Introduction into US business law FS 2016 Prof. Dr. Andreas Kellerhals
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Introduction into US business law
FS 2016
Prof. Dr. Andreas Kellerhals
Repetition last time (1)
>Specialities civil procedure> Extensive pretrial discovery
> Heavy reliance on live testimony (jury)
> Aggressive pretrial motions> Summary judgment
> Settlement
> Class actions
> Punitive damages
> Lawyers fees (no „loser pays“ rule)
Repetition last time (2)
> 4 stages civil procedure
> Pleading
> Pre-Trial
> Trial
> Post-Trial
> Contract
> Offer
> Acceptance
> consideration
326. April 2017
The way up to the US Supreme Court!
http://www.youtube.com/watch?v=ZS2Up5TeirM
Next time!
Contracts
Basis
> Common law (England)
> Basically till today
> Individual states have own contract law
> Statutes
> Too many different regulations by the end of 19th century
> Harmonization movement
> National Conference of Commissioners on Uniform State Laws (NCCUSL)
> 1942 Uniform Commercial Code – model law (UCC)
> Esp. Sales contract (UCC Art. 2)
> 1988 – CISG – UN convention on sales of goods applicable among states
> Freedom of contract
New York Contract Law
Contract law
> Contract Components> Offer> Acceptance> Consideration (speciality)
> Defenses to Contract> Legality of the Contract> Capacity of the Parties> Mistake, Duress, and Fraud> Unconscionability> Statute of Frauds> Parol Evidence Rule
> Contract Termination> Damages (Money Damages, Specific Performance, Liquidated Damages)
Contract formation (1)
> Issue: how does an agreement become an enforceable obligation in contract law?
> UCC distincts between
> Agreement (parties‘ bargain in fact)
> Not enforceable
> Contract (resulting legal obligation)
Contract formation (2)
> Through offer and acceptance!
> Offeror/offeree
> No fixed form required (writting, informal, conditional)
> Excp: „firm offer“ = binding
> Just „meeting of the minds“
> Expressis acceptance
> Or by any reasonable means
> Expl. Acting accordingly
> Informal approach except formality is required by law!
Contract (1)
>Agreement of two parties > to create obligation to do or refrain from doing something
> Initiated by the offer (offeror)
>Acceptance by the offeree
>Legally binding only if either> Contract is formalized (speciality contracts) or
> Supported by consideration (simple or informal contracts)
Contract (2)
> Simple contracts are either
> Unilateral or
> Posting a reward (bring back dog)
> Dog against money
> Bilateral
> Selling goods
Contract (3)
> „Sealed contract“> Formalization consists of
> Contract signed> Sealed (wax, sign)> And delivered> (wittnessed)
> states know certain types of contracts that must be in writting> promise to pay debt for somebody else> promise to marry> Agreements involving real estate> Insurance contracts> Sale of goods over US$ 500
Contracts (4)
> For an agreement to become a legally binding contract is needed:
> Offer
> Acceptance
> Consideration
> Performance
> By a reasonable person
> Sufficient clear
> Essential points
> Able person (> 21, mostly 18) – otherwise impeachable, not void
What is «consideration»? (1)
> Consideration> Complex concept
> Major difference common law/civil law
> ~ mutually bargained-for exchange between the parties
> Idea of «do ut des»
> Each side has to receive something in exchange for what they give
> Agreement without consideration = illusory, not binding
> Some states today accept written contracts as consideration
Consideration (2)
>A binding agreement generally requires „consideration“> An exchange/or promise to exchange of something of
value
> Consideration separates purely gratuitous promises
> Consideration = bargain for and given in exchange for performance or performance or a promise of performance by the offeree.
> Usually price for goods
Consideration (3)
> Each party of a contract must provide something of value that induces the other to enter the agreement
> Value exchanged not equivalent> Expl. Car for not smoking for 5 years> Sufficient consideration?> Courts typically focuses more on offeree> Offeree has to suffer a „legal detriment“ = gives a legal
right> f.e. not promise to give love
Consideration (4)
Expl. (Bonfield)> Prof. Banks promises to give you an A on your exam> Prof. Banks promises to you an A if you always attend the
class> If you get a D although attending the class can you sue
Prof. Banks?> Only in second expl. is consideration> More serious commitment> Each side has undertaken to act in exchange
Consideration (5)
>Consideration can be anything of value>Each party has to agree to exchange if contract is
to be valid> If only one party offers consideration, agreement is
not a legally binding contract> „something must be given or promised in
exchange or return for the promise“> Also mutual promises
>Without consideration, a agreement is not a legally enforceable contract
Consideration (6)
> Consideration can be executory or
> Promise to do in future
> Executed
> Exchange not
> Consideration can not be „past“
> Anything of value (item, service)
> „Quid pro quo“
Consideration (7)
>Consideration does not need to be adequate
>To be „good“, consideration must be of some value, even minimal value
>Courts will not measure, that is up to the parties
>Consideration can be in any form
>Even a peppercorn would be sufficient
Chappell & Co v. Nestle (1)
> House of Lords (1960)> Copyright case> Nestle advertised: for some money and 3 chocolate
wrappers they would send a copy of a record „Rockin Shoes“
> Owner of copyright entitled to 6.25% of selling price> He argued value has to be calculated on money plus
value of wrappers> Nestle said: wrappers have no value
Chappell & Co v. Nestle (2)
> House of Lords held that wrappers were part of consideration
> Consideration has two parts:
> Buying chocolate bars
> Paying money
> Both are of value to Nestle
> Some dissenters
> (AC 87 House of Lords - 1960)
Consideration (8)
> But: Consideration must be sufficient
> Not for a past event
> F.e. not for a meal already eaten
> Eastwood v. Kenyon
> Guardian raised loan to educate young girl to improve her marriage prospects
> After marriage, husband promised to pay off loan
> Guardian could not enforce because past.
Consideration (9)
> Illusory consideration
> Must be some kind of connection between a promise and consideration
> No consideration is to „refrain from a conduct wich was never intended to persue“
Consideration (10)
> Certainty
> Consideration is good where it can be expressed in economic terms
> Court held: promise to stop complaining about something has no economic value
> Promise to perform an existing duty to the other party is not good
> But ok to third party
Lack of consideration
> http://study.com/academy/lesson/lack-of-consideration-in-contract-law.html
2926. April 2017
Lak of Consideration in Contract Law - Video & Lesson Transcript | Study.com
Promissory Estoppel
> Reasonable reliance on a otherwise (non enforceable) promise
> A promise on which someone reasonably can rely
> To avoid „unjust enrichment“
> fairness
> Paying for goods that someone did not order but is using
> Needs interpretation of contract
Interpretation
> When interpreting a contract, assess what the parties intended
> Factors:
> Terms of contract
> Course of performance
> Course of dealing
> Trade usage
> Ambiguity: such terms will be interpreted in favor of the party who had less reason to know of the ambiguity
> All contracts are assumed to include a term requiring performance in good faith
3126. April 2017
Form
> Generally no specific form needed
> Some contracts need written form
> Promise to marry
> Bailment (Bürgschaft)
> Real estate (rights for longer than a year)
3226. April 2017
Carlill v. Carbolic Smoke Ball Company (1892)
> http://www.youtube.com/watch?v=vYRcKQGadRo
3326. April 2017
Carlill v. Carbolic Smoke Ball Company (1892) (1)
>English decision
>Carbolic smoke ball> In advertisment buyer would guaranteed that it works
against influenza, if not reward £ 100
> Is this a contract?
>Court said (in inventive ways) YES, all essential elements are there, including offer, acceptance, consideration and intention to create legal relations
Carlill v. Carbolic Smoke Ball Company (1892) (2)
Court of Appeal
> Fully binding contract – all elements
> Advert unilateral offer to all
> Satisfying conditions for using ball = acceptance
> Purchasing and using ball = good consideration, benefit to Carbolic
> Claim of £1000 deposit showed serious intention to be legally bound
Breach of contract (1)
> Unjustifiable faulure to perform a contractual duty
> Also only partially
> Defenses
> No valied contract
> Lack of capacity (drunk)
> Mistake (mutual/unilateral)
> Changed circumstances
> Fraud
> Duress/intoxication
> Public policy
Breach of contract (2)
> Remedies
> General damages = Money damages
> Including consequential damages
> Sometimes punitive damages
> Restitution (f.e. overship of house)
> Specific performance (duty to perform)
> Only when monetary damages do not adequately redress the injury
> Exception, specially for unique goods – f.e. selling antiques, realestate)
> Liquidated damages
> Damages specified in the contract by agreement
Uniform Commercial Code (UCC) (1)
> First published in 1952
> Idea: to harmonize the law of the sale and other commercial transactions
> Secure interstate trade
> Created by American Law Institute (private organization)
> Not binding, only recommendation
> Permanent editorial board
Uniform Commercial Code (2)
> In one or another form enacted in all 50 states
> Even Louisiana mostly
> But some differences remain
UCC – Art. 2 (1)
> Contract formation
> Firm offers (offers that can not be revoked for a set time) are valid without consideration and irrevocable for time stated (or up to 3 months)
> Failure to set price will not prevent formation of contract if parties original intent was to form a contract. A reasonable price will be set by the court.
UCC – Art. 2 (2)
>Sending non-conforming goods = counteroffer
>Good faith requirement
>FOB – place of business
>Reclamations within 20 days
> Insolvency
>Battle of forms - when multiple forms with varying terms are exchanged
>Etc.
UCC – Art. 2 (3)> § 2-204. Formation in General.> (1) A contract for sale of goods may be made in any manner sufficient to show
agreement, including offer and acceptance, conduct by both parties which recognizes the existence of a contract, the interaction of electronic agents, and the interaction of an electronic agent and an individual.
> (2) An agreement sufficient to constitute a contract for sale may be found even if the moment of its making is undetermined.
> (3) Even if one or more terms are left open, a contract for sale does not fail for indefiniteness if the parties have intended to make a contract and there is a reasonably certain basis for giving an appropriate remedy.
> (4) Except as otherwise provided in Sections 2-211 through 2-213, the following rules apply:
> (a) A contract may be formed by the interaction of electronic agents of the parties, even if no individual was aware of or reviewed the electronic agents' actions or the resulting terms and agreements.
> (b) A contract may be formed by the interaction of an electronic agent and an individual acting on the individual's own behalf or for another person. A contract is formed if the individual takes actions that the individual is free to refuse to take or makes a statement, and the individual has reason to know that the actions or statement will:
> (i) cause the electronic agent to complete the transaction or performance; or> (ii) indicate acceptance of an offer, regardless of other expressions or actions by the
individual to which the electronic agent cannot react.
UCC – Art. 2 (4)
> § 2-205. Firm Offers.> An offer by a merchant to buy or sell goods in a signed
record that by its terms gives assurance that it will be held open is not revocable, for lack of consideration, during the time stated or if no time is stated for a reasonable time, but in no event may such period of irrevocability exceed three months; but in no event may the period of irrevocability exceed three months. Any such term of assurance in a form supplied by the offeree must be separately signed by the offeror.
UCC – Art. 2 (5)
> § 2-301. General Obligations of Parties.> The obligation of the seller is to transfer and deliver and that of the buyer is to
accept and pay in accordance with the contract.
Case: Payne v. Stalley (1995)
> Lawyer relied on official text of UCC and failed to check the Florida statute
> As result, he missed a filing deadline in an important case
> Court hold „we cannot rewrite Florida law to accomodate a Michigan attorney more familiar with UCC“
Uniform Commercial Code (UCC) (2)
> Adopted in all 50 states
> in whole or in part
> Dealing with sale of goods (contract law)
> Other sources
> Consumer protection law
> Judge-made law
Drafting US contracts
> Fact: longer than continental European ones
> Why?
4826. April 2017
nächstes Mal
Company law
Overview
> Corporate law (or company law) is basically state law> Interstate commerce clause (Art. 1 sec. 8 USC)
> US corporate law does not existe> Significant differences between states> Players on market are free to chose> Doing business in that specific state not necessary> Regulatory competition> Dominant state jurisdiction: Delaware50% of all US companies
Delaware (1)
> Why Delaware?
> No tax on activities outside the state
> Experienced courts
> Often no juries
> More case law than anywere else
> Long tradition (since 19th century)
> Computerized registration system
> Confidentiality?
> Lax corporation laws
> Manager friendly approach
Delaware (2)
>Why Delaware?> Internal affairs doctrine> For internal matters jurisdiction with state of incorporation
> All offices may be held by a single person who also can be sole shareholder> US citizenship/residence not necessary
> May also operate anonymously
>Other states have followed up> Race to the bottom? (Delaware effect)
Easy to create company in Delaware
> http://www.youtube.com/watch?v=4DVkdt5yVhM&feature=relmfu
5326. April 2017
Florida articles of incorporation
> http://form.sunbiz.org/pdf/cr2e047.pdf
5526. April 2017
Delaware code of ethics and company law
> http://www.youtube.com/watch?v=6SIIwWYi7u4
5626. April 2017
Model laws
> Regulatory competition lead to efforts to establish common standards
> National Conference of Commissioners on Uniform State Laws – NCCUSL created several model acts which are adopeted by most states> Uniform Partnership Act (UPA) 1916> Revised Uniform Partnership Act (RUPA) 1994
> Kind of legal harmonisation> But still considerable differences remain> Louisiana declines to adopt the model acts at all
Relevant Federal Laws
> Securites Act of 1933> After stock market crash 1929> Regulates Securites (information, fraud)
> Securites Exchange Act of 1934> Governs secondary trading of securities> Stocks, bonds, etc.> Antifraud provisions
> Sarbanes-Oxley Act of 2002> After Enron> The legislation set new or enhanced standards for all U.S. public company
boards, management and public accounting firms. > It does not apply to privately held companies
Legal entity - characteristics
> Shareholder’s liability limited to investment
> Formation: filed with secretary of state
> Taxes as separate entity
> Statutory requirements (persons, no residence, name, officers, shares, address, purpose)
> Financing (stocks, bonds)
> Piercing corporate veil (torts, fraud, inadequate capitalization, parent liability)
> Duites of directors and officers (duty of care, duty of loyalty, business judement rule)
> Private / public (listened) corporations (Securities and Exchange Act, Sarbanes – Oxley Act)
6026. April 2017
Different forms of doing business
>Sole Proprietorship
>General Partnership (GP)
>Limited Partnership (LP)
>Corporation (Company)
>Closed Corporation
>Limited Liability Company (LLC)
>Limited Liability Partnership (LLP)6126. April 2017
Sole Proprietorship
> Most simple way of running a business
> Only one owner
> Large part of US economy
> No separate legal existence from owner
> No formalities
> «John Miller – hairdresser»
> All debts of business are also personal debts
> No business taxes – personal taxes
> ~ «Einzelunternehmung»
General Partnership (GP)
> Almost every business activity as goal> At least 2 partners
> People or business entities
> No legal personality> Each partner is personally, jointly and severally liable for all partnership
debts (torts)> duty of care and loyality (no competition)> General rule: profit share equally
> Agreement possible by contribution
> Dissolved when one partner leaves> Partnership agreement not subject to any form requirements
> No registration necessary
Limited Partnership (LP)
> Variation of general partnership> RUPLA (Rev. Uniform Limited Partnership Act)
> One or more general partners and one or more limited partners> Comparable to „Kommanditgesellschaft“> Liability liminted to their investment> Investment in money, kind or services> No management function for limited partner
> „sworn certificate“ with Secretary of State> Firm: „limited partnership“> Tax considerations have made LP very popular as investment vehicle,
particulary in real estate or „venture capital“ companies
Corporation (1)
> Legal entity comparable to «AG»
> Easily formed by filing the articles of incorporatons with State Secretary
> Articles of incorporations (Statuten) and public notary
> Not very demanding
> Bylaws (Reglemente)
> Business name includes „Corp.“, „Inc.“ or „Ltd.“
> Issuing shares
> Public corporation/closed corporation
Corporation (2)
> Board of Directors = VR / officiers (Angestellte)
> Z.B. CEO, CFO, etc, chairman of the board
> Board of Directors appoints the officiers and monitors them
> Both have duty of care and loyality
> Also majority stock owner
> Decisions protected from court review by „business judgement rules“
> Exception: conflict of interest
> Internal affairs-rule (law of the where company was created)
> For internal affairs (Delaware)
> Stockholder not liable
> Exception: Piercing corporate veil (Expl.)
Arizona articles of incorporation
> http://www.youtube.com/watch?v=u1epTtVsO-U
6726. April 2017
Piercing corporate veil
>Walkovszky v. Carlton (1966)> New York taxis business
> Set up a corporation for each taxi but was in fact run by one company
> Taxi hit person on the street
> That taxi corporation had no money
> Insurance only up to $10‘000
> Question: piercing the veil?
> Undercapitalised subsidiary?
> Court held no piercing (majority)
Corporation (3)
>Limitied liability (coporation only)
>Yearly: income statement, balance sheet, evtl. auditing
>Stocks and stockholders> Stock exchange – public corporation (AG)
> Stocks can be transfered with agreement
> Consent not required (otherwise in articles of incorp.)
> „one man corporations“ possible
Corporation (4)
>Closed corporation> „Closed corporation“ (GmbH)> Fixed shareholders (familiy business)> Not more than 500> < US $ 5 million> Not so many> Same name> Tax advantages> Often specific duty of care> Voting rights – agreements
> Stock transfer restrictions
Corporation (5)
>Advantages:> Perpetual lifetime (not dependend of lifetime owner)
> No liability for stockholders
> Board and officers are obliged to do business in best interest of stockholders
>Disadvantages:> Double taxation
> Result: limited liability company
Limited Liability Company (LLC) (1)
> Relatively new type – more flexible
> Recently established by statutory law
> 1992 Uniform Limited Liability Company Act (NCCUSL)
> Between limited partnership and closed corporation
> Combines advantage of limited liability of corporation and tax status of partnership (no double taxation)
Limited Liability Company (LLC) (2)
>Similar formation like corporation> Article of incorporation and certificate of formation from
State Secretary
>Name: LLC oder Limited Liability Company
>Often only limited duration (f.e. 30 years)
>Transfer to third party without consent only interest, not voting rights
>Members do also manage LLC
Corporation or LLC?
> http://www.youtube.com/watch?v=i_Je_66jwtY
7526. April 2017
Limited Liability Partnership (LLP)
> More recent model
> General partnership in which the partners enjoy certain types of liability protection
> Protection varies from state to state
> Insurance instead of personal liability
> Registred with Secretary of State
> Popular legal form for professional like lawyers
> Many big law firms are LLP
> Can have unlimited term
> Change in partnership only with consent
Capital Market Regulation
> Securities and Exchange Commission (SEC)
> Sole power concenring federalwide business and supervision of financial services operators and mutual funds
> National Securities Market Improvement Act (1996)
> Securities Litigation Uniform Act (1998)
> Very powerful
> State authorities nowadays very limited powers
> < 25 million
> Sarbanes-Oxley Act (200)
> Additional obligation on executives, audit commities, information)
7826. April 2017
Public listed companies
> NYSE (Wall Street)
> Largest stock exchange in the world
> Dow Jones Index
> 1790
> 24. October 1929 («black Thursday»)
7926. April 2017
International level playing field
> http://uscorporation.com/?gclid=CLK24p_FvrYCFYJV3godal0AKw
8026. April 2017
Conclusion
> Like Swiss law US law distinguishes between two fundamental types of legal organizations:
> partnership and corporations
> But also „hybrid“ legal forms
> Chosing right form mostly depends on
> Liability risks
> tax
Next time
>Next time: Torts law
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