Business Associations - Coyle

promoter magic words

"[Name] in the name and sole by the credit of [corporation]"

Apparent Authority can be broken down into 3 elements:

1) The "agent" acted in a way that would lead a reasonable person to conclude that he was an agent of the principal 2) Plaintiff actually believed that that the "agent" was an agent of the principal 3) Plaintiff relied to his detriment upon the care and skills of the allegedly negligent agent (generally a given if 1 and 2 can be met)

the Restatement defines agency as the fiduciary relationship that arises:

1) When one person (a Principal) 2) Manifests assent to another person (an agent) that the agent shall act on the principal's behalf and subject to the principles control, and 3) the agent manifests assent or otherwise consents so to act

a finding of a corporation de facto requires:

1) the state has a law authorizing corporations 2) there was a good faith effort to create the corporation legally 3) the purported corporation exercised corporate powers

Walkovsky v. Carlton Facts

Taxi company was organized in 10 different corporations, each owning only two cars. The cabs all operated as one company with regard to financing, supplies, repairs, employees, and garaging. One of the cabs hit struck someone who sued in tort

default rules

can be altered by the partnership agreement

Decisions in the ordinary course of business:

can be made by a majority of the partners

mandatory rules

cannot be altered by the partnership agreement

shareholders cannot

control directors by giving them instructions

the principal also owes limited fiduciary duties to the agent such as:

dealing with the agent fairly and in good faith; indemnify the agent when the agent acts on his (the principal's) behalf

the members and manager of an LLC all owe:

fiduciary duties to the LLC; some state statutes allow limiting or eliminating these fiduciary duties to the LLC

the partnership must reimburse the partners for:

for all regular costs and liabilities incurred by the partners in the ordinary course of business

A partner can always:

give notice he wants to leave and get the remaining partners to buy him out

convertible stock

is preferred stock that can be converted into common stock at the holder's option and is commonly used by venture capitalists

Agency relationships terminate only when:

it is longer reasonable for a third party to believe that the agent possesses apparent authority

Apparent Authority

it was reasonable for a third party to believe an agent acted with actual authority and the belief is traceable to the principal's manifestations

the agent owes the principal fiduciary duties of:

loyalty and care

Principals can be liable for their agents activities on their behalf through:

Actual or Inherent authority

Cranson v. Internal Business Machine Corp. Facts

After being advised by an attorney that a company had been properly incorporated, Cranson bought typewriters for his company. In fact, the articles were not properly filed for almost six months after they were signed. IBM sued for Cranson for an unpaid balance on the typewriters

RUPA §404(b) - Duty of Loyalty

Agent has to to be loyal to the principle and put the principles interests first at all times, cannot deal with adverse parties, and cannot compete with the agency

Horne v. Aune Facts

Couple bought a house together through a partnership agreement. The man moved out and the woman continued to pay for everything to keep the house up. The woman wanted the option to buy the property and sued to allow her to do so

Martin v. Peyton Holding

Court found that no partnership existed as a matter of law Demonstrates that careful drafting of an agreement can avoid a finding that a partnership exists, thus preventing individuals from being on the hook for massive liabilities

Limited Liability Partnerships

Exactly like limited partnerships with an additional key feature: when one partner acts he is personally liable for his actions and so is the partnership, but other partners are not personally liable for the "rogue" partner's actions

Organizing an LLC:

Fill out the filing with the Secretary of State in the state organization, and create an operating agreement spelling out arrangements between the members

O'Rorke v. Geary Facts

Geary was going to form a corporation to build a bridge, and was going to bind the corporation to the contract, not himself, so he signed the contract as "Geary, for a bridge company to be organized and incorporated." The company wasn't formed and O'Rorke sought payment on the contract

Peed v. Peed facts

Husband and wife owned a dairy together. Wife invested $3,000 into the business when she married husband. She and defendant agreed they would be partners in the dairy and registered the cows and land in both of their names. Wife was involved in the operation of the business and wrote checks off the business account (though husband did more day-to-day work)

Cranson v. Internal Business Machine Corp. Holding

IBM estopped from denying the existence of the corporation Cranson worked for because it dealt with him as if he were representing a corporation and everyone thought that a corporation existed

Piercing the corporate veil Instrumentality Test:

Is the corporation operated as a mere instrumentality or "alter ego" of a sole or dominant shareholder as a shield for his activities? Three elements: 1) "Complete domination, not of finances, but of policy and business practice in respect to the transaction attacked so that the corporate entity had at the time no separate mind, will, or existence of its own" 2) The control was used to commit a fraud, wrong, violation of statutory or other legal duty, on unjust act in contravention of the plaintiff's rights 3) The control proximately caused the injury to the plaintiff

Limited Partnerships

Limited partnerships are general partnerships with a few passive investors "along for the ride"

East Market Square, Inc. v. Tycorp Pizza IV, Inc. holding

Piercing the veil appropriate Bland exercised total control because he was the only player The control led to a breach of contract (legal wrong) which was the proximate cause of plaintiff's injury

Iceland Telecom, Ltd. v. Information Systems & Networks Corp. holding

Piercing the veil not appropriate because Maryland law makes it basically impossible (though case led to a revision of Maryland law)

Butler v. McDonald's Corp. Facts

Plaintiff was injured by shattering door at a McDonald's store was not directly operated by the corporation. The franchise agreement between the operator and McDonald's required the operator to adhere to certain standards

winding up a partnership

Shutting down the partnership and fully liquidating and distributing the remaining assets

National Biscuit Company, Inc. v. Stroud Facts

Stroud and Freeman were partners in a grocery business. NABISCO sold bread to the partnership, but the partnership did not pay for what it had purchased. There was nothing to suggest that the Freeman's authority as a general partner was limited, though Stroud did tell NABISCO at one point that he would not be responsible for any additional bread sold to the business. The purchase and sale of bread was part of the partnership's ordinary course of business

Summers v. Dooley Facts

Summers approached Dooley about hiring a new employee. Dooley refused his request, but Summers hired the employee anyway and paid him out of his own pocket. Dooley objected again after learning of this and refused to pay the new employee out of the partnership funds

Gateway Potato Sales v. G.B. Investment Co. Facts

Sunworth (general partner) entered into a limited partnership with G.B. Investment (limited partner) to farm potatoes in Arizona. Sunworth bought potato seed on credit, falsely giving the impression that it was in a general partnership with the respected/solvent G.B. The seed seller wanted to get money out of G.B.

O'Rorke v. Geary Holding

The contractual language was not sufficient to absolve Geary of liability. Since he didn't use any of the other "escape hatches" to liability he was responsible for paying out the contract

Horne v. Aune Holding

The majority approach is to read "liquidation of the partnership assets" in RUPA § 807 as giving a departing partner the right to receive the fair of the value of his property interest in cash upon the winding up and dissolution of the partnership The minority approach strictly construes the language and requires a forced sale

Red River Wings Facts

The majority limited partners in an operation owning a number of Hooters franchises became dissatisfied with the general partner, ousted him, and effectively controlled the business as general partner. They changed management companies several times and eventually sued the old general partner, all over the objection of the minority limited partners

Summers v. Dooley Holding

The majority requirement for settling disputes about the ordinary course of business in partnership means in effect that there must be unanimity for making these decisions in two-person partnerships

Piercing the corporate veil

allows a court to disregard the corporate entity and to hold shareholders personally liable for corporate debts when the court concludes that the corporate form is being misused

right of redemption

an investor has the right to force the company to buy back his shares at a future date at a fixed price

written agreements affirming or disclaiming the agency relationship:

are not dispositive of their existence

an agent's Duty of Care:

do a reasonably good job in carrying out the duties that the principal assigns

LP Fiduciary Duties

general partners owe the duties of loyalty, care, and good faith and fair dealing to the limited partners. The duties of general partners are generally more limited, (but see red river wings)

Giving someone a corporate title of significance (CFO, VP of sales) may:

give them the authority to act, though allowing them to use company letterhead or email is not enough on its own

IPO

going public raises a good deal of capital and also opens other financial doors, but comes with certain regulatory requirements

preferred stock

is created when companies set up different classes of stock

RUPA §404(c) - Duty of Care

limited to refraining from engaging in grossly negligent or reckless conduct, intentional misconduct, or a knowing violation of the law (has to do as good a job as is expected under the circumstances)

general partnerships are

not well suited to the modern environment, they can, and often are, formed inadvertently

Piercing the corporate veil:Weighing the various factors: look for total control and injustice to the plaintiff; if so then appropriate to pierce the veil

o Inadequate capitalization o Non-compliance with corporate formalities o Excessive fragmentation o Strong control by one or a few shareholders o Injury to plaintiff (tort should theoretically be a better a case for piercing, though contract often is in practice)

an agency argument for promoter liability does not work because:

one cannot be an agent for a principal that does not yet exist

though it happens infrequently, a court in every state except for Delaware may exercise its equitable authority to:

pierce the veil and hold individual LLC member liable when justice so requires

Private equity funds after making an initial investment:

play an active role in the company's management to add value to it, the selling the company for a profit

Partnerships can carry on as a new partnership by:

remaining partners buying out the departing partner

Novation

substituting the corporate name for the promoters name

the buyout price of a partner is determined by:

taking the value (both in liquidation of assets or as a going concern), subtracting the liabilities, and multiplying that number by the percentage ownership the partner has

Partners owe each other three fiduciary duties:

the Duty of care, duty of good faith and fair dealing, and duty of loyalty

the two main sources for law for the course are

the Model Business Corporation Act (MBCA) and the law of Delaware

when the principle is unidentified and the third party does not know that the agent is action for a principal:

the agent is liable

when the principle is unidentified and the third party knows that the agent is acting for a principle but doesn't know who the principal is:

the agent is liable unless the agent and the third party agree otherwise

When the principal is disclosed, and the third party knows who the principal is:

the agent is not liable unless the agent and the third party agree otherwise

call right

the company has the right to buy back the stock at a future date at a fixed rate

Whether the agent is personally liable for the contracts he signs on behalf of the principle depends on:

the identity of the principal in the contract

the veil is pierced only with respect to:

the individual who acted inequitably

LP newest rule:

the limited partner is never liable even if participates in the management of the partnership

common stock

the most basic form of stock, comes with right to vote (voting rights and receive dividends (economic rights), and is last in line behind lenders and preferred stockholders (in that order) in the case of company liquidation

by default, when one partner leaves a partnership:

the partnership is dissolved

Corporation by estoppel occurs when:

the plaintiff goes after an individual for the debts of the "corporation" and then: 1) the plaintiff is estopped from going after the defendant 2) the defendant must have acted in good faith, thinking that a corporation existed

agents remain liable for:

their own actions, however the principal usually has more money so thats who gets sued

though an agreement is required to form an agency relationship:

there doesn't have to be a contract or a formal recognition that such a relationship exists

it is important to follow the steps of incorporation validly because if they are not:

there is no corporation and the incorporator(s) would be personally liable for any of the non existent entity's liabilities

promoters will generally be held liable for Ks the enter into on behalf of the yet to be formed corporation unless:

they use the magic words, argue the offer has not yet been accepted, receive a novation, seek indemnification from the company, get the corp to adopt the K

factors a court could consider in deciding whether to pierce the veil include:

total control of the LLC by one member, fraud, following corporate formalities, commingling funds between a member and the business, inadequate capitalization

Decisions outside the ordinary course of business require:

unanimous consent of all the partners

the members of an LLC get:

voting rights, economic rights (a share of the profits), and a pro rata share of the LLC profits when the business is wound down

Defective Incorporation

where the parties honestly believe that a corporation existed at the time of K, but such a corporation does not exist for whatever reason, courts will equitably infer the existence of a corporation through a "corporation de facto" or "corporation by estoppel"

National Biscuit Company, Inc. v. Stroud Holding

· If one partner goes to a third party to contract for the partnership, the other partner cannot prevent it by writing to that third party and telling him not to contract · What either partner does with a third person is binding on the partnership · In two-person partnerships, one cannot control the other's actions in the ordinary course of business because he does not have more than a half-stake

Gateway Potato Sales v. G.B. Investment Co. Holding

Applied the "old rule" and held that it was jury question as to whether G.B. could be held liable

Gay Jenson Farms Co. v. Cargill, Inc. Facts

Cargill loaned Warren more than $3.6 million during the 1970s. Warren and Cargill had a separate agency agreement for other purposes. As Warren's debt increased, Cargill became involved in the daily management of Warren's business and had to sign off purchases of any consequence

Martin v. Peyton facts

Investment in a banking partnership looked a lot like a partnership, but specifically rejected that idea Investors received a share of the profits (a percentage), installed their friend as the director of the business, had veto power over all major decisions, and had option to formally enter the partnership/could exercise control over who became a member of it; loan funds were not co-mingled with other funds

Red River Wings Holding

Limited partners who take an active role in the business incur the same fiduciary duties as general partners When not in control, limited partners have limited fiduciary duties

Limited Liability Company

Has the limited liability advantages of a corporation, but like a partnership is taxed only once (whereas corporations are taxed twice—when income is earned and when dividends are paid out)

Corporate Promoter

Person acting on behalf of a yet to be formed corporation

Iceland Telecom, Ltd. v. Information Systems & Networks Corp. facts

Same man controlled two very similar entities, made contracts with one in a way that confused the other party as to which entity they were dealing with. Then dissolved one of the entities and other party sought enforcement of contract

Actual Authority

agent acting at the express or implied direction of the principle, usually under some delegation of authority

Ratification

a principal can ratify an agents unauthorized actions by affirming the conduct the principals assumes liability for the agents behavior

respondant superior

a principal may be vicariously liable for the actions (within scope of duty) of employees (who may or may not be agents)

an agent's Duty of Loyalty:

1) Avoid conflicts of interest with the principal 2) Avoid competition with the principal outright and from aiding the principal's competitors 3) Avoid stealing from the principle (defined broadly to include the stealing of opportunities from the principle)

Piercing the corporate veil Instrumentality Test Element 1 complete domination factors:

1) Inadequate capitalization 2) Non-compliance with corporate formalities 3) Complete domination or control of the corporation so it has no independent identity 4) Excessive fragmentation of a single enterprise into separate corporations (goes to enterprise liability)

there are three ways a company can acquire capital:

1) Issuing stock in the company in exchange for capital (selling equity) 2) Borrowing money from a lender (selling debt) 3) Reinvesting the profits the company makes in itself (retained earnings)

The process of forming a corporation:

1) Step one: check to make sure that the name has not already been taken 2) Step two: maintain an office in the state of incorporation (sometimes a service is used) 3) Step three: prepare and file the corporate charter/articles of incorporation with the secretary of state in the state of incorporation; generally, must decide on: o The number of shares to be issued o In Delaware, the purpose of the business (but can be listed as "any lawful activity" 4) Step four: hold an organizational meeting where the by-laws are adopted, the shares are officially issued, etc.

there are four factual scenarios that generally give rise to a corporation de facto or corporation by estoppel defense:

1) The incorporator honestly and reasonably believes that the articles have been filed by attorney when they haven't been 2) The articles of incorporation are mailed to the secretary of state but are delayed or returned by the secretary because of some error 3) A third party urges immediate execution of a contract in the corporate name in full knowledge that the company has not yet filed its charter with the secretary 4) A passive investor provides funds with the instruction not to engage in business until the articles are filed, but business is commenced anyway before incorporation

the formation of a partnership involves four elements:

1) two or more people 2) come together as co owners 3) to operate a business 4) for a profit

East Market Square, Inc. v. Tycorp Pizza IV, Inc. facts

Bland organized a network of corporations to run Pizza Huts in North Carolina and Virginia. One of his entities leased space in shopping plaza, failed to make the needed repairs on the building, and ultimately defaulted on the lease

Peed v. Peed Holding

Though a jury question, there was enough here for a jury to find that a partnership existed That one partner owns certain property in the business or provides the capital, while the other performs certain work, does not mean they are no co-owners of the business

Walkovsky v. Carlton Holding

Though the case was ultimately a close one, the court ruled that piercing the veil was not appropriate Coyle says because of excessive fragmentation, better case for enterprise liability

Gay Jenson Farms Co. v. Cargill, Inc. Holding

Though there was no specific agency agreement in this context, an agency relationship existed by implication (court looked at all the circumstances) There does not need to be an explicit agreement to form an agency relationship

Butler v. McDonald's Corp. Holding

To show reasonable belief of agency, a court could consider all means and methods a franchisor requires to maintain an image of uniformity among its franchisees, including national advertising, common signs and uniforms, common menus, common appearance, and common standards Court held enough for reasonable belief of agency (though a jury question)

Term Partnerships

Very rarely a partnership will have an expiration date on it (term partnership), meaning that a partner may not dissociate until the term is up or else be subject to suit for wrongful dissociation (Page v. Page)