Business Organizations and Corporations

Debt Financing

"Bonds" and "debentures" are essentially identical types of investments in which investors lend money to a corporation in small pieces of debt, typically in the amount of $1000 per bond or debenture. They are trade-able securities, just like shares of common stock, except these are trade-able pieces of loaned money in the debt part of the capital structure of the corporation. The term "Bond" is often used colloquially to describe both bonds and debentures in a very general sense. The specific difference, however, is that bonds literally have the added protection of collateral and a lien on the real estate and other assets of the corporation (for the added protection of the lenders holding the bonds in the event of corporate default on the bonds). The holders of debentures have no such added protection because they are not given collateral. In the event of corporate bankruptcy they often lose badly. Consequently, debenture holders take on an additional risk (I return for for a higher rate of interest on their loans) and rely on the corporate income as the source of their loan recovery rather than the assets of the corporation.

Common Shares continued

"Common shares" are a class or classes of shares that have the fundamental rights of voting for directors and receiving the net assets of the corporation as described above. MBCA 6.01(b) and 6.03(c). Holders of common shares have non-financial rights as well: a right to inspect books and records (see MBCA 16.02), a right to sue on behalf of the corporation (see MBCA 7.40-7.47), a right to financial information (MBCA 16.20), and so forth. Common shares may be defined in various ways. The USSC identified the characteristics usually associated with common stock as: (i) the right to receive dividends contingent upon an apportionment of profits; (ii) negotiability (capable of being transferred by delivery, in good faith, and without notice of conflicting title claims or defenses); (iii) the ability to be pledged or hypothecated; (iv) the conferring of voting rights in proportion to the number of shares owned; and (v) the capacity to increase in value. In a nutshell, common shares represent the residual ownership interest in the corporation. Their financial interest is open-ended in the sense that they benefit as the business prospers and the corporate assets increase.

Par Value

"Par value" is an arbitrary dollar value assigned to shares of stock which, after being assigned represents the minimum for which each share may be sold. Generally, there is no minimum or maximum value that must be assigned. In most states, shares may also have "no par value," which means that the board of directors will assign a value to the stock below which the shares cannot be issued. In some states, the articles of incorporation must state the "par value" of the shares of each class (or state that the shares are issued "with no par value" or "without par value"). The remaining states, like the MBCA (see 6.21(c)), either have eliminated entirely or made optional the concept of par value. The current trend is toward the elimination of this concept as an historical anomaly. Par value provisions involve archaic and confusing common law concepts of legal capital and watered stock, and, in most jurisdictions retain the par value concept, they form the basis for restrictions on dividends, corporate share repurchases, and other transactions involving a direct or indirect distribution of corporate assets to shareholders.

Contractual Liability between an agent and a third party

(1) A principal is disclosed if, at the time of the agent's transaction, the third party has notice that the agent is acting for a principal and has notice of the principal's identity. (2) A principal is partially disclosed if, at the time of the agent's transaction, the third party has notice that the agent is or may be acting for a principal, but has no notice of the principal's identity. (3) A principal is undisclosed if, at the time of the agent's transaction, the third party has no notice that the agent is acting for a principal.

Liability of the Principal to a Third Party

(1) Actual Authority: arises from the manifestation of a principal to an agent that the agent has power to deal with others as a representative of the principal. An agent who agrees to act in accordance with that manifestation has actual authority to so act, and his actions without more bind the principal. (2) Apparent Authority and Estoppel: if the principal's words or conduct would lead a reasonable person in the third party's position to believe that the agent (or other person) has authority to act on the principal's behalf, the agent (or other person) has apparent authority to bind the principal. No agent can create apparent authority. (3) Inherent Authority: A general agent for a disclosed or partially disclosed principal has inherent authority to bind the principal "for acts done on the principal's account which usually accompany or are incidental to transactions which the agent is authorized to conduct if, although they are forbidden by the principal, the other party reasonably believes that the agent is authorized to do them and has no notice that he is not so authorized." (4) Ratification: even if an agent acts without authority, the principal will be liable to a third party if (1) the agent purports to act (or, under the 3d. Rest.) acts on the principal's behalf, and (2a) the principal affirmatively treats the agent's act as authorized (express ratification), or (2b) the principal engages in conduct (accepts benefit) that is justifiable only if the principal is treating the agent's act as authorized (implied ratification). Significantly, ratification does not occur unless the principal, at the time of the ratification, is fully aware of all of the material facts involved in the original transaction.

Fiduciary Duty Violation Remedies

(1) Constructive Trust: equitable remedy that tries to put the parties back in the position they would have been in without the fiduciary duty violation. A constructive trust is created to remedy (or make up for) a situation where there is "unjust enrichment." If someone has possession of property (money, real estate, or other assets) that they should not have because they obtained it unfairly through fraud or breach of a fiduciary duty, this is unjust enrichment. The constructive trust is set up to solve the unfair situation that has happened by requiring the unjust enricher to hold the property in "constructive trust" until the victim is able to take possession of the property. (2) Equitable Remedy of Accounting: requires the partner in violation of their fiduciary duties to produce a complete accounting of all transactions from the start of the partnership to the present. Then half of the profits are required to be given by the offending partner to the victim partner.

Three elements of an agency relationship

(1) consent by the principal and agent; (2) action by the agent on behalf of the principal; and (3) control by the principal.

Management and Operation of LPs

(1)As RULPA 403(a) indicates, a general partner in a limited partnership has the same rights, power, and restrictions as a general partner in a general partnership (except where RULPA otherwise applies). The statute explicitly links to general partnership law on the subject of a general partnership's management rights and powers. (2) RULPA does not explicitly grant or deny management rights to limited partners. Nevertheless, several cases have stated that limited partners cannot take part in the management of the business and partnership agreements tend to explicitly deny management rights to limited partners. Limited partners who participate in control of the business risk liability for some or all of the obligations of the venture, see RULPA 303. Indirectly, therefore, this control restriction helps to restrain limited partners from exercising substantial management rights. (3) RULPA does not speak to the issue of whether a limited partner is an agent of the limited partnership who can bind the venture, via apparent authority, to transactions in the ordinary course of business. There is some case law, however, stating that limited partners have no agency authority merely as a result of their limited partner status. (4) Absent provisions in a partnership agreement, a limited partner has no voting rights under RULPA. In practice, however, partnership agreements often provide voting rights, at least on some issues, to limited partners.

Shareholder Voting and Agreements

7.31 [Shareholder] Voting Agreements 7.01 Annual Meeting 7.20 Shareholders' List for Meeting 7.22 Proxies Additional MBCA Sections: §§ 6.01, 7.07, 7.28, 7.29, 7.30, 7.31, 6.27, 8.04

General Partnership Partner Liability

A defining characteristic of the general partnership is that each partner has unlimited personal liability for the obligations of the partnership. UPA provides that partners have "joint and several" liability for all partnership obligations under sections 13-14 (essentially tort obligations) and "joint" liability for all other partnership obligations (essentially contractual obligations). See UPA 15. RUPA eliminates the reference to joint liability and instead provides that all partners are jointly and severally liable for all obligations of the partnership. However, a judgment creditor is first required to exhaust partnership assets (with certain exceptions) before proceeding directly against a partner's individual assets. See RUPA 307(d) (This is an important difference from RUPA)

General Partnership Main Provisions

As a general matter, once a partnership has been formed, the partnership's operation is governed by the provisions of the applicable statute. UPA sec. 18(a). It is important to note that almost all of the statutory provisions function merely as default rules that can be altered by the agreement of the partners.

Corporations: Where to Incorporate

As a practical matter, the choice usually comes down to the jurisdiction where the business is to be conducted or Delaware, the most popular choice outside jurisdiction. If the corporation is closely held and its business is to be conducted largely or entirely within a single state, local incorporation is almost always to be preferred. The cost of forming a Delaware corporation and qualifying it to transact business in another state will be greater than forming a local corporation in that state.

Authorization and Issuance of Common Shares

Assume that a corporation has been formed under the MBCA and that it desires to create only a single class of common shares. These shares, or some of them, are to be issued equally to two persons, A and B, for an aggregate consideration of $10,000 in cash or for specified property, the value of which is uncertain but probably about $10,000. How many shares should be authorized, how much shares should be issued, and what prices should be established as the issue price for such shares? Under the MBCA, the answers to these questions are simple and straightforward. Any number of shares may be issued at any price so long as the combination (number of shares x price) totals $10,000. It may be 5,000 shares each at $1 per share, 500 shares each at $10 per share, 50 shares at $100 per share, 5 shares each at $1,000 per share, one share each at $5,000, or any combination in between. The only constraint is that the price be the same for both A and B, since they are buying the same class of shares. Also, the number of shares authorized in the corporation's articles of incorporation must, of course, be at least equal to the number of shares that the corporation plans to issue.

Business Judgment Rule/Duty of Care

Business Judgment Rule: a court will uphold the decisions of a director as long as they are made (1) in good faith, (2) with the care that a reasonably prudent person would use (no gross negligence), and (3) with the reasonable belief that the director is acting in the best interests of the corporation. Shlensky: 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. The shareholder(s) have the burden of proof under these situations to prove that there is some kind of fiduciary issue that overrides the business judgment rule. Usually, courts say that instead of granting a remedy, vote out the directors or sell your stock. A corporation's president and board have authority to determine what course of action is best for the business. While the president and board must have a valid business purpose behind their actions, a decision motivated by a valid business purpose will be given great deference. Notes: Delaware passed a statute allowing boards to make an agreement with shareholders to waive directors from being personally liable for money damages as a result of fiduciary duty of care violations.

Federal Income Tax Considerations (Part 2)

C-Corp: advantage is that if no dividends are paid out, the business does not have to pay out twice, and only pays taxes at the corporate level. Additionally, any wages paid out to directors is taxed (at the personal level), but there is no deemed received rule for dividends. Although the dividends cannot be held forever, the corporation can control when the secondary taxation on the dividends occurs (as opposed to every year for S-Corps). Additionally, some C-Corps use a "zero out" strategy whereas when business deductions (including salaries to employees and directors) and your income is zero (although the individual incomes are taxed), the corporation does not pay an income tax. However, remember those deductions must be reasonable, because the IRS has a database for what other companies are doing. Excessive deductions will subject companies to criminal penalties. Four principles on whether you want pass through taxation or not: (1) a corp is a corp, you cannot argue your way out of it to get pass through taxation unless you file the S-Corp sheet; (2) no public entities qualify, as a publicly traded corp, you are big and the IRS is comfortable doing double taxation on you; (3) everybody else (either not a corp nor publicly traded) the IRS gives you pass through taxation automatically (4) remember the rules on changing: once you elect to be an S-Corp, you can change your mind once, however you cannot make a subsequent change again for five years.

Basic Fiduciary Duties

Care = sufficiently informed; loyalty = free of financial conflicts; and good faith = honesty in statements and beliefs.

Getting Around the BJR

Cede: For the plaintiff to override the business judgment rule, the plaintiff must prove a fiduciary duty violation, if they fail on that point, the only issue for the court to determine is whether the corporate decision was rational. If the plaintiff proves a fiduciary violation, the burden of proof shifts hard (strict scrutiny) to the corporate directors. The BJR operates as both a procedural guide for litigants and a substantive rule of law. As a rule of evidence, it creates a "presumption that in making a business decision, the directors of a corporation acted on an informed basis [i.e., with due care], in good faith and in the honest belief that the action taken was in the best interest of the company." The presumption initially attaches to a director-approved transaction within a board's conferred or apparent authority in the absence of any evidence of "fraud, bad faith, or self-dealing in the usual sense of personal profit or betterment." The rule posits a powerful presumption in favor of actions taken by the directors in that a decision made by a loyal and informed board will not be overturned by the courts unless it cannot be "attributed to any rational business purpose." Thus, a shareholder plaintiff challenging a board decision has the burden at the outset to rebut the rule's presumption. To rebut the rule, a shareholder plaintiff assumes the burden of providing evidence that directors, in reaching their challenged decision, breached any one of the triads of their fiduciary duty--good faith, loyalty or due care. If a shareholder plaintiff fails to meet this evidentiary burden, the business judgment rule attaches to protect corporate officers and directors and the decisions they make, and our courts will not second-guess these business judgments. If the rule is rebutted, the burden shifts to the defendant directors, the proponents of the challenged transaction, to prove to the trier of fact the "entire fairness" of the transaction to the shareholder plaintiff. Under the entire fairness standard of judicial review, the defendant directors must establish to the court's satisfaction that the transaction was the product of both fair dealing and fair price. Further, in the review of a transaction involving a sale of a company, the directors have the burden of establishing that the price offered was the highest value reasonably available under the circumstances. The [business judgment rule] presumption [of propriety] ... can be overturned only if a plaintiff can show that a majority of the directors [1] expected to derive [a material] personal financial benefit from the transaction, [2] ... lacked independence, [3] ... were grossly negligent in failing to inform themselves, or [4] that the decision of the Board was so irrational that it could not have been the reasonable exercise of the business judgment of the Board.

Dissolution under UPA (Part 2)

Collins: A partner does not have a legal right to force dissolution of a partnership if the other partner fulfills his or her duties under the partnership agreement, and the partner asking for the court ordered dissolution acted wrongly to impede the duties of the other partner. Dreifuerst: A partner can force a sale of partnership assets upon dissolution and wind-up of the partnership, in the absence of a written agreement to the contrary. Upon lawful dissolution, each partner has the right to have the partnership's assets liquidated and his share paid to him in cash. UPA 38(1) allows for dissolution in the form of liquidation of partnership assets to turn into cash; UPA 40(b) sets up the hierarchy of creditors who will be in line to receive the proceeds. Creel Case: MD allows for the avoidance of a wind up if the surviving partners provide a completely transparent wind up of the deceased partner's share. In that case they say that an entire wind up of the partnership and liquidation of assets is unwarranted. UPA 42: occurs if the representative of the deceased partner or the partner retires (a dissolution under 29), but they have no problem allowing the remaining partner(s) to continue the business, there is no agreement or settlement, can have the judge determine the value of the former partner's share on the date of their dissolution, and then the former partner receives that share (plus interest for using that share between the dissolution date and the judgment date) as a non-partner creditor or, at the option of the former partner in lieu of interest, the profits attributable to the use of the former partner's property during that same time frame (between the dissolution date and the judgment date). Finally, sec. 42 makes that former/deceased partner are a less senior creditor to the other partnership creditors. UPA 35 (explains apparent authority in the context of dissolution), 36 (explains that unlimited personal liability follows a partner even through dissolution). UPA 17 (explains that incoming partners can be liable for the actions of the other partners and partnership, but only out of partnership property and not personal property). Bohatch: A partnership may expel a partner for purely business reasons, to protect relationships within the firm and with clients, or to resolve a fundamental schism in the partnership. Expulsion is under UPA 31(d) Causes of Dissolution.

Oppression (Rules)

Court have followed two different approaches: (1) Most jurisdictions have developed special common-law doctrines, often aided by statutes, that are designed to protect minority shareholders from oppressive majority conduct. In these jurisdictions, the protection is doctrinally articulated either as a fiduciary duty that shareholders in closely held corporations owe to one another, or as a right to dissolution (or other remedy) on the grounds of oppressive conduct by those in control. (2) A minority of jurisdictions (most notably Delaware) have refused to develop special common-law rules to protect minority shareholders in closely held corporations. In these jurisdictions, an oppressed investor can attempt to rely on traditional legal principles for protection (e.g., traditional corporate or contract law doctrines), but no additional common-law safeguards are provided. Remember this issue is a concept as opposed to a bright line test, further because it's a equitable doctrine, the court has significant discretion to determine if the actions of the majority crosses the line (if the minority investor(s) has about 0% of control the court is much more likely to enforce this doctrine).

Successor Liability

Courts are split on the issue of whether it is fair to impose liability on a successor company. Courts sometimes impose such liability on successor corporations in order to impose liability in the party who is better able to bear it (possibly through insurance), or who is the only plausible defendant to compensate an injured plaintiff, or to protect the good name and reputation of the preceding company, or to prevent fraud. Courts that decline to impose successor liability argue that the doctrine is inappropriate because it fails to respect the corporate forms of the companies involved, and that it is unfair because it holds a corporation liable for an obligation that was not its fault. Courts also argue that imposing liability will not deter misbehavior because the compensation paid is not from the wrongdoer, but from an innocent party. The courts argue that when mergers and other financial arrangements are made, finality is necessary in order to permit the free transferability of assets. Obviously, corporations will be reluctant to make acquisitions if there is significant uncertainty about their contingent liability for the debts and other obligations of the companies they acquire. Nissen Corp.: A successor corporation does not acquire its predecessor's liabilities and debts, unless there is an agreement to assume liabilities, the transaction is merely a consolidation or merger, the successor is merely a continuation or reincarnation of the predecessor, or the transaction was fraudulent, made in bad faith, or made without sufficient consideration.

LLC Formation

DLLCA 18-104 DLLCA 18-201: Certificate of Formation DLLCA 18-303: Liability to 3d Parties Like limited partnerships, corporations, and LLP, LLCs are formed by filing a document, usually known as the "articles of organization" or "certificate of organization" with the secretary of state or equivalent official of the appropriate jurisdiction. The articles of organization are relatively skeletal and typically include only basic information about the company. In Delaware, for example, the "certificate of formation" is required to include only the name of the LLC, the address of its registered office, and the name and address of its registered agent for service of process. The real detail on the governance of an LLC is usually provided in a separate document known as an "operating agreement" or a "limited liability company agreement." The operating agreement is a nonpublic document (it is not filed with any state official) similar to a partnership agreement or a corporation's bylaws. It contains specifics on the rights, duties, and obligations of the LLC's members and managers and on the operation of the LLC as a whole.

LLC Fiduciary Duties

DLLCA 18-1101: Construction and Application of Chapter and LLC Agreement (c): allows members, managers and other person's fiduciary duties to be expanded, restricted, or even eliminated by the LLC agreement. The only exception is that the LLC agreement may not eliminate the implied contractual covenant of good faith and fair dealing. To win on an implied contractual covenant of good faith and fair dealing, the plaintiff must point to an express promise in the agreement that was undermined by the defendant. The DE Fiduciary Duty of Good Faith and Fair Dealing is a defense if you subjectively believe that your action was done in the best interests of the person you owed fiduciary duties to, a violation only occurs if you act willfully against good faith and fair dealing. Note: that Delaware has limited the implied covenant of good faith and fair duty to express promises in an agreement. LLC statutes often state that members (in member-managed LLCs) and managers (in manager-managed LLCs) owe fiduciary duties of care and loyalty to the LLC, and at least some of the statutes indicate that those duties also run to the individual members. VGS: 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.

LLC General Governance

DLLCA 18-402: Management of Limited Liability Company Most LLC statutes assign, as a default rule, all management functions to members. See: DLLCA sec. 18-402. This member-managed structure resembles a general partnership, as each of the owners has management rights. However, Delaware also allows the members to default to management by a separate group of manager(s), who may or may not be members. This manager-managed structure resembles a corporation as management is centralized in a smaller subset of actors. Because these are only default rules, member-managed jurisdictions allow the owners to elect manager-managed governance, and manager-managed jurisdictions allow the owners to elect member-managed governance. The default rules for voting in an LLC differ among the statutes. Delaware's default is to allow members voting on a pro rata basis (by financial or other contribution to the firm). For ordinary matters, majority rule (whether on a per capita or pro rata basis) typically carries the decision. For extraordinary matters, some statutes require a specified supermajority vote. In manager-managed LLCs, decisions are usually made by a majority vote of the managers (by number), although certain extraordinary decisions will often require a specified vote of the members as well.

Distributions by a Closely Held Corporation

Dodge: A company cannot take actions that harm its shareholders and are motivated solely by humanitarian concerns, not by business concerns. Issue: Can a company choose to stop paying dividends and instead invest its profits in the communities in which it is active? Holding and Reasoning (Ostrander, J.): No. A business exists to conduct business on behalf of its shareholders. It is not a charity to be run for its employees, or neighbors. Notes on Court Ordered Payment of Dividends: the mere existence of an adequate corporate surplus is not sufficient to invoke court action to compel such a dividend. There must also be bad-faith on the part of the directors. There are no infallible distinguishing ear-marks of bad faith. The following facts are relevant to the issue of bad faith and are admissible in evidence: (1) intense hostility of the controlling faction against the minority; (2) exclusion of the minority from employment by the corporation; (3) high salaries or bonuses or corporate loans made to the officers in control; (4) the fact that the majority group may be subject to high personal income taxes if substantial dividends are paid; (5) the existence of a desire by the controlling directors to acquire the minority stock interests as cheaply as possible. But if they are not motivating causes they do not constitute "bad faith" as a matter of law. The essential test of bad faith is to determine whether the policy of the directors is dictated by their personal interests rather than the corporate welfare. Circumstances such as those above mentioned and any other significant factor, appraised in the light of the financial condition and requirements of the corporation, will determine the conclusion as to whether the directors have or have not been animated by personal, as distinct from corporate, considerations.

Debt & Equity Capital

Every firm needs financing in order to conduct its operations. The financing that firms use to fund their business activities is called "capital." Capital may be obtained in three ways: (1) by borrowing funds, (2) by selling shares in the company, or (3) by retaining earnings of the business rather than distributing them to owners. The critical distinction in finance is the distinction between "debt" and "equity" capital. Debt is associated with the idea of borrowing. The main characteristics of debt are (1) it must be repaid at some point, (2) interest on the principal borrowed must be paid periodically, and (3) the repayment of principal and interest is not contingent on the success of the business. "Equity" by contrast, is synonymous with "ownership." The principal characteristic of equity is that, conceptually, the value of an owner's equity in a piece of property equals the market value of that property minus the market value of the debts that are liens against the property. Equity capital is composed of contributions by the original entrepreneurs in the firm, capital contributed by subsequent investors usually in exchange for ownership interests in the business, and retained earnings of the enterprise. Based on these fundamental characteristics of debt and equity, debt claims sometimes are referred to "fixed claims" while equity claims are referred to as "residual claims." The terminology conveys the idea that fixed claimants (creditors) are entitled to be repaid the principal and interest owed to them on the loans they have made, while residual claimants (equity owners) have a claim only on everything that is left over after the fixed claimants have been paid.

Common Shares Distribution of Funds

Funds may be distributed to common or preferred shareholders in the form of "dividends" or "distributions." If earnings of the corporation are retained by the corporation and not distribution, the value of common shares will increase but the value of preferred shares may not (since their rights are usually limited or capped). The MBCA sets forth rules for distributions generally. The same rules apply to dividends and other sorts of distributions such as share repurchases. MBCA 1.40 (defining "distribution"), 6.40. Decisions involving whether or not to make a distribution to common shareholders, and if so, how much, are matters within the business judgment of directors. Typically, common shareholders have no legal basis for complaint if distributions or dividends on common shares are omitted over extended periods of time.

Federal Income Tax Considerations (Part 1)

Historically, the catch 22 is that although the partnership doesn't pay federal income tax, the partners have unlimited personal liability. However, if you wanted to be shielded by filing as a corporation, the corporation as an entity would be taxed and then your dividend (equal payout based on amount of shares) would be also be taxed as an income. Subchapter S Corporation: from the 1950s to the present, where Congress created a statutory code for smaller corporations that allows only the dividend income to be taxed and the corporation itself will not be taxed. The "small" corporation is defined as up to, but no more than, 100 shareholders (refer to the handout for how this 100 is defined). Problems: Any money that is earned that year (as your share of dividends) has to be reported on your income tax return, as it is deemed received, even if you keep the money in the corporation (retained earnings) or delay the dividend to another year, and do not receive it as a dividend that year. Basically, the S-Corp will distribute enough dividends to cover each shareholder's income tax, a certain sweet spot of additional dividends for living expenses, and then the rest of the money is retained by the corporation to grow and improve the business. General Partnership: similar to S-Corps, any more that is earned that year has to be reported on your income tax return, even if you take it or not. Basically, the GP will distribute enough dividends to cover each shareholder's income tax, a certain sweet spot of additional dividends for living expenses, and then the rest of the money is retained by the corporation to grow and improve the business.

Fiduciary Duty of Care

In Biz Orgs, we do not evaluate the wisdom of the business decision, we look at the process that went into the business decision. It is not a breach of the duty of care to make a risky investment, bold investment, etc. Rather we want to know what information the Biz Org used before the transaction was made. For example, a small monetary decision requires little investigation, contemplation; but for a large monetary decision requires significant due diligence. Fulfilling the duty of care means that you were sufficiently informed and thus made an educated decision on behalf of the business. If this is the case, the court will thus "trust the process." Breach of the process only results in liability if the directors were grossly negligent.

Dissolution under UPA (Part 1)

In UPA Sec. 29, "dissolution" is defined as "the change in the relation of the partners caused by any partner ceasing to be associated in the carrying on . . . of the business." Put differently, "dissolution" refers to a change in the composition of the partners themselves, while "winding up" or "liquidation" refers to the process of selling off the partnership's assets, paying off creditors, and settling up profits and losses between the partners. For some acts of dissolution, UPA suggests that the act is rightful, it is "without violation of the agreement between the partners." Sec. 31(1). UPA also specifics an act of dissolution that is, in effect, wrongful, it is "in contravention of the agreement between the partners." Sec. 31(2). UPA provides four other grounds for dissolution that are not explicitly designated as rightful or wrongful: (1) any event which makes it unlawful for the business of the partnership to be carried on or for the members to carry it on in partnership; (2) the death of any partner; (3) the bankruptcy of any partner or the partnership; and (4) a decree of court under Sec. 32. See Sec. 31(3)-(6). Acts of dissolution that are considered wrongful subject the dissolving partner to damages and other penalties. See Sec. 38(2)

Tax Treatment of Debt

In a C corporation, there are usually tax advantages when shareholders who are individuals lend to the corporation a portion of their investment rather than make a contribution to capital. Interest payments on debt are deductible by the borrower (but the lender individual will have to pay income taxes on interest payments) whereas dividend payments on equity securities are not. A loan by a shareholder to his corporations therefore reduces the double tax problem of a C corporation because the corporation can deduct the interest payment since it is not a dividend. On the other hand, if the shareholder is a corporation, the shareholder may prefer to receive payments in the form of dividends rather than interest because of the dividend-received deduction (corporations may deduct dividend payments if they are exchanged between corporations), even though this causes the "borrower" corporation to lose the benefit of an interest deduction.

General Partnership Management

In a general partnership, each partner has an equal right in managing the partnership's business. However, apparent authority manifested by one of the partners may override a limitation in a partnership agreement if the third-party can bind the partnership to the agreement.

General Partnership Finances

In the absence of an explicit agreement, profits are equally shared amongst partners. See UPA 18(a). It makes no difference if the partners contributed unequal amounts of capital. Where there is no partnership agreement as to losses, and where one partner contributes money to the venture and the other contributes services or labor, in the event of a loss neither party is liable to the other for any loss sustained. In the absence of an agreement on how to apportion losses, both parties share in the loss, one in dollars, and the other in labor.

Fiduciary Duties Related to LPs

Limited Partners: RULPA does not address the fiduciary duties of limited partners. As most limited partners do not exercise the degree of control over the business that typically calls for the imposition of fiduciary duties (due in large part, of course, to the control rule), generally limited partners do not owe fiduciary duties to a general partner(s). Appletree Square Limited: where a fiduciary relationship exists, silence may constitute fraud. Remember, a general partner has a broad common law duty to disclose all material facts (disclosure rule under the fiduciary duty of loyalty, Meinhard). RULPA 304: Rights to Information of Limited Partner and Person Dissociated as Limited Partner In re USACafes, L.P.: when you have an entity (corporation) that is acting as a general partner in a limited partnership, (in this case a corporation), the board of directors of the corporation owes the limited partners of the LP personal fiduciary duties.

Limited Partnership

Limited Partnerships are a hybrid biz org because they incorporate both a general partner(s) (generally one but occasionally two or three) with a class of investors known as limited partner(s) who are shielded from personal liability for liabilities of the partnership.

Shares Generally/Common Shares

MBCA 1.40 defines shares as the "unites into which the proprietary interests in a domestic or foreign corporation are divided." Further, a corporation may create and issue different "classes" of shares with different preferences, limitations, and relative rights. If a corporation issues only one class of shares, they may be referred to as "common shares," "capital shares," "shares," or "stock." The various designations and rights of shares of different classes must be set forth in the articles of incorporation. MBCA 6.01. MBCA 6.01(b) sets forth two fundamental rights of holders of common shares: (1) they are entitled to vote for the election of director and on other matters coming before the shareholders, and (2) they are entitled to the net assets of the corporation (i.e. the assets remaining after making allowance for debts) upon dissolution.

Issuance of Shares: Presumptive Rights and Dilution

MBCA §§ 6.30, 6.40 Rule 6.30(a) allows for this issue of preempting stock to be opted in, but the default rule is that you do not get this right. Additionally, publicly traded stock exchanges require that this rule not be opted into by a corporation. Therefore, the last area that this rule is possibly applicable is with closely held corporations. If you get that right, 6.30(b)(1) gives the rule for how it works. Stokes v. Cont'l Trust Co. of City of New York Rule of Law: A stockholder has the 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. Issue: Does a stockholder have a preemptive right to subscribe for new stock in the same proportionate share as he held in the old stock? Holding and Reasoning (Vann, J.): Yes. A stockholder has a right to subscribe for new stock in the same proportionate share as he held in the old stock. By doubling the shares of stock, Stokes' voting power was reduced in half. This deprivation of voting power is a deprivation of a property right. This court therefore establishes the rule that a stockholder has an inherent right to a proportionate share of new stock that is issued for money, and that, while this right can be waived, the stockholder cannot be deprived of that right without his consent, unless the new stock is issued at a price that is at par or greater, and the stockholder is allowed to take his same proportion of the new shares at that price or in some other equitable way.

Traditional Roles of Shareholders and Directors

MBCA §§ 7.31, 7.32, 8.01 McQuade: A contract is void if it requires directors of a corporation to refrain from changing officers, salaries, or policies or retaining individuals in office without consent of the contracting parties. Directors may not by agreements entered into as stockholders abrogate their independent judgment, (they may not make solid decisions on corporate matters in advance by agreement). Shareholders may combine their votes to elect directors, but they may not extend this power to limit directors' authority to run the corporation, such as in the selection of officers or fixing salaries. A contract adding a concurrent duty to other directors brings with it the likelihood that the director will not always make personnel decisions in the best interests of the corporation. Clark: Where the parties to the action are the complete owners of the corporation, there is no reason why the legal exercise of the power and discretion of the directors cannot be controlled by valid agreement between themselves, provided that the interests of creditors are not affected. ISSUE: Was the voting agreement between plaintiff and defendant valid? ANSWER: Yes. CONCLUSION: The Court held that the voting agreement between plaintiff and defendant was valid since it did not impair any exercise of judgment among the board of directors. If there was any invasion of the powers of the directorate under that agreement, it was so slight as to be negligible; and certainly there was no damage suffered by or threatened to anybody. Hence, the Court reversed the judgment of the appellate court. 7.32(b)(1) or (2) Shareholder Agreements (which if all shareholders agree, the ability of directors to make advance voting agreements is alright)

Oppression (Generally)

MBCA §§ 7.32, 8.08, 8.09, 14.30(2), 14.32, 14.34 A. Oppression Oppression of the Minority Shareholders (uniquely a closely-held corporate law problem): a majority of stockholders turns against a minority of stockholders (because in corporate law the majority rules) and suddenly the minority stockholders do not get anymore dividends or salaries. A shareholder in a closely held corporation typically expects an active participatory role in the company, usually through employment and a meaningful role in management. A shareholder in a closely held corporation also invests money in the venture and, like all shareholders, she hopes to receive a return on that money. By definition, however, a closely held corporation lacks an active market for its stock. Absent a sale of the entire company, therefore, investment return is normally provided by employment compensation and dividends, rather than by sales of stock at an appreciated value. Traditionally, most corporate power is centralized in the hands of a board of directors. Because these directors are elected by shareholder vote, the board of a closely held corporation is typically controlled by the shareholder (or shareholders) holding a majority of the voting power. Through this control of the board, a majority shareholder (or majority group) has the ability to take unjustified actions that are harmful to a minority shareholder's interests. Common techniques include the termination of a minority shareholder's employment, the refusal to declare dividends, the removal of a minority shareholder from the board of directors, and the siphoning off of corporate earnings through high compensation to the majority shareholder. This denial of financial and participator rights is at the core of many lawsuits alleging that the majority has used her control in an abusive or "oppressive" fashion against a minority shareholder. In a closely held corporation, there are no market exits and without an explicit buyout provision in a stockholders' agreement or a company's organizational documents, corporate shareholders have no right to compel a redemption of their holdings.

General Partner Duties When Leaving a Partnership

Meehan: A partner has a fiduciary duty to provide, on demand of another partner, true and complete information of any and all things affecting the partnership, (such as providing a guesstimated list of clients the lawyer(s) is taking with them), remember the duty for candor does not extend to disclosing all information about intending to leave a firm and compete, instead it applies for when partners lie about what they are intending to do (pilfer clients) during the period when they are asked by other partners, because that gives the leaving partner(s) an unfair advantage in the competition market against their former employer.

Erosion of Fiduciary Duties

Modern cases are eroding Meinhard-era fiduciary duties when parties sign contracts (or partnership agreements) that erode fiduciary duties in every biz org except corporate law. UPA 21(1) talks about constructive trust and forensic accounting. Doesn't address if there is a contract to the contrary. Additionally, partners can waive fiduciary duties with agreement if all of the relevant information is presented. RUPA (2013) 409(b): duty of loyalty; 105 discusses how certain duties may be limited in a partnership agreements (including the duty of loyalty) focus on (c)(6) and (d)(3) notice that the duties may not be completely eliminated.

Financial Rights and Obligations (LP)

RULPA 503 and 504 state that, unless otherwise agreed in a written partnership agreement, the profits, losses, and distributions of a limited partnership shall be allocated "on the basis of the value . . . of the contributions made by each partner to the extent they have been received by the partnership and have not been returned." See also RULPA sections 101(2), 501 (defining "contribution" broadly). Notice that this default rule differs from the "equal sharing" default rule of general partnership law. RULPA contains several provisions that are designed to prevent partners from abusing their financial rights to the detriment of creditors. Section 502 gives a creditor the right, under certain circumstances, to enforce a limited partner's promise to contribute to the venture. Under section 607, a distribution to a partner is prohibited if it would leave the firm insolvent. Finally, section 608 makes partners liable to the limited partnership for wrongful distributions and, in some instances, for rightful distributions. These creditor protections can be viewed as a trade-off of sorts for the limited liability granted by the statute.

Defective Incorporation

Robertson: under the MBCA, 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. Earlier courts distinguished between: (1) de jure corporations, formed according to mandatory statutory conditions; (2) de facto corporations, which were recognized despite being defectively incorporated, where there was (a) an attempt to organize under (b) a valid corporation law, (c) actual user of a corporate franchise, and a (d) good faith claim to be and in doing business as a corporation; (a de facto corporation is recognized for all purposes except where there is a direct attack by the state in a quo warranto proceeding); and (3) corporations by estoppel, which were recognized for equitable reasons, and which estopped the parties from denying the existence of the corporation. Estoppel can arise whether or not a defacto corporation comes into existence. Estoppel problems arose where the certificate of incorporation had been issued as well as where it had not been issued, and under the following general conditions: where the "association" sues a third party and the third party is estopped from denying that the plaintiff is a corporation; where a third party sues the "association" and the "association" is precluded from denying that it was a corporation; where a third party sues the "association" and the members of that association cannot deny its existence as a corporation where they participated in holding it out as a corporation; where a third party sues the individuals behind the "association" but is estopped from denying the existence of the "corporation"; where either a third party, or the "association" is estopped from denying the corporate existence because of prior pleadings. (de jure and de facto are much more favorable than estoppel because estoppel only works plaintiff by plaintiff, additionally estoppel will never work against a personal injury claim, whereas a tort claim would be shielded by a de facto corporation). The Business Corporation Act of the District of Columbia is patterned after the MBCA. MBCA §§ 50 and 139 did away with de facto corporations and corporations by estoppel. Under MBCA § 50, a corporation exists only after the certificate of incorporation is issued, before which time there is no corporation, whether de jure, de facto, or by estoppel. MBCA 2.04 Liability for PreIncorporation Transactions (unaddressed areas of 2.04 informally allows for de facto and estoppel to be factored in).

Equitable Subordination

Rule of Law: A court may, for equitable purposes, disregard the corporate entity and disallow or subordinate an officer or stockholder's claim against a corporation. Proceedings in bankruptcy courts are inherently proceedings in equity, and such courts have the power to decide the claims of a corporation's officers, directors, and stockholder's during that corporation's bankruptcy. An officer or stockholder's claim against a corporation is sometimes required to be disallowed or subordinated for equitable purposes (equitable subordination). Occasionally this is done by disregarding the corporate entity. Directors and stockholders are fiduciaries. Their dealings with the corporation must be subjected to rigorous scrutiny, and the burden is on them to prove good faith in their transactions and inherent fairness to the corporation and to those interested in the corporation. If, under all of the circumstances, the transaction does not carry the earmarks of an arm's length transaction, it will be set aside for equitable purposes. Remember: this doctrine only applies when there are a mix of inside and outside creditors in competition for claims. Where one of those creditors is an inside shareholder owner, if that inside creditor uses his position to put outside creditors at a disadvantage, then equitable subordination is generally appropriate. But in addition, the inside creditor must not properly document their creditor interests for this doctrine to apply, if the bank inspects the books and sees that the inside creditor(s) was open with the outside creditor(s) (bank) about the inside creditor's interest then this doctrine will not apply.

Piercing the Corporate Veil (Subsidiaries)

Rule of Law: 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. The test listed in this case is used in many jurisdiction for a subsidiary in addition to the factors in the Woodruff case. (1) complete domination and control over the finances, policy, and business of the corporation, so that the corporation at the time of the transaction had no separate mind, will, or existence of its own; (2) the control was used by the defendant to commit fraud, to violate a legal duty, or to act dishonestly or unjustly in violation of the plaintiff's legal rights; and (3) the control and breach of duty proximately cause the plaintiff's injury. Undercapitalizing a subsidiary satisfies the second element of the Collet test, since creating a business and operating it without sufficient funds to be able to pay bills or satisfy judgments against it implies a deliberate or reckless disregard of the rights of others. Remember: the analysis is whether a given subsidiary is closely held, (by one or a small few shareholders), it doesn't matter whether the parent company has many shareholders.

Dissociation and Dissolution under RUPA

Some differences between RUPA and UPA on this issue, but they are not substantive. RUPA 601 Events Causing Dissociation: because partnerships have gotten so big, so if one partner retires or resigns, then the big partnership is still going fine (not the same as dissolution because winding up does not occur). Most large firms these days have detailed partnership agreements when dissociation occurs which override the UPA and RUPA. RUPA 602 Power to Dissociate as Partners; Wrongful Dissociation. RUPA 701 Purchase of Interest of Person Dissociated as Partner: Dissociation without dissolution, you essentially get bought out and there is no liquidation. 701(b) has the buyout valuation. 701(c) only allows you to receive the interest that accrues from the date of dissociation and the date of payment, no sharing of profits like in UPA. 701(c) also mentions that damages for wrongful dissociation are offset against the interest plus buyout price. RUPA 801 Events Causing Dissolution: Dissolution

Limited Liability Companies (LLCs)

The limited liability company, LLC, is a noncorporate business structure that provides its owners, known as "members," with a number of benefits: (1) limited liability for the obligations of the venture, even if a member participates in the control of the business; (2) pass-through tax treatment; and (3) tremendous freedom to contractually arrange the internal operations of the venture.

How to Incorporate

The formal requirements for filing of documents are set forth in MBCA Chapter 1, particularly secs. 1.20-1.25. These minimal requirements are similar to those adopted by most states, and the trend is towards limiting the procedures for forming a corporation to those specified in the MBCA. After the articles of incorporation are filed, MBCA secs. 2.05-2.06 discuss that in addition to preparing and filing the articles of incorporation, attorneys usually must handle other details in connection with corporate formation: (1) Prepare the corporate bylaws; (2) Prepare the notice calling the meeting of the initial board of directors, minutes of this meeting, and waivers of notice if necessary; (3) Obtain a corporate seal and minute book for the corporation; (4) Obtain blank certificates for the shares of stock, arrange for their printing or typing, and ensure that they are properly issued; (5) Arrange for the opening of the corporate bank account; (6) Prepare employment contracts, voting, trusts, shareholder agreements, share transfer restrictions, and other special arrangements which are to be entered into with respect to the corporation and its shares; (7) Obtain taxpayer identification numbers, occupancy certificates, and other other governmental permits, or consents to the operations of the business; and (8) Evaluate whether the corporation should file an S corporation election, assuming that election is available.

Going Public in General

The goal for many closely held corporations is to "go public," that is to raise substantial amounts of capital by making a public offering of their securities through the services of an underwriter. These transactions are known as initial public offerings ("IPOs"). Going public has both significant costs and significant benefits to the owners of the company. Of course, the principal benefit of going public is to raise additional capital for expansion. Many closely held companies feel uncomfortable with the amount of disclosure that must be made during the process of making an IPO. Companies that have engaged in conflict of interest transactions, for example, may decide not to go public because they are unwilling to disclose the details of those transactions. Similarly, prior to an IPO, management will have to "clean up its balance sheet." Some argue that this process sometimes requires companies to sacrifice long-term investments in order to meet short-term objectives.

Limited Liability Partnerships (LLPs)

The limited liability partnership "LLP" is typically a general partnership that, depending on the relevant statute, provides the partners with limited liability for the firm's tort obligations or for both its tort and contract obligations. Because the LLP is ordinarily a general partnership rather than a limited partnership, all of the partners have the right to participate in the management of the venture without risking a loss of their limited liability. More generally, because partnership statutes typically provide that an LLP is a "partnership," general partnership law is applicable to LLPs when it is not explicitly altered by LLP-specific provisions. Kus: A partner in a limited liability partnership is not liable for the obligations and liabilities of the partnership or the other partners.

General Partner Presumption

The most important of these rules indicates that a person who receives a share of the profits of a business is presumed to be a partner in the business, unless the profits were received in payment of a debt, as wages, or for other listed exceptions. UPA sec. 7(4).

Going Public SEC Requirements

The process of going public involves substantial legal risks. The company is strictly liable under Section 11 of the Securities Act of 1933 for intentional or unintentional material misstatements and omissions in the Registration Section (which contains the prospectus and other documents that must be filed with the SEC before the company may make an IPO). Section 11 makes violations against the corporation to be strict liability, and shifts the burden onto any individuals on those disclosures to prove their defenses (due diligence defense sec. 11(b)(3)). Even after a company goes public, it must file quarterly and annual financial reports under the Securities Exchange Act of 1934 (sec. 13) and comply with strict internal accounting control measures and record-keeping requirements. Also, a publicly held company must constantly deal with analysts and outside shareholders. Sec. 10(b) prohibits any intentional act or omission resulting in fraud or deceit in connection with the purchase or sale of any security (including insider trading)(this is the only section of either the 1933 or 1934 acts that can reach a closely held corporation). Compliance with the Securities Act of 1933, involves the filing of a registration statement with the SEC pursuant to Section 5 of the Act. A registration statement consists of two parts: (1) a "prospectus," a document that is to be distributed to potential and actual investors; and (2) additional information that must be submitted to the SEC and is publicly available, but need not be included in the prospectus. Registration of an issue by an "unseasoned company," i.e. one whose shares are not widely traded in the public markets and who has never previously filed a registration statement under the 1933 Act, is an expensive, complex, and often messy process.

Piercing the Corporate Veil

The six-factor list is not exhaustive, and we will pierce the corporate veil where necessary for equitable purposes or to prevent injustice, fraud, or fundamental unfairness. Woodruff Factors: The burden is on the party seeking to pierce the corporate veil to show the exceptional circumstances required. Factors that would support such a finding include (1) the corporation is undercapitalized; (2) it lacks separate books; (3) its finances are not kept separate from individual finances, or individual obligations are paid by the corporation; (4) the corporation is used to promote fraud or illegality; (5) corporate formalities are not followed; and (6) the corporation is a mere sham. Other Points: Remember, in LLCs, Courts do not examine factor number (5) because by default, LLCs are the business casual of biz orgs. A consensual creditor that is a sophisticated user of legal services and does not seek a personal guarantee is not likely to get piercing used in their favor. Some courts have said that a partial piercing may occur where passive investors are not liable and active investors that are operators would get pierced.

Promoter Liability Rule

The term "promoter" includes a "person who, acting alone or in conjunction with one or more other persons, directly or indirectly takes initiative in founding and organizing the business or enterprise of an issuer." One important aspect of the promoter relationship is that the promoter owes significant fiduciary duties to other participants in the venture (whether that be other promoters, the corporation, and/or investors); namely: exacting good faith in their intracompany activities and demanding adherence to a high standard of honesty and frankness. Promoter Liability Rule: A promoter who presumes to go out and make contracts before the corporation exists is personally liable for those contracts (in some states jointly & severally), unless another third party agrees to personally assume liability for paying through a novation. Remember, both the corporation and the promoter may be liable if the new corporation either implied or expressly adopts the contract.

Basic Rights of Shareholders

Three main rights as a shareholder: sue, sell, and vote; also remember, MSLA: merger, sale, liquidation, and acquisition. Stocks case says that shareholders have "the right to vote for directors and upon all propositions subject by law to the control of the stockholders, and this is his supreme right and main protection."

Fiduciary Duty of Loyalty

Typically apprises from misappropriating a related (corporate/business) opportunity. The opportunity must be closely related (nexus) to the geography and type of business at issue. "Line of business test." The nexus rule does not apply under UPA 21 if the partner uses partnership property/assets to go after the opportunity, then it automatically becomes misappropriation. Enea: Partners must carry out the business of the partnership with the loyalty and care of a fiduciary, and may not take advantages for themselves at the expense (detriment) of the partnership. Self-dealing transaction are not inherently a violation of the fiduciary duty of loyalty, but there is a strong presumption against them. Remember, the burden is on the defendant to show that the self-dealing transaction is a win-win situation. DE uses the "entire fairness" standard. However there is always a breach if a partner(s) takes self-dealing actions that are to the detriment of the business. See RUPA 409(e).

General Partnership Indemnification

UPA 18(b) provides that, in the absence of a contrary agreement, a partnership must indemnify a partner for payments made and liabilities incurred by the partner in the ordinary course of the partnership business. As between the partners themselves, however, each partner is only responsible for his share of the partnership obligation. If one partner pays off a partnership obligation, he is entitled to indemnification from the partnership. If the partnership lacks the funds to indemnify the partner, the partners are required to contribute according to their loss shares.

Basic UPA and RUPA Fiduciary Duties

UPA 20: Duty to Render Information is a statutory candor disclosure, however UPA 21 is the only provision in the UPA that explicitly refers to a partner's fiduciary duty. Many partnership cases cite Meinhard and section 21 as establishing a broad fiduciary duty among partners. Meinhard: Co-adventurers, like partners, have a fiduciary duty to each other, including disclosing without asking, the sharing in any opportunities and benefits that result from the parties' joint venture. RUPA approaches the fiduciary duty issue very differently than the UPA. RUPA 404(a) limits the fiduciary duties of partners to those of loyalty and care, while 404(b) and (c) define the scope of those duties. See also RUPA (2013) 409(a)-(c). Additionally, RUPA 404(d) imposes an "obligation of good faith and fair dealing" upon partners while discharging duties and exercising rights. Bane: A partner owes no fiduciary duties to former partners.

Transfers of Partnership Interest

UPA 27: all that a partner can assign is the profits the assigning partner would otherwise be entitled. A mere assignee under Rule 27 is not liable for the judgments against a business. Rapoport: Unless otherwise provided in the partnership agreement, the right to assign one's partnership interest without consent does not include the right to unilaterally add new partners to the partnership.

General Partnership Definition

UPA 6: formed whenever there is an "association of two or more persons to carry on as co-owners a business for profit."

General Partnership Property

UPA generally adopts an aggregate theory of partnership, thus partnership property is treated as if it were owned by the partnership itself. The net result of UPA 25's restrictions is that the partnership, rather than the partners, is effectively treated as the owner of partnership property. Remember, UPA Sec. 26: partners trade things (assets they transfer to the partnership) for strings (profits and surpluses of the business). Under UPA Sec. 28: the partner's interest under Sec. 26 can be subject to a charging order. First you have to succeed against a partner on a personal liability and get a judgment which is not subsequently paid. All the party seeking a charging order may get is a partner's strings or profits and surpluses of the partnership. RUPA avoids the conceptual problems and related complexity associated with the UPA approach. RUPA recognizes the partnership as an entity (Sec.201(a)) and provides, in a conceptually consistent manner, that property acquired by a partnership is property of the partnership and not of the partners individually. Sec.203. Similarly, Sec.501 provides that a partner is not a co-owner of partnership property and has no interest in partnership property which can be transferred, either voluntarily or involuntarily.

Entity v. Aggregate Views

UPA: adopts an aggregate view of the partnership and rejects the notion that a partnership is a legal entity. RUPA: explicitly adopts an entity view of the partnership.

Ultra Vires

Ultra Vires: The doctrine in the law of corporations that holds that if a corporation enters into a contract that is beyond the scope of its corporate powers (purpose), the contract is illegal. MBCA 3.04 Ultra Vires: the doctrine is limited to (1) shareholders against the corporation to enjoin the act (note that this is a discretionary call by the courts and generally this action has to be brought as soon as the shareholder learns of it, i.e. you can't bring an action once the contract is completed); (2) by a corporation (directly, derivatively, or through a receiver, trustee, or other legal representative, against an incumbent or former director, officer, employee, or agent of the corporation; or (3) by the attorney general (very rare). The default is that (unless expressly limited by corporation formation), 3.01(a) allows for any lawful action by the corporation (which destroys a 3.04(b)(1) claim).

Entity Status LPs

Under RULPA, the statute does not directly speak to the question of whether a limited partnership is to be considered a separate legal entity. Nevertheless, limited partnerships possess a number of characteristics that suggest a separateness between the partners and the business itself. Perhaps not surprisingly, therefore, courts have generally treated RULPA limited partnerships as legal entities distinct from their owners. Even if a limited partnership is recognized as an entity under limited partnership law, however, a court may conclude that a limited partnership will not be treated as a distinct entity when policy considerations outside of limited partnership law are compelling.

LLC Authority

Under most statutes, members in member-managed LLCs possess partnership-like agency authority to bind the LLC, and managers in a manger-managed LLCs have similar authority. DLLCA sec. 18-402: "unless otherwise provided in a limited liability company agreement, each member and manager has the authority to bind the limited liability company." Taghipour: When two statutory provisions cover the same subject and conflict in their operation, the provision that is more specific in application will govern over the more general provision. In this case: where a statute states that mortgage documents executed by a limited liability company's manager are valid and binding on the company, but the operating agreement states that no loans can be made without authorization by all the members, mortgage documents executed by a manager without the other members' consent will be valid and binding on the company.

General Partnership's Liability

With respect to the partnership's liability in contract, you have already learned that a partnership is liable for contracts entered into on its behalf by partners with actual or apparent authority, see UPA 9. With respect to the partnership's liability in tort, UPA 13 reflects agency principles by providing that a partnership is liable to third parties for "any wrongful act or omission of any partner acting in the ordinary course of the business of the partnership or with the authority of his co-partners." This is true regardless of whether the partners had a previous agreement about losses, which is unenforceable against outside creditors, remember any creditor (including judgment creditors) can come after any partner for the full amount of their judgment.

Watered Stock

Watered stock essentially gives the new investors the same power as the existing shareholders for a significantly reduced amount of money. This also devalues the original investment of the original investors and essentially steals from the original investors. This is also called issuing shares of dilutive stock. This occurs when the first stock sale is $100, then a later stock sale is cheaper, at $50, this is unfair because it steals money from the first stock purchasers due to the dilutive effect of the later stock sale. MBCA 6.21 Issuance of Shares (especially (b) and (c)) Hanewald: The mere formation of a corporation, fixing the amount of its capital stock (par value), and receiving a certificate of incorporation, do not create anything of value upon which the company can do business. It is the shareholders' initial capital investments which protects their personal assets from further liability in the corporate enterprise. Thus, generally, shareholders are not liable for corporate debts beyond the capital they have contributed to the corporation. A shareholder is liable to corporate creditors to the extent his stock has not been paid for. Accessibility Doctrine: shareholders are personally liable up to the amount of their unpaid capital (par value of shares) to creditors.

Oppression Remedies

When a shareholder is successful in proving oppressive conduct, what remedy is provided? In fiduciary duty jurisdictions, there is already a large body of existing case law on traditional remedies for breach of fiduciary duty (e.g., damages, injunctions). As a result, developments in this area have largely occurred in states with involuntary dissolution statutes. In most of these states, courts are not limited to orders of dissolution; instead, courts are empowered (either by statute or by judicial decision) to offer a wide range of alternative remedies when oppressive conduct is demonstrated. Davis: Courts may order a buy-out of shares as a remedy for oppressive acts, as an alternative to corporate liquidation. Issue: Is a buy-out an appropriate remedy for oppressive acts? Holding and Reasoning (Dunn, J.): Yes. A buy-out is an appropriate remedy for oppressive acts. A buy-out is most commonly ordered where there has been oppressive conduct, especially where the majority in a closely held corporation has attempted to squeeze out the minority. Oppressive conduct does not require a showing of fraud, illegality, mismanagement, wasting of assets, or deadlock. Courts have found that oppressive conduct arises when the majority's conduct defeats the reasonable expectations of the minority shareholder that were central to his decision to join the venture. Other courts have alternatively defined oppressive conduct as: burdensome, harsh and wrongful conduct; a lack of probity and fair dealing in the affairs of a company to the prejudice of some of its members; or a visible departure from the standards of fair dealing, and a violation of fair play on which every shareholder who entrusts his money to a company is entitled to rely. This court finds that conspiring to deprive a shareholder of his stock in a corporation (their reasonable expectation of investment) is oppressive conduct. MBCA 14.30 Grounds for Judicial Dissolution MBCA 14.32 Receivership or Custodianship MBCA 14.34 Election to Purchase in Lieu of Distribution MBCA 8.09 Removal of Directors by Judicial Proceeding

Difference between Servant and Independent Contractor

While a master is liable for torts committed by a servant within the scope of his employment, a principal is generally not liable for torts committed by an independent contractor in connection with his work.

Formation of an LLP

With respect to formation, therefore, an LLP must fall within the statutory definition of a partnership - i.e. an association of two or more persons to carry on as co-owners a business for profit. Beyond meeting the partnership definition, an LLP must satisfy certain statutory formalities. (1) An LLP is required to file a document (generally called an application, registration, or certificate) with the secretary of state or other designated official. The document must provide prescribed information, which usually includes, among other items, the firm's name (which ordinarily must contain the "LLP" abbreviation or the "limited liability partnership" term), the firm's address, and a statement of its business or purpose. See RUPA sec. 1001 (prescribing the contents of the "statement of qualification"); RUPA sec. 1002 (addressing the LLP's name); see also RUPA (2013) secs. 901-902. Because of legislative variations, you should always check the relevant statute in your jurisdiction for the precise informational requirements. (2) Some jurisdictions require an LLP to provide a specified amount of liability insurance or, alternatively, a pool of funds designated and segregated for the satisfaction of judgments against the partnership. An LLP that fails to comply with the insurance/segregated funds requirement presumably loses its limited liability protection, at least up to the amount that insurance or segregated funds should have provided. Even if there is no LLP-specific insurance/segregated funds provision, an LLP may still be subject to similar requirements under licensing or other statutes.