Bus Org Outline

AGENCY AGENCY: R2 1

Fiduciary relation which results from:1. The manifestation of consent by one person (the principal) to another (the agent) that the other shall act

1) On his behalf AND 2) Subject to his control AND

2. Consent by the other (the agent) so to act.

Gorton v. Doty (1937) (page 1)o School football game, car needed, D volunteered her car but only if the coach would drive it,

accident, D was sued.o Rule: there was an agency relationship b/t the D and the coach. o Evidence of Agency:

Act on D’s behalf: Asked the coach to driver her car, therefore it was not a loan, and the coach acted on her behalf.

Act subject to D’s control: exerted control b/c wanted coach to drive the car. Told him where to drive it.

Consent to act on D’s behalf: Accepted the car, and drove it to the game. o Dissent- agency is more than passive permission, there has to be more control, more direction.

This was a gratuitous bailee relationship= loan of car, and does not give rise to liability. Agency relationship can still be established even if the parties signed a contract stating that one is NOT

acting like an agent for the other. Courts are NOT bound by how the parties classify their own relationship.

Gay Jensen Farms Co. v. Cargill, Inc. (page 7)o Agreement was entered into where Cargill would loan money to Warren, a grain farmer. Contract

stipulated that Warren would provide Cargill with annual financial statements, Cargill would keep the books, or an audit would be conducted. Warren would have to obtain Cargill’s consent before he could more than $5,000 in repairs. Warren began shipping Cargill 90% of its grain.

o Issue: Whether Cargill became liable on contracts made by Warren with plaintiffs? Plaintiffs= Jensen Farms, sold grain, were not paid by W, want to establish agency relationship b/t C and W to get $ from C.

o Held: Yes. Agency relationship exists. Warren= Cargill’s agent. Cargill is liable b/c Cargill consented to Warren acting on its behalf and subject to his

control: Act on C’s behalf: Warren produced grain for Cargill, Cargill financed Warren. Subject to C’s control: Warren was not allowed to take money from other lenders,

bank loans had C’s letterhead, and name attached. C was able to inspect W, audit, and supervise operations.

o ADVICE: The more control you have over an entity = more likely an agency relationship. Less control

= more like a debtor/creditor relationship (what Cargill tried to argue.) Why does/ should control result in liability?

o Could be involved in the decision-making that lead to the disputed problem. o The controlling company should have some liability if a problem results.

Liabilities of the Principal to Third Parties:1. Contractual liability: Focus on authority of agent to act in the way that led to contractual liability.

Actual authority – depends on communication b/t principal and agent. o Express Actual Authority (EAA)- R2 Agency §7, and 26.

“manifestation” of consent by the principal to the agent. Look for some indication by the principal to the agent for the agent to do certain

acts.

Ex. Principal tells Agent “do X”- Agent has EAA to do X, and once done, Principal is bound.

o Implied Actual Authority (IAA)- R2 Agency, §7, 26, and 35. Agent needs to do the act to carry out Principal’s express instructions OR The act is incidental to/ usually accompanies the carrying out of the expressly

authorized task OR Past conduct by Principal, by custom, industry practice, etc.

Mill Street v. Hogan (page 14)- Bill was hired to paint, previously had been allowed to hire his brother, Sam. Elders decided that Petty would be helper, and he was hard to find so Bill hired his brother, and brother got hurt.

o Bill had implied actual authority to hire his brother.o Principal intended agent to possess this authority and includes

powers necessary to complete the duty delegated. Circumstantially proven authority.

o Focus on the agent- here, Bill reasonably believed that he had the authority to hire his brother, Sam.

Apparent Authority (AA)- R2 Agency, §8 and 27. –depends on communication b/t principal and 3 rd party.

o Focus on the 3rd party! Whether the 3 rd party reasonably believed that the agent had power. Look for written or spoken words or other conduct by Principal that causes 3 rd

party to reasonably believe that Principal consented to Agent’s doing the act in question.

o Authority that the agent is held out by the principal as possessing. Lind v. Schenley Industries, Inc. (page 16)- Lind was told by Kaufman that he would

get a commission. Lind was told through a memo to talk to Kaufman. Even if K didn’t believe that he had authority- doesn’t matter, it matters what L believed, and he believed that K had the authority.

Park and Tilford represented that K had the authority to offer the compensation to L.

Inherent Agency Power (IAP)= inherent authority. R2, §8Ao Principal does NOT have to make any manifestation to the 3 rd party. o Consider the fairness to the 3rd party. o Power of an agent which is derived SOLELY from the agency relation and exists for the

protection of persons harmed by or dealing with a servant or other agent. Derived from agency relationship- some power automatically comes from the agency relationship.

o Nogales Service Center v. ARCO- page 31- Whether ARCO’s manager had the authority to make an agreement with owners of the service center? Yes- IAP. A principal can be held liable for the actions of its agent in situations including when the agent is in violation of the principal’s orders, when the agent acts purely for his own purposes, and when the agent is authorized to dispose of goods. IAP exists for the protection of persons harmed by or dealing with a servant of another agent.

o ADVICE: To avoid becoming liable under IAP, spell out what agent’s power, what they can/can’t do, and careful supervision of employees.

Ratification- R2 Agency, §82, 83o Affirm a PRIOR act which DIDN’T bind you when it was done, BUT it is given effect as if it

was ORIGNALLY AUTHORIZED. o Affirmance: 2 ways-

1. Express 2. Implied

o Any different based on A’s acting with authority? NO, b/c it is as if it was ratified at the time it took place.

Estoppel- R2 Agency, §8B – NO agency relationship. (diff. than apparent authority). o Plaintiff MUST have suffered a loss in reliance of the purported agency relationship for

estoppel to apply. o A person who is not otherwise liable as a party to a transaction purported to be done on

his account, is nevertheless subject to liability to persons who have changed their position (suffered a loss), because of their belief that the transaction was entered into by or for him IF:

(a) he intentionally or carelessly caused such belief OR (b) knowing of such belief and that others might change their positions because of

it, he did not take reasonable steps to notify them of the facts. o Hoddesson v. Koos Bros (page 40)- plaintiff purchased furniture from who she though was

a salesman, paid him money, and no furniture was delivered. Rule: there is no actual or apparent authority here, but the case is remanded, IF it is found that the store was negligent in preventing imposters from taking orders from customers, then defendant will be ESTOPPED from disclaiming the agency relationship.

2. Tort Liability: servant (employee) v. independent contractor, actions done within “scope of employment.” 1. First establish agency relationship. 2. Servant v. Independent Contractor

o Master- R2, §2 (1): master is a principal who employs an agent to perform service in his affairs, and who controls or has the right to control the physical conduct of the other in performance of the service.

o Servant- R2, §2 (2): servant is an agent employed by a master to perform service in his affairs whose physical conduct in the performance of the service is controlled or is subject to the right to control by the master.

o Independent Contractor- R2, §2 (3): independent contractor is a person who contracts with another to do something for him BUT who is NOT controlled by the other NOR subject to the other’s right to control with respect to his physical conduct in the performance of the undertaking. He MAY or MAY NOT be an agent.

R2, § 220- determining whether someone is a servant or an independent contractor. i. extent of control ii. whether or not the one employed is engaged in a distinct occupation or

business (then that person is usually an independent contractor) iii. Whether work is usually done under direction of the employer iv. Skill required (specialized= independent contractor) v. whether the employer supplies the instrumentalities vi. length of time the person is employed (shorter= independent contractor) vii. Whether the work is part of the regular business of employer viii. Whether the parties believe they have created a master servant relationship ix. Whether the principal is or is not in the business

Murphy v. Holiday Inns, Inc. (page 53)- P sued for damages sustained while she was a guest at Holiday Inn. Rule: NO agency b/t Holiday Inn and the premises’ holder, b/c there was no control by Holiday Inn over the methods or details of doing the work, no control over the day to day operations, an agency relationship was not established, and therefore Holiday Inn cannot be held liable.

o 3. Tort Liability and Apparent Agency Miller v. McDonalds-(page 58)- P bit into stone at McDonald’s, went to that

particular McDonald’s based on their reputation. There was only a very small sign indicating that McDonald’s did not run that particular store, but it was not very distinguishable. Rule: there was MORE control than Holiday Inn, therefore there is an agency relationship b/t 3K’s ownership of this McDonald’s and Big McDonalds. Menu was the same, everything about the appearance and operation of the Tigard

McDonald’s identified with Big McDonald’s. Big McDonald’s was held out to be the apparent agent - and P was injured b/c of lack of skill- and P reasonably relied on this apparent agency relationship, therefore P can recover.

ADVISE: make signs bigger, put them in more places, make it more publicly known- through advertising—that the franchises are independently owned or operated. They could also get insurance, advise 3K to get insurance, and as a backup, have some of your own. Franchise operators- have a manual, obtain permits in their own name, if there are local rules- it is their responsibility to get the necessary licenses.

o 4. Scope of Employment- Respondeat Superior- R2, § 219 (1) Master is liable for the torts of his servants committed while acting in the scope

of their employment. (2) master is not liable for the torts of servants committed OUTSIDE the scope of

their employment UNLESS 1. The master intended the conduct or the consequences, OR 2. The master was negligent or reckless, OR 3. The conduct violated a non-delegable duty of the master, OR 4. The servant purported to act or to speak on behalf of the principal and

there was reliance upon apparent authority, or he was aided in accomplishing the tort by the existence of the agency relation.

Manning v. Grimsley (page 68)- P, spectator at a professional baseball game, was injured by a ball thrown by the pitcher. Sought damages from pitcher and employer.

In MA, need to show conduct, and present interference with employees ability to do their job. Here, the pitcher was unable to do his job b/c of P’s conduct, and pitcher assaulted P based upon this conduct, therefore it fell within the scope of employment.

R2, §228: o (1)Conduct of a servant is within the scope of employment if, BUT

only if: (a) it is the kind he is employed to perform

Pitching the ball= conduct supposed to perform. (b)occurs substantially within the authorized time and space

limits Conduct occurred during the game

(c) it is actuated, at least in part, by a purpose to serve the master and

It was actuated to serve the master- stop the heckling and pitch effectively

(d) if force is intentionally used by the servant against another, the use of the force is NOT unexpectable by the master.

P was trying to rattle Grimsley, therefore his retaliation was foreseeable.

o (2) conduct is NOT within scope of employment IF: DIFFERENT IN KIND from authorized conduct, FAR BEYOND authorized time or space limits, OR TOO LITTLE ACTUATED by purpose to serve the master.

Kind of Scope Within Scope R2, §229o Of SAME GENERAL NATURE as authorized conduct, or incidental to

it. o Helpful facts to determine if conduct is so similar/ incidental to be

within scope of employment

Can be within scope of employment, even though consciously criminal or tortuous: R2, §230

Can be within scope of employment even though consciously criminal or tortuous: R2, §231

Agent’s Fiduciary Obligation- Fiduciary relation b/t principal and agent o 1. Agency is a fiduciary relation: R2, § 1 o 2. Unless otherwise agreed, an agent must act solely for the benefit of the principal: R2, §

387 o 3. Account for profits: R2, §388o 4. Cannot act adversely (unless otherwise agreed, or with principal’s knowledge): R2, § 389-

92o 5. Cannot act for persons whose interests conflict with the principal: R2, §394 o 6. Duty not to compete (unless otherwise agreed): R2, §393o 7. Not use/ share confidential information: R2, §395o 8. Cannot commingle property: R2. § 398 o General Automotive Manufacturing v. Singer (page 83)- Singer started outsourcing some of

the contracts that he determined Automotive could not take. Employment contract: stated that he had to observe certain working hours, not supposed to disclose any information, and could not engage in other business permanent in nature during term of his employment. Rule: Court says that Singer should have disclosed this to the company to determine whether he should do this or not, he breached fiduciary duty. Remedy: cannot keep secret profit.

o Duty of Care: Paid Agent: R2, §379: act with standard of care and with standard skill and exercise

any special skill Other duties:

Good conduct (protect reputation)- §380 Give Principal relevant information- §381 Keep and render accounts of $, etc- §382 Act only as authorized- §383 Obey directions- §385

o Remedies of Principal: §399- Examples of appropriate remedies: Action on contract, for losses and for misuse of property Specific performance Restitution Injunction Discharge Refusal to pay

o Agent is liable for results of breach: §401, 403 Agents Fiduciary Obligations AFTER Agency Relationship

o Town and Country-(page 87): three employees of homecleaning agency broke off and opened their own business and targeted the homecleaning agency’s clients. Court focused on trade secret: T and C spent a lot of time and energy getting their customer list. Violated fiduciary duty b/c they ONLY solicited T and C’s customers.

PARTNERSHIP

Sole proprietorship: 1 person is the owner and operator of the business, and they have NOT taken the formal step of operating a business.

Partnership: NOT officially incorporated, but must have more than 1 owner. Common Law UPA/RUPA- 1914 v. 1997Partnership agreement

Definition: partnership is an association of two or more persons to carry on as co-owners a business for profit. UPA §6.

Characteristics: Profit Sharing: Share of profits is prima facie evidence that he is a partner in a business: UPA §7.

o Fenwick v. Unemployment Comp. Comm (page 91)- entered into partnership agreement, Court ruled that it was an employment agreement b/c there was no obligation to share the profits and no ownership and control. Intent is NOT dispositive of a partnership. Partners compared with employees.

Loss sharing: not required to have a partnership, but it is good evidence of a partnership. Consent: no person can become a member of a partnership without the consent of all the

partners. UPA §18 (g) Co-Ownership- the partners co-own the assets of the business

o They share in: 1. The right to control and dispose of the assets

Partners compared with lenders: o Martin v. Peyton-(page 96)- plaintiff-creditor, tried to find

defendants- who loaned money to the company- as partners. Court ruled NO, the defendants were lenders, not enough control, this is a precaution that lenders take- being advised of financial decisions. Also, defendants cannot enter into a relationship which binds the firm = limited kind of control.

Partners compared with employees- Fenwick 2. Share in profits- Fenwick

Partnership by Estoppel Young v. Jones- (page 106): Ps were investors from TX, funds disappeared and tried to use argument of

partnership by estoppel. Ps relied on the fact that PW was a large company, so PW-US should be held liable for PW-Bahamas. Rule: NO. PW brought documents that say they are separately organized. UPA §308.

o To show partnership by estoppel: 1. Representing themselves as partners 2. 3rd party relies on them holding themselves out as partners 3. Detriment suffered by the plaintiffs arguing for estoppel

FORMATION:

1. Deliberately 2. Inadvertently

TYPES:1. Partnership at will- ends as soon as someone doesn’t want to be partners anymore2. Partnership for a term- set out explicitly how long the partnership will last 3. Partnership defined for a particular undertaking

OPERATION: Fiduciary obligations

o Render information: UPA §20o Account for benefits, hold as trustee any profits from transaction connected with partnership or

from use of its property: UPA §21 compare with RUPA §404o Right to formal account of partnership affairs: UPA §22o Meinhard v. Salmon- (page 109)- lease of Hotel Bristol, for 20 years. New, more profitable lease

was entered into by Salmon, and did not disclose to Meinhard. Rule: duty to disclose, so Meinhard could have become a part of it. Doesn’t matter that it might have been for little value- should have been disclosed. Different result: if the contract was for a different building in a different area. Dissent- limited duration, not a partnership, no breach.

utmost loyalty, duty of the finest loyalty, undivided loyalty supposed to renounce thoughts of yourself, put your partners well being ahead of your

own= very HIGH standard o Grabbing and Leaving

Meehan v. Shaughnessy (page 117)- partners left firm, court ruled that they breached their fiduciary duties in the letters they sent to clients, did not present both options of staying or leaving, cannot urge clients to leave with you- they must retain the choice, firm asked for list of clients0 but letter sent out to clients before they gave firm the list, they were specifically asked whether they were going to leave- duty to tell truth, but kept plans secret. Not as high a standard as Meinhard-b/c court said that can compete with entity to which they owe allegiance.

o Expulsion- NO right to expel, MUST be included in the agreement. UPA §31 Lawlis- (pg. 125)- alcoholic partner, partners voted Lawlis out. Partnership agreement has

a ‘no cause’ clause for expulsion. They gave him several chances. Court ruled: ok, he was properly expelled.

Tried to argue that the moment of expulsion = when they took his files away, court disagreed.

Limitations: Bona fide – must be in good faith

o Ownership of partnership property- who owns what o Putnam v. Shoaf- (page 132)- Mr. P died, wife took over, and sold share to Shoafs. Wife wanted

half her money back b/c she owned it when money was stolen. Rule: NO. she gave her interest away, once leave partnership, not possible to go back and have an interest in the partnership property that surfaces later.

Rights as a partner: 1. Right to use the property of the partnership- UPA §25

o Possessory right to use the property for the partnership, equal rights among the partners to use the property for partnership purposes. ONLY for people in the partnership= tenancy in partnership.

o RUPA 1997- §501, no more co-owners. NOW- partnership is a separate legal entity, and the partnership owns its own property as a separate legal entity.

§502- transferable interest: each partner has 1 property right and a transferable interest = right to profits and surplus of the partnership

§503- legal consequences of transfer: same as UPA, assignee gets rights to the profits

§504- charging order from the court. Person with the charging order is NOT a partner, just have the right to get the money that comes from the order.

2. Interest in the partnership- UPA §26o Real interest in the partnership- your share of the profits and surplus.o Assignable/ chargeable- UPA §27, 28

ONLY receive profits, does NOT make assignee a partner. §27o Right to participate in management-

All partners have equal rights in the management and conduct of the partnership: UPA §18 (e)

No person can become member of the partnership without the consent of all the partners: § 18 (g)

Partnership is VOLUNTARY.- cannot force partners to do something. Rights of Partners in Management:

o UPA §18 (e): EQUAL rights in management and conduct of business.-can provide that one does something, and someone else does another.

National Biscuit v. Stroud- (page 140)- S and F are partners, articles of partnership did not restrict authority (nor should it- page 141), S told F that he would not be responsible for any purchase of bread = ordinary and legitimate business. F sold the bread, RULE: partnership is bound. F had equal rights in the mgmt and conduct of the pship as a general partner b/c the purchase was an ordinary matter connected with the pship and within its scope. –there is NO way that S could have unilaterally restricted F’s authority, unless F agreed to the restriction. (DIFFERENT: partnership NOT bound if acts are NOT within the legitimate and ordinary course of business.)

Acts which do NOT bind the partnership- UPA §9 (1): Each partner is an agent for the partnership AND the act of every

partner for APPARENTLY carrying on in the usual way in the business BINDS the partnership UNLESS:

o 1. The partner had restricted authority ANDo 2. The person which whom they deal had knowledge of the fact that they

had no authority. (NEED BOTH, to get pship off the hook) UPA §9 (2): acts NOT in the ordinary course of business UNLESS other partners bind

them UPA §9 (3): list of acts that partners lack authority to do alone, require unanimous

agreement: CANNOT be contracted out of:o Assign pship property in trust for creditors;o Dispose of the good- will of the businesso Do an act which makes it impossible to carry on the ordinary business o Confess a judgment o Submit a pship claim or liability to arbitration or reference

o UPA § 18 (f): NOT entitled to salary- subject to partnership agreement Partners make money by sharing profits, partners should share equally in profits. UPA

§18Ao Disagreement: UPA §18 (h)- decided by a majority of the partners, NOT by partner interest.o Raising Additional Capital

There is NO requirement that some partners can be forced to invest more than others. Exception: if the partnership agreement provides

There is NO requirement that partners loan money. Exception: if the partnership agreement provides.

There is NO requirement that some partners force others to adopt new partners. Exception: if the partnership agreement provides. Note: concern with this specific situation, b/c control gets diluted when you add new partners.

Partnership Liability: o Joint and several liability for: UPA §15 (a)

Loss/ injury caused by wrongful acts or omissions of any partner. UPA §13 Misappropriate of $ rec’d by a third person: Embezzlement UPA §15

o Joint liability for other debts and obligations. UPA §15 (b)o RUPA (1997): ALL joint and several liability.

FIRST sue pship as a separate legal entity, and go after partner assets first THEN go after individual partners. RUPA §307 (d)

Moren v. Jax (pg. 144)- mother puts son on counter, gets hurt. RULE: partnership held liable b/c she came in, made pizza= ordinary course of business. RUPA §401 (c)- indemnification

o UPA §18 (b): partner’s right to indemnify other partners for personal liabilities incurred by him. Transferable Interest:

o Interest in pship is transferable. UPA §27 Effect: does not make the transferee a partner- ONLY get profits, cannot make managerial

decisions.DISSOLUTION: someone ceases to be associated with the pship UPA §29

Partnership is NOT terminated once someone leaves, pship continues until the winding up of their affairs are finished. UPA §30

o Wind up. UPA §37 Causes: UPA § 31

o Without violation of the partnership agreement: 1. Termination of definite term, or particular undertaking 2. Express will of any partner 3. Express will of all partners 4. Expulsion- in accordance with pship agreement

Prentiss v. Sheffel (pg. 163)- two majority partners tried to exclude third partner by freezing him out. Judicial sale sold the acquired assets. RULE: excluded partner from a partnership can bid on partnership assets at a judicial sale. Freeze out= proper way to dissolve this pship.

o Violation of the partnership agreement- where it does not provide for a dissolution under any other provision- by the express will of any partner at any time

o Any event which makes it unlawful to carry on business of pship o Death of a partner

Do remaining partners want to continue? NO- liquidate under §38 YES- does partners estate representative agree to let the remaining continue?

o YES- estate is entitled to fair market value plus interest or profit- §42 o NO- liquidate under §38

o Bankruptcy (of any partner or partnership)o Court decree

Owen v. Cohen (pg 152)- P and D b/came partners to open up a bowling alley. RULE: Court ordered dissolution b/c D’s conduct created disharmony in derogation of the best interests of the pship. In addition, proceeds from the dissolution would pay back P’s loan.

Types: Voluntary

o Partners have right to dissolve o Partnership agreement- provisions for what happens when someone dies/disabled/wants to

leave Involuntary- go to court, get a decree.

Application of partnership property AFTER dissolution UPA §38 and 42 o Without violation of partnership agreement:

Each partner (unless otherwise agreed) may have the pship property applied to discharge its liabilities, and the surplus applied to pay in cash the net amount owing to the respective partners. Each partner can force liquidation, pay partnership liabilities, and pay surplus. UPA §38

o With violation of pship agreement: INNOCENT partners have right:

Liquidate Make wrongful partner pay damages Continue business using pship property

o MUST pay wrongful partner the value of his interest in pship minus damages; ignore value of good will of business.

Sharing of losses:o Kovacik v. Reed (page 179)- K invested $, R provided labor, and they would share profits 50-50.

Did NOT discuss the possibility of sharing losses. RULE: the partner who didn’t put in any cash to begin with doesn’t have to pay the money that was lost. Why? b/c implied agreement as to the value of their contributions, and they both lost- neither should have to make up to the others. (DIFFERENT: under UPA §40 (b)- ordered form of payment).

Buyout Agreements o Separate agreement- establishes a mechanism by which partners could be bought out. o G & S Investments v. Belman- (pg. 183)- partnership formed to run an apartment building.

One of the partners had a drug problem, others wanted to get rid of him. After they initiated court proceedings to dissolve the pship, he died. RULE: the filing for court-ordered dissolution did NOT constitute a dissolution event. Actual dissolution occurred upon the death of the partner, buy out provisions in the agreement apply.

o UPA §38

Rights of departing partners:o Meehan v. Shaughnessy-part II (page 192)- agreement stated that if you brought the client in

on your own, you could take the client with you and pay a reasonable charge. Court made the departing partners pay the fair charge, and pay what they would have made in profits had they finished at the firm. Departing partners have the burden to prove that the clients would have gone with them even if they did NOT breach the fiduciary duties.

Under RUPA (1997) :Dissociation- replaces ‘dissolution’

§601- Causes of dissociation:o Death o Expulsion o Express will of partner

§602- wrongful dissociation:o Breach of express provision of pship agreement o Leaving prematurely- if pship for term, or particular undertaking o Liability for any damages to pship if wrongful dissociation.

Partnership property AFTER dissociation: §701- purchase of dissociated partner’s interest: continue business; purchase dissociated partner’s

interest at buyout price (default calculation method), and pay interest from date of dissociation §801- events causing dissolution and winding up of partnership business: dissociation when business is

being dissolved and wound up; dissociation events listed.LIMITED PARTNERSHIP:General partners have more control, limited partners have limited role. Formation: in partnership agreement. File a ‘certificate of limited partnership’ with the public official. MUST have

at least one general partner and one limited partner Liability: Generally, no personal liability

o Limited partners are liable as general partners if they take part in the control of the business, as they did here- they chose the crops to be planted, and could withdraw the entire funds if they chose. Holzman v. De Escamilla- (pg. 197)

CORPORATION FORMATION

MUST filed Articles of Incorporation in order for it to come into existence. Place of Incorporation: DE is most common choice. Participants:

Shareholders = owners of the corporation Board of directors Officers- bind the corporation Corporation

MECHANICS OF INCORPORATION Select a corporate name (MBCA 4.01)

MUST contain certain either “corporation,” “company,” or an abbreviation. Incorporator- files Articles/ Certificate of Incorporation

Hold organization meeting (MBCA 2.05) Elect directors (if NOT named in Articles) and officers Approve bylaws Issue stock Authorize bank account, etc

PROMOTER AND THE CORPORATE ENTITY Promoter: an individual who develops the business idea for the corporation, and who brings together the

investors and other corporation participants. Owe fiduciary duties- similar to agent and principal.

Duty of loyalty, honesty, and care Ex. Cannot take secret profit.

Pre-incorporation dealings AND promoter liability: Southern Gulf Marine- (pg. 202)- before it was formally incorporation, southern gulf entered into a

contract with Camcraft where Camcraft would provide southern gulf with a boat. RULE: Camcraft had suffered no injury even though Southern- Gulf was not incorporated.

Promoter is still liable when the corporation is never formed. MBCA 2.04- people who take an active role will be liable for a business that is not properly incorporated.

THE CORPORATE ENTITY AND LIMITED LIABILITY Unless otherwise provided, a shareholder is NOT personally liable for the acts or debts of the obligations-

MBCA 6.22 (b) Theories of liability:

1. Enterprise Liability- when several small corporations operate together as a single enterprise, courts may find that the entire enterprise, and NOT just the single corporation is liable for the obligations of the corporation.

2. Piercing the Corporate Veil Walkovsky v. Carlton-(pg. 207)- P was run down by taxi cab. RULE: court did not find Carlton liable

b/c he was not acting in his individual capacity. Corporate veil could not be pierced. Test:

MUST be unity of interest and ownership that the separate personalities of the corporation and the individual no longer exist

Circumstances must be such that adherence to the fiction of separate corporate existence would sanction a fraud or promote injustice.

Sea Land v. Pepper Source (pg. 212)- establishes test. P argues that he wasn’t paid by Pepper Source. Met first part of test, didn’t meet second b/c could not show a kind of wrong. RULE: need something that arises to the level of fraud to pierce the corporate veil. On remand- ruled in favor of Sea-Land- found that the sold shareholder had

commingled property of the companies, and engaged in blatant tax fraud was enough to pierce the corporate veil.

In re Silicone Gel Breast Plants (pg. 222)- Bristol bought out MEC, 2/3 of MEC’s directors were Bristol’s directors. Filed consolidated returns prepared by Bristol and Bristol provided loans to MEC. Showing of fraud is NOT necessary to pierce the corporate veil. RULE: “when a corporation is so controlled as to be the alter ego or mere instrumentality of its stockholder, the corporation may be disregarded in the interests of justice.” p.226 –ok to have some overlap, but make sure that the board is in place is an active board. Here, it was not. Also, Bristol may be liable b/c it held its name out there- by putting it on the products. Easier to get single shareholder.

Tort v. Contract Tort: courts are generally more lenient when there is a tort plaintiff, require less proof.

Don’t have to show fraud. Contract: voluntary dealt with D, therefore has a higher standard of proof, need to

show fraud. SHAREHOLDER DERIVATIVE SUITS – Cohen, p.232

Derivative suit: brought by shareholder on behalf of entire corporation. Requirements:

1. Demand – that the corporation bring the suit on its own behalf Why? –cuts off possible litigation, board’s decision to make, gives the corporation one more

time to look at the potential for litigation Where to get information: public sources, records of the corporation- shareholder has the

right to inspect books and records to investigate the possibility of corporate wrongdoing. Excused from making demand:

1. Majority of board has a material financial or familial interest 2. Majority of the board is incapable of acting independently for some other reason

such as domination or control 3. Underlying transaction is not the product of a valid exercise of business judgment

Grimes v. Donald (p. 241)- Grimes attacks board’s decision to enter into the agreement on the grounds that it was wasteful, excessive and operates as an abdication. Demand was refused. RULE: the shareholder must overcome the presumption (business judgment rule) that the rejection of the demand was made in good faith, MUST be proven with particular facts. Here, it was not. ALSO, cannot contest that demand was excused IF already made the demand. Have to allege wrongful refusal. Wrongful refusal:

1. if a demand is made and rejected, the board rejecting the demand is entitled to the presumption of the business judgment rule UNLESS the stockholder can allege facts with particularity creating a reasonable doubt that the board is entitled to the benefit of the presumption.

2. IF there is reason to doubt that the board acted independently or with due care in responding to the demand, the stockholder may have the basis ex post to claim wrongful refusal.

2. Give security for defense 3. Contemporaneous ownership - Must have had share AT THE TIME of the injury.

Direct suit: brought by individual who suffered the injury. THE ROLE AND PURPOSES OF CORPORATIONS

Make donations. MBCA 3.02 (13) AP Smith Mfg. v. Barlow- (pg. 282)- shareholder protested against donation made by corporation.

Incorporation documents contained no express authority to make charitable donations. RULE: charitable donation ok, b/c it was NOT made indiscriminately or to a pet charity of the corporate directors in furtherance of personal rather than corporate ends. Restrictions on charitable donations:

not made indiscriminately not made to a pet charity not made in furtherance of personal goals.

Dodge v. Ford Motor Co. (pg. 288)- Ford decides: no more special dividends. Wants the extra profits to go back to the company, wants to build smelter, raises wages of employees. RULE: “a business corporation is organized and carried on primarily for the profit of the stockholders.” Court ruled that the corporation had must pay the special dividend, and because it was in the best interests of the corporation, Ford was permitted to move forward with the smelting plant.

Shlensky v. Wrigley- (p. 293)- P wants Wrigley Field to use lights to have night games, Wrigley refuses. RULE: do NOT have to prove fraud, illegality, or conflict of interest to win, however, the claim MUST border on one of the three in order for the court to interfere. Here, there is a presumption that Wrigley acted within the best interests of the corporation, concerns about the surrounding neighborhood were legitimate.

DUTIES OF DIRECTORS Chosen by shareholders Make important business decisions One vote per share Terms of office: MBCA 8.05- corporations decide Number: MBC 8.03 Functions: MBC 8.01

(b) all corporate powers shall be exercised under the authority of the Board of Directors Mode of making decisions:

MBCA §8.20- meetings MBCA §8.24- quorum- adequate number of directors present

Decided by the bylaws, or it is a majority MBCA §8.21- can take action without a meeting by giving consent and writing out a statement of the

possible action.

OFFICERS Required corporate officers- MBCA §8.40 Chosen by the Directors Functions: someone has to be assigned the task of preparing minutes for meetings, and keeping records. One person can have more than one role- MBCA §8.40 (d) Removal: MBCA §8.43

Resign by giving notice, effective when notice is delivered unless otherwise specified Removed

Duties of Officers, Directors, and Other Insiders:1. Duty of Care:

A director must be diligent, attentive, and prudent in making decisions. The ‘business judgment rule’ presumes that corporate directors are fulfilling this duty. MBCA §8.30, 8.42 (officer) Rebuttable presumption: presumption that directors acted in accordance with the business

judgment rule. AP Smith- charitable donation- show no reasonable belief that it was in best interests/

excessive amount or it was made for personal reasons. Dodge- dividends- show fraud, misappropriate assets, bad faith, or arbitrariness (No rational

business purpose for the decision). Shlensky- lights- show fraud, illegality, or conflict of interest Kamin (p. 328)- board of directors issued a stock dividend, minority shareholders balked and

initiated a derivative suit, b/c the corporation could have saved money on taxes if it sold the shares. RULE: court held that it would not interfere unless it be made to appear that the acts were fraudulent or collusive, and destructive of the rights of the stockholders. Mere errors of judgment are not sufficient grounds for equity interference. Courts will not second guess what the directors did just b/c they thought their idea was better.

Van Gorkom- (p. 332)- DIRECT action brought by a class of shareholders alleging that they were personally harmed by the acts of the board of directors. This case involved a leveraged buyout deal. RULE: the directors breached their duty of care by failing to make an informed decision. The court cited instances of rushed board meetings, and a failure on the part of the directors to educate themselves of the details of the deal.

Brehm- (p. 345)- Eisner, the Chairman of Disney, hired his friend Ovits as a top company executive. O’s contract contains provisions regarding his compensation under several different scenarios. The scenario under which he could receive the most compensation- where O was unable to fulfill his obligations through no fault of his own. Shareholders objected. RULE: the court rejected shareholder’s argument that the directors’ decision was uninformed. The board relied on an expert advice when making the agreement.

2. Duty of Loyalty: Conflict of Interest Transactions

i. Common law: if you have a transaction involving the corporation and one of its directors has a conflict of interest as it is entered into, at some later point, the corporation can void that contract.

ii. Modern Law: Test:

1. Substantive- look at fairness of the transaction Bayer (p. 374)- shareholders challenge the hiring of a director’s wife as a

performer on a show that the corporation sponsored. RULE: the court found that the wife’s payment was reasonable to the overall cost of the production. The court excused the directors for failing to conform to corporate formalities, and admonished them to be more observant in the future. Board had no idea that the wife would be hired, was NOT an effort to facilitate in the signer’s career.

2. Procedural- look at the way in which the transaction was approved, as long as it was approved by the disinterested and informed directors and shareholders- OK. Lewis- (p. 379)- corporation shared some common directors and shareholders.

A shareholder of one of one of the companies who was not a shareholder of the other, sued, alleging that those who were directors of both companies were self dealing. RULE: deal was fair.

MBCA §8.60- definitions Conflicting interest Fair to the corporation Required disclosure

MBCA §8.61 (b): directors is NOT liable if: Approved by directors: §8.62 OR

Proper approval by directors will get you off the hook, cannot be held liable Approved by shareholders, then cannot be held liable: §8.63 OR Transaction proven fair-then you will not be held liable.

Self-Dealing – director/ officer on both sides of the transaction. DEFENDANT bears the burden of proving that the transaction was fair and reasonable at the time it was entered into. Lewis. A deal CANNOT be set aside because of self-dealing if ANY of the following occurred:

1. Fair and reasonable to the corporation at the time it was approved by the board 2. Interested parties have to disclose that they are interested, the rest of the board who is not

interested must approve- approval by a disinterested and informed board 3. Shareholders vote once they are informed

Corporate Opportunity – take an opportunity and exploit it for yourself Test:

1. Is the corporation financially able to undertake the opportunity? 2. Is it in the line of the corporation’s business? 3. Is it one where the corporation has an interest?

In Re Ebay- (p. 389)- shareholders of Ebay found out that directors and officers have taken advantage of investment opportunity. Given the opportunity to buy stock that could quickly go up in value. RULE: could be a corporate opportunity.

Standard for Director Liability: MBC §8.31

Director NOT liable UNLESS plaintiff shows: (SHOW ONE) 1. Not in good faith OR 2. Decision flawed because (a) no reasonable belief in corps best interest, or (b) not informed

(duty of care) OR 3. Objectivity problem 4. Problem re: oversight/ attention- not properly overseeing business affairs/ attention OR 5. Problem re: benefit/ fairness

Basic Roles and Rights of Shareholders:-not personally liable for corp. acts/ debts (6.22 b)-have ‘preemptive rights’ IF in articles (6.30)-receive dividends IF declared- then have right to get them (6.40)-annual meeting (7.01); proxy voting OK (7.22)-usually 1 vote per share= default (7.21)-elect directors by plurality (7.28) compare with7.25-may bring derivative suit (7.40-46)-vote on conflicting interest transactions (8.63), business opportunities (8.70)-amend articles (10.03); some mergers (11.04)And any extra rights if own ‘preferred stock’ (6.01)

CLOSELY HELD CORPORATIONS Shareholders in closely held corporations have a more active role than in bigger corporations. Shareholders expect to become directors and officers in closely held corporations. Galler- (p. 618)- two brothers owned drug company, disagreement about whether they were going to enforce

an agreement that was made and executed before one of the brothers got ill and passed away. RULE: agreement had to be enforced, there was no objection due to fraud or disadvantage minority interest

Abuse of Control: Wilkes (p. 630)- W and four other partners ran retirement home. Began to do well, but relationships

became strained. W notified that he intended to sell his shares. The board ceased W’s salary and did not reelect him as director or officer. W sued. RULE: majority shareholders have to deal with minority according to good faith standard. There was NO legitimate business purpose for severing him from payroll. This was a freeze out. Majority should be entitled to a little bit of selfish ownership. 2 part balancing test/approach: Controlling groups must show legit business purpose for oppressive conduct minority must show less harmful ways to achieve the same thing.

FEDERAL SECURITIES LAW

Rule: MUST register securities (stock) with SEC (securities exchange commission) PRIOR to sale, UNLESS exception applies.

Securities:Stock= equity securities- represents ownership interest in corp. Bonds= debt securities- represent debt owed by the corp. to the bondholder.

Security Exchange Act of 1934:Focus: securities transactions/ matters AFTER initial issuance by the corporation;

Covers:-securities fraud, including insider trading -periodic public disclosure requirements (annual, quarterly, certain events)-takeover regulation-proxy regulation

Registration: Section 5CANNOT offer to sell stock, BEFORE filing a ‘registration statement’ AND CANNOT sell stock UNLESS

-stock was registered with the SEC or an exemption applies AND-buyer of stock received copy of the PROSPECTUS (key disclosure/ sales document = core of the registration statement)

REGISTERED = when SEC signed off on the registration statement’s compliance with disclosure requirements NOT on merits/ value of stock, etc.

Exemptions: when is a sale exempt from the registration requirement?o Exempted securities

Securities issued by the US or a state Securities issued by a bank

o Exempted transactions Transaction NOT involving a ‘public offering’ Small offering of securities: $ limit Offering (within $ limit) of securities to ‘accredited investors’ = institutions and wealthy

sophisticated individuals. o Note: if exempt from registration requirement, still cannot commit a FRAUD.

Pros and Cons of Registration Cons: Try to qualify for an exemption if possible because:

o Cost of process o Time involved in processo Disclosure concern- initial/continuing

Benefits of Registration:o Broader distribution/ market so more $o Easier to re-sell o You’ve made it!

Liability- 1933 Act – focus ON registration Liability for misrepresentation OR omission- creates a private right of action and basis for criminal

prosecution.

Lawyers Role:

o Due diligence review Review corp. minute books, articles and bylaws, annual and other reports, etc. Interview corp. officers, etc- to get their sense of what’s going on Goal: assess the accuracy and adequacy of disclosure in registration statement re:

corporation and securities. The 1933 act was designed to ensure that prospective investors receive disclosure of information so that

they can make informed decisions prior to buying securities in registered offerings. o SEC does NOT perform a merit review of securities. o Purchasers of securities that are sold in an offering that was exempt from the registration

requirement WILL NEED to make sure that their re-sale transaction qualifies for one of the exemptions: NOT A FUNCTION of the ACT.

1934 Act- what happens AFTER registration Focus: securities transactions/ matters AFTER initial issuance by corp.; covers:

Securities fraud, including insider trading Periodic public disclosure requirements

Annual, quarterly, certain events, insiders' trades Takeover regulation Proxy regulation

Insider Trading 10b-5o Illegal for anyone to use a manipulation or device in securing a security. o Applies to all persons o Covers:

Untrue statements of a material fact/ omissions of material facts Insider trading Other kinds of fraud, deceit, etc. Provides a FEDERAL remedy for securities fraud.

o U.S. v. O’Hagan- (p. 501)- insider trading. Lawyer in firm which was retained by Grand Met regarding a potential tender offer for the common stock of Pillsbury Company- headquartered in Minneapolis. Lawyer- Ohagen- bought the stock and sold it for millions in profit. RULE: he was involved in insider trading b/c he was a temporary insider. When a peron misappropriates confidential information he is violating 10b-5. Traditional theory: applies to insiders who owe shareholders a fiduciary duty, here no duty was owed, however the misappropriation theory applies: you have a duty to disclose to the SOURCE OF THE INFORMATION. Here, law firm = provider, and Ohagen breached duty.

o Corporate Insiders- violate 10b-5 by trading corporation’s stock on basis of confidential information b/c owe fiduciary duty to corporation and its shareholders.

Permanent = officer/director of a corporation Temporary = attorneys, doing some legal work for corp.

o Corporate Outsiders- held liable under the misappropriation theory. O’Hagan. Violate 10b-5 by misappropriating confidential information for trading purposes in breach of duty of trust or confidence owed to the source of the information.

Ex. Attorney uses info received from law firm client to trade in the stock of another corp. O’Hagen

LIMITED LIABILITY COMPANY FORMATION

O Distinct entity, distinct from its members- ULLCA §201 Partnerships- are NOT distinct from its members

O Participants = owners =members and managers -choice Members look more like a partnership Managers look more a corporation

O Process: File Articles of Organization. ULLCA §202

Content: ULLCA §203O State whether managed by members or managers. O Comply with LLC name requirements (§105)

MAY enter operating agreement. §103 LEGAL RELATIONSHIP

O b/t LLC, its members and managers to 3 rd parties Agency/ authority

In member- managed LLC- §301 (a) In manager- managed LLC- §301 (b)

LLC liability for 3rd party losses for wrongful acts or omissions, etc. §302. Limited liability- §303 NO ‘piercing’ for failure to observe formalities- §303 (b)

O b/t members/ managers to each other/ LLC members interests/ dissociation (501, 601) tax treatment: can elect pass-through tax treatment (like partnership or “S Corp.”)- applies

to both profits and losses owners alone pay tax on entity’s income. Double taxation= usual C Corp. tax treatment- entity pays tax on its income and

owners also pay tax when they get some of it (ex. Shareholders receive dividends) One level of taxation on income = partnerships = S. Corp. = corporation itself does

not pay taxes on the income, individual owners pay.O Individual partners pay tax on the individual income received from the

partnership Compare LLP = GP with liability limitations re: tort and/or contract claims.

Operates as general partnerships (GP) with limitations on their liability.O In some states, partners are only protected against tort claims.

O Manager Rights Management- 404 and distributions- 405

In member- managed LLC- 404 (a)- equal right to manage; majority vote In manager- managed LLC- 404 (b)- equal right to manage, majority vote, selected

by members. Matters requiring unanimous member vote- 404 (c) Distributions- equal shares- 405 (a)

O Standards of Conduct: Members: have ONLY fiduciary duties specified- loyalty, care, good faith and fair dealing Managers: §409 (h): managers have same conduct as members. (members who are NOT

managers owe NO duty to the company or to other members solely by reason of being a member).

O Distributional Interests; Dissociation Members distribution interest- 501, etc.

Member NOT co-owner of LLC property Distributional interest IS transferable (transferee does NOT = member, §502).

Member’s Dissociation- §601 Power to dissociate at any time, MAY be wrongful- §602. Effect depends on whether at will or term LLC

O If term, whether LLC will wind up and dissolve, or not- §603). O Walter, Waste and Land v. Lanham-(p. 300)- Need to make clearly that it is an LLC, otherwise you

could end up with personal liability as was found here). O McConnell v. Hunt- (p. 317)- not required to have an operating agreement, although it is advisable.

Courts will enforce provisions of operating agreement. Provision in operating agreement said it was ok to compete, therefore it was permissible.