Business Organizations

Judicial Dissolution

A court will issue a dissolution if: -a partner becomes incapable of performing his part of the agreement -a partner has been guilty of conduct that prejudicially affects the carrying on of the business -a partner willfully or persistently commits a breach of the partnership agreement, or conducts himself in ways not reasonably practicable to carry on the business.

Van Gorkom Case

A decision to merge with another company was uninformed when the decision was approved in less than 2 hours and the directors didn't know the value of the company. They did not inform themselves of all info reasonably available to them and relevant to their decision to merge which breaches their fiduciary duty to shareholders. (No longer good law in DE; 102(b)(7) regarding negligence is now the DE standard: allowing directors to opt out of fiduciary duties except duty of loyalty, good faith, or personal benefit)

Auerbach v. Bennett

(MAJORITY): BJR applies where some directors are charged with wrongdoing, so long as the remaining directors making the decisions are disinterested and independent. The court will analyze the procedures by which the committee came to its decision, but absent a showing of inadequacy in those procedures, the court will not look to the substance of their decision.

Zapata Corp. v. Maldonado

(MINORITY): Court should decide the independence and good faith of committees' and the basis for their conclusions. A corporation should have the burden of proving independence, good faith and reasonableness. TWO STEP TEST: 1. are the committee's independent? Did they have good faith? Was there a reasonable investigation? (Burden on Corp.) 2. Court applies its own BJR

Shareholder Agreements

(Pooling Agreements): A shareholder commitment to electing themselves or their representatives, as directors, are generally considered unobjectionable (required appointment is also ok if signed by all shareholders)

Bushey v. US

(drunk seaman sank the ship): It was foreseeable that crew members crossing the dock might do damage, negligently or even intentionally. The risk that seamen going and coming from the ship might cause damage to the dock is enough to make it fair that the enterprise bear the loss. -HAND FORMULA: Increased safety costs are offset by a decrease in costs accrued by accidents. -Debow says that it would be more "fair" to require the government to screen its employees.

Securities Act of 1933

(mandates disclosure by issuers in connection with transactions) -Mandates disclosure of material info to investors -prevents fraud -Investment contract is a security and it relies solely on the efforts of others' investments

Stone v. Ritter

(oversight and caremark cases): If D can prove a good system is in place to monitor failure to act, and there is no record of bad conduct, D is not liable. A director cannot act loyally towards a corporation unless he acts in a good faith belief that his actions are in the corporation's best interest. (Debow thinks this should be in duty of care not loyalty)

Securities Act of 1934

(requires periodic disclosure by public corps) Regulates: -Insider trading -short-swing profits by corporate insiders -regulation of shareholder voting via proxy solicitations regulation of tender offers creates SEC which fills in the blanks for these 2 broad acts (Debow thinks the SEC and both acts are unconstitutional)

Doran Test

-# of offerees and their relationship (public v. private) -# of units offered (the smaller the more likely its exempt) -size of the offering -manner of the offering

Safe Harbors for Securities

-Issuer raises no more than $1 million, it generally may sell to an unlimited number of buyers without registration -Less than $5 million, up to 35 buyers without registration -More than $5 million, only 35 buyers and each buyer must pass tests of financial sophistication.

All parts of the RUPA can be K'd around except

-It may not eliminate the duty of loyalty -It may not unreasonably reduce the duty of care -It may not eliminate the obligation of good faith and fair dealing.

4 Rules of Thumb to avoid having your corporate veil pierced.

-Keep money separate & accounted for -Follow formalities such as shareholder/board meetings -Have enough money to pay all reasonable expenses -If it's made up of other entities, keep them separate.

Elements of Agency

-Manifestation by the principal that the agent will act for him (consent by principal) -Acceptance by the agent of the undertaking -Understanding between the parties that the principal will be in control

Security Registration Requirement

-May not be offered for sale unless registered -May not be sold until registration is effective -Disclosure statement must be delivered to purchaser before sale Exceptions: -Private placements -transactions by any person other than an issuer, underwriter or dealer (buys a security with the intention of reselling it)

Implied ratification

-Principal accepts the benefits of the agent's actions while it is still possible for the principal to reject those benefits -Principal's silence or inaction -Principal brings a lawsuit to enforce the transaction

Property rights of a partnership under UPA

-Rights in specific partnership property: tenancy possessory right of equal use -Interests in the partnership: co-tenancy right to profit and surplus -Right to participate in management: one partner, one vote unless K'd around

Elements of a Partnership

-Risk: Who bears the risk of loss (loss isn't measured only in $) -Return: How do you split up the profit? -Control: Who is in control/ Who is going to manage? -Duration: How long will it last? What if someone wants to leave? Division?

Two steps to dissolution

-Wind up *Contributions are paid out *Profits are divided up according to each partner's share *Partners are most likely to breach their duties in this period -Termination: when wind up is completed.

Duty of Care in Corporations

BJR APPLIES IF: Van Gorkom test -Decision is informed -Decision is made in good faith -Decision is in the best interest of the corporation. BJR DOES NOT APPLY IF: -fraud -wrongful conduct -conflict of interest (duty of loyalty) -bad faith (duty of loyalty) -egregious/irrational decision -waste -uninformed decision -no decision (caremark case) Procedural Requirement: Burden is on P to prove gross negligence Substantive Requirement: Burden is on D to prove that it wasn't a negligent business decision, but courts will not look at the substance of the decision. INFORMED SHAREHOLDER VOTE BARS DUTY OF CARE CLAIM Entire Fairness: Affirmative defense (Burden on D)

Disney Case

Bad faith involves an intentional dereliction of duty or a conscious disregard for one's responsibilities: 3 options -The fiduciary intentionally acts with a purpose other than that of advancing the best interest of the corporation -The fiduciary acts with the intent to violate applicable positive law -Where the fiduciary intentionally fails to act in the face of a known duty to act, demonstrating conscious disregard of his duties.

Hoover v. Sun Oil

Barone does not make weekly reports, he assumes all risk of profit or loss in his business operation, he determines his own hours of operation, and he was not given instructions. He is an independent contractor.

Father of Closely Held Corporations

F. Hodge O'Neil

Modern Law scope of employment

FORESEEABILITY TEST - the employer should be held liable for expected risks which arise out of and in the course of his employment.

Humble Oil Case

Humble maintained strict financial control and supervision over the agent's actions and the agreement required him to do anything Humble told him to do. Agent is a servant as a matter of law.

Servant

If a principal can tell an agent not just what to do, but how to do it. It doesn't matter if there is a disclaimer clause, agency is dependent on actions of the parties.

Insider Information

Insiders cannot act on material information until the information is reasonably, publicly disseminated - MUST DISCLOSE OR ABSTAIN There is no breach of fiduciary duty to a corporation when an officer buys stock on inside information.

O'Hagan case

Misappropriation theory protects the integrity of the market against abuses by outsiders to a corp. who have access to confidential information that will affect the corporation's security price when revealed, but who owe no fiduciary or other duty to that corporation's shareholders.

Pillsbury v. Honeywell

Pillsbury became shareholder and invoked a proxy fight not to increase the value of the firm, but to take control of the board so that he could advocate his particular political social vision. This is not ok.

Section 11 Securities Act

Principal express cause of action directed at fraud committed in connection with the sale of securities through the use of a registration statement. P doesn't need to prove anything with respect to the defendant's state of mind. Once P makes his prima facie case, the issuer is strictly liable. The issuer can be held liable even if the misrepresentation or omission was an inadvertent mistake. Prima facie case: Materiality and misrepresentation.

Actual Implied Authority

Principal tells the agent to do a task, and the agent is allowed to do something reasonably necessary to complete that task. Exists in the mind of the agent.

Actual Express Authority

Principal tells the agent to do some particular thing

Meehan Case (compared to Meinhard)

Rather than act as fiduciaries, the Meehan team behaved like competitors. They planned secretly to recruite the best associates. They took the most profitable clients. And they did all of this before they left the firm. Still, none of it amounted to a breach of fiduciary duty. Dishonesty only got them in trouble. They had already broke their K agreement when they only gave 30 days notice instead of 90.

Piercing the Corporate Veil

Reaching the personal assets of a controlling shareholder - Only in Closely Held Corporations

Disgorgement

Remedy for breach of fiduciary obligations of agents. Even though the principal suffers no loss, they are entitled to all profit made by the agency in the scope of their agency. This is a punishment to deter agents from breaching their fiduciary obligations.

Ratification

The affirmance of a person of a prior act which did not bind him but which was done or professedly done on his account giving effect as if originally authorized by him.

Apparent Authority

The authority the agent is held out by the principal as possessing. It is a matter of appearances on which the third party comes to rely. Exists in the mind of the third party upon which the third party relies.

Least cost avoider

The burden goes on the party that has the least amount of risk.

Cargill Case

The principal must be shown to have consented to agency since one cannot be the agent of another except by the consent of the latter. (black letter case) -Debow: Are the control factors really control factors, or are they just what a concerned lender would do?

Doran Case

The private offering exemption is conditioned on either actual disclosure of the information registration would have provided or the offerees' effective access to such information. P must prove it is a security, and D must raise the affirmative defense that it was exempt and that the security if private.

Kovacik case

They were each liable for their own losses. The partner with money was not entitled to reimbursement from the other partner if he put in labor. You each contribute in your own way to losses.

Partnership at will

Unless specified, a partnership may be dissolved at will by any partner, provided the partnership is exercising good faith. A party who caused the dissolution of the partnership is not entitled to collect for the value of goodwill at the time of dissolution. In the absence of any agreement to the contrary, partners participate equally in the profits and losses of the business regardless of the inequality in the amounts each contributed to the capital employed in the venture, with losses being shared in the same proportions as profits.

Hypothetical Bargain

What would the parties have agreed to if they would have discussed the issue? M would want to have been told. There is no way S could say that he didn't want to be obligated to tell M about future ventures. This makes Cardozo's opinion the better default rule in the end. **The best practice is to frame the default rule after what the parties would have negotiated had they discussed it. The law should mimic what people would have agreed to when negotiating. Coase Point: You can always avoid this dispute if you K around it.

Efficient Market Hypothesis

You cannot beat the market. The Price of a financial asset reflects all of the information available and responds only to unexpected news. Prices can be viewed as optimal estimates of true investment value at all times. It is impossible for an investor to predict whether the price will move up or down. -Weak: Future values can't be predicted by looking at the past -Semi-strong: All public information is taken into account almost instantaneously. -Strong: All information, public & private, is instantaneously known to the market.

Misappropriation Theory

a person commits fraud "in connection with" a securities transaction, and thereby violates 10b-5 when he uses confidential information for securities trading purposes without disclosure, in breach of a duty owed to the source of the information. outlaws trading on the basis of nonpublic information by a corporate outsider in breach of a duty owed not to the trading party, but to the source of the information.

Dirks v. SEC

a tippee assumes a fiduciary duty to the shareholders of a corporation not to trade on material nonpublic information only when the insider has breached his fiduciary duty to the shareholders by disclosing the information to the tippee and the tippee knows or should know that there has been a breach. (tippee duty derives from insider's duty) absent material gain, there is no fiduciary duty to stockholders absent a breach by the insider, there is no derivative breach Tipper must gain, not tippee

Broz. test for corporate opportunity

director/officer must turn the opportunity over to the corporation and not keep it for personal gain. -Is the corp. financially able to undertake the opportunity? -Do they want to do it? -Will it help the business? (product and geographical market) This is only applicable when the self-interest of the officer/director would conflict with his fiduciary duty to the corporation.

General Partners in a limited partnership

each liable for all debts

Limited partner in a limited partnership

not liable for debts beyond the amount they contributed

Corporation

separation of ownership and control Shareholder: ownership Director: control Purpose: make as much money as possible

Joint venture

similar to a partnership, but limited in scope and duration. Principles of partnership law typically apply.

Undisclosed principal

the other party has no notice that the agent is acting for a principal. -Agent will be liable on the contract.

Partially disclosed principal

the other party has notice that the agent is or may be acting for a principal but has not notice of the principal's identity. -Least cost avoider: The burden goes on the party that has the least amount of risk.

Fraud on the Market Theory

the price of a company's stock is determined by the available material information regarding the company and its business. Thus, misleading statements will defraud purchasers of stock even if the purchasers do not directly rely on the misstatements. A different type of reliance. Price determined based on the total mix of all information in the market. So, any misleading statement, whether the investor heard it or not, is reflected in the price.

Materiality

those matters to which an average prudent investor ought reasonably to be informed before purchasing the security registered. an omitted fact is material if there is a substantial likelihood that a reasonable shareholder would consider it important in deciding how to vote.

Actual Authority

where the principal tells his agent to do something.

RULPA on limited partnerships

you can have a limited partnership, and you are not necessarily liable just by taking a part in controlling the day to day activities of the partnerships. You will only be liable if you hold yourself out to third parties as being a limited partner and they reasonably believe, based on conduct, that the limited partner is a general partner.

Duty of Loyalty

*Conflict of Interest Directors and other officers of a private corporation cannot directly or indirectly acquire a profit for themselves or acquire any other personal advantage in dealings with others on behalf of the corporation. Director must prove: -good faith transaction; AND -entire fairness from the viewpoint of the corporation and those interested. If disclosed, board can ratify transaction under BJR scrutiny barring claim If disclosed, majority shareholders can ratify barring claim

When a partner can move to dissolve a partnership based on another partner's conduct

-Conduct negatively affects the business; OR -Partner repeatedly breaches the partnership agreement

Requirements for successful derivative action

-Contemporaneous Ownership Requirement: P must have been a shareholder at the time of the transaction of which he complains. -Proof of Demand: P must demand an action of the directors. Rejection is subject to BJR -Approval of Court: Notice must be given to all shareholders of court procedure. *Bond Requirement: Some states require P to post a bond to proceed to litigation.

Alter Ego Theory

-Corporation is influenced and governed by parent corp/person -Parent corp/person has a unity of interest and ownership with the corp.

General Standards of a Partner's Conduct

-Fiduciary duties owed by a partner to a partnership are duties of care and loyalty -Should not have any interests adverse to the partnership -Refrain from competing with the partnership -Refrain from engaging in grossly negligent or reckless conduct, intentional conduct, or illegalities.

Dissolution by Partner at fault

A partner does not have a right to dissolve when it is his own conduct that adversely affects the business

Obligation of Good Faith & Compensation

Absent a conflict of interest, gross negligence, fraud, illegality, or waste, the court will apply BJR. Absent any fiduciary duty violation, it will leave questions of compensation to the shareholders' meetings. If a shareholder dislikes what his board pays its officers, he can take elect new directors or sell his stock.

Proxy Fights

An insurgent group tries to oust incumbent managers by soliciting proxy cards and electing its own representatives to the boart

Express ratification

All you have to do is say yes and the contract is accepted

Security

An economic reality of a particular instrument, rather than the label attached to it, that ultimately determines whether it is a security. Stock, note, bond, evidence of indebtedness, investment contract.

Mill Street Church Case

Brother who was hired by the church hires his brother to help as he has done many times before. Church is liable under implied and apparent because brother assumed he had the authority to hire someone else, and the hired brother reasonably relied on the fact that his brother had the authority to hire him.

Proxy Fight Regulatory Scheme

Courts construe "solicitation" broadly Those who solicit proxies must furnish each shareholder with a proxy statement that discloses information relevant to the decision the shareholder must make. Management gets a choice when being contested, it may either mail the insurgent's proxy statements and bill them for costs, or give them access to shareholders list and let them do it on their own.

Business Judgment Rule

Courts generally defer to the discretion of the board, absent a showing of fraud, illegality, conflicts, negligence, or waste

Wrigley case

Courts will not inquire into the motives of the board members, as long as their acts are within their lawful powers. Decision to install lights is not up for debate with shareholders.

Dodge v. Ford

Courts will show great deference to the business when making decisions on issues that pertain to the running of the business. Discretion of directors is to be exercised in the choice of means to attain profit of stockholders.

Walkovsky case

D followed all 4 rules of thumb, but because it is a tort case and P didn't choose to do business with the corporation, the veil was pierced when insurance did not cover all damages.

Special Litigation Committee's

Disinterested directors who decide whether to pursue a derivative action or let it go.

Duty of Care of Agents

Duty to act in accordance with principal's promises Duty of care and skill Duty of good conduct Duty to give information Duty to keep and render accounts Duty to act only as authorized Duty to not attempt the impossible or impractical Duty to obey

Duty of Loyalty of Agents

Duty to act solely for the benefit of the principal in all matters Duty to account for profits arising out of employment Acting as adverse party without principal's consent Acting as adverse party with principal's consent Acting for adverse party without principal's consent Acting for adverse party with principal's consent Competition as to subject matter of agency Acting for one with conflicting interests: Rash v. JVIC Using or disclosing confidential information: Town and Country

Private Placement

Each offeree has been given information about the issuer (that would have been disclosed in a registration statement) Each offeree had effective access to such information

Independent Contractor

If the principal gives the agent substantial discretion about when and how to do his job. Difference is a matter of control.

The Agency Problem

In any situation where one person (principal) seeks to employ another person (agent) to act on the principal's behalf, the principal runs a risk that the agent will not work as diligently, competently, and unselfishly as the principal would prefer.

Rosenfeld Case

In good faith contests over policy, directors have the right to incur reasonable and proper expenses for solicitation of proxies. The successful contestant has the right to reimbursement.

10b-5 SEC

It is unlawful to use or employ in connection with the purchase or sale of any security registered on a national securities exchange or any security not so registered in any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the Commission may prescribe as necessary or appropriate in the public interest or for the protection of investors. Reliance is an element under fraud on the market theory. Because most publically available information is reflected in market price, an investor's reliance on any public material misrepresentations may be presumed for a 10b-5 action.

Limited Partnership

Limited to personal liability in the amount they contributed to the partnership

Common Law scope of employment

MOTIVE TEST - the way we decide whether a tort is within the scope of the agency is whether the tort was motivated by a purpose to serve the master. If it was, then we will consider the master liable for the actions of the servant. -"Fairness" approach

Benihana Case

Owner of the restaurant puts shares of it in a trust when he got in legal trouble. Attorney had stock in BFC financial but didn't tell Benihana. Should have disclosed.

Wrongful Dissolution UPA

Partner who has not caused wrongful dissolution is entitled to damages for breach of agreement. Partner who has not caused wrongful dissolution may continue the business in the same name for the agreed term for the partnership, provided they secure the payment by bond approved by the court, or pay the partner who has cause the wrongful dissolution the value of his interest at dissolution, less any damages, and indemnify him against all present or future partnership liabilities.

Meinhard v. Salmon Case

Salmon leased a hotel and turned it into offices. Meinhard funded the remodeling. They split cost to construct it, profits, and losses. Salmon had sole power to manage. Subsequently, when the S&M lease was ending, Salmon entered a new deal and doesn't tell Meinhard. **They were in it "for better or for worse." They were more than joint venturers, they were married, and Salmon cheated on Meinhard when he didn't disclose that he was renewing the lease. Why didn't Meinhard ask? M should have asked, even though Salmon had a duty to disclose. Default rule is What would Mother Teresa do? **The punctilio of an honor most sensitive, is the standard of behavior. Dissent: There isn't any evidence about the party's understanding of an end date. If they wanted to call it a partnership, they would have meant to keep going. Instead, they called it a joint venture because they would go their seperate ways after the one project is done. He infers that the lawyers creating the agreement would have discussed the difference between the two before it was signed.

Sinclair Oil case

Shareholder is entitled to vote in a manner that is most beneficial to his interest, but he cannot use his capacity for personal benefit at the expense of the other stockholders.

Derivative Action

Shareholder sues corporation in equity for action/inaction 1. Who suffered the harm? 2. Who would receive the benefit of a remedy?

Dominant Shareholder

Shareholder: Shareholders are in it for themselves and may vote for themselves, but courts police misbehavior by giving them a fiduciary duty. Parent Subsidiary: Intrinsic fairness because parent's majority ownership controls the transactions.

McQuade v. Stoneham

Shareholders are not supposed to be acting in their director role when electing officers. (New Rule in Galler, but it doesn't matter because these corps. add a provision in the articles of incorporation that allows them to elect directors and officers as stated in McQuade) Rule: -Shareholder agreements are perfectly acceptable with regard to the election of officers -Shareholders and sell their shares if they want to -Shareholders can compete with firms -Shareholders can vote for whichever person they think will allow them to benefit the most.

Chiarella v. US

The duty to disclose or abstain arises from the relationship of trust between a corporation's shareholders and its employees. There was no relationship of trust here, because he found out on his own, so he had no duty to disclose or abstain. Silence is only fraudulent when you have a duty to disclose

Misrepresentation

The fact which is falsely stated in a registration statement, or the fact omitted.

Fenwick Case

The intent of the parties was to simply increase her compensation, not make her a partner. Employee didn't share in any losses and had no control. One of the key elements of a partnership is complete control and management, therefore the employee was just that, not a partner.

Due Diligence Defense

The issuer is strictly liable, but anyone else may raise this. -one conducted a reasonable investigation -they had reasonable grounds to believe -did believe -that the statements therein were true and that there were no omissions of material facts

Wrongful Dissolution RUPA

The partnership doesn't necessarily dissolve. If it doesn't, the partnership must buy out the withdrawing partner for an amount equal to his or her share of the value of the assets if sold at a price equal to the greater of the liquidation value or value based on a sale of the business. This is reduced by damages caused by wrongful withdrawal. No goodwill penalty.

Dissolution: UPA v. RUPA

UPA states that partnership must be completely dissolved upon the exit of one partner, but RUPA allows partnership to stay so long as exiting partner is justly compensated.

Enterprise Liability

When one corporation controls another, and uses it as a means, agency and instrumentality by which the former carries out and performs its business, it is liable for the debts of the other.

Disclosed principal

at the time of the transaction, the other party has notice that the agent is acting for a principal and the principal's identity. -Agent is not liable

Buyout Agreements

allows a partner to end his relationship with the other parters and receive a cash payment, or series of payments, or some assets of the firm, in return for his interest in the firm. -Trigger Events -Obligation to buy or option to buy -Price -Method of payment -Protection against debts of partnership -Procedure for offering either to buy or sell

102(b)(7)

allows directors to opt out of fiduciary duties except duty of loyalty, good faith, or personal benefit