Corporations Study Checklist PDF

**Corporations Study Checklist** +---------+---------+---------+---------+---------+---------+---------+ | **\#** | **Topic | **Assig | **Textb | **PPT** | **Cards | **Outli | | | ** | nment** | ook** | | ** | ne** | +=========+=========+=========+=========+=========...

**Corporations Study Checklist** +---------+---------+---------+---------+---------+---------+---------+ | **\#** | **Topic | **Assig | **Textb | **PPT** | **Cards | **Outli | | | ** | nment** | ook** | | ** | ne** | +=========+=========+=========+=========+=========+=========+=========+ | (#cl | Corpora | 1-8 | X | X | | | | ass-1) | tions | | | | | | | | & Other | | | | | | | | Busines | | | | | | | | s | | | | | | | | Organiz | | | | | | | | ations | | | | | | +---------+---------+---------+---------+---------+---------+---------+ | (#cl | Introdu | 125-145 | X | X | | | | ass-2) | ction | | | | | | | | to the | | | | | | | | Corpora | | | | | | | | tion | | | | | | +---------+---------+---------+---------+---------+---------+---------+ | (#cl | Agency | 11-54 | X | X | | X | | ass-3) | Essenti | | | | | | | | als | | | | | | +---------+---------+---------+---------+---------+---------+---------+ | (%5C | Partner | 57-94 | X | X | | | | l) | ship | | | | | | | | Essenti | | | | | | | | als | | | | | | +---------+---------+---------+---------+---------+---------+---------+ | (#cl | LLCs | 95-122 | X | X | | | | ass-5) | Essenti | | | | | | | | als | | | | | | | | & | | | | | | | | Choice | | | | | | | | of | | | | | | | | Organiz | | | | | | | | ational | | | | | | | | Form | | | | | | +---------+---------+---------+---------+---------+---------+---------+ | (#cl | The | 145-156 | X | X | | | | ass-6-7 | Process | | | | | | | ) | of | DE | | | | | | | Incorpo | code: | | | | | | | ration | 101, | | | | | | | | 102, | | | | | | | | 121, | | | | | | | | 122 & | | | | | | | | 106-109 | | | | | +---------+---------+---------+---------+---------+---------+---------+ | (#cl | The | 156-165 | X | X | | | | ass-6-7 | doctrin | & | | | | | | ) | e | 169-171 | | | | | | | of | , | | | | | | | "intern | excerpt | | | | | | | al | 219-232 | | | | | | | affairs | | | | | | | | " | DE | | | | | | | & | code: | | | | | | | officer | 142 | | | | | | | s' | | | | | | | | authori | | | | | | | | ty | | | | | | +---------+---------+---------+---------+---------+---------+---------+ | (#cl | Directo | Excerpt | X | X | | | | ass-8) | r | 232-239 | | | | | | | authori | (proble | | | | | | | ty | m | | | | | | | and | on 235) | | | | | | | formali | | | | | | | | ties | DE | | | | | | | of | code: | | | | | | | directo | 109, | | | | | | | r | 141, | | | | | | | action | 229 | | | | | +---------+---------+---------+---------+---------+---------+---------+ | (#_C | Corpora | 251-264 | X | X | | | | lass_9) | te | & | | | | | | | securit | 273-286 | | | | | | | ies, | | | | | | | | capital | DE code | | | | | | | structu | (skim): | | | | | | | re, | 151-154 | | | | | | | dividen | , | | | | | | | d | 160-162 | | | | | | | policy, | , | | | | | | | and | 170, | | | | | | | stock | 172-174 | | | | | | | redempt | , | | | | | | | ions | 244 | | | | | +---------+---------+---------+---------+---------+---------+---------+ | (#c | "Pierci | 173-202 | X | X | | | | lass-10 | ng | | | | | | | ) | the | | | | | | | | corpora | | | | | | | | te | | | | | | | | veil" | | | | | | +---------+---------+---------+---------+---------+---------+---------+ | (#c | Shareho | 557-579 | X | X | | | | lass-11 | lder | | | | | | | ) | authori | DE | | | | | | | ty | code: | | | | | | | and | 109, | | | | | | | formali | 112, | | | | | | | ties | 113, | | | | | | | of | 211, | | | | | | | shareho | 212, | | | | | | | lder | 216, | | | | | | | action | 222, | | | | | | | | 223, | | | | | | | | 228, | | | | | | | | 251-253 | | | | | | | | , | | | | | | | | 262, | | | | | | | | 242, | | | | | | | | 271, | | | | | | | | 275 | | | | | | | | | | | | | | | | Securit | | | | | | | | ies | | | | | | | | Act of | | | | | | | | 1934 | | | | | | | | rules: | | | | | | | | 14a-7, | | | | | | | | 14a-8, | | | | | | | | 14a-9 | | | | | +---------+---------+---------+---------+---------+---------+---------+ | [11.5]( | Shareho | 611-623 | X | X | | | | #class- | lder | & | | | | | | 11.5) | inspect | 630-637 | | | | | | | ion | | | | | | | | rights | DE | | | | | | | & the | code: | | | | | | | role of | 220 | | | | | | | the | | | | | | | | shareho | Securit | | | | | | | lder | ies | | | | | | | and | Act of | | | | | | | federal | 1934 | | | | | | | regulat | rules: | | | | | | | ion | 14a-7, | | | | | | | of the | 14a-8, | | | | | | | proxy | 14a-9 | | | | | | | process | | | | | | +---------+---------+---------+---------+---------+---------+---------+ | (#c | Theorie | 421-448 | X | X | | | | lass-12 | s | | | | | | | ) | of the | *Total | | | | | | | corpora | Governa | | | | | | | tion | nce* | | | | | +---------+---------+---------+---------+---------+---------+---------+ | (#c | Directo | 322-327 | X | X | | | | lass-13 | rs' | & | | | | | | ) | Duty of | 296-317 | | | | | | | Care | | | | | | | | and the | | | | | | | | Busines | | | | | | | | s | | | | | | | | Judgmen | | | | | | | | t | | | | | | | | Rule | | | | | | +---------+---------+---------+---------+---------+---------+---------+ | (#c | The | *In Re | X | X | | | | lass-14 | Duties | Walt | | | | | | ) | to | Disney* | | | | | | | Avoid | | | | | | | | Waste | *Miller | | | | | | | and | v. | | | | | | | Illegal | AT&T* | | | | | | | ity | | | | | | +---------+---------+---------+---------+---------+---------+---------+ | (#c | Insulat | 318-322 | X | X | | | | lass-15 | ion | & | | | | | | ) | of | 543-556 | | | | | | | Directo | | | | | | | | rs | | | | | | | | from | | | | | | | | Liabili | | | | | | | | ty | | | | | | | | for | | | | | | | | Breach | | | | | | | | of Duty | | | | | | +---------+---------+---------+---------+---------+---------+---------+ | (#c | The | 386-403 | X | X | | | | lass-16 | BJR, | | | | | | | ) | Good | | | | | | | | Faith, | | | | | | | | and | | | | | | | | Monitor | | | | | | | | ing | | | | | | +---------+---------+---------+---------+---------+---------+---------+ | (#c | Directo | *Shlens | X | X | | | | lass-17 | rs' | ky | | | | | | ) | Duty of | v. | | | | | | | Loyalty | South | | | | | | | and | Parkway | | | | | | | Interes | Bldg. | | | | | | | ted | Corp.* | | | | | | | Transac | | | | | | | | tions | *Marcia | | | | | | | | no | | | | | | | | v. | | | | | | | | Nakash* | | | | | | | | | | | | | | | | 342-352 | | | | | | | | | | | | | | | | DE | | | | | | | | Code: | | | | | | | | 144 | | | | | +---------+---------+---------+---------+---------+---------+---------+ | (#c | The | 360-371 | X | X | | | | lass-18 | Duty of | | | | | | | ) | Loyalty | *In Re | | | | | | | , | Walt | | | | | | | Opportu | Disney* | | | | | | | nities, | | | | | | | | and | DE | | | | | | | Executi | Code: | | | | | | | ve | 144 | | | | | | | Compens | | | | | | | | ation | | | | | | +---------+---------+---------+---------+---------+---------+---------+ | (#c | Duties | 639-657 | X | X | | | | lass-19 | of | | | | | | | ) | Control | | | | | | | | ling | | | | | | | | Shareho | | | | | | | | lders | | | | | | | | Part 1 | | | | | | | | (Intere | | | | | | | | sted | | | | | | | | Transac | | | | | | | | tions) | | | | | | +---------+---------+---------+---------+---------+---------+---------+ | (#c | Duties | Excerpt | X | X | | | | lass-20 | of | : | | | | | | ) | Control | 903-924 | | | | | | | ling | | | | | | | | Shareho | | | | | | | | lders | | | | | | | | Part 2 | | | | | | | | (Sale | | | | | | | | of | | | | | | | | Control | | | | | | | | ) | | | | | | +---------+---------+---------+---------+---------+---------+---------+ | (#c | Shareho | 655-663 | X | X | | | | lass-21 | lders' | | | | | | | ) | Duties | | | | | | | | in | | | | | | | | Close | | | | | | | | Corpora | | | | | | | | tions | | | | | | +---------+---------+---------+---------+---------+---------+---------+ | (#c | An | 497-500 | X | X | | | | lass-22 | Introdu | & | | | | | | ) | ction | 505-521 | | | | | | | to | | | | | | | | Shareho | Excerpt | | | | | | | lder | : | | | | | | | Derivat | 511-519 | | | | | | | ive | | | | | | | | Actions | | | | | | | | and the | | | | | | | | Demand | | | | | | | | Require | | | | | | | | ment | | | | | | +---------+---------+---------+---------+---------+---------+---------+ | (#c | Duties | 702-722 | X | X | | | | lass-23 | To | | | | | | | ) | Whom? | | | | | | | | Redux: | | | | | | | | Directo | | | | | | | | r's | | | | | | | | Duties | | | | | | | | in | | | | | | | | Selling | | | | | | | | Control | | | | | | | | (Part | | | | | | | | I) | | | | | | +---------+---------+---------+---------+---------+---------+---------+ | 24 | Duties | 723-737 | X | | | | | | To | | | | | | | | Whom? | | | | | | | | Redux: | | | | | | | | Directo | | | | | | | | r's | | | | | | | | Duties | | | | | | | | in | | | | | | | | Selling | | | | | | | | Control | | | | | | | | (Part | | | | | | | | II) | | | | | | +---------+---------+---------+---------+---------+---------+---------+ [Class 1 7](#class-1) [Introduction to the Corporation 7](#introduction-to-the-corporation) [What is a Corporation? 7](#what-is-a-corporation) [Corporation Characteristics and Relevant Issues 8](#corporation-characteristics-and-relevant-issues) [Where do you find corporate law? 8](#where-do-you-find-corporate-law) [Players in Corporations 8](#players-in-corporations) [Textbook Overview 9](#textbook-overview) [Class 2 12](#class-2) [Corporation Basics 12](#corporation-basics) [History of corporate law 12](#history-of-corporate-law) [Fundamentals of the Corporation 13](#fundamentals-of-the-corporation) [Eight Questions 16](#eight-questions) [Corporations: Characteristics and Relevant Issues 16](#corporations-characteristics-and-relevant-issues) [Equity v Debt 17](#equity-v-debt) [The Corporate Arenas 17](#the-corporate-arenas) [Formal Powers of Shareholders v. Directors & Officers 18](#formal-powers-of-shareholders-v.-directors-officers) [What is Agency? 18](#what-is-agency) [Shareholder voting 19](#shareholder-voting) [Class 3 20](#class-3) [Agency Overview 20](#agency-overview) [Formation of Agency Relationship 20](#formation-of-agency-relationship) [Rights and Duties Between Principal and Agent 21](#rights-and-duties-between-principal-and-agent) [Agency Triangle 22](#agency-triangle) [Contract Liability: Principals 23](#contract-liability-principals) [Express v Implied Agency 23](#express-v-implied-agency) [Principal's Consent (Rest. 3d § 8.06) 23](#_Toc183348248) [Principal's Liability to 3^rd^ Parties in Contract 24](#_Toc183348249) [Agent's Liability to 3^rd^ Parties in Contract 25](#_Toc183348250) [Class 4 26](#class-4) [Intro to Partnerships 26](#intro-to-partnerships) [Partnership Formation (RUPA § 202) 26](#partnership-formation) [Martin v Peyton (NY Ct. of App. 1927) 26](#martin-v-peyton-ny-ct.-of-app.-1927) [Fiduciary Duties in Partnership 27](#default-fiduciary-duties-and-information-rights) [Default Partnership Management Rights 28](#_Toc183348256) [Default Partnership Liability 29](#_Toc183348257) [Partnership Property 29](#_Toc183348258) [Transferable Interest 30](#_Toc183348259) [Finance 30](#_Toc183348260) [Dissociation 31](#dissociation-and-dissolution) [Review of Partnership Agreements 32](#review-of-partnership-agreements) [Other Partnership Forms 32](#section-5) [Class 5 34](#class-5) [Overview 34](#overview) [Sources of Law 35](#sources-of-law) [Formation 35](#formation) [Limited Liability and Veil Piercing Exception 36](#limited-liability-and-veil-piercing-exception) [Management 37](#management) [Finance 37](#finance) [Information Rights 38](#information-rights) [Direct and Derivative Litigation 38](#direct-and-derivative-litigation) [Dissociation and Dissolution (RULLCA) 38](#dissociation-and-dissolution-rullca) [Takeaways 39](#takeaways) [Choice of Organizational Form 39](#choice-of-organizational-form) [Corporations: Characteristics and Relevant Issues 40](#corporations-characteristics-and-relevant-issues-1) [Class 6 & 7 41](#class-6-7) [The Process of Incorporation 41](#the-process-of-incorporation) [Certificate of Incorporation 41](#_Toc183348279) [Commencement of Corporate Existence 43](#_Toc183348280) [Organization Meeting of Incorporators or Directors Named in Certificate of Incorporation 43](#_Toc183348281) [Defective Incorporation: Three Approaches 43](#defective-incorporation-three-approaches) [What state should you incorporate in? 44](#what-state-should-you-incorporate-in) [McDermott v. Lewis (Del. Supremes 1987) 44](#mcdermott-v.-lewis-del.-supremes-1987) [Section 160 44](#section-160) [Wilson v. Louisiana-Pacific Resources, Inc. 45](#wilson-v.-louisiana-pacific-resources-inc.) [Formal Powers of Shareholders v. Directors & Officers (a primer) 45](#formal-powers-of-shareholders-v.-directors-officers-a-primer) [Two Basic Agency Problems 46](#two-basic-agency-problems) [Authority 46](#authority) [Class 8 47](#class-8) [Directors' Powers 47](#directors-powers) [Problems 47](#_Toc183348292) [Protective Procedures and Efficiency Procedures 47](#protective-procedures-and-efficiency-procedures) [Class 9 48](#_Class_9) [What is a "security"? 48](#what-is-a-security) [Howey Test (for interests in unincorporated entities) 48](#howey-test-for-interests-in-unincorporated-entities) [Equity v Debt 48](#equity-v-debt-1) [The Corporate Arenas 49](#the-corporate-arenas-1) [Par Value and Authorized Shares 49](#par-value-and-authorized-shares) [The Balance Sheet 49](#the-balance-sheet) [Dividend Rules 50](#dividend-rules) [Class 10 51](#class-10) [Limited liability 51](#limited-liability) [BOBO 51](#bobo) [Arguments for Limited Liability 51](#arguments-for-limited-liability) [Piercing the Veil 52](#piercing-the-corporate-veil) [Class 11 53](#class-11) [Shareholder voting (8 Del. C. §) 53](#shareholder-voting-8-del.-c.) [What can shareholders initiate? 53](#what-can-shareholders-initiate) [Auer v. Dressel (306 NY 427, 1954) 54](#auer-v.-dressel-306-ny-427-1954) [Campbell v. Loews, Inc. (Del. Ch. 1957) 54](#campbell-v.-loews-inc.-del.-ch.-1957) [CA \[Computer Associates\] v. AFSCME Employees' Pension Plan (Del. 2008) 56](#ca-computer-associates-v.-afscme-employees-pension-plan-del.-2008) [Blasius v. Atlas Corp (Del. Ch. 1988) 57](#blasius-v.-atlas-corp-del.-ch.-1988) [Class 11.5 58](#class-11.5) [Saito v McKesson HBOC 58](#saito-v-mckesson-hboc) [Class 12 60](#class-12) [Class 13 61](#class-13) [Francis v. United Jersey Bank (NJ 1981) 61](#francis-v.-united-jersey-bank-nj-1981) [Smith v Van Gorkom (Del. 1985) 62](#smith-v-van-gorkom-del.-1985) [Class 14 66](#class-14) [In re Walt Disney 66](#in-re-walt-disney-2006) [Miller v AT&T 66](#miller-v-american-telephone-telegraph-co.) [Class 15 68](#class-15) [Are you ready to be a director? 68](#are-you-ready-to-be-a-director) [Exculpation §102(b)(7) 68](#exculpation-102b7) [Indemnification §145 69](#indemnification-145) [Insurance 70](#do-insurance) [Class 16 72](#class-16) [Bad Faith/Duty to Monitor Cases 72](#_Toc183348329) [In Re Caremark (Del. Ch. 1996) 72](#in-re-caremark-del.-ch.-1996) [Stone v. Ritter (Del. 2016) 72](#stone-v.-ritter-del.-2016) [Class 17 74](#class-17) [Shlensky v. South Parkway Building Corp. 74](#shlensky-v.-south-parkway-building-corp.) [Marciano v. Nakash (Del. Supremes 1987) 76](#marciano-v.-nakash-del.-supremes-1987) [Class 18 78](#class-18) [Taking corporate opportunities- tests 78](#taking-corporate-opportunities--tests) [Directors' Compensation 79](#directors-compensation) [Executives' Compensation 79](#executives-compensation) [Class 19 81](#class-19) [Sinclair Oil Corp v. Levien (Del. 1971) 81](#sinclair-oil-corp-v.-levien-del.-1971) [Weinberger v UOP 82](#weinberger-v-uop) [Class 20 84](#class-20) [Control & Premium 84](#control-premium) [Harris v Carter (Del. Ch 1990) 84](#harris-v-carter-del.-ch-1990) [Perlman v Feldman (2^nd^ Cir. 1955 inter Indiana law) 85](#perlman-v-feldman-2nd-cir.-1955-inter-indiana-law) [Class 21 87](#class-21) [MC Inc. 87](#mc-inc.) [Provisions for Closely-Held Companies 87](#provisions-for-closely-held-companies) [Class 22 89](#class-22) [Tri-State v. Zuckerberg 89](#tri-state-v.-zuckerberg) [Special Litigation Committee 90](#special-litigation-committee) [Auerbach v. Bennett (NY 1979) 90](#auerbach-v.-bennett-ny-1979) [Zapata v. Maldonado (Del 1981) 90](#zapata-v.-maldonado-del-1981) [Class 23 92](#class-23) [Directors' Duty of Care in Change of Control Situations 92](#directors-duty-of-care-in-change-of-control-situations) [Unocal v. Mesa Petroleum (Del. 1985) 92](#unocal-v.-mesa-petroleum-del.-1985) [Revlon v. MacAndrews & Forbes (Del. 1985) 93](#revlon-v.-macandrews-forbes-del.-1985) [Duty of care when pursuing a fiduciary takeover 94](#duty-of-care-when-pursuing-a-fiduciary-takeover) [Air Products v. Airgas (Del. Ch. 2011) 94](#air-products-v.-airgas-del.-ch.-2011) Class 1 ======= Corporations & Other Business Organizations \[1-8\] --------------------------------------------------- ### Introduction to the Corporation - Nature and origins of corporations - Corporations have a partly-private-partly-public nature - Corporate form invented in Rome - Power of corporations - Walmart generates more revenues than Spain - Nation States vs corporations - If corporate revenues were compared to tax revenues, corporations would present 71 of the top 100 revenue generators in the world - Fortune 500 companies - 2022 revenues: \$16.1 trillion - 2022 profits: \$1.8 trillion - Intermediated investing & institutional investors - 70% of public companies' shares held by institutional investors - 92% of shares held by institutional investors are voted - The Big Three have asses under management worth \$20 trillion, which is more than China's GDP - BlackRock - Vanguard - State Street ### What is a Corporation? - A legal person - With infinite life - That does business - With limited liability - Through delegated management - With many investors - Public corporations and private corporations - Public - Anyone can buy shares in their stock - Often traded on exchanges (e.g., NYSE and NASDAQ) - Few controlling shareholders - SEC disclosure - Generally big - Private/close - "restricted" shares - Have controlling shareholders - No Federal disclosure - Most are small (but some can be very big ### Corporation Characteristics and Relevant Issues - Legal personality - Process of incorporation - Corporate rights - Infinite life - Fundamental changes - How do they raise and distribute \$\$\$? - Capitalization: equity v debt - Dividend rules/rights of securities holders - Limited liability - Piercing the veil - Who controls? - Organization structure - Directors, shareholders, officers - Director powers - Shareholder voting: proxy rules (SEC) - Delegated management - Power of human agents - Fiduciary duties: loyalty & care - Fiduciary duties and derivative suits - Executive compensation - Many equity investors - Shareholders' fiduciary duties - Purchases of control - What purpose? - Ultra vires/social role of corporations ### Where do you find corporate law? - External: - US Constitution - Federal Statutes - State Constitution - State Statues (mostly Delaware) - Internal: - Articles of incorporation/characters - By laws - Private contracts ### Players in Corporations - Sources of financing: - Shareholders - Individual (about 30%) - Institutional investors (about 70%) - Pension funds - Mutual funds - Hedge funds, foreign, private equity, etc. - Debtholders - Mostly institutions - Pension funds, mutual funds, hedge funds, insurance companies - Control rights: - Shareholders - Directors - Insiders - Independent/outside - Officers - CEO - ***Secretary*** - CFO - CAO (comptroller) - CLO (general counsel) - COO/ "President" - CIO - Plus endless vice presidents ### Textbook Overview - Un-corporations - Partnerships - Formed by operation of law - Partnership duties - Default form of partnership -\> unlimited personal liability - LLCs - Members vs managers - Contractual form of doing business - Principal-agent relationships - Agents owe fiduciary duties to principals - Actual vs apparent authority - Principal liability to 3^rd^ parties - Corporations - Key characteristics - Centralized management - Limited liability - -\> piercing the corporate veil - Holds shareholders liable for tort and contract violations - Reverse veil piercing - Takes away limited liability - Main actors - Formation - Judicial concepts - Equitable review - Internal affairs doctrine - Accounting and valuation - 3 financial statements - Balance sheet - Capital structure - Equity vs debt - Preferred stock and options - Taxes and bankruptcy - Income statement - Cash flow statement - Directors and officers - Duty of care - Business judgement rule - Exculpation - Duty of loyalty - Conflicts of interest - Corporate opportunity doctrine - 2^nd^ version of duty - 2 key concepts: good faith and oversight - DE law - Caremark claims - Stakeholders - Corporations purpose in society - Social responsibility and ESG - Shareholders - Rights - Vote - Voting procedures - Shareholder activism - Sue - Derivative and direct forms of litigation - Sell - Right to obtain information - Duties - Controlling shareholders - Intra-group transactions - Cash-out transactions - Oppression in closely held corporations - Sale of control for a premium - Markets - Mergers and acquisitions - Deal structures - Fiduciary duties of directors - Unocal standard vs Revlon standard - Securities class action litigation - Rule 10b-5 under Section 10(b) of 1934 Act - 3 elements: - Materiality of alleged misrep. - Scienter (state of mind) of any defendants - Reliance of shareholders in public markets on alleged misrep. - Insider trading - 3 SC cases that defined the law - Classical theory vs misappropriation theory Class 2 ======= Introduction to the Corporation \[125-145\] ------------------------------------------- ### Corporation Basics - 2 categories of judicial doctrines important to corporate law: - Internal affairs - Courts use for determining which state's law applies to a corp - Equitable principles - Courts reference in disputes involving corps ### History of corporate law - England had joint stock companies - Ex: East India Company - Similar characteristics of modern corporations - Earliest US corps were mostly non-business entities - Churches, charities, municipalities - Corporate charter was a privilege - Incorporation became an economic necessity -\> states enacted general corporation laws - **Corporation = person (with similar legal attributes)** - Own property - Enter into contracts - Sue and be sued in its own name - Held liable for debts - *Trustees of Dartmouth College v Woodward* - Holding: Contracts clause of US Constitution protects private corporations from state interference with corporations' contractual obligations - Concurrence suggested that states could avoid this restriction by granting future charters subject to a reserved right to amend them - **-\> all states reserve the power to amend the statutes that govern corporations** - By mid 1800s, most states lifted restrictions on size and duration - Concern over abusing unchecked power, needed regulations - 1860s **shareholder derivate suits** to deal with managers' corruption and fraud - Individual shareholders can sue on behalf of the corporation to enforce corporate duties - Modern statutes allow for broad purpose provision - "purpose of engaging in any lawful business" - Ultra vires (beyond the power) not applicable ### Fundamentals of the Corporation - **Public and private ordering** - Create corp - File articles or certificate of incorporation with state office and pay fees - Shareholders elect BOD - BOD manages business and affairs - Delegated responsibilities to officers and employees - **Fundamental shareholder rights** - Vote, sue and sell - Can be limited - Derivative suit - On behalf of the corporation against its directors where directors have harmed corporation - Breaching duties of care or loyalty - **Characteristics and actors** - Types of corporations - For-profit - Goal: generate wealth to distribute to shareholders - Nonprofit - Goal: variety of purposes, no shareholders - Professional corporations - Benefit corporation - Public vs private - Private/ closely held/ close - Overlap in participants - Public - Freely traded - Shareholders not normally in management - Tax status - Corporation - double taxation (C corp) - Tax on business income - Shareholders tax on dividends or gains - flow through (S corp) - LLC with \< 100 shareholders, one type of stock - Typically private corps - Characteristics - Separate entity from investors - Perpetual existence - Shareholders have no right to withdraw/demand payment - Limited liability - Centralized management - BOD, officers - Transferability of ownership interests - **Sources of corporate law and private ordering** - law - Some federal statutes for corporate activity, no federal corporate law - Mostly state statutes, judicial decisions (fiduciary duties) and privately created governance - Model business corporate act - Delaware general corporation law (DGCL) - Private - Articles of incorporation - Establish corp and have basic provisions required by state - Aka certificate of incorporation or corporate charter - Short (one page), filed with state - Bylaws - Not filed with state, governing details of corporation - Hierarchy - Articles can't conflict with statute - Bylaws cant conflict with statute or articles - **Corporate securities** - Ownership docs are electronic - 3 categories - Common shares - Can have dividends - Last-in-line/ residual claim in dissolution - Right to vote - Preferred shares - Right to dividends - Priority over common shares and less risky - Debt - Least risky, lowest return - Fixed payment interest - Priority over equity in dissolution - Articles of incorp have authorized \# of shares - Need to amend to increase (requires shareholder approval) - Issued shares - BOD can sell authorized but unissued shares without shareholder approval - Outstanding shares - Sold and in hands of investors - Corp can repurchase (treasury shares) in stock buybacks - **Corporate** **actors** - Shareholders - Owners of stock - Passive role, limited voting rights - Elect directors and approve fundamental transactions - Amend articles or bylaws - merger - Directors - Elected by shareholders - Manage business - Owe duties to act on behalf of the corporation - Outside director- no affiliation with corp - Inside director- director and corporate employee (CEO) - Officers - Delegated authority from board - Board selects most senior officers - Stakeholders - Credits, employees, customers and community - **Authority and actions binding Corporation** - Board of directors - Authority as a collective body - Default rules: - majority of directors present for quorum to pass resolution - Bylaws can increase/reduce quorum to no less than 1/3 of board - 2 days notice for special meetings - Delaware: board can act without a meeting with unanimous written consent - Officers - Agency principles apply - Actual authority - Apparent authority - Reasonable belief - Implied based on prior dealings - **Fiduciary Duties** - Duties of care and loyalty - Care: need to be attentive and prudent in making decisions - Loyalty: put corporation's interests ahead of their own - Business judgment rule - Courts defer to judgement of the BOD absent a conflict of interest, bad faith, or gross inattention - Presumptions - Director decisions (1) are informed, (2) made in good faith, and (3) in an honest belief that action is in best interest of the corp. - Creates a presumption that (absent evidence of self-dealing, illegality, or directors not being reasonably informed) all board decisions are intended to advance the interests of the corporation and its shareholders - Insulates board's decision making from shareholder second guessing - Liability to corporation and shareholders - Managers who breach fiduciary duties can be liable for any losses - Shareholders not authorized to act directly for corp - Can't enforce corporate claim against managers - -\> derivative suit fixes this - Derivative suit - Any recovery goes to corporation - Most corps agree to indemnify/insure managers against liability in most suits (class actions) - Duties of shareholders - Generally no fiduciary duties - One major exception - If shareholder exercises control through their ownership, courts often hold that controlling shareholders owe fiduciary duties to other shareholders ### Corporations: Characteristics and Relevant Issues **Sole Proprietor** **Partnership** **Limited Partnership (LP)** **Corporation** **LLC** -------------------------------- --------------------- ----------------------------------- ----------------------------------- --------------------- -------------------------- Needs formal action to create? No No Yes Yes Yes Can take in equity investors? No Yes Yes Yes Yes Who's liable? Proprietor Partners GP only Corp only LLC only Who controls? Proprietor Partners share GP Directors Members (or managers) Duration Until dies Until P dies Until GP dies Perpetual Perpetual (was 30 years) Who gets \$\$ out? Yes Yes No No Optional (unless listed) Entity-level tax No Optional Optional Yes (unless S corp) Optional (unless listed) Investors can sell interest? No No-only assign financial interest No-only assign financial interest Yes Optional ###### Eight Questions - How created? - How raise money? - Who liable? - Who controls? - What duration? - Who gets money out? - Who pays tax? - Can equity investors sell? ###### The Corporate Arenas - Internal: charters, by-laws, contracts - Par value/authorized shares - Dividend rules - "piercing the veil" - Shareholder fiduciary duties ### Equity v Debt - Control rights - Votes - Standing to sue on behalf of the corporation - Economic rights - Priority of periodic payments - Priority of repayment of investment - A screenshot of a computer screen Description automatically generated - Result: conflict among investors ### Formal Powers of Shareholders v. Directors & Officers - Shareholders - Elect \[remove\] the directors - Veto fundamental changes - Merger, sale, amend certificate of incorporation, dissolve - Adopt/amend by-laws - Directors - Ultimately control the corporation - Pick & compensate executives - Declare dividends - Bless "interested" transactions - Initiate fundamental changes - \[maybe\] adopt/amend by-laws - Officers - Run day-to-day ### What is Agency? - Terms - Principal - Agent - Two basic agency problems - Corporation v. Directors & Officers - Principal v. Agent - Corporation (via D&Os) v. 3^rd^ Party - Principal v. Third Parties -  - Fiduciary duties of agents - Duty of loyalty - Duty of care - Duty of obedience? - Duties of principal - Pay agreed compensation - Indemnify - Actual authority and apparent authority - Actual authority - Apparent authority ### Shareholder voting - What shareholders vote on - Elect directors (fill vacancies) - 8 Del.C. § 211(b) - Remove directors - 8 Del.C. § 141(k) - Approve "fundamental changes" - Merge, dissolve, amend articles, sell all assets - 8 Del.C. §§ 251-53, 275, 242, 271 - Adopt, amend, repeal by-laws - 8 Del.C. § 109(a) - Shareholder resolutions - Formalities of shareholder voting - Shareholders vote at annual and special meetings - 8 Del.C. § 211 - Notice required - 8 Del.C. § 222 - Quorum required - 8 Del.C. § 216 - Voting rule - Majority rule (unless art/statute otherwise) - Absolute majority (for fundamental changes) - Plurality for directors (who gets most votes) - 8 Del.C. § 216 - One share, one vote (unless articles provide otherwise) - 8 Del.C. § 212 Class 3 ======= Agency Essentials \[11-54\] --------------------------- ### Agency Overview - Agency law determines the following: - When agency relationship is formed - Duties and obligations between a principal and agent - Legal consequences with 3^rd^ party - Agency exists where: - One person (the Principal) manifests assent to another (the Agent) that A shall act on P's behalf and subject to P's control and A consents so to act - Agency relationships are ubiquitous - E.g., sole proprietor with an employee - Building block/relevant in many types of business relationships - Sources of law - Case law (and a few states have statutory law) - Restatement (case law summary that is very persuasive and influential, but not binding) - Restatement (Third) of Agency - Each state has its own law - statutory (legislature) or case law ### Formation of Agency Relationship ##### Rest. 3d § 1.01 definition of the agency relationship Agency is the fiduciary relationship that arises when one person (a "**principal**") manifests asset to another person (an "**agent**") that the agent shall act on the principal's behalf and subject to the principal's control, and the agent manifests assent or otherwise consents so to act - 2 parties: agent and principal - 3 basic elements: - **1. Mutual assent** - parties mutually agree: - Agent will act on behalf of principal - Agent will be subject to principal's control (Rest. 3d § 1.01) - **Intent** nor awareness of legal consequences required - Determined by parties' outward manifestations from reasonable person pov - NOT inner, subjective thoughts - Each party needs to objectively manifest assent - Via words or conduct - Can infer based on circumstance - Commercial setting (contract) not required, promise to act gratuitously counts - Parties' labeling and popular usage is not controlling (Rest. 3d § 1.02) - **2. Control** - Is principal "in charge" or able to instruct agent? - Power and right to direct agent regarding goal of relationship - **3. Acting on behalf of a principal** - Principal wants someone else to take action on their behalf - Agent acting in representative capacity or to further principal interests #### A Gay Jenson Farms Co. v. Cargill, Inc. - SC of Minnesota holding - a creditor that assumes significant control of the debtor's business may become liable as principal for the acts of the debtor-agent - Reasoning: - Cargill's intrusion went far beyond the typical debtor-creditor relationship. Cargill's close oversight and control indicated a relationship akin to that of principal and agent ### Rights and Duties Between Principal and Agent - Once relationship is created, parties owe each other certain obligations and duties under the law ##### Rest. 3d § 8.14 & 8.15: Principal's obligations to agent - 8.14 - P has duty to indemnify A for the terms of any contract between them, when A makes a payment within scope of actual authority, or that is beneficial to P unless A acts officiously in making the payment, or when A suffers a loss that fairly should be borne by P in light of their relationship - 8.15 - P has a duty to deal with A fairly and in good faith - P should generally cooperate with agent and not unreasonably interfere with agent's duties ###### Agent's Fiduciary Duties to Principal - Not just obligations -\> fiduciary duties - Fiduciary = someone who has special relationship of trust, confidence, or responsibility in certain obligations to others - Put other's interest ahead of their own - Protects against negligence or disloyalty - Agency costs - Theory explaining relationships between principals and agents - When agent's interests diverge from principals - Can be minimized but still residual - Fiduciary duties = "gap fillers" to reduce agency costs - Agent is fiduciary for matters within scope of agency relationship - []{#_Toc183348248.anchor}**Principal's Consent (Rest. 3d § 8.06)** - Conduct by A that would otherwise breach the below-listed duties does not constitute a breach if P consents, provided that A acts in good faith and discloses all material facts in obtaining the consent - Duty of loyalty - Duty not to acquire material benefit from a T - Duty not to act adverse or compete - Duty of confidentiality - If breached without consent from fully informed principal -\> agent **liable** for resulting damages - Could also be liable to disgorge any profit agent made from breach ##### Rest. 3d §§ 8.01-8.11: Agent's Duties to Principal - **Duty of loyalty** - Can't put their own interests ahead of principals when acting within agency relationship - Duty not to acquire a material benefit from a T for actions taken on behalf of P through A's use of position - Duty not to act as adverse party to P - Duty to refrain from competing with P during agency relationship - Duty to not use P's property for A's own purposes - **Duty of care, competence, diligence** - If agent is specialist, heightened level of care - Duty to act in accordance with any contract with P - Duty to act only within scope of actual authority and duty to obey - Duty of good conduct - **Duties relating to information** - Duty of **confidentiality** - Even after termination - Relay information principal would want to know - Provide facts that are material to agent's duties #### General Automotive Manufacturing Co. v. Singer - Wisconsin Supreme Court Holding - An employee's secret operation of a side business that competes with the employer is a breach of fiduciary duty - Reasoning: - Agent owes a fiduciary duty to an employer - Exercise good faith and loyalty, acting in further and advance employer's interests - Can't act adversely to employer's interests or use position to acquire a private interest ### Agency Triangle A black and white image of a triangle Description automatically generated - Why does it matter if there is an agency relationship between P & A? - A owes fiduciary duties to P and P has certain obligations to A - A's dealings with T can create legal liability between P & T ### Contract Liability: Principals - 5 ways principal can be liable for actions of agent: - 1\. Actual authority - 2\. Apparent authority - 3\. Undisclosed principal liability - 4\. Ratification - 5\. estoppel ##### Rest. 3d § 2.01: Actual Authority An agent acts with actual authority when, at the time of taking action that has legal consequences for the principal, the agent reasonably believes, in accordance with the principal's manifestations to the agent, that the principal wishes the agent so to act - Authority **agent reasonably believes** they have based on principal's manifestations (words or other conduct) - Inference: reasonable person belief standard - Looks at A's reasonable belief based on P's manifestations, and includes acts necessary or incidental to accomplish P's objectives, as A reasonably understands - Includes custom or past dealings -  - Can be express or implied ###### Express v Implied Agency - Express - An agency that occurs when a principal and an agent expressly agree to enter into an agency agreement with each other - E.g., exclusive agency contract, power of attorney - Express agency contracts can be either oral or written unless the Statute of Frauds stipulates that they must be written - Implied - There doesn't have to be specific mention of "agency" or a written agreement for an agency relationship to exist - An agency relationship can be implied from the conduct of the parties - The extent of the agent's authority is determined from the particular facts and circumstances of the particular situation #### Mill St. Church of Christ v. Hogan - Kentucky Holding: - Implied authority exists when the principal acts in a way that would lead the agent to reasonably believe that the principal intended for the agent to have such authority - Reasoning: - Implied authority = actual authority the principal intended the agent to possess and includes such powers as are practically necessary to carry out the duties actually delegated - Determined by agent's understanding of their authority - Look at parties' present and past conduct + nature of the task or job ##### Rest. 3d § 2.03: Apparent Authority When a **third party reasonably believes** the actor has authority to act on behalf of the principal and that belief is traceable to the principal's manifestation #### - Doctrine that protects reasonable beliefs of third parties - A triangle with a line drawn on it Description automatically generated - Can be basis for liability when agent acts beyond scope of actual authority or when there's no true agency relationship - \*\*Based on what 3^rd^ party reasonably believes principal authorized agent to do #### Ophthalmic Surgeons, Ltd. v. Paychex, Inc. - 1^st^ Circuit Holding: - Principal is liable for the actions of its agent taken within the scope of the agent's apparent authority, even if the actions exceed the scope of the agent's actual authority - Reasoning: - Principal inaction when agent deviates from actual authority can have the appearance that agent's authority does allow for agent's actions ##### Rest. 3d § 2.06: Undisclosed Principal Liability 1. An undisclosed principal is liable for its agent's actions- acting without actual authority- if a third party detrimentally relies on the agent and the principal has **notice and does not take reasonable steps** to notify the third party of the facts 2. An undisclosed principal can't rely on narrowing an agent's authority to less than what a third party would reasonably believe the agent to have under the same circumstances if the principal has been disclosed - Formerly broader concept of "inherent agency power" in Rest. 2d. - When 3^rd^ person isn't aware that they are dealing with agent acting on behalf of a principal - Protects third parties by backstopping actual authority when circumstances might otherwise permit the principal opportunistically to speculate at the expense of third parties - When the P is undisclosed, both the P and A are liable on the contract (unless excluded/otherwise agreed) - Almost always the same when the P is unidentified ##### Rest. 3d § 4.01: Ratification The affirmance of a prior act done by another, whereby the act is given effect as if done by an agent acting with actual authority - A person may ratify an act if the actor acted or purported to act as an agent on the person's behalf - Acts as if principal had originally authorized it - Ratification can express or implied: - Objectively manifests acceptance of transaction through oral or written statements - Conduct that justifies a reasonable assumption that the person so contends - Principal accepts benefits of transaction (like payment) - At the time of ratification, the purported P must have knowledge of all material facts (or not unaware of lack of knowledge), and T must not have already withdrawn from the transaction - Ratification is not effective if there has been a material change in circumstances that would make it inequitable to bind T, unless the T chooses to be bound - Ratification creates the effects of actual authority - Both P and T are bound by the contract and the purported A is discharged from any liability for breaching duty to principal - Not partial ratification ##### Rest. 3d § 2.05: Estoppel to Deny Existence of Agency Relationship A person who has not made a manifestation that an actor has authority as an agent and who is not otherwise liable as a party to a transaction purportedly done by the actor on that person's account is subject to liability to a third party who justifiably is induced to make a detrimental change in position because the transaction is believed to be on the person's account, if \(1) the person intentionally or carelessly caused such belief, or \(2) having notice of such belief and that it might induce others to change their positions, the person did not take reasonable steps to notify them of the facts. - Equitable doctrine - Doesn't create binding contract between parties - Prevents principal from avoiding an obligation by arguing that agent had no authority at time of contract - Applied regardless of existence of agency relationship - Raised when agent didn't have actual or apparent authority, but third party still asks court to hold principal liable due to some fault - Similar to apparent authority: 3^rd^ party belief that authority existed - Differences: - Require that 3^rd^ party detrimentally changed position in reliance on principal - AA: principal made manifestations of authority to 3^rd^ party - One-way street: allows 3^rd^ party to hold principal liable but principal has no rights against 3^rd^ party (unless principal ratifies transactions) - Remedy is damages rather than making principal party to contract ### Contract Liability: Agents #### - Agent liability based on type of principal - 1\. **Disclosed** - Agent with actual or apparent authority - Between principal and agent, if principal is bound by agreement under 3^rd^ party's apparent authority claim, principal might have claim against agent for actions taken without actual authority - Only principal and third party who are parties to contract - Agent not a party unless agent and third party agree otherwise - 2\. **Unidentified** - When third party knows agent is acting for a principal but doesn't have notice of principal's identity - Agent with actual or apparent authority - All three principal, agent, and third parties are parties to contract - Unless agent and third party agree otherwise regarding agent's liability - 3\. **Undisclosed** - Agent with actual authority - Agent and third party are parties to contract - And unless excluded, the principal is also a party - \*if agent doesn't want to be liable for contract -\> need to disclose they are acting on behalf of principal and provide identity - **Claim of breach of the implied warranty of authority** - Doesn't bind agent to contract or make them a party - Holds agent responsible for representing authority to bind the principal if it turns out to be false - If knowingly or negligently makes false representations -\> liability for fraud or negligent misrepresentation - State dependent: if agent and principal can be bound, third party can only sue one or both (but only recovery damages once) ### ### Tort Liability - Principal can be liable - when agent acts within actual authority or if principal ratifies agent's conduct - for third party harm caused by principal's negligence in selecting or supervising agent - strict liability if activity engaged in by agent is "inherently" or "abnormally" dangerous - demolition, blasting, wild animal, or dangerous activities likely to cause harm unless precautions are taken ###### Respondeat Superior - liable if agent/employee committed tort while acting "within the scope of employment" - 2 approaches: - motive or purpose test (Rest. 3d § 7.02(2)) - An employee acts within the scope of employment when performing work assigned by the employer or engaging in a course of conduct subject to the employer's control. An employee's act is not within the scope of employment when it occurs within an independent course of conduct not intended by the employee to serve any purpose of the employer - foreseeability test - should employee's conduct have been fairly foreseen from the nature of the employment or whether the risk of such conduct was typical or incidental to the employer's enterprise #### Clover v. Snowbird Ski Resort - Holding: - under the doctrine of respondeat superior, employers are vicariously liable for employees' torts committed in the scope of employment - Reasoning: - Determine whether employee was acting within scope: - 1\. Conduct occurred while employee was engaging in work duties (rather than personal tasks) - 2\. Conduct occurred substantially during work hours and at place of employment - 3\. Conduct was motivated at least partially by a desire to serve employer's interests - Franchisor Tort Liability - Whether a franchisor has exercised sufficient control over the franchisee to create an agency relationship through which the franchisor can be held liable for the franchisee's tortious conduct - Patterson v. Domino's Pizza, LLC - Holding: vicarious liability for acts committed by a franchisee's employees does not automatically extend to the franchisor - Reasoning: - Depends on level of control exercised by the franchisor ### Termination of Agency Relationship - Formation requires mutual assent - Either party can terminate at any time and for any reason via communication - Renunciation by agent - Revocation by principal - Effective when other party has notice of it - Other ways: - Death - Loss of capacity - Expiration of a specific term - Agents actual authority ends when agency ends - Apparent authority ends when it's no longer reasonable for third party with whom an agent deals to believe that the agent continues to act with actual authority - Duty of confidentiality exists after - Class 4 ======= Partnership Essentials \[57-94\] -------------------------------- ### Intro to Partnerships - "\[A\]n association of two or more persons to carry on as co-owners a business for profit..." - A general partnership can be formed **without any filing** with the state - Witten agreement not required - Voluntary association but partners don't need intent to form a partnership - "residual form" of business org: exists even if other forms (corporation, LLC) don't - After association -\> general partnership law determines the parties relative rights and duties - Sources of law - Model statutes adopted by states = - **Uniform Partnership Act** (UPA, 1914) or - **Revised Uniform Partnership Act** (RUPA, 1997) - harmonized/amended in 2013 - Most RUPA provisions are **default rules** that partners can **alter by agreement** - Written, oral, or implied unless SOF requires otherwise - RUPA 105(a) and (b) states that 105(c) tells you which provisions are mandatory and cannot be altered by agreement - Case law interpreting the statute - **4 key features of general partnerships** - 1\. Jointly and severally liable - Unlimited personal liability (not limited liability) - 2\. Each partner can participate in control and management (unless otherwise agreed) - 3\. Profit share/loss equally (unless otherwise agreed) - 4\. Pass-through taxation - Partnership income not taxed - Profits/losses of partnership flow through to partners to include on their personal taxes - Some rights and duties that are nonwaivable (RUPA § 105) - Can't unreasonably restrict partner's right to access books and records - Eliminate duty of care or loyalty or - Restrict rights of third parties ### Partnership Formation ##### RUPA § 202: Formation of a Partnership a. "Except as otherwise provided in subsection (b), the association of two or more persons to carry on as co-owners a business for profit forms a partnership, whether or not the persons intend to form a partnership" (See also RUPA § 102(11)) b. That's true unless those persons instead followed the steps necessary to have it become a limited partnership, LLC, LLP, LLLP, or corporation c. In determining whether a partnership is formed, the following rules apply: 1. Joint tenancy, tenancy in common, tenancy by the entireties, joint property, common property, or part ownership does not by itself establish a partnership, even if the co-owners share profits made by the use of the property 2. the sharing of gross returns does not by itself establish a partnership, even if the persons sharing them have a joint or common right or interest in property from which the returns are derived 3. A person who receives a share of the profits of a business is presumed to be a partner in the business, unless the profits were received in payment: A. Of a debt by installments or otherwise; B. For services as an independent contractor or of wages or other compensation to an employee; C. Of rent; D. Of an annuity or other retirement or health benefit to a deceased or retired partner or a beneficiary, representative, or designee of a deceased or retired partner; E. Of interest or other charge on a loan, even if the amount of payment varies with the profits of the business, including a direct or indirect present or future ownership of the collateral, or right to income, proceeds, or increase in value derived from the collateral; or F. For the sale of the goodwill of a business or other property by installments or otherwise - Many cases involve determining whether a relationship constitutes a partnership or something else - Start at RUPA §202 - Does relationship have characteristics of a typical partnership? - Presumption of partnership if there is profit sharing unless exception #### Martin v Peyton (NY Ct. of App. 1927) - Issue - Has a partnership been formed? - Holding - Lenders, not partnership - In order for a creditor to be a partner in a firm, the creditor must be closely enough associated with the firm so as to make it a co-owner carrying on the business for profit **Factors** **Partnership** **Lenders** ---------------------------------------------- --------------------------------- ------------------------------------------------------------------- Intention of Parties Express/writing Profit Sharing Yes- RUPA 202(c)(3) But might be interest on loan- Rupa 202(c)(3)(v) Sharing of Losses No- fixed amount to be returned by deadline Management Some evidence of control by PPF But is it consistent with "ordinary caution" of a worried lender? Ownership of Property No- only security for loan Rights of Parties on Termination/Dissolution Loan due in full after 2 year term? Conduct/Holding Out to Third Parties Not held out as partners - "as in other branches of the law, a question of degree is often the determining factor. Here that point has not been reached" ##### RUPA § 308: Partnership by Estoppel - True general partnerships: association of two or more persons to carry on as co-owners a business for profit - Doctrine exists to protect creditors in situations where there is reliance on the purported partner - Claim of partnership by estoppel - Doesn't allege a real partnership existed - Instead that a person becomes subject to partnership liability if that person purported to be a partner or consented or being represented as such, and a third party relied on that representation in entering into the transaction ### Default Partnership Management ##### ##### RUPA § 301: Partner Agent of Partnership \(1) each partner is an agent of the partnership for the purpose of its business. \[A partner's act\] for apparently carrying on in the ordinary course the partnership business or business of the kind carried on by the partnership binds the partnership, unless the partner did not have authority to act for the partnership in the particular manner and the person with which the partner was dealing knew or had notice that the partner lacked authority ##### RUPA § 305: Partnership Liable for Partner's Actionable Conduct \(a) a partnership is liable for loss or injury caused to a person, or for the penalty incurred, as a result of a wrongful act or omission, or other actionable conduct, of a partner acting in the ordinary course of business of the partnership or with authority of the partnership ##### ##### RUPA § 401 Partner's Rights and Duties \(h) each partner has equal rights in management and conduct of the partnership's business - Hypo: A contributes 70% of the partnership capital, B contributes 20% of the partnership capital, and C contributes 10% - How would you describe the rights of management of A, B, and C? What are their voting rights? - Both rights are equal, but can be modified by contract \(k) a difference arising as to a matter in the ordinary course of business may be decided by a majority of the partners. An act outside the ordinary course of business of a partnership and an amendment to the partnership agreement may be undertaken only with the consent of all of the partners ###### Default structure of decentralized management - Each partner is agent of partnership (RUPA § 301) - Unless otherwise, each partner has actual authority to bind partnership in ordinary course of business - Partner has apparent authority - Unless third party knew or had notice that the partner lacked actual authority - Partnership liable for partner's tort when partner acted in ordinary course of business or with authority (RUPA § 305) - Default: each partner has equal voting rights - amount of capital contribution makes no difference on voting power - disagreement about partnership management (RUPA § 401) - can be altered by agreement - large partnerships often have executive committees with delegated authority - default rules can lead to potential deadlock problems (even \# of partners or 2) #### National Biscuit Company, Inc. v. Stroud - Holding: in a general partnership with two partners, each party has the power to bind the partnership in matters pertaining to the partnership's business - Reasoning: - Each partner has an equal right in the management and conduct of a partnership - Differences within a partnership are decided by a majority of the partners - With only 2 partners, there can't be a majority - Neither partner can prevent the other from binding the partnership in the ordinary course of business ###### Default Fiduciary Duties and Information Rights - Partners are fiduciaries of each other and the partnership - Meinhard v. Salmon - Dispute between two co-adventurers in a commercial real estate project - Holding: Co-adventures, like partners, have a fiduciary duty to each other, including sharing in any benefits that result from the parties' joint venture - 2 main standards of conduct (RUPA § 409) - Partner owes partnership and other partners duties of care and loyalty - Because partners owe fiduciary duties and are liable for partnership debts, they need access to information - Information about the partnership (RUPA §408) - Keep books and records at its principal office - Information required partners need to exercise their rights and duties - Upon request, any other information within reason ##### RUPA § 409: Standards of Conduct for Partners a. A partner owes to the partnership and other partners the duties of loyalty and care stated in subsections (b) and (c) b. The fiduciary **duty of loyalty** of a partner includes the duties: 1. To account to the partnership and hold as trustee for it any property, profit, or benefit derived by the partner: A. In the conduct or winding up of the partnership's business; B. From a use by the partner of the partnership's property; or C. From the appropriation of a partnership opportunity 2. To **refrain from dealing** with the partnership... as or on behalf of a person having an interest **adverse to the partnership**; and 3. To **refrain from competing with the partnership**... c. The **duty of care** of a partner... is to refrain from engaging in grossly negligent or reckless conduct willful conduct, willful or intentional misconduct, or a knowing violation of law d. A partner shall discharge the duties and obligations under this \[act\] or under the partnership agreement and exercise any rights consistently with the **contractual obligation of good faith and fair dealing** e. Omitted f. If all the partners may authorize or ratify, after full disclosure of all material facts, a specific act or transaction by a partner that otherwise would violate the duty of loyalty g. It is a defense to a claim under subsection (b)(2) and any comparable claim in equity or at common law that the transaction was fair to the partnership... ##### RUPA §403(c): Partner's rights and Duties with respect to information - The partnership shall furnish to each partner... - \(1) without demand, any information concerning the partnership's business, financial condition, and other circumstances which the partnership knows and is material to the proper exercise of the partner's rights and duties under the partnership agreement or this \[act\]...; and - \(2) on demand, any other information concerning the partnership's business, financial condition, and other circumstances, except to the extent the demand or the information demanded is unreasonable or otherwise improper under the circumstances ##### RUPA §103(c): Effect of partnership agreement; non-waivable provisions - \(c) The partnership agreement may not... - Unreasonable restrict a partner's right to access the partnership books and records - Alter or eliminate the duty of loyalty, - Although if not manifestly unreasonable, the partnership agreement may alter or eliminate the aspects of the duty of loyalty stated in 409(b); and identify specific types of categories that do not violate the duty of loyalty - Alter or eliminate the duty of care, - Although if not manifestly unreasonable, the partnership agreement may alter the duty, but may not authorize conduct involving bad faith, willful or intentional misconduct, or knowing violation of law - Eliminate the contractual obligation of good faith and fair dealing - But the partnership agreement bay prescribe standards, if not manifestly unreasonable, by which performance of obligations is measured - Vary the power of a partner to dissociate - Restrict the right of third parties under RUPA ###### Default Partnership Property, Liability, and Finances - **Property** - Capital and property acquired via transactions and operations - Default: partner can use partnership property only on behalf of the partnership, not for personal reasons - Transferable interest treated as personal property - Can transfer without dissociating or dissolving - Transferee has no rights of management or access to records - \*only receive distributions - Partner can't transfer status as partner or unilaterally make someone else a partner without unanimous consent of other partners (RUPA §§ 402(b) and 503) ##### RUPA §§ 203, 204, 401, 501 - What counts as partnership property - Acquired in the name of the partnership - Acquired by one or more partners with a document transferring title that indicates the partner was acting in his capacity as a partner - Property purchased with partnership funds is *presumed* to be partnership property - "A partner may use or possess partnership property only on behalf of the partnership" - "A partner is not a co-owner of partnership property and has no interest in partnership property which can be transferred, either voluntarily or involuntarily" ##### RUPA § 401: Partner's Rights and Duties - (b): "A partnership **shall reimburse** a partner for any payment made by the partner in the course of the partner's activities on behalf of the partnership, if the partner complied with this section and § 409 in making the payment - (c): "A partnership **shall indemnify** and hold harmless a person with respect to any claim or demand against the person and any debt, obligation, or other liability incurred by the person or reason of the person's former or present capacity as a partner, if the claim, demand, debt, obligation does not arise from the person's breach \[of this section, § 407 on improper distributions, or § 409 on standards of conduct for partners\]." - (g): A partner can make a loan to the partnership, "which accrues interest from the date of the payment or advance." ##### RUPA § 502: Partner's Transferrable Interest in Partnership - The only transferrable interest of a partner in the partnership is the partner's share of the profits and losses of the partnership and the partner's right to receive distribution. The interest is **personal property** - Comments: "absent a contrary provision in the partnership agreement or the consent of the partners, a 'transferable interest' is the **only** interest in a partnership that can be transferred to a person not already a partner." - RUPA § 102(23) defines a "transferable interest" as "the right, as initially owned by a person in the person's capacity as the partner, **to receive distributions from a partnership**, whether or not the person remains a partner or continues to own any part of the right. The term applies to any fraction of the interest, by whomever owned." - **Liability** - All partners are jointly and severally liable to outside creditors - Unlimited liability for entire amount of partnerships liabilities - Not liable for debts before joining - Creditors recover from partnership assets first before going after partner's assets - Between partners, each partner is only responsible for their share of partnership obligations ##### RUPA § 306: Partner's Liability a. Except as otherwise provided in subsections (b) and (c), all partners are liable jointly and severally for all obligations of the partnership unless otherwise agreed by the claimant or provided by law b. A person admitted as a partner into an existing partnership is not personally liable for any partnership obligation incurred before the person's admission as a partner c. A debt, obligation, or other liability of a partnership incurred while the partnership is a limited liability partnership (LP) is solely the debt, obligation, or other liability of the partnership... - **Finance** - **Capital contributions** - As a matter of default, initial capital contributions are **not** required from partners - Some or all partners may contribute only services - Vocab: a "service partnership" or "K-and-L partnership" = where one partner provides all the capital and another provides all the labor - Default: each partner is credited with the amount equal to the value of any other property contributed. The contributed capital itself belongs to the partnership and can be any property (real, intangible, etc.) - **Compensation for services** - RUPA § 401(h): Unless otherwise agreed (and a limited exception during winding up), a partner is not entitled to compensation for services - **Profits and losses** - RUPA § 401(b): by default, a partner "is entitled to an equal share of the partnership profits and is chargeable with a share of the partnership losses in proportion to the partner's share of the profits." - 1997 version; 2013 uses the term "distributions" - So the default = equal share of profits and losses in proportion - **Distributions** - The statute is silent on when profits are distributed. A well-drafted partnership agreement will address this - Comment to § 401 (1997 version) - "Absent an agreement to the contrary... the interim distribution of profits \[is\] a matter arising in the ordinary course of business to be decided by majority vote of the partners" - 2013 amendments are silent on this topic #### Kovacik v Reed - Holding: monetary losses are apportioned equally between partners who make capital contributions - If dissociation triggers dissolution and is not rescinded -\> wind up ##### RUPA § 806: Settlement of Accounts and Contributions in Winding Up - A partnership must apply its assets to discharge the obligations of **creditors** - **If there is any surplus, that is divided among the partners in accordance with their right to distributions** - A partner shall contribute to the partnership an amount equal to any excess of the charges over the credits in the partner's account... - If a partner fails to contribute the full amount required, all of the other partners shall contribute, in the proportions in which those partners share partnership losses, the additional amount necessary to satisfy the partnership obligations for which they are personally liable - A partner or partner's legal representative may recover from the other partners any contributions the partner makes to the extent the amount contributed exceeds that partner's share of the partnership obligations for which the partner is personally liable ### Dissociation and Dissolution - **Dissociation** - A change in the relationship of the partners caused by any partner ceasing to be associated in the carrying on of the business - When partner leaves the partnership - **does not necessarily cause a dissolution** - dissolution triggered: partnership begins winding up to terminate - no dissolution: partner leaves partnership (with buyout), partnership continues if \> 2 partners - A partner is dissociated from the partnership upon... RUPA §601 - **Dissolution** - First of three phases (dissolution, winding up, termination) by which a partnership can come to an end - Can rescind - At will: can dissociate and trigger dissolution by giving notice - Term vs at will - Term partnership for set time - At will: termination not defined ##### RUPA § 603: Effect of Dissociation - Depending on the act of dissociation, 1 of 2 consequences will occur: - If the event is listed in **RUPA § 801**, then **dissolution is triggered** - If the event is **not listed in RUPA § 801**, then a **buyout will occur** pursuant to RUPA § 701 and the partnership business continues #### Giles v Giles Land Co. - Holding: dissociation is appropriate if the partner engaged in conduct relating to the partnership business that makes it not reasonably practicable to carry on the business in partnership with the partner ### Review of Partnership Agreements - Can: - Change governance rules - i.e., voting and management rights - define scope of duties, so long as "not manifestly unreasonable" & consistent with RUPA § 105 rules - establish financial rights between partners (during, at dissolution, or upon termination) - e.g., can address a "buy-out", valuation, continuation - Cannot: - Completely eliminate duties/rights to accounting - Alter third parties' rights - For full list, see RUPA § 105 (formerly 103) ### ### Other Partnership Forms - **Limited Partnerships (LPs)** - Separation of ownership and management functions - A type of partnership with 2 types of partners: - General partners - Manage the business and have the power to bind the partnership - They are personally (and jointly and severally) liable for the partnership debts - Limited partners - Silent/passive partners without management rights - Not personally liable unless they participate in management or control of the LP (old "control rule"- Cal.) - Current uniform act has modified to not personally liable except in extraordinary circumstances - The partnership must have at least one general partner and one limited partner - The partnership name must have a signifier- i.e., "LP" - Default rule is that partners in a LP share profits and losses in proportion to their respective capital contributions - Requires a formal filing (a "certificate of limited partnership") to create a LP - Each state has a LP statute - Most states either have some version of RULPA or ULPA (2008) (aka Re-RULPA) - **Limited Liability Partnerships (LLPs)** - LLP = limited liability form of the general partnership - See Article 10 of RUPA - Forming a LLP requires filing a form with the secretary of state - The partnership name must have a signifier- i.e., "LLP" - The effect is to shield partners from personal liability for the partnership debts. - A partner remains personally liable for er own wrongful acts - **Same liability shield for general partners in an LP -\> Limited Liability Limited partnership (LLLP)** Class 5 ======= LLCs Essentials & Choice of Organizational Form \[95-122\] ---------------------------------------------------------- - Overview (incl. History & Sources of Law) - Formation - Limited liability and veil piercing - Management - Finance - Information rights - Fiduciary duties - Direct and derivative litigation - Dissociation and dissolution ### Overview - Basic business organization choices: - Partnership - LLC - Corporation - Key characteristics: - Formation - Liability - Owner voting - Management - Financial rights (tax) - Liquidity - Changes/combinations - Planning considerations: - Economics of choice - Tax consequences - LLCs are their **own unique form**. Not partnerships or corporations - LLCs are not subject to the restrictions applicable to S corporations - E.g., 100 shareholders, US citizens or residents - They typically have **characteristics** of both partnerships and corporations - **Tax advantages** - Can choose to be taxed like a partnership or a corporation - Partnership = pass-through tax - **Limited liability** like corporations - Hallmark characteristic of LLCs is **flexibility** - Premised on **private ordering** - An LLC is "as much a creature of contract as of statute." - Except as expressly limited by statute, the "**operating agreement**" sets the rules for the LLC - LLC History -  Textbook notes - Needs at least one person to engage in business - Agency questions arise because of distinction between managers (manage business) and members (investors) - Pass-through taxation - Emphasis on contractual agreement that defines structure **Basic Vocabulary** ------------------------------------------- ----------------------- ------------------------------------------------------------------------- ------------------------------------------------------------------------- **Partnership** **Corporation** **LLC** Required document for formation None Certificate of incorporation (aka articles of incorporation or charter) Articles of organization (aka certificate of organization or formation) Other key organizational documents Partnership agreement Bylaws Operating agreement (aka LLC agreement) Participants holding a financial interest Partners Shareholders (aka stockholders) Members ### Sources of Law - State LLC laws vary widely - Each state has its own LLC statute - Over a dozen states have adopted the uniform statute, RULLCA - LLC case law is developed; LLCs are relatively new - Courts draw on contract principles as well as partnership and corporate law in resolving disputes - Note the importance of the "operating agreement" as the key document, stating the various rights and duties of members ### Formation - Process - Choose state of organization and reserve the LLC name - Draft articles/certificate of organization consistent with statutory requirements and file with the Secretary of State, paying filing fees and the franchise tax - Tax arrangements (state and federal) - Designate office and agent for service of process - Draft and enter into an operating agreement - In some states, must file a "statement of information" with the Secretary of State, within 90 days after filing the articles of organization (and update as required) - **Articles of Organization** - Check the statutory requirements of what is required and file with Secretary of State's Office - E.g.: - Name - Purpose - Agent for service of process - Description of the type of business that constitutes the principal business activity of the LLC - If the LLC is to be managed by 1 or more managers and not by all its members, the articles shall contain a statement to that effect - Operating Agreement - The basic contract governing the affairs of an LLC and stating the various rights and duties of the members - E.g.: - Each member's units/interests in the company - Rights and duties of the members - Including management structure and rights, voting rights and requirements - The manner in which profits and losses are divided, and distributions are made - Amendment of operating agreement - Default is unanimous consent - Remedies in the event that the members disagree on the direction of the company - Exit provisions and dissolution - Provisions: withdrawal, dissociation, admission - RULLCA mandatory provisions that operating agreement can't alter: - Very choice of law that applies under internal affairs doctrine - Capacity to sue and be sued - Records filed with Sec of state - Duty of loyalty, care (some ex