Law of agency is law of delegation to act on its behalf

2nd Restatement defines agency as the fiduciary relation which results from the manifestation of consent (mutual consent with manifest to consent) to another that the other shall act on his behalf (primarly on behalf of the principle not the agent - agent cannot be primary beneficiary) subject to his control and consent. Control is subjective, and normally left to a low bar - basic approval is ok but cannot be a independent contractor.  

Person can be individual or corporation on either side.

Agency also created by ratification/acceptance of princip

Master/servant (resp superior) diff than independent independent contractor.  Master employs agent to act on his behalf (employee as example) vs independent contractor has control over how work is done and not subject to "control". 

Master/employee subject to resp superior, but independent contractor not subject to resp superior and tort liability - contractor not subject to how to get work done, not subject to "control".

Note if the tortious activity is within the scope of the job - was it a frolic or detour.  

In making the CONTRACT liability determination is important to ID if the principal is Disclosed, partially disclosed or undisclosed (no liabiltiy)-if the 3rd party has notice that agent is acting on behalf of the principle.  Also for principal is liable on contract between agent and 3rd party when the agent acts with Actual (written oral), apparent (indicates another has authority indicated to the 3rd party but must be within scope of work) or inherent authority (authority only provided to agent) - no liability if they cannot show one of these three authorities. 

Ratification required - principle will be liable to a 3rd party if the agent purports to act on the principals behalf AND the prin affimatiley treats the agents act as authorized OR principle engages in conduct that is justifiable only if the principal is treating the agent act as authorized.  Principle must be aware of the materials facts - pricilple must manifest acceptance of transabtion done by agent.  If ratified by principal, the agent is not liable for any contractual claims. 

Liability of the 3rd party to the principal - if agent 1) had authority, OR if 2) if principle was disclosed to 3rd party and 3) principal was not fraudulently concealed (Walt disney did not disclose that his agents were buying on his behalf but was not fraudulent).    

Liability tof the agen tthe third party - agent is not a party ot the cotnract and is not liable if principle is disclosed - partially disclosed and undisclosed differnt.  

3 ways for a business to obtain money - borrow money, earn, or equity investor, parther, shareholders

Formation of business focused on three major issues: 1) owner liability, 2) how entity is taxed (1st driver) - llp/llc avoids double taxation and 3) limit agency cost agent/employee liability from respondeat superior. 

Taxes - either legitimate tax planning tax avoidance  OR illegitimate tax evasion/fraud.

1. sole proprietor - oldest and most used form of business - no protection at all
2. Partnership - facilitated trade- share profits in the value chain
3. Corporations - roman origins - ability to raise funds for public projects
4. Corporations - english and dutch backgrounds, industrial revolution, dutch east india company - sharing of risk for ship disappearing.  Invest in 10 boats, share risk across all 10 via stock. Boston scientific first real business corp.  
5. Delaware corporations have benefits of low taxes, chancery specialty cour for business, stable laws that change only after vetting, judges who focus on business law and are predictable, 
6. LLC created first in wyoming where corporation profits taxed on lat the shreholder level - single taxation.  
7. LLp from texas to protect partners in law firms, phsyician firms, etc.  

Key elements: principle disclosed, agent authority (actual apparent, inherent) and ratification (DAR)

Agent is contractually liable to 3rd party in contract if no authority or principle undisclosed or partially disclosed. Not liable if principle disclosed - but if partially discolsed or prin is disclosed then agent will not be liable to 3rd party. 

Agent is contractually liable to principle even if agent acted without authority and without ratification if agent had apparent authority, agent should indemnify principle; 

Principle is contractually liable to agent in contract if agent was acting in authority and in scope - provide indemnity to agent if acting in auth and scope.  

3rd party liable to principle if if agent 1) had authority/ratification (even if principal concealed) OR if 2) if principle was disclosed to 3rd party and 3) principal was not fraudulently concealed

Cannot bind 3rd party when responsibilities materially change.  

Principle contractually liable to 3rd party only if disclosed/partially disclosed or fraudulently nondisclosed. 

Ratification required - principle will be liable to a 3rd party if the agent purports or acts on the principals behalf AND the prin affimatiley treats the agents act as authorized OR principle engages in conduct that is justifiable only if the principal is treating the agent act as authorized.  Principle must be aware of the materials facts - principle must manifest acceptance of transaction done by agent.  If ratified by principal, the agent is not liable for any contractual claims. 

 Liability of the 3rd party to the principal - if agent 1) had authority, OR if 2) if principle was disclosed to 3rd party and 3) principal was not fraudulently concealed (Walt disney did not disclose that his agents were buying on his behalf but was not fraudulent).    

Duties of Agent to Principle.  

Fiduciary, keep informed, best interests, care, loyalty 

Duty to act only as authorized by principal

Loyalty and duty of care. 

Duty of Care = competence and diligence normally used by agents in similar circumstances 

 Principals duty to agent:

contractual commitments and provide indemnification (always required in fiduciary relationship unless contracted alternatively)

cannot interfere with agents duty

act fair and good faith

• When objectives are complete
• When either dies unless contract says differently
• Corporation bankrupt, merger, dissolution,
• Principal or agent revokes relationship, based on contract - if contract says no termination or breach then they cannot breach. 
• Might need notice to revokes the relationship

Formation - An association of two or more persons to carry on as co-owners for profit

Does not require partners to be aware of partner status - intent to do things which constitute partnership is necessary

All surrounding states use RUPA more common.  

PA uses RUPA 13

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.

Firm KNK was in financial difficulty, one partner Hall obtained a loan for 2.5mil paid back by 40% of profits.  Number of agreements were made to ensure profits were made and paid. 

Agreements to ensure profit not enough to make partnership - must be closely associated so as to be co-owners of the business for profit.  Plus the exception of payback of loan.  

UPA Section 6 Partnership Defined

Section 7 Rules to determine partnership

A partnership is an association of two or more persons to carry on as co-owners a business for profit (says nothing about losses)

Joint property ownership does not make partnership

Sharing of gross returns does not make partnership

Share of profits key, but not if received as debt or employment pay

Every partner is an agent unless there is no authority of the partner. 

An act of a partner that is not apparently related to carrying on the business does not bind the partnership. 

Partner cannot unilaterally make loans, dispose of goodwill, do something that makes business impossible, confess a judgment, submit to arbitration or accept a claim.  

Same as RUPA 301

Partnership bound to loss or injury if partner is acting in ordinary care of business or with authority of co partners.  

Also liable to 3rd parties - different than RUPA 409 which requires Gross negligence and only liable to fellow partners, not 3rd parties.  

 (a) partner repaid his contributions, and be paid equally in profits and equally respons for debt..

 (b) indemnify every partner against personal liabilities 

 (d) A partner shall receive interest on the capital 

 (e) All partners have equal rights in the management 

(f) reasonable compensation for his services in winding up the partnership affairs.

 (g) No person can become a member of a partnership without the consent of all the partners.

 (h) ordinary business may be decided by a majority of the partners; but no act in contravention of any agreement between the partners must be unanimous

Partnership formed with or without intent - association of two or more persons to carry on co owners a business for profit. Profit is key determinant even if has no knowledge

Lack of intent is key difference between UPA and RUPA

 All partners are liable

 (a) Jointly and severally for everything chargeable to the partnership under sections 13 and 14.

(b) Jointly for all other debts and obligations of the partnership; but any partner may enter into a separate obligation to perform a partnership contract.

305 - A partnership is liable for loss or injury when a partner was acting in the ordinary course of business of the partnership or with authority of the partnership. Also applies to money/property misused by partnership

306 - All partners jointly and severally liable; new partners not liable for obligations incurred before his partnership.   

Liabilities incurred in a limited liability partnership is solely the obligation of the partnership entity - partners not personally liable.  

Principple will be liable to 3rd party if:

1

AND 

2

OR

3

Principle must be fully aware of the material facts. 

No written requirment to form a partnership, can be oral or implied.  If no written agreement, the gov will assign default elements of a partnership - they determine for you

Key to have a written agreement to ensure you define the elements of the partnership and what happens with the money when something goes wrong

Especially required when land is transferred for partnership because it violates the statute of frauds. 

Aggregate theory- UPA says partnership is an aggregate group of partners - and there is NO true entity

Entity - RUPA says clearly that a parternship itself is an entity

This is important because when you need to figure out who to sue - under UPA, you sue the partners, when under RUPA you sue the Entity

Most states allow to sue as entity regardless of UPA/RUPA

A partnership may be created by estoppel, without a formal partnership agreement, where the parties intend to and by their actions create a partnership relationship.

Smith was employee at Kelly and Galloway.  His agreement indicated he was a partner and presented as a partner in front of other agencies - but did not get profits - leaves the firm and sues to get profit as partner.

Can be a non equity partner -like smith - but did not share profits, no intent, and no actions to otherwise act as partner, especially lack of profit share

In a general partnership, each partner has an equal right in managing the business (unless agreement otherwise).

Summers and dooley were partners in trash business, Summers wanted to hire another employee, but dooley refused, summer hired anyway.  dooley would not pay out of partnerhsip funds, sues for expenses of employee. 

Material Decisions made by majority, if only two, must be unanimous.  Dooley not liable for unilateral expenses of a partner. had authority, but not to be reimbursed. 

In a general partnership with two partners, each party has the power to bind the partnership in matters pertaining to the partnership’s business.

Stroud and Feemena had gen partnership to sell groceries.  Partnership did not limit either partner ability to conduct business on behalf of the partnership.  Stroud told Nat Biscuit that he would not be liable for any bread sold to the partnership.  biscuit sued. 

Stroud had no right to negate Freemans purchase of bread. Diff than Dooley because Nabisco is 3rd party and partnership is liable because Freeman was Authorized

In the absence of a partnership agreement, it is assumed that partners intend to share equally in the profits and losses of the enterprise, regardless of the amount of money they contributed to the partnership.

Kessler bought and funded renovations on house, Antinora was GC, house sold at a loss, Kessler sues Antinora for 40% of losss (was to be 40% of profit).  

Kessler to be repaid for expenses and then 60% of profit, no agreement for Antinora to reimburse for loss.  Not share in losses because antinora was giving labor.

A partner is jointly and severally liable for the tortious acts of another partner if he authorizes those acts or if the acts are committed in the ordinary course of the partnership’s business.

Berentson and Mead were law partners, Mead takes $20K loan from Roach, mead does not repay, Roach sues partnership.  Brentenson held liable also.  Partner can be vicariously liable - jointly and severally liable for actions in ordinary course of business. 

partnership must indemnify a partner for payments made and liabilities incurred  by the partner in the ordinary course of the business 

Indemnification is an obligation of the partnership

Contribution (when business has losses - and individuial partner has unlimited liability) is an obligation of a partner.  

This is why LLCs are done today rather than GPartnerships. 

20 - Duty of partners to render information - true and full information of all things affecting partnership

21 - Accountable as Fiduciary - cannot hold profits for self for ANY transaction connected with the formation, conduct or liquidation of the partnership 

22 - Right to account - if partner is wrongfully excluded for business, whenever circumstances render it just and reasonable

Certified copy of statement filed with secretary of state

Must be executed by at least 2 people of partnership

No filings are mandatory under RUPA, mostly just the submission of the partnership agreements.  

Duty of loyalty and care

Fiduciary duty

act in good faith

Not a violation if conduct futhers partners own interests

Valid defense to say that transaction was "fair" to partners

23 - Continuation of partnership beyond fixed term - expires on first term date, but if continue to act as partners is prima facia evidence of partnership continuation

24 Property rights of partner include partnership property, interest in the partnership and right to participate in management. 

25 - tenant in partnership - equal rights to possess for business, need consent for non business use

26 - Partners interest in partnership is share of profits and is same as personal property

27 - assignment of conveyance of partners interest does not dissolve partnership, assignee cannot interfere with management of partnership or see books

28 - 

32 - dissolution by decree of court - partner may dissolve partnership if found to be incapable, insane, found guilty of crime that prejudices partnership, if partner persists in violations of the partner agreement, if business can only go forward as a loss, 

Dissolution is any partner leaving or complete ending before winding up and liquidation,  Partnership is not TERMINATED until the assets/laibiities are distributed. Dissolutions is different than winding up the business   

Key is if Partnership is at will (default) or "for term" (defined time for its existence).  

UPA 38 - Partner property after dissolution

UPA 42 - Rights of deceased partner when partnership continues

Salmon has 20 year lease and concurrently entered into JV with Meinhard to manage retail property, 50/50 profit.  With 4 months left, Salmon executes new 20 year lease w/o Meinhard.  Meinhard sues for 50% interest from new lease.  

JV and other partners have fiduciary duty to other parties and must disclose business opportunities DURING THE ENTERPRISE resulting from the partnership/JV.  Meinhard given 50/50 rights to first lease with JV.  Loyalty and duty of care example

Enea sues former partner daniels for breach of fiduciary duties by renting the sole asset, office building, to themselves as less than market value. 

Sup Ct said they cannot rent to themselves below market value, breach of loyalty and fiduciary duties.  Cannot take advantage of property at expense of partnerhsip, even when goal was to sell property later at profit.  

A partner has fiduciary duties to other partners, but not to former partners. There is only limited liability for gross negligence in winding up business affairs in dissolution.

  Bane retires, the firm merged with another firms and then dissolved without a successor entity.  Bane sues for negligent conduct of law firm.  

Once retired, no fiduciary duty to ex partner, and is shielded from liabilities of failed partnerships

A partner can compete against the partnership and other individual measures if agreement says so. 

Singer family has oil production partnership called Joseline; partnership agreement said individual members of the firm were free to enter into business transactions that conflict or compete with partnership business. In a business meeting, one member brings up a 95 acre parcel, but no decision made.  Stan and Andrea buy the parcel though a new partnership agreement.  Joe brings suit under fiduciary duty.  

A partner has a fiduciary duty to provide, on demand, true & complete info of any things affecting the partnership. Cannot act secretly against partnership

Meehan disgruntled partnership in law firm, planned to quit and start new partnership, asked if he is leaving, said no.  Gave 1 month notice and then immediately solicited current clients, asked to provide list of targeted clients, did not give.  New firms sues old firm for withheld compensation, old countersues new firm for breach of fiduciary duty, breach of contract and tort interfere with business.

Unless specific in the agreement, cannot unilaterally add new partners - ambiguity results in RUPA rules. 

Rapoport joins with others to form partnership, agreement says partners can sell or assign to immediate family without consent; upon death, his share goes to heir.  Rapoport assigned 10% of their share to sons

If the agreement does not address the specific issue, the matter is governed by partnership law.   Can assign the partnership but the agreement did not allow for full membership and right to manage.  

 A limited partnership has the powers to do

all things necessary or convenient to carry on its activities, including the power to sue, be sued, and defend in its own name and to maintain an action against a partner for harm caused to the limited partnership by a breach of the partnership agreement or violation of a duty to the partnership. 

Can eliminate the duty of loyaly and care as long as it is not manifestly unreasoable - can id specific types or categories of loyalty and care.  Cannot eliminate good faith and fair dealing. 

(a) In order for a limited partnership to be formed, a certificate of limited partnership

must be delivered to the [Secretary of State] for filing. 

As long as the certificate complies with most of the requirements, the partnership is formed when Sec of State files the certificate.  

Unlike general partnerships, requires formal filing of a document. 

Each partner is an agent of the LP unless otherwise stated otherwise.  If not authorized and 3rd person did not know agent had authourity, partnership still liable (not so if 3rd party knew lack of authority by partner/agent). 

Must also be ordinary course of business activities

If a general partner misapplies money, the limited liability partnership is liable fo the loss.

 all general partners are liable jointly and severally for all obligations of the limited partnership unless otherwise agreed by the claimant or provided by law

new GP not liable for previous liabilities

GP not liable for limited liability limited partner liabilies

contribution can be monetary, property, services or loans

Partners obligation to contribute IS NOT excused by death, disability or other inability to perform. 

Obligation only removed by consent of ALL partners

503 says distribution upon dissolution based on the proportional value contributed to the partnership - if you contributed 10% of the total investment, you get paid 10%

404 (1997) says loyalty is LIMITED to the following...

409 (2013) says INCLUDES ....

CanNOT contract away fiduciary duties in UPA

But can do this under RUPA 103 (1997)/105 (2013)- to an extent...

delaware can entirely contract out the fiduciary responsibilities....

Still need to act is good faith for all circumstances...

A partner does not have a legal right to force dissolution of a partnership if the other partner fulfills duties

Collins and lewiis 50/50 partnership for a cafeteria, collins is money man, lewis was manager, never made money, collins says he wants out. lewis wants to buy out collins, but cannot.  Collins sues for dissolution 

Courts reject the dissolution because no reasonable expectation of profit, collins interference in business prevented profit, lewis was competent to manage.  Cannot terminate if not at end of term when partnership is a term based partnership    

The Board of directors of a corporate general partner owes fiduciary duties to the other partners and to the partnership, in addition to the duties owed to the corporate general partner.

USA cafes was a limited partnership with GP and group of limited partnership unit holders.  Metsa acquires essentially all of the partnerships assets, unitholders sued saying asset sale price was too low and that bribes were going on.  Failed to obtain best price, breach duty of loyalty. 

A partner is entitled to payment in cash of his partnership assets upon dissolution and wind-up 

Brothers operate feed mills, no written agreement - at will partnership, all but one partner elected to dissolve and wind up partnership.  The courts divide the two properties but one partner wants cash.  

Without written agreement, one partner can require cash settlement in the dissolution of the partnership - because property based assets have different values and profitability

A partnership may expel a partner for purely business reasons, to protect relationships within the firm and with clients, or to resolve a schism in the partnership.

One partner of a law firm suspects another partner is overbilling pennzoil; every one else disagrees, accusing partner is denied year end distribution and she files for breach of duty and breach of contract.  Whislteblower wins some, but partnership is allowed to expel another partner. 

There was a dissolution section in the agreement. 

A dissociation is wrongful if it is in breach of an express and un-ambiguous provision of the agreement.

MRI associates partnership, written agreement says that partner could withdrawal under four conditions.  St Alphonsus dissociated under a different condition.  

Dissociation is only wrongful if it breaches an express (not implied) provision of the partner agreement.  St Alphonus did not dissociated improperly - says IF means one of other possibilities - can be other than the 4 agreed dissolution ways.  Ambiguous  

General partner in LLLP is liable for the business only when GP would be liable.  Only need to file and pay funds to be LLLP

No separate statute - but can declare the limited liability provision in the agreement and must also be in the business as a LLLP or similar. 

Look at 404 for limited liability language and 114 for the naming requirements for a limited partnership limited liability - note only limited liability to 3rd party claims. 

must have lllp in name

General partner not liable in any way to obligations of the llp

A partner in a limited liability partnership is not liable for the obligations and liabilities of the partnership or the other partners.

Irving was a llp law firm, Kus sued LLLp alleging forceful inducement to sign high fee rate by Irving himself.  

Rest of the law firm was not liable, only Irving himself.  

• Must file certificate - terms not need to be in writin
• General partner has same unlimited liability as in a general partnership - must have at least 1 general partner and 1 limited partner (LLC/LLP requires no general partner)
• Limited partner in limited partnership has limited liability up to the amount that you invested 
• Limited partner does not have fiduciary duty to gen partner unless in the agreement. Gen Partner has fiduciary duty to other gen partners
• Can limit the fid duties of GPs to an extent, can completely eliminate fid duty in DE

Use DE Limited Liability Corp Act

Must file certificate with state and pay fees - DE best because you have freedom of contract and favorable corp judicial system. 

LLC articles said Jerez was manager, agreement said no loans unless authorized by all (state statue#1 says can make LLC specific rules).  Jerez takes loan for LLC, defaults, foeclosed. LLC tries to say loan not valid because not authorized by all, but state statue#2 says LLC manager has authority to take loans. 

LLC agreements are always subordinated to any specific state statue laws.   

A member of a limited liability company is protected against liability for claims arising solely by reason of being a member or acting as a manager of the co. 

handy looks at land for investment, has wetland, then sells to Pepsi without disclosing wetlands.  Forms LLC with 2 others to buy the land &sell to Pepsi;sues LLC. 

Member of a LLC is not protected against claims arising from before LLC formation.  Will not be liable for claims SOLELY by reason of being a member, but this was not SOLELY associated with LLC membership but fraud before or if they know LLC will be insolvent

means beyond the power - actions of the corporation beyond the agreement, bylaws or clauses - if beyond the scope actions then they are void or voidable.  

Cannot be ratified or changed by shareholders

Was a defense for estoppel

Corp can protect itself from individual member tort with UV

Now mostly abolished, especially in DE. as almost all charters allow LLCs to transact any lawful business - protects creditor and other claimants

Under the ultra vires doctrine, a plaintiff may challenge a corporation’s act on the ground that the act is beyond the scope of powers granted to the corporation under its incorporating document.

Kings highway leases land from Marine repair, but lease was for theater ,and marine repair is restricted to marine repairs only.  Kings highway sues to get out of contract saying its beyond marine repairs scope.  

Kings highway loses because Ultra vires is prohibited by state law

Do list/schematic of what rule book or specific rules to use / make GP all the way to LLLP etc.  e.g. LLP is created by RULPA 305, etc.  

Note that there is a difference between certificate of a limited entity (very little info required to submit to state agency)  and the AGREEMENT which is not public and may have many other items listed to organize and govern the business.  

Members of an LLC violate their duty of loyalty to a fellow member if they do not give him notice of an LLC action that is adverse to him and that he would be able to prevent given his controlling role in the LLC.df

Must disclose to other members that LLC action is averse to an individual LLC member - part of fiduciary duty.  

Can negotiate this away in the agreement but (as always) cannot eliminate the contractual duty of good faith

Under the business judgment rule, directors of a corporation are presumed to have acted on an informed basis, in good faith, and with an honest belief that their actions were in the company’s best interests.

Occidental petro company founder Hammer, hammer wanted to fund new art museum with $50million, shareholders thought this was waste of corporate funds. 

Ct rules in favor of Hammer, can make charitable foundation and assumed good faith and in corporation interests as long as charitable contribution is reasonable

Agency created when both sides manifest agency, normally by clear communication.  Manifestation can also be done by behavior of principal (not by behavior of agent)

Agency can be present even if verbally stated that there is no agency - if prinicple acts as if agent is agent.  

Was Agency Created?

Authority?  Actual or apparent or none?

Within scope of employment

Ratified by principle

Is principle disclosed

ADARS

A promoter (Agent/firm who does preliminary work incidental to the formation of a company) will be personally liable on his contract, even if he believed he was acting on behalf of a projected corporation, unless the other party agreed to take payment from some person or fund other than the promoter

"Agent"/promoter is contractually liable to a 3rd party because the principal does not yet exist - even when new entity is identified/disclosed.  

Under the Model Business Corporation Act, a corporation only exists after the certificate of incorporation is issued, and individuals who act as a corporation before then are jointly and severally liable.

Levy's new cert of corporation was rejected (not sure why), assigned a lease to rejected corp entity, then defaults on lease.  Levy is personally liable for lease and other obligations of the rejected corporation.  Was not any type of corporation, therefore personally liable. 

Helps protect the corporation - should be open ended and user friendly to the corporation - number of directors, how they are elected, when meetings occurs, how to determine officers, definition of quorum, requirement for votes to pass, whatever buylaw saus.  50% quorum in DE is default case - 

Can have a single topic in both the cert of org and the bylaws - cert should be broad (shares are limited in transferability) and bylaws should be specific (only transferable with full consent of board, etc.) Ultimately the state law is highest, then certificate over bylaws. 

A plaintiff may pierce the corporate veil of a corporation, and impose liability on its shareholders, to prevent fraud or to achieve equity - if there was fraud, misrepresentation, or illegality. Does not depend on if the director was incompetent or stupid - must be fraudulent etc. 

Disregarding the corporate entity is Rarely done, DE especially protects the corporation. 

Home owner corp sues bartle for mismanaging construction of co op apartments in NYC

When substantial ownership of a corporation’s stock lies in a single individual, and there are other factors in support, courts often apply the “alter ego” or “instrumentality” doctrine to pierce the corporate veil and make the individual stockholder liable.

Look into if there is commingling of assets, lack of CORPORATE FORMALITIES such as documentation of transfers, no meetings, only one director/stockholder - constructed corporation just as a ruse - insufficient capital is a major factor as well. 

A plaintiff may ordinarily pierce the corporate veil and bring a parent corporation into a case against a subsidiary where the subsidiary was operating while undercapitalized - can be undercapitalized if insufficient insurance or insurance company is defaulted.

in order to pierce the veil, you must have 1) full control/closely held companies (complete domination of llc control), 2) must use it for fraud or dishonest/unjust act, inequitable manner, insuficient funding/undercaptialized, etc 3) must have proximate cause injury

issues where corp veil comes up - 1)to pay employees of the corp 2) to remedy fraudulent behavior, 3) bankruptcy valuations that do not protect creditors and shareholders

has never been n companies that have more than ~9 shareholders

Diassociation is one partner leaving entity

Winding and dissolution Up is termination of partnership

Always decided based on language OR default rules

Unlimited for GP

Limited for LP except General Partners

LLC to extent of contributions, 

LLP contributions AND unlimited for own personal wrong acts

GP - All

LP - GPs only

LLC - members and delegated to managers

LLP - all partners or as agreed in UPA

GP - UPA or RUPA

LP - RULPA 

LLC - DLLCA

LPLL - RULPA 114 and 404

LLP - RUPA 102.9 and 306c

• De jure corporation - completely formed
• Defacto corporation - defective in technical issue but considered still valid - valid law, attempt to be corp and have actual user of name/entity
• Corp by estoppel - cannot deny that you are an entity - narrow circumstances, declare you are an entity only to one person/entity
• Can also be none of the above - no corporation at all and therefore fully liable

UPA 40 - Rules for distribution after dissolution

Subject to other agreements, default rules indicate:

• Assets include partnership property and contributions of partners
• Rank and payment of liabilities are:
  • outside creditors
  • partner-provided credit not related to capital/profits
  • partner liability for capital
  • partner liability for profits

partnership agreement may not:

• violate local state law or appropriate jurisdiction 
• unreasonably restrict the duties and rights of information provided to partners
• alter or eliminate duty of loyalty and care except as desribed in subsection of 105(d)(1) - which allows the modification or elimination of fiduciary duty.  
• Cannot eliminate fid duty in DE????

partners owe duty of loyalty and care to partnership and other partners

during regular conduct and widing up of business, with use or appropriation of partnership property, 

refrain from competing against other partners

duty of care for partner is gross negligent, not standard neg

Willful withdrawal

event in agreement causing dissociation

person is expelled pursuant to agreement

person is expelled by consent of all other members

if the partnership is for a stated purpose or defined time/term

If a partnership by will and person is required for partnership (normally with only 2 partners)

If there is an LLC, you need a partnership agreement - and operating agreement (which controls) - name general manager partner in op agreement to name son as GP - look at how to amend agreement - by majority of interest in the LLC they can amend agreement - 

test covers only info up to tonight - essay exam - everything after GPs will be on exam.  

A court may, for equitable purposes, disregard the corporate entity and disallow or subordinate an officer or stockholder’s claim against a corporation.

Litton sole shareholder of his partnership Splint, did not take salary, goes bankrupt, pepper is a creditor; in order to take all assets from company, litton puts in a claim of unpaid salary to get all money and value from company and therefore pepper gets nothing. 

Courts rule against litton, subordinates his salary claim to creditor claim

A successor corporation does not acquire its predecessor’s liabilities and debts, unless

1) there is an agreement to assume liabilities (even if they acquire only some of the liabilities but not others)

2) the transaction is merely a consolidation or merger,

3) the successor is merely a continuation or reincarnation of the predecessor with same mangement and owners  , or

4) the transaction was fraudulent, made in bad faith, or made without sufficient consideration.

Wanted to also include continuation of enterprise (sellinmh the tresdmills)

Piercing veil - law - court may under pricni;es of equity, subordinate all or part of one interest to another.   - page 218 of text.  

subsident consolidation equitable doctrine - pierce viel and treat corp and individual the same when there is fraud.

Successor liability - obligations to ensure that a sale of assets does not come will the liabilities of previous entity.  General priciniple was no liabilith is transferred with sale of assets unless there is a lein or other interrest attached or other circumstances such as, 1) express agreeement to acquire liablilities, 2) liability or merger, 3) mere continuation of entity, 4) in fraud or with out consideration - not the continuity of the enterprise that the business continues without continuation of ownership.   

A successor corporation does not acquire its predecessor’s liabilities and debts, unless: 

1) there is an agreement to assume liabilities,

2) the transaction is merely a consolidation or merger,

3) the successor is merely a continuation or reincarnation of the predecessor, or

4) the transaction was fraudulent, made in bad faith, or made without sufficient consideration.

Continuation of entity (such as still selling same treadmills)  not sufficient - where its the same business but owned by others

Get Non assumption of liabilities in agreeeemnt

Get indemnifcation by seller for things bad after sale

Try to get some proceeds in escrow until entity proven

Or keep entity open or provide insurance to also protect buyer from being defrauded by open unknown liabilities. 

Debt and equity for corp financing

structure of corporation depends on financing of company - Debt and equity

Characteristics of debt - 1) debt must be repaid,2)  interest on prin must be paid periodically, 3) repayment of prin and interest not dependent on if the business is successful.  Article of incorporation/certificate of incorporation is ONLy place that defines the AUTHORIZED shares issued.  

Types of equity - 1) stock/shares are same - (MBCA def is 1.40 - units of interests re how the corporation is divided - must be in articles of corporation) - shares can be divided (6.01 classification (preferred/commmon) and series (a,b,c of common stock, designation only generally, mostly in preferred shares) of shares, in articles of corp NOT bylaws) - at least one class that must have voting rights in shares and right of profits.  Can be redeemable (cash in) or convertible (change from pref to common stock)- all stockholders have right to review documents, sue corporation, receive dividends, 

Preferred shares - can be preferred in many ways, voting rights, worth more, liquidation, transferability, dividend rights, rights only negotiable if cert agreement provided the ability to negotiate rights of preferred shares.  If board has rights to neg any term for preferred shares, these are called blank check preferred shares - must be in cert of corporation and in cert of designation. 

Articles MUST have corporate name, number of shares authorized to issues, street address registered office and agent.

Articles MAY have: names of initial directors, purpose of the corp, limitation of powers, etc. 

Articles MUST set forth any classes of shares and series of shares, must prescribe a designation for each class or series and rights of preferred shares.  Also must define how many shares for each class.  Also must define voting rights of various shares (these are mandatory - cannot have corp without voting rights defined by shares). 

6.02 Terms of Class or series determined by BOD preferred or common - CERT OF DESIGNATION defines preferred shares and is part of the articles of corp.  may or not be part of the articles of incorporation for pref stock. 

6.03 - corporation can ISSUE the AUTHORIZED shares

BOD or Shareholders (if articles indicate that shareholders can do this) may authorize additional shares

Also will provide the consideration - does not have to be cash - for the issuance of the shares - services, property, prmissory note, past and future services to the firm.  BOD defines this conclusively - not arguable.  non assessable - cannot change the price essentially.  

BOD MAY determine if and when distributions are made  but is pursuant to articles.

Cannot distribute if corp cannot pay debts in usual course of business (insolvency test)  OR if assets are less than the sum of its liabilities and payments to preferred stockholders (balance sheet test)

Direct or indirect payment to shareholders based on value of the corporations - normally dividends.  

Quorum must be attained, default is majority of shares allocated to shareholders, 

Some requirements for greater shareholder quorum for election of directors and cannot be lower than that. 

Leverage is when you can earn more than the cost of capital/debt (you can double your money in profit and it only costs you 10% interest). 

Debt to corporation by shareholders is good leverage and avoids some taxes, but if the loans are consistently never paid back, courts will reject that it was a loan and will classify it as an equity investment. 

Registration for IPO requires two parts:

1) prospectus document distributed to potential investors & 2) additional information that must be submitted SEC

 CIVIL AND CRIMINAL PENALTIES ALLOWED

1933 registration act requires registration statement with SEC for IPO-shares publicly traded must have initial disclosure via the prospectus and lots of info/exhibits such as risk and prev financials.  

1934 exchange act- about disclosure to allow fairness across the board - no insider trading, etc. - disclosure on ongoing basis every quarter - 10K, 8K,etc. . 

(1) A person is guilty of securities fraud when he misappropriates confidential information for securities trading purposes, in breach of a duty to the source of that information.

(2) SEC Rule 14e-3 is a proper use of the SEC’s rulemaking authority and should be given deference.

Ohagan was at law firm for CONFIDENTIAL tender offer in Pillsbury common stock which, insider trading, got call options while IPO was confidential and profited $4 million

A stockholder has a PREEMPTIVE right to vote in proportion to the number of his shares, and this right cannot be curtailed by the directors, officers, or other shareholders of the company.

Stokes was original shareholder with significant number shares issued, company decided to double the total shares, and Stokes demanded to therefore double his number of shares to keep his % voting rights but was refused.  Stokes won.  

A close corporation may not issue new stock at a price that is significantly below book value without a valid business justification.

Sidler stockholder of 1/3 of closely held corporation, corp re issued shares below actual value, Sidler did not take the opportunity, but is still permitted to receive his proportionate share of the new stock.  Would otherwise be inequitable in a closely held company.  Fiduciary duty to not issue stocks at price below market value.  

In DE has board has absolute unfettered discretion to pay dividends or not unless there is a preferred stock that had right to dividends and cannot have a controlling stockholder trying to suppress/bad faith/selfish motivations harming minority.    

FOrd was very profitable early on and distributed millions of $ in early years.  Then Henry Ford said no more dividends, all profits go to lowering price of car and growing the company.  Dodge brothers were minority shareholders and disagreed.  THey won.  

6.30 Shareholders do not have a preemptive right to acquire corporations unissued shares.  Can easily be granted if in articles or bylaws. 

6.40 Distributions: BOD authorizes distributions, cannot do if liabilities are greater than assets (balance sheet test)  or if the distributions affects the ability to paydebt.  

Completely different than what MCBA says - DEis one of those jurisdiction that uses other rules Delaware General Corporate Law  - can have par value or no par stock in these states. 

Par value of shares is the amount stated as the value of the stock defined in the articles of incorporation - defines the amount of capital that goes into the corporation for each share purchased -  whatever you want this to be valued at - typically a 01. per share - 

You are liable up to the par value of the shares that you recieve if you have not paid the par value - Corporate shareholders must pay for their shares of stock as a prerequisite for their limited personal liability.

par value for common stock is $1000 - but initial stock holders did not pay par value - then defaulted on loan that capitalized the company and they were ordered to pay $1000 par value for all shares to cover the debt.  

Par value could be covered by sweat equity, property or other consideration.  Limited liability to the amount of par value that should have been paid for par value.  

Authorized is total number of shares possible

Issued shares are those released by BOD to be sold, but not all need to be released

Outstanding shares are those that are distributed to investors

Treasury shares are those bought back/repurchased or NOT ISSUED shares and has the discretion to make publicly available or not. 

A shareholder contract cannot limit the change of officers, salaries, or BOD policies (cannot contract out fiduciary duties) without shareholder agreement per 7.32. BODs cannot agree among themselves to limit fiduciary duties.  

Similar to LLC, where you can contract out the fid duty but MUST have ALL shareholders agree per MCBA 7.32 - really applied to closely held companies.  

Director on BOD primary responsibility is to shareholders, not other BODs under separate agreement. 

Shareholders can have agreements that limit the BOD powers and even ones dictating distributions and who will be officers, voting rights, etc. - Broad set of powers that the shareholders can agree to.  

BODs cannot have such agreements among themselves (McQuade v Stoneman). 

ALL shareholders must sign the agreement. 

Every Corp must have BOD unless otherwise specified in 7.32 type of agreement

Except for agreements under 7.32, the BOD directs the actions of the corporation and has broad authority to govern the corporation's. 

Business and affairs of the corporation managed by the BOD - now become fiduciaries (duty of care and loyalty) to corporation AND the shareholder itself (if acting in best interest of the corporation, then also in best interest of shareholders).  

An election inspector presiding at a shareholders’ meeting has broad authority to determine the validity of proxies in order; the correctness of that decision is reviewable only after the election in a quo warranto (legal court) proceeding.

Salvo is president of GD, Meer was election inspector for corp voting, One major shareholder was in bankruptcy, and pioneer casualty represented by Matthews was in receivership had proxy voting documents.  Meer refused to validate the proxy voting documents. Preliminary win for Meer, but corrected after legal action that confirmed proper proxy voting rights.  

Unless otherwise agreed in bylaws, must have annual meeting.  

If no annual meeting, this does not affect the validity of any corporate action.  

A fixed voting date that is in the bylaws (such as annual or other regular meetings) does not require notice.  

BODs may fix a date for a specific meeting and must be more than 70 days away.  

7.07 says that there will be an alphabetical list of all voting shareholders that is made public for inspection.  Must be provided two days after notice of meeting.  

However, refusal to provide the list does not invalidate the actions of the meeting.  

Appointment of a proxy voter is effective when a signed appointment form or electronic transmission of the appoint is received by the inspector/person who counts votes. 

If you purchased shares after record date, you must get proxy agreement from original owner in order to vote at the indicated meeting (annual or special)

Directors normally elected by highest number WINS

Shareholders do not have right to cumulate their votes for directors - protects minority shareholders

ONLY IF the articles state that they can cumulate their votes, the shareholders can multiple the number of votes  by the number of directors who they are entitled to vote and cast the produce for a single candidate.  

MUST ALSO BE ANNOUNCED OR PETITIONED BY SHAREHOLDERS

Shareholders can create voting trust and confer the right to vote or otherwise act for them.  

This is more permanent than proxy voting

Can also create a voting agreeement between shareholders

Voting trusts MUST be shared with the corporation, the voting agreement does not need to be shared with corporation

Restriction on trade of shares is allowed if, 1) in articles or bylaws, 2) an agreement among shareholders, 3) agreement between shareholders and corporation

Must be noted conspicuously on the shares

Cannot affect shares issued before the restriction unless otherwise agreeed

Some special shares can create special voting groups that direct the election of BODs

can be for all or part of the BOD

Prohibits use of any deceptive device associated with the purchase OR sale of any securities (insider trading) - material information - duty owed to the provider of confidential information 

cannot trade if you are an officer, director, employee, anyone with relationship, with fiduciary duty (attorney, accountants, consultants), and anyone who has inside information.

Amendment to articles of incorporation shall be adopted when, 

1) amendment is adopted by BOD

2) Must be approved by a minimun absolute shareholders (articles can dictate higher majority) 

3) with a quorum of shareholder

4) with appropriate notice to all shareholders unless there is a standard meeting. 

For broadly traded shares, an oppressed minority shareholder can sell and get out, not as easy for a closely held corporation. 

agreement as a minority shareholder in closely held company should ask for pre defined buy-sell provisions

Courts will either, 1) enforce fiduciary duty, dissolution or other forced remedy, or 2) in DE, provide no recourse other than contractual rights if they were included in the agreement to buy shares, etc.  

Shareholders can remove a director without cause unless articles say otherwise.  Directors cannot remove another director - must be by shareholders. 

TO remove, must have more votes to remove than to keep.  unless articles or bylaws say otherwise.  

This vote can only be done at a special meeting to remove the director with appropriate notice time and announcement, 

Can be (may be) removed by court order if there was fraud or abuse of power determined by the court AND inadequacies of alternative solutions (2 part test)

Can also barr the Director from re-election

Can also be done by court order if no other remedies and the removal is in the best interest of the corporation.

On behalf of corporation (directors) or by shareholders 

Can be for no cause - just best interest of the corporation

Shareholder must show that  the directors are deadlocked in the management of affairs, irreparable injury to the corporation is threatened (bankruptcy) , OR business and affairs of the corporation cano no longer be conduced to the advantage of the shareholders. OR assets are being misapplied or wasted. 

or if the BOD is acting in illegal, oppressive or fraudulent

Or two annual meetings with deadlock in voting power. 

OPPRESSION NOT APPLICABLE IN DE-CAN ONLY DO IF ILLEGAL/FRAUD

Receivership is for insolvent corp and job is to pay debts and distribute remaining capital of company. , custodian for a solvent corp and runs the corporations

unless the court has already ruled on a purchase, the court must assign one or more custodians to manage the business and affairs of the corporation.  

Court should describe the powers and duties of the receivership/custodian. 

Annual meeting - MCBA 7.01, in bylaws, vote on BOD, 

Record Date - 7.07, in articles or by BOD, >70 days out

Shareholder list 7.20, must provide, inspected in 2days

Proxies 7.22 - signed paper/electronic,inspector received

Quorum 7.25 - 50%+1 or as stated in articles

Cumulative voting 7.28 - NOT the default-#votes times #directors cast votes for 1 director

Inspectr of electns 7.29-reqrd for SEC corp, broad pow'r

Sharehold'r trusts 7.30-10yr max;1 pers'n vote for many

Voting agreements 7.31- can reject fid duties, close corps

 As long as a corporation’s directors can show a valid business purpose for their decision, that decision will be given great deference by the courts except for fraud, corruption, or violation of law. 

Cubs did not play night games because of harm to neighborhood, was less profitable as a result, Shelinsky sues Wrigley, 

Single aggrieved shareholder cannot sue BOD for maximizing profits.  Goodwill for community and fans good enough reason.  

"The business judgment rule is a presumption that in making a business decision, the directors of a corporation acted on an informed basis, in good faith and in the honest belief that the action taken was in the best interests of the company.

Applies to DE and not to MBCA

Easier to show lack of good faith/duty of loyalty rather than irrational business decision. 

MBCA 8.31 is the corollary rule outside of DE

BOD shall act 1) in good faith, 2) manner reasonably believed to be in best interest of company.  Must be done in an informed aspect and for decisions/management as well as oversight function. 

Gross negligence is standard for liability

Duty of care and loyalty applies to controlling shareholders - if they choose to exercise their rights - maybe as low as 25% stockholder - can be controlling at 25% if rest of stockholders do not exercise rights. 

Party asserting liability must show:

1) no defense by BOD based on 2.02b4, 202b6, 8.61, 

2) Challenged alleged conduct was result of lack of good faith or decision not in best interest of corp, lack of objectivity based on family or financial relationships

3) show damages that are

4) proximal to the alleged conduct

Gross negligence standard

Easier to show lack of good faith/duty of loyalty rather than irrational business decision.  

DGCL 102(b)(7) - Allowance for provision eliminating or limiting personal liability for breach fiduciary duty

MCBA 202b4 - similar provision allowing the elimination of fiduciary duty

Duty to act on a informted basis.  duty of care in decision making processes and duty to exercise care in ll other aspects - such as oversight

Director liability is predicated upon concept of GROSS NEGLIGENCE

A director transaction that is also a personal benefit will not be voidable if the transaction is intrinsically fair.  

Nakash was a BOD and made loans to Corp, made $2.5 million in loans, Marciano wanted them voided so that they could get more equity out of the dissolution of company, loans found to be nonetheless fair because Corp had to get loans somewhere, somehow.  

Some self-dealing transactions are voidable - either need to be ratified by corp or demonstrated to be intrinsically fair. intrinsically fair is two part- fair dealing and fair $. 

Directors can be liable for failure to engage in proper corporate oversight if they fail to implement oversight  systems OR KNOWLING fail to monitor or oversee systems (caremark standard)

AmSOuth fined $50million for violation of money laundering - alleged that duty of care by BOD was violated b/c lack of oversight - court found that there was oversight 

BOD implemented policies, were not liable, must show that BOD KNOWINGLY they were not fulfilling duties  

Courts may order a buy-out of shares as a remedy for oppressive acts, as an alternative to corporate liquidation.

Under judicial dissolution under 14.30, corporation may elect one or more shareholders to buy out company or corporation may buy out shares.  

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Court will determine the fair value if parties disagree about fair value

attorney fees can be paid by corporation if if the court finds probable grounds (less that 50/50) that oppressive behavior occurred. 

Bad faith is intentional act

Intentional dereliction of duty and a conscious disregard for one’s responsibilities is an appropriate standard for determining whether fiduciaries have acted in good faith.

Ovitz represented all major clients, disney had a problem with Ovitz-paid ovitz 92 million to leave disney after 1 year of service.  92 million was not bad faith or dereliction of duty or consiouse disregard of responsibilities. 

Duty of good faith is the same as the duty of care.  

Will send out the sections of the code that will be on the test. 

Employer liability to employee

Principle liable to independent contractor

An employer is liable for the employees (agents) contractual and tort liabilities (within the scope of work).

A principal is liable only for the contractual liabilities of an

independent contractor, and not for the IC's torts.

The agent has the power to affect the legal relations of the principal.

Formation of an agency relationship requires mutual manifestation of assent that the agent act on the principal’s behalf and subject to the principal’s control.

Employees have apparent authority to enter into contracts with other parties (if part of scope of employment) if there are business cards, titles, etc that creates appearance...

Apparent authority also derives from customs in industry.

Agent authority can be recinded with terminations

Undisclosed agents never have apparent authority and are liable for contracts made without actual authority

Ratification requires the agent has actual knowledge of material facts.  

Ratification can be done even if the manifesttation is not made to the third party. 

Ratification can create an agency relationship