,R"O*, +ho si ns the Re . StatementK c. 55(() Cssuer !(orp# is liable for fraud in the reg statement, B#0 indi6s are not lia(le if4 !1# *onEe'pert4 had a Reasona(le (elief, after a Reasona(le in6esti ation, that there was no material falsit&;omission (a) ?id *onEe'pert in6esti ate;find out +hat the& didn2t kno+? !+# ,'pert +ho drafted part of the re statement in =uestion4 (i) had a Reasona(le Belief, after a Reasona(le In6esti ation7 that there was no material falsit&;omission, BF (ii) such reg statement did not fairl& represent the e4pert
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portion he created. (a) ?id ,'pert in6esti ate;find out +hat the& didn2t kno+? !b# ,'perts +ill (e lia(le +hen the& dele ate this t&pe of +ork to someone +ho +asn2t =ualified to do it7 and didnOt properl& super6ise. 9$ar*hris Cne4perienced auditor didnGt ha2e e4perience to as probing "uestions; .uditors liable; Feg statement o2erstated Qowling alley sales - earnings, etc.: (3) ,'pert +ho did *O0 draft part in =uestion4 (i) had no reasona(le round;(elief that there +as an& material falsit&;omission7 or (ii) that the part of the re statement +as not a fair;accurate 6ersion of that created (& the other e'pert. $ar*hris.9 if you/re a director, you ha2e a responsibility to now what you now, and find out what you don/t now; (an/t rely on auditorsS MJ&% $B $J8 $C<<C081(8S: !a# Lust (;c &ou hired la+&ers7 doesnOt e'pertEi%e the +hole thin ; they pro2ided legal ad2ice; they ,ust memorialize info for the client; they are treated ,ust li e e2eryone else so they ha2e to thin of V 11 and their liability !b# [[0he Be&s are4 materialit& !a6 prudent in6estor think it importantD#, reasona(le in6esti ation !as to 11!b#!.#-!Q## - reasona(le (elief !as to 11!.#!(## M/. SA /otin Ri hts A. General 5. Strai ht 6. )umulati6e Uho+ SAs can use their 6otesF4 a) S0RAIGA04 (?efault rule) C can 2ote up to each of my 9Z of: shares, but no more, for each $ir candidate. U@irst7 al+a&s multipl& [ of shares ' [ of dirs. Seats to see ho+ man& 6otes &ou ha6eF !1# Person +ho o+ns 3a8orit& of shares can elect the entire Bd. Of ?irs. !+# 8.g. Qill has 1@@ &hares of .Q(, inc.; he can 2ote up to 1@@ times for each of the = directors seats; &o Qill has =@@ 2otes to use, QJ% can only cast a M.KCMJM of 1@@ per seat. &o bill could 2ote 1@@ times for seat 1 !or less#, 1@@ times for seat +, etc. !*# PO-I)" )O*SI?,RA0IO* doesn2t i6e minorit& SA2s much po+er b# )#3#-A0I/,4 C ha2e T 2otes, can use them any way C want can put all of them into one candidate3 more po+er for minorit& SA2s. U@irst7 al+a&s multipl& [ of shares ' [ of dirs. Seats to see ho+ man& 6otes &ou ha6eF !1# 8.g. Cf Qill was 2oting for = different dirs., he could ta e all of his =@@ 2otes and 2ote for 1 person ? )onsolidatin /otin Po+er. Person +;less shares has a (etter chance of selectin director$ Gi6es 3inorit& SA2s some control. 1. Pluralit& 6. 3a8orit& Uho+ ?irs are elected (& the 6otes that +ere done either 6ia strai ht or cumulati6e schemeF a# Pluralit&4 Ehoe2er gets the most 2otes are elected !1# (an be a plurality of a straight scheme, or plurality of the cumulati2e !+# Pluralit& is preferred (& ma8orit& shareholders b# 3a8orit&4 1eed to ha2e H5Z of outstandin share 6otes !can be applied to each $ir candidate# !1# Ma,ority of straight scheme, or ma,ority of cumulati2e B. StockholderOs Ri hts4
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1. ,conomic4 (5) recei2e di2idends, (1) residual claim on assets li"uidation +. /otin ri hts4 (5) elect directors7 (1) appro2e some e4traordinary matters <. Packa in 4 a# 1eed at least 1 class of stoc w)unlimited 2oting rights - at least 1 class w) the residual claim on assets !the + may be the same class, but need not be#. 3B)A C I.D5(() !1# 1on2oting stoc - other 2ariants on one-share-one-2ote are authorized. 3B)A C I.D5(c) !a# MQ(. is 2ery liberal, some states are more restricti2e. () )ommon Stock !1# 5igh ris can be high reward !if stoc does well# !+# <ast on chain during li"uidation usually get nothing !residual claim# !*# Fecei2e di2idends B1<I after preferred &5/s as declared by Qd. Bf $irs. !;# Loting rights 0et to ha2e more influence on corp. ob,ecti2es - policy by electing dirs. - appro2ing e4traordinary matters G. *ote other roups 6otin ri hts a# <<( what you put in b# one share, one 2ote for corps c# 'artners e"ual 2oting rights default J1<8&& you contract out (. )losel&Eheld )orps4 (5) stoc in a few hands !or a few families#, - (1) shares are rarely !if e2er# dealt 1. General4 no secondary mar et for shares, go2erned by state statutes. +. (lose (orp. &5/s issues a# Bften undi2ersified b# Cnterested in co. performance - di2idends, not share price c# Minority &5/s M.I ha2e little influence on Qd. Bf $irs. Br Mgmt. d# 'ersonality conflicts can lead to $eadloc or Bppression <. Solutions to deadlock4 a# /otin trust4 &5s agree to transfer all shares to a trustee, who becomes nominal record owner !1# %he trustee 2otes the shares in accordance w) the trust agreement, if any, - is responsible for distributing any di2idends to the beneficial owners !+# R#-,4 ?G)- C 15S E %rust document 3#S0 be filed with the state. () SA a reements4 !1# A reements relatin to election of Bd of ?irs (aka 6ote poolin a reements) !a# R#-, - )ourts ma& hold that SAs are (ound (& their a reements7 (ut are Reluctant to tell people AOW to 6ote their shares (a.k.a. )ts. are reluctant to reEcharacteri%e an a reement as a U/otin F 0rust7 so +ould rather sa& 9Breach of B:). !ingling. 9Fingling and 5aley family factions had a written agreement under which they were to 2ote together; .rbitrator designated in the agreement 9ha2e a pro2ision to bring in third party neutral in deadloc :; agreement suggest that arbitrator come in - ma e binding decision; 'arties promised in the A, to 2ote their own shares in accordance w)arbitrator/s decision. (t. reasoned that the a reement +as a 6alid B (as opposed to a 6otin trust (;c ct. reluctant to do that)7 so Aale&2s refusal to e'ercise her 6otin ri hts in accordance +;the decision of the ar(itrator +as a (reach of her B. R,3,?"
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! In6alidated Aale&2s 6otes:. !+# A reements relatin to limitation on the Bd of ?irsO discretion !a# R#-,4 SA2s 3A" *O0 a ree to )ontrol the ?irs. In the e'ercise of the Independent Bi% 8ud ment$ (an/t tell directors who to get as officers. &5/s must let $irs. Manage the biz, which includes election of officers - salaries. 0cMuade v. "toneham !i# *O0, - .greeing to 2ote for each other as directors is o ay ! li9e a vote pooling agreement#, but agreeing on policy decisions and business ,udgments !officer salaries, etc# is 1B% o ay.

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