Business Organizations and Government Roles

• These notes cover business organizations, government roles, key considerations, business forms, and antitrust laws

Government's Role in Business Structures

• Encourages business creation for economic benefits
• Establishes legal relationships between owners and managers
• Protects investors and counterparties from exploitation
• Regulates business operations for compliance with laws and fair competition

Key Considerations in Business Structure

• Different business forms (corporation, sole proprietorship, partnership, LLC) have significant tax implications
• Corporations face double taxation, which includes tax on corporate income plus shareholder dividends
• Pass-through entities avoid double taxation
• Liability is based on if business owners are personally liable for debts, lawsuits, or torts
• Factors determining liability include present assets, future assets, and industry risks
• Corporations and LLCs provide limited liability protection, shielding personal assets
• Under Respondeat Superior, employers are liable for employee's negligent conduct within the scope of employment
• Fiduciary Duty dictates that directors, officers, and partners owe absolute loyalty to shareholders or partners
• They must also act in good faith and avoid conflicts of interest

Business Forms

• Single owner, no separate business entity is a characteristic of sole proprietorships

Sole Proprietorship Advantage

• No double taxation
• Easy setup and complete control
• Minimal regulatory requirements

Sole Proprietorship Disadvantages

• Unlimited personal liability
• Difficulty raising capital
• Business continuity depends on the owner

Partnerships

• Taxation: treated as "pass-through" entities, avoiding double taxation
• Profits and losses reported on individual partners' tax returns

Types of Partnerships

• General Partnership
• Formed orally, in writing, or by conduct
• No state filing is required unless operating under a different name
• Governed by Uniform Partnership Act (UPA) if no written agreement exists
• Partners share equal rights, responsibilities, and liabilities
• Limited Partnership
• Requires a written agreement filed with the state
• Includes General Partners (full liability) and Limited Partners (limited liability, no management role)
• Limited partners contribute capital but do not participate in daily operations

General Partnerships

• Two or more persons are needed for formation
• Agreement can be implied
• Co-ownership for profit

General Partnership Liability

• Partners are personally liable for debts and torts of the partnership

Partner Relationships

• Partners act as both agents and principals
• Partners are bound by agency law and fiduciary duties
• Apparent Authority: Unauthorized acts can still bind the partnership if ratified
• Joint and Several Liability indicates each partner is individually and collectively responsible for partnership obligations

Transfers & Assignments

• Partners can transfer profit shares, but not partnership responsibilities
• Death of a partner disassociates them but does not make their estate a partner

Management & Duties

• Equal control unless otherwise agreed
• Partners cannot compete with the partnership or exploit partnership assets
• Decisions are made by majority vote unless otherwise specified

Liabilities

• Partners are jointly and severally liable for partnership obligations
• New partners assume existing obligations
• Withdrawing partners remain liable for pre-withdrawal debts

Personal Torts

• A partner's personal torts do not make the partnership liable but can impact their profit share

Termination of Partnerships

• Disassociation
• Can occur via notice, agreement, expulsion, incapacity, death, or bankruptcy
• Requires Statement of Disassociation to prevent liability for future acts
• Dissolution & Winding Up
• Dissolution: Legally ending the partnership
• Winding Up: Settling debts and distributing assets

Order of Payments

• Creditors (including partner loans) have the first priority
• Partners' original contributions have the second priority
• Then Remaining profits/losses (split equally unless agreed otherwise)
• Liability remains until debts are settled

Limited Partnerships (LPs)

• General Partners:
• Have full management control and personal liability
• Are Responsible for partnership debts and legal obligations
• Limited Partners:
• Only provide capital, do not manage business, and have limited liability
• Liability is limited to their investment amount unless they participate in management

Legal Requirements for LPs

• Must be in writing and filed with the state
• Third parties must be notified of limited liability status

Restrictions for LPs

• Limited partners cannot use their name in the business
• They cannot manage the business without losing liability protection

Rights for LPs

• Can vote on major issues (e.g., admitting new partners, dissolution)
• Do not owe fiduciary duties to the partnership
• Can inspect partnership records and financials

Limited Liability Company (LLC)

• Created in response to demand for a business form combining benefits of corporations and sole proprietorships
• Combines limited liability and tax advantages
• Minimum of 1 member, with a maximum of 30 membership interests
• Taxed like a partnership: Pass-through taxation, with no federal taxes unless elected to be taxed as a corporation
• Liability: Limited to the amount of investment (like shareholders in a corporation)
• Requires an operating agreement and registration with the state
• Business must include "LLC" or "Limited Liability Company" in its name
• Downside: Ownership interests are not easily transferable (requires consent)
• Member-managed: All members participate; majority members owe a fiduciary duty to minority members
• Manager-managed: Appointed managers owe fiduciary duty to members, similar to corporate managers

Franchise

• Franchisee: Purchases the right to run a franchise
• Franchisor: Sells business model, IP, and brand support
• Franchise relationship is contractual and subject to federal and state laws
• Franchisors: Concerned about brand reputation, expansion, and maintaining control
• Franchisees: Invest significant capital; risk losing investment if franchisor ends the relationship
• Government regulations protect franchisees, especially regarding investment and capital

Franchise Types

• Product Distributorships: Franchisee sells products within a designated area (e.g., GM, Ford)
• Territorial rights are key to Franchisee
• Business Format/Chain-style: Franchisee follows franchisor's operational rules (e.g., McDonald's)
• Trademark/Trade Name Licensing: License for manufacturing/processing (e.g., Coca-Cola)

Corporations

• Governed by state statutes defining creation and rules
• Two types: Public and Private

Public Corporations (C Corporations)

• Shares are publicly traded
• Regulated for transparency, especially for shareholder protection

Private Corporations

• Fewer than 500 shareholders
• Not publicly traded
• More flexibility in management

Public Corporations

• Have more working capital and can issue stock or bonds to raise funds
• Vulnerable to market scrutiny

Private Corporations

• Can pivot more quickly
• Do not face strict reporting/auditing requirements
• Fewer investor protections

Corporate Characteristics

• A corporation is considered an "artificial person" with rights like individuals (e.g., access to courts, freedom of speech)
• Owned by shareholders (one share = one vote, except for preferred shares)
• Governed by a Board of Directors that hires officers for day-to-day management
• Shareholder liability: Limited to the value of their shares, no personal liability for corporate debts

Piercing the Corporate Veil

• Courts may hold shareholders liable if:
• Single Economic Unit: Insufficient separation between shareholders and corporation
• Inadequate Capitalization: Underfunded corporation
• Lack of Formalities: Not following corporate procedures
• Fraud/Injustice: Shielding the corporation may result in unfair outcomes

Corporate Governance

• Defined by bylaws, guiding internal operations
• Three main groups: Shareholders, Board of Directors, and Management

Shareholders/Stockholders

• Own the corporation but do not manage day-to-day operations

Shareholder Rights

• Right to vote: Elect directors, approve mergers/acquisitions, change bylaws, and more
• Right to receive dividends if declared
• Right to sell shares
• Shareholder derivative suits: Legal actions against directors or officers on behalf of the corporation

Management: CEO

• Executive compensation: Salary, annual bonuses, long-term bonuses, and stock options
• Clawbacks are the returning of bonuses if financial performance is later found to be erroneous or fraudulent

Board of Directors

• Responsibilities: Appoint and oversee corporate officers, make major financial and policy decisions, and authorize corporate actions like mergers/acquisitions
• Fiduciary duty: Act in shareholders' best interests
• Business Judgment Rule: Directors and management protected from liability for honest mistakes or poor decisions made in good faith

Types of Corporations

• S Corp: Limited to 100 shareholders, one class of stock, with pass-through taxation
• Professional Corporations (PC): Limited liability for individual actions (e.g., doctors)
• Benefit Corporation: Pursues social goals beyond profit maximization

Wells Fargo Banking Scandal and Fallout

• Initial Scandal and Blame Placement
• Wells Fargo faced criticism for blaming lower-level employees for opening millions of fake accounts without customer knowledge
• Over 5,000 employees were fired, but executives initially faced little to no punishment
• Congressional Response
• Senator Elizabeth Warren demanded accountability, urging Wells Fargo executives to resign, return compensation, and face criminal investigation
• CEO John Stumpf later resigned following the hearings
• Board Investigation and Clawback Penalties
• The Wells Fargo board conducted an independent investigation, revealing deeper executive involvement
• Total clawback amount: $183 million
• $69 million from former CEO John Stumpf
• $66 million from former retail banking head Carrie Tolstedt ◦ $32 million from eight bank operating committee members, including current CEO Tim Sloan
• $15.5 million from four retail banking executives fired in 2017
• Executives' Role and Toxic Culture
• Carrie Tolstedt's leadership fostered an insular culture, where:

Information About Fraudulent Sales Practices

• Information about fraudulent sales practices was either not escalated or actively hidden
• Employee terminations related to aggressive sales tactics were not properly addressed

Impact on Wells Fargo's Business

• Up to 2.1 million unauthorized or fictitious accounts were created
• Severe reputational damage led to losses, employee dissatisfaction, shareholder concerns, and heightened government scrutiny
• CEO Timothy Sloan acknowledged that eliminating product sales goals earlier could have prevented some of the damage

Legal and Political Consequences

• Two congressional hearings scrutinized the bank's actions
• State and federal investigations into Wells Fargo's practices continued

Shareholder Derivative Lawsuit

• A shareholder derivative suit is a lawsuit filed by a shareholder on behalf of a corporation
• It occurs when the corporation has a valid cause of action but has refused to act
• Common when the defendant is a corporate officer or director
• If successful, proceeds go to the corporation, not the shareholder
• Significance: Allows shareholders to sue when corporate management fails to act

Justice Department Policy on Corporate Accountability

• New DOJ policy (2015) prioritizes individual prosecution over corporate settlements
• Companies must turn over evidence against executives to receive credit for cooperation
• Executives held accountable: DOJ aims to prosecute individuals responsible for corporate crimes
• Impact on corporate investigations: Companies cannot protect high-level executives by scapegoating lower-level employees
• Internal investigations conducted by corporate lawyers may become more significant in settlements

Tesla and Direct Sales Model

• Tesla sells cars directly to consumers, bypassing traditional dealership networks
• Retail Presence of stores & galleries operate in 26 states + Washington D.C., while mobile "pop-up" stores (Airstream trailers, shipping containers) expand reach
• Legal Challenges of 48 states restricting or banning direct manufacturer sales where dealership associations have sued Tesla to block direct sales, while court rulings vary

The Federal Trade Commission (FTC) on Tesla and Direct Sales

• The Federal Trade Commission (FTC) supports direct sales, stating it could save consumers 8% per purchase

Ease of Buying a Tesla

• Boston likely has the easiest access due to Massachusetts' more favorable stance on direct sales
• Dallas (Texas) has restrictive laws, requiring buyers to purchase online and take delivery out-of-state
• New Orleans (Louisiana) is unclear but likely faces restrictions similar to Texas

Antitrust Law Overview

• Designed to promote competition and prevent monopolies

Competition

• Competition ensures better pricing, quality, and variety for consumers
• Rising prices indicated anticompetitive behavior, but falling prices can also be problematic

Modern Antitrust Focus

• Lina Kahn, FTC Chair under Biden, re-examined how antitrust applies to big tech
• Focus shifted from consumer prices to: Platform markets and economies of scale over short-term profits Online intermediaries controlling infrastructure their competitors depend on

Historical Context

• Trusts (e.g., Standard Oil) controlled entire industries, leading to the first antitrust laws
• Chris Hughes, Facebook co-founder, argued that Facebook should be broken up
• Lawsuits like those against Google and Facebook highlight ongoing enforcement

Enforcement of Antitrust Laws

• Justice Department
• Civil cases: prohibit conduct
• Criminal cases: fines and jail time
• Political influence affects enforcement
• Federal Trade Commission (FTC) enforces civil actions only
• State Attorneys General can file federal and state actions
• Private Lawsuits: Injunctive relief and treble damages while being required to establish standing by proving injury due to anticompetitive conduct

Key Antitrust Laws

• Sherman Act Section 1 prohibits contracts, combinations, or conspiracies that restrain trade and requires conscious concerted action between two parties

Law of Restraints: The Sherman Act

• Restraints must be unreasonable and determined through a Per Se Rule which is always illegal, or Rule of Reason which uses fact-based analysis

Sherman Act Section 2

• Prohibits monopolization or attempts to monopolize
• Having a monopoly isn't illegal, but leveraging it unfairly is

Clayton Act

• Prevents anticompetitive mergers and acquisitions before they happen
• Mergers that substantially lessen competition or create a monopoly are prohibited

Analysis of Antitrust Violations

• Per Se Violations (Always Illegal): Bid Rigging, Price Fixing, Territorial Divisions, and Group Boycotts
• Courts assess factors such as pro- and anticompetitive effects, industry structure, market power, and history/duration through the Rule of Reason Analysis (Case-by-Case)

Tying Arrangements

• Conditioning the sale of one product on the purchase of another
• Per Se illegal if seller has monopoly power
• The Rule of Reason applies if no monopoly power is present
• Microsoft tied Internet Explorer to Windows OS, creating an unfair advantage

Monopoly Considerations

• A monopoly is legal if it results from: Patents, Natural monopolies (economies of scale), Business acumen or superior product, and Government-granted monopolies (e.g., utilities)
• Illegal when leveraged unfairly (e.g., tying arrangements)

Mergers & Market Share Analysis

• Courts assess mergers by defining Product Market combined with Geographic Market to calculate Market Share
• Post-merger market share exceeding 50% is problematic

Example Cases of Market Share Analysis

• Kroger-Albertsons Merger: Government sued to prevent reduced competition.
• CHI Franciscan-West Sound Orthopedics: Settlement required would restore competition

Predatory Pricing

• Selling below cost to eliminate competition and illegal if intent is to monopolize

US. v. Google Antitrust Case

• Federal Judge Amit Mehta ruled is a monopolist and acted illegally to maintain its monopoly.
• The ruling follows an antitrust lawsuit filed by the Justice Department in 2020, joined by 38 state attorneys general. The government accused Google of orchestrating business deals to ensure its search engine dominance.
• After a 10-week trial and closing arguments in May 2024, the judge found that Google acted illegally.

Key Findings from Google's case

• Google has dominated general search for over 15 years, making it synonymous with search
• This highlights how tech companies amass power and influence daily-used products with Google's ruling possibly having lasting effect on tech giants' business practices
• Attorney General Merrick Garland emphasized that no company is above the law which will continue enforcing antitrust laws

Google's Response

• Google plans to appeal the ruling
• Kent Walker, Google's president of global affairs, argued that the ruling acknowledges Google's superiority but unfairly restricts its ability to distribute search engine
• Google controls 90% of the U.S. search engine market and assembled a massive legal team to fight the case Google's defense claims its search product dominates due to its quality, not illegal tactics
• Tech executives testified, including Google CEO Sundar Pichai and Microsoft CEO Satya Nadella Internal documents, redacted evidence, and alleged destruction of employee chat logs occurred during the trial

Exclusive Agreements & Anti-Competitive Practices

• Google paid billions annually to phone manufacturers and web browsers to be the default search engine
• In 2021, In 2021, Google spent $26.3 billion on these deals, with Apple receiving $18 billion
• Judge Mehta ruled that these agreements gave Google a “major, largely unseen advantage" over competitors in this action which DuckDuckGo's VP Kamyl Bazbaz welcomed the decision

Google and Future Remedies

• Mehta's ruling does not include immediate penalties & it will undergo a separate trial to determine remedies
• Possible remedies include: Fines, forcing Google to cancel exclusive contracts with Apple, Samsung, etc, and restructuring Google's business practices
• Appeals could delay enforcement of any remedies

Wider Implications for Big Tech

• This sets precedent for other antitrust lawsuits against Amazon, Apple, and Meta
• Bill Kovacic, former FTC chair, said this case is a “crucial foundation" for prosecuting dominant tech

Kroger-Albertsons situation

Judges blocked the $24.6 billion Kroger-Albertsons merger in two separate cases

• Federal case ruled in favor of the Federal Trade Commission, halting the merger for administrative review with the Washington state case finding the merger violated consumer-protection laws and a third lawsuit is still pending in Colorado

Companies Involved in Kroger and Albertsons Case

• Kroger operates Ralphs, Harris Teeter, Fred Meyer, and King Soopers
• Albertsons operates: Safeway and Vons
• Together, having 5,000 stores that employ 720,000 workers across 48 states

FTC & States regarding the Kroger-Albertsons Situation

• Reduce competition, leading to higher food prices for consumers and fewer choices for shoppers and workers
• Two chains are major rivals in many markets, making the merger particularly harmful
• Public opposition: FTC received 100,000 comments against the merger
• Labor unions voiced concerns claiming the merger could have resulted in give too much power on wages and benefits

Kroger & Albertsons' Arguments for Consolidation

• Argue the merger is necessary to compete with larger retailers like Walmart, Costco, and Amazon
• Their claims were they would help lower prices by increasing negotiation power with suppliers
• Assert that FTC's competition model focused with local grocery options rather than big-box stores and online competitors
• Unionized workforce argument: Strengthening against non-unionized competitors

Key Concerns Over Store Divestitures of Kroger and Albertsons

• Kroger and Albertsons planned to sell 579 stores to C&S to prevent antitrust issues
• FTC challenged this plan, citing has only 23 stores, mainly Piggly Wiggly, with little experience in large-scale grocery operations
• C&S internal documents have expressed concerns about store quality
• Prior historical precedent showed that previous companies failing after acquisition

Future Implications of Kroger and Albertsons

• Kroger & Albertsons can appeal or abandon the consolidation situation
• Pending decision in Colorado case could impact next steps with a FTC win strongly potentially influencing future retail mergers

Kroger-Albertsons Merger Blocked

• A $24.6 billion merger between Kroger and Albertsons has been blocked in two separate rulings
• The Federal Trade Commission of FTC + states opposed consolidation, citing concerns over higher prices and reduced competition
• A state ruling showed that consumers were harmed while others pushed pause on any process

Monopsony & Penguin Random House-Simon & Schuster Consolidation

• Penguin Random House or PRH wanted to buy Simon & Schuster for $2 billion

The result of any Penguin Random House-Simon & Schuster Consolidation

• A lawsuit was filed by the DOJ blocking the action citing harm to authors due to major market shifts potentially creating a price gouging environment

New Era, Antitrust Enforcement Shift

• Traditional antitrust enforcement used to focus on consumer welfare (prices, choice) only which shifted a new era and current focus on protecting the worker's wages via the Executive Order 2021 that promotes competition while combating said monopsonies by shifting new actions in various sectors like teaching or medicine

Yale Law Review Article on Amazon's Antitrust Violations

• Critique of Current Antitrust Framework has many faults due to consumer welfare now encompassing short-term vs a long term view

Faults of Amazon

• Integration across distinct business lines may be anticompetitive and should be better addressed in antitrust law
• There are concerns of predatory pricing to eliminate smaller business out of existence

Google Acted Illegally

• A federal judge ruled Google acted to maintain its monopoly over search, and their Google's practices of paying others to make Google the default search engine, was illegal

Google and Monopoly Characteristics

• The ruling showed Google was found to have abused its monopoly power in order to secure its dominance
• In addition, Apple and Samsung, which prevented rivals from effectively competing, showed many faults to the market

Explore business organizations, government roles, and antitrust laws. Also learn about business creation for economic benefits, legal relationships, and investor protection. Understand tax implications, liability, and choosing the right business structure.