BA

LLCS

Cross between partnership and corporation / can create multiple classes of partnership. Combine corporation's LL w partnership's pass through tax treatment. · An LLC can be managed directly by its members, with no BOD, etc. o Inevitably, such a firm will devote less attention to formalities relating to decision making and other aspects of internal governance o A greater degree of compliance with organizational formalities, however, might be expected with respect to matters potentially affecting third party rights because it is a company § Veil Piercing - LLC members should be careful to respect formalities such as keeping a separate bank account, avoiding comingling of funds, signing in the name of the LLC, and the like

Corp def

A legal entity/"person" created by state action. o R3d §1.04(5): A person is § (a) an individual § (b) an organization or association that has legal capacity to possess rights and incur obligations § (c) a government, political subdivision, or instrumentality or entity created by government § (d) any other entity that has legal capacity to possess rights and incur obligations

LIMITED LIABILITY LIMITED PARTNERSHIPS

A limited partnership that elects LLLP status by filing an application for LLLP registration / all partners, GPs and LPs have personal liability protection / other than limited liability, functions like a limited partnership / 2 class of partners

limited partnership

A partnership formed by 2+ persons and having 1+ general partners (with unlimited liability) and 1+ limited partners (with limited liability) / liability is limited to the GPs / 2 class of partners (vs GP = 1 class of partners)

· Safe Harbor Statutes

A safe harbor is a provision of a statute or a regulation that specifies that certain conduct will be deemed not to violate a given rule.

Making Decisions (bod)

"Consensus" -- participatory democracy, all constituents have vote Works with well-informed, common interest, small enough group Shareholders delegate authority to BOD to make decisions "Agency costs" - tension between BOD and officers Problem: authority requires accountability Authority and accountability are always in tension -- power to review becomes power to decide

o Partnership agreements govern:

1) Relations among the partners as partners and between the partners and the partnership 2) The business of the partnership and the conduct of that business / and 3) The means and conditions for amending the partnership agreement

DGCL § 144 statute text

(a) No contract or transaction between a corporation and 1 or more of its directors or officers, or between a corporation and any other corporation, partnership, association, or other organization in which 1 or more of its directors or officers, are directors or officers, or have a financial interest, shall be void or voidable solely for this reason, or solely because the director or officer is present at or participates in the meeting of the board or committee which authorizes the contract or transaction, or solely because any such director's or officer's votes are counted for such purpose, if: (1) The material facts as to the director's or officer's relationship or interest and as to the contract or transaction are disclosed or are known to the board of directors or the committee, and the board or committee in good faith authorizes the contract or transaction by the affirmative votes of a majority of the disinterested directors, even though the disinterested directors be less than a quorum; or (2) The material facts as to the director's or officer's relationship or interest and as to the contract or transaction are disclosed or are known to the stockholders entitled to vote thereon, and the contract or transaction is specifically approved in good faith by vote of the stockholders; or (3) The contract or transaction is fair as to the corporation as of the time it is authorized, approved or ratified, by the board of directors, a committee or the stockholders. (b) Common or interested directors may be counted in determining the presence of a quorum at a meeting of the board of directors or of a committee which authorizes the contract or transaction.

· Term partnerships

(parties agree at outset it'll exist for a specific pd or until a specific undertaking has been completed) -Explicit terms -Duration specified in partnership agreement -Specific purpose/object specified in partnership agreement -Implicit Term -Must be clear evidence allowing one to infer an agreement among the partners that the partnership (i) has a minimum or maximum duration or (ii) terminates at the conclusion of a particular venture whose time is indefinite but certain to occur

o Events Triggering Disassociation of a Partner

1) Notice of partner's express will to withdraw 2) Occurrence of agreed upon event 3) Expulsion pursuant to partnership agreement 4) Expulsion by unanimous vote of other partners if: i. It's unlawful to carry on partnership business with that partner ii. There's been a transfer of all or substantially all of that partner's transferable interest in the partnership iii. Corporate partner has been dissolved, or iv. A partnership that is a partner has been dissolved 5) Partner's disassociated by court order because of wrongful conduct, material breach of partnership agreement, conduct which makes it not reasonably practicable to carry on the business in partnership with the partner 6) The partner's becoming a debtor in bankruptcy / executing an assignment for the benefit of creditors / appointment of a trustee, receiver, or liquidator 7) The partner's death / the appointment of a guardian or general conservator for the partner / or a judicial determination that the partner has otherwise become incapable of performing the partner's duties

Board Committees

-Audit committee -- supervises company's accounting and finances -Nominating committee -- selects new directors -Compensation committee -- sets compensation of CEO -Executive committee Used to be internal directors who could make emergency decisions Most companies nowadays, only one member of board (CEO) is employed by company

UPA def of partnership?

1) Association of 2+ persons (2) to carry on as co-owners (3) of a business for profit

o Rosenblatt 3 Part TEST for determining whether someone (namely a non-equity partner) is a partner or just employee:

1) Extent of an individual's ability to control and operate the business as evidenced by participation in policy decisions, 2) Extent to which an individual's compensation is based on a percentage of business profits, and · If compensation is based on a percentage of firm's profit, they're more likely to be deemed partners. 3) Extent of employment security enjoyed by the individual

o Post-incorporation § Bylaws:

1) More detailed in comparison to AOI, day-to-day operations 2) Tend to be procedural, tend to be process-oriented 3) Process by which corp. and BOD take actions 4) Chevron -- forum selection bylaw o Lawsuits pertaining to intra corporate disputes are subject to forum selection clauses 5) DGCL 109 o SHs or BOD - MBCA o DE SHs can amend bylaws without BOD action o You may authorize the BOD to have concurrent power to amend bylaws, but cannot take away power

Partnership at will:

: A partnership that can be dissolved by any partner at any time without any liability. Has indefitinte life until it's dissolved and may be dissolved by the unilateral act of any partner.

o TEST (Fenwick): Does the Agreement form a Partnership?

1. Intent of the parties (cts first look to this) · There must be an agreement/K · Oral K must be clear and convincing of partnership 2. Right to share in profits · Remember that sharing of profits creates a rebuttable presumption of partnership unless... (see above exceptions) · In Martin, division of profits did not create a partnership because UPA § 7(4)(d) there was a loan / the "profit" paid was just interest on the loan · Partners don't get salaries, they get profits 3. Obligation to share in losses 4. Ownership and control of the property and business 5. Community power in administration 6. Language in the agreement 7. Conduct of parties toward TP 8. Right of the parties on dissolution · Go through this test and then ask Peyton/Coppola question: whether the creditor has just enough control to ensure they get paid back or do they have so much control they're in fact de facto owners of the biz?

corp formation process

1. Promotion -Stuff you do before incorporate, line up investors 2. Name search -Fictitious Business Name Act - make sure no one else using name (finding name aka DBA can be hard bc running out of names 3.Subscribers -Potential investors who will become SHs 4.File AOI -Show up with filing fee, AOI/ hand you back now certificate (moment of incorporation) 5.State Charter 6.1st organizational meeting -§ 2.06 - Draft bylaws § 2.05 - Hold meeting Name directors, adopt bylaws, appoint officers Issue stock

For first prong of "ways to cleanse", the following are considered when determining whether prong is satisfied: (re 144 and 141)

144 Disinterested Majority in total 141 Doesn't say disinterested Majority present **interested director/officer can count towards quorum.

DGCL § 144 Ways to Cleanse: first prong

144(a)(1): Material facts as to D/O's relationship or interest to K are disclosed to BOD AND BOD in good faith authorizes by majority of disinterested directors (even though disinterested directors may be < quorum) Can count interested directors toward reaching quorum If a committee is formed, only the majority of disinterested directors on the committee must approve, not majority of disinterested directors on BOD Telephonic conference call is allowed for quorum and to reach majority (?) So you need at least 1 interested director But probably don't want 1/5 because optics What if all are interested? --> e.g. re director compensation, SHs vote Compare to § 141(b): "The vote of the majority of the directors present at a meeting at which a quorum is present shall be the act of the BOD unless the certificate of incorporation or the bylaws shall require a vote of a greater #." (If approved under 141, but not 144, transaction won't be "cleaned" as reqd by 144.

DGCL § 144 Ways to Cleanse: 2nd prong

144(a)(2): Material facts are known to SHs who are entitled to vote and majority approves

DGCL § 144 Ways to Cleanse: 3rd prong

144(a)(3): K is fair to corporation as of time its approved by BOD or SH (applies to cases in which BOD or SHs acted but did so either defectively or after the fact) DGCL § 144 (a)(3) -- "The K or transaction is fair as to the corporation as of the time it is authorized, approved or ratified, by the BOD, a committee, or the SHs" For a1 and a2, need approval of BOD or SH prior to transaction being effect If BOD or SH approves but was not fully informed, 0 effect on a1 and a2 § When to apply 144(a)(3): K or transaction is fair to the corporation when authorized and is approved or ratified by the BoD, committee, or shareholders · Where the transaction was approved by the board or shareholders / but the approvement was defective (didn't have the requisite majority or disinterestsed shs or directors. All the directors are all interested, so they cant approve it because there are no disinterested directors - cant under (a)(1) / was it fair at the time they defectively approved

apparent authority re partnership (1914 and 1997)

1997 change expanded liability -- COMPARE: UPA 1914 §9(1): Every partner is an agent. An act of a partner binds the partnership if the act is to apparently carry on the partnership in its usual way. UNLESS the partner doesn't have authority to act AND the person who he is dealing with knows he has no authority. (simplified) "apparently carrying on in the usual way the business of the partnership of which he is a member" = Usual way our partnership is run UPA (1997) §301(1): Every partner is an agent. An act of a partner binds the partnership if the act is to apparently carry on the partnership or a similar business in its ordinary course. UNLESS the partner doesn't have authority to act AND the person who he is dealing with knows or has notice he has no authority. (simplified) "apparently carrying on in the ordinary course the partnership business or business of the kind carried on by the partnership binds the partnership" = Usual way partnerships are run

LIMITED LIABILITY PARTNERSHIP

A general partnership that elects limited liability partnership status by filing an application for LLP registration / a group of GPs with the same liability as the LPs but functions like a general partnership other than the limited liability aspect / 1 class of partners

1) Sharing of profits creates a rebuttable presumption of partnership, unless profits received in payment:

A. Of a debt by installments or otherwise B. For services as an independent contractor or of compensation to an employee C. Of rent D. Of an annuity or other retirement or health benefit to a deceased or retired partner or a beneficiary, representative, or designee of a deceased or retired partner E. Of interest or other charge on a loan, even if the amount of payment varies with the profits of the business, including a direct or indirect present or future ownership of the collateral, or rights to income, proceeds, or increase in value derived from the collateral, OR F. For the sale of the goodwill of a business or other property by installments or otherwise

· Types of Authority

An agent may have actual, apparent, or inherent authority to enter into Ks on behalf of the P. In addition, the P also can be bound to a K made by its agents on grounds of estoppel or ratification.

Rule of thumb re corps

Board ACTS, Shareholders REACT

Board Composition

Boards have added more outsiders instead of old managers, more women, more minorities

Agent's Fiduciary Duties

COALD: Care, Obedience, Accounting, Loyalty, Disclosure

allege with particularity... (sh lit)

Complaint must allege with particularity the cause of action against the directors (can use SH inspection rights to obtain information

DE Fiduciary duty waiver statute:

DGLC § 18-1101(c) - Fiduciary "duties may be expanded, restricted or eliminated by provisions in a limited liability company agreement / provided, that the limited liability company agreement may not eliminate the implied contractual covenant of good faith and fair dealing" Waiver must be clear and unambiguous

o Reconciling Summers & Nabisco

Depends on whether a TP is involved As between the partners and TP, all partners are agents with power to bind (National Biscuit) As between the partners, all partners have equal rights to participate in management (Summers) Clash bw two basic principles of partnership law: All partners are agents of the partnership with power to bind the partnership All partners have equal rights to participate in the management of the partnership Covalt v. High (NM 1983) -- "As between the partners themselves, an act involving the partnership business may not be compelled by the co-partner. If the parties are evenly divided as to a business decision affecting the partnership, the power to exercise discretion on behalf of the partners is suspended so long as the division continues. // The rule is different, however, as to transactions between partners and third parties."

Fiduciary Duties of directors/officers

Directors and officers are fiduciaries Duty of Care: Directors/officers are expected to act in good faith and the best interests of the corporation Failure to exercise due care may subject individual directors or officers personally liable* (*basically unheard of) Duty of Loyalty No competition with Corporation No taking a "corporate opportunity" No conflict of interests No insider trading No transaction that is detrimental to minority shareholders

Effect of Approval by Shareholders of related party transaction:

Duty of care claims -Extinguished by informed vote -Duty of loyalty claims against directors -Fully informed vote shifts burden of proof to plaintiff to show waste -Duty of loyalty claims against controlling shareholder -Fully informed vote shifts burden of proof to plaintiff to show unfairness

apply Opportunity Doctrine test to meinhard

Factors / sued for usurping -Partnership was probably financially able to take opportunity -Line of business was building and operating office buildings -Partnership had interest/expectancy -Yes conflict

(re corp opp) o Initial Public Offerings

First sale of stock by company to the public Hire team of "underwriters" to conduct the sale (big Wall Street banks) IPO price is typically 5-15% below closing price of first day, sometimes as much as 100-200% IPO buyers are virtually guaranteed a profit, so identifying who gets to buy that stock is side benefit of offering Issuer gives underwriters a list of friends of company who should get IPO stock, but underwriters will get number of IPO shares for their own friends (≈10%) "Spinning": Allocating hot IPOs to the personal brokerage accounts of top executives in return for company business At best unethical, and illegal if done with intent to induce CEO to pick Goldman Sachs as company's investor

duty of loyalty rule

If a servant takes advantage of his service and violates his duty of honesty and good faith to make profit for himself, where being a servant was main cause of obtaining money, he is accountable for it to his master

Not problem re related party transactions

K/transaction between corporation and 1+ of its D/O's K bw corporation and any other corporation in which 1+ D/O's are D/O's or have financial interest Bayer v. Beran -- doesn't apply because wife isn't organization Conflicted director is at meeting Conflicted Director's vote is counted

Liability in LLC--

Members can lose the capital contributed, but personal assets cannot be attacked

•X Corporation is in the business of acting as investment adviser to a group of clients in planning their long-term securities portfolios. •A, a senior executive of X Corporation, uses information that A has developed in the course of reading and research for giving investment advice to X's clients in planning A's personal long-term investment portfolio. (breach of loyalty?)

NO. RULE: A person who serves as a director or senior executive normally develops general knowledge and skills as a result of the continuing acquisition of information in that capacity, and sometimes is able to use such information for personal pecuniary advantage (e.g., when taking employment with another corporation or when making private investments)

Corporate Officers (aka executives)

Officers (a.k.a. executives) are hired by the board of directors. Agents of the corporation, and thus have fiduciary duties. serve mostly at pleasure of BOD In most states, can be officer and director Less common now as practical matter

PRINCIPAL'S DUTIES TO AGENTS- Duty of Cooperation

P owes duty to cooperate with and assist A in the performance of A's duties and the accomplishment of the agency

· Corporate Opp. Doctrine --vs.-- Related Party Transaction (see below for both)

RPT - transaction between corp. entity and either director or director's affiliate (or officer) CO - director has opportunity that arises outside of corporation with third party in which corp. would justifiably have interest Can you have both? - YES

· Use of Corporate Property rule

RULE: A director or senior executive may not use corporate property, material non-public corporate information, or corporate position to secure a personal benefit (doesn't matter if corp also benefitted or wasn't harmed) Exceptions: Such use is authorized as part of a compensation package Authorized or ratified by a majority of the disinterested directors

Competition with the Corporation Rule

RULE: Directors may not advance their own interests by engaging in competition with corporation unless either: 1) Any reasonably foreseeable harm to the corporation from such competition is outweighed by the benefit that the corporation may reasonably be expected to derive from allowing the competition to take place, or there is no reasonably foreseeable harm to the corporation from such competition; 2) The competition is authorized in advance or ratified, following disclosure by disinterested directors; or 3) The competition is authorized in advance or ratified, following such disclosure, by disinterested SHs and the SHs' action is not equivalent to a waste of corporate assets

DGCL § 144 -

Rejects common law rule that conflict of interest voids a transaction / No transaction between corporation and its directors will be void solely due to conflict of interest (even if director/officer votes in favor of transaction), provided the transaction is cleansed, unless plaintiff can show waste

Steps in analyzing safe harbor statutes (DGCL § 144):

Related party won't lead to voidness provided one of three things apply (aka it's cleansed): -Transaction approved by majority of disinterested directors provided that material facts are known; OR -Can count interested parties towards quorum -The material facts as to the conflict are known and approved by shs; OR -The k or transaction is fair as to the corp as of the time it's authorized, approved or ratified, by the bods, a committee, or the shs. Unless P can show waste -Cts have consistently held that bod approval doesn't preclude judicial review. It simply puts burden of proof on the P who must prove that the bd in approving this transaction, committed waste -Standard: "no person of ordinary, sound business judgment would say that the consideration received for the options was a fair exchange" - I.e. BJR standard of review is almost insurmountable to plaintiff. V difficult to prove.

Board Functions

Supervisory, not day-to-day Hire, monitor, and fire CEO Oversee: strategies, management of corporate resources Review, approve major plans and actions Other functions prescribed by law

INHERENT AUTHORITY Instructions as defense

UP may not rely on instructions given to A that reduce A's authority to less than authority a TP would reasonable believe A to have because something As in general have power to do

Distribution in partnership - 4 Tiers

UPA 1914 §40 -- In settling accounts between the partners after dissolution, the following rules shall be observed, subject to any agreement to the contrary: The liabilities of the partnership shall rank in order of payment, as follows: 1. Those owing to creditors other than partners, 2. Those owing to partners other than for capital and profits, · Loans made by partner to the partnership. 3. Those owing to partners in respect of capital, 4. Those owing to partners in respect of profits AND under UPA 1997 § 806: Creditors (including partners who have lent firm money) Leaves issue of subordination to agreement or, if applicable, bankruptcy law Return of capital Distribution of profits in accord w partners' agreed division of profits.

INHERENT AUTHORITY Estoppel:

UPs are liable for the actions of their Agents acting w/o actual authority when: o TP detrimentally rely on A o P does not take reasonable steps to notify TP of the misplaced reliance o TP reasonably believed that A had authority

Factors of a fair transaction? re RPT

Within the range of terms that parties bargaining at arms-length might reach But Defects in disclosure highly relevant If undisclosed facts had been known, firm might have gotten a better deal even if terms were in the range of fairness

policy behind martin v. peyton?

You want creditors to have enough freedom to protect themselves rather than pulling plug to avoid partnership implications

LLC Membership rights

a member's rights include financial interest and management rights

o Agency costs

a) Defined as the sum of three sets of costs incurred to prevent shirking: Monitoring expenditures by P (monitoring agent's behavior) + Bonding expenditures by A (A promises to do their best, make promise more credible. Bonding devices used to give promise credit - bail bonds, hostages) + Residual loss (shirking that was not prevented)

o R2D §220(2) Factors to identify a servant:

a) Extent of control which, by the agreement, master may exercise over the details of the work / b) Whether or not the one employed is engaged in a distinct occupation or business / c) Knd of occupation, with reference to whether, in the locality, the work is usually done under the direction of the employer or by a specialist without supervision / d) Skill required in the particular occupation / e) Whether employer or workman supplies instrumentalities, tools, and place of work for worker / f) Length of time for which person is employed / g) Method of payment, whether by the time or by the job / · Whoever gets leftover money is more likely to be the P · If the franchisee keeps all the money then they are an independent contractor, thus no liability · If franchisee must give some profit to franchisor, then servant h) Whether or not the work is a part of the regular business of the employer / i) Whether or not the parties believe they are creating the relation of master and servant / and j) Whether the principal is or is not in business o Bainbridge thinks most important is (a). also (d) and (either c or g, didn't hear him correctly lol)

violations of duty of loyalty

a. Bribes b. Kickbacks c. Usurping P's property d. Competing with P e. Conflicts of interest f. Secret profits g. Usurping business opportunities from P (see duty of loyalty under partnerships) h. "GRABBING AND LEAVING"

o Sea-land TEST: Plaintiff can reach the assets of SHs/pierce the veil when: (1) SHs controls corporation as its alter ego- Factors to show control?

a. Commingling of funds b. *Undercapitalization (Undercapitalization occurs when a company does not have sufficient capital to conduct normal business operations and pay creditors.) § Siphoning out funds to make the corporation judgment proof § A factor but not a determining factor. Cts weary to follow bc if enough then technically corp veil can be pierced anytime corp doesn't have enough money to pay creditors. § (Under Keating's dissent, this would be sufficient) c. Disregard for corporate formalities: § Failure to hold SH meetings § Failure to hold BOD meetings § Failure to keep minutes of said meetings § Failure to keep separate books § Failure to issue stock § Failure to appoint a board § Failure to adopt charter or by-laws d. *Nature of Plaintiff's Claim - breach of K or tort? § E.g. lie about assets to bank so they don't require personal guarantee § K disputes are disfavored because parties voluntarily enter into Ks · Logic of piercing is that claimant should be protected when they couldn't protect themselves. · General rule is that creditors shouldn't be able to pierce veil in K cases bc they could've refused to extend money and not enter K. · Misrepresentation exception - if the corporation misrepresents itself to creditor, then pierce the veil § Tort claims favored because victims cannot bargain e. *Nature of Defendant § Passive SHs of close corporation -- Can't be held liable on veil piercing theory § Public corporation SHs -- Veil piercing happens almost exclusively with small closely-held companies § Parent of a subsidiary corporation -- The fact that corporation is a SH doesn't change fact that SH have LL. But CAN pierce veil here too.

o UPA (1997) § 602 Wrongful Dissociation

a. Partner has power to dissociate at any time, rightfully or wrongfully, pursuant to §601(1) b. A partner's dissociation is wrongful only if: 1) It's in breach of an express provision of the partnership agreement, or 2) In the case of a partnership for a definite term or particular undertaking, before the expiration of the term or the completion of the undertaking: i. The partner withdraws by express will, unless the withdrawal follows within 90 days after another partner's dissociation by death or otherwise under § 601(6) through (10) or wrongful dissociation under this subsection ii. The partner is expelled by judicial determination under § 601(5) iii. The partner is dissociated by becoming a debtor in bankruptcy, or iv. In the case of a partner who is not an individual, trust other than a business trust, or estate, the partner is expelled or otherwise dissociated because it willfully dissolved or terminated c. Partner who wrongfully dissociates is liable to partnership for damages caused by dissociation

o UPA (1997) § 701 Provides Procedure for Dissociating:

a. The partnership must purchase the dissociated partner's interest · Absent contrary agreement, buyout price is the amount that would have been distributed to the dissociated partner if, on the date of dissociation, the firm's assets were sold, minus damages for wrongful dissociation. o Compute value of what partner's share would have been if on the day of dissociation, partnership was liquidated. Alternatively, calculate what his share would've been if on that day, biz was sold as a going concern. Whichever is more is what partner is entitled to. · A wrongful dissociater may have to wait to get paid in full, unless a court determines that immediate payment "will not cause an undue hardship to the partnership," but the longest nonwrongful dissociaters need to wait is 120 days. · A dissociated partner can sue the firm to determine the buyout price and the court may assess attorney's, appraiser's, and expert's fees against a party the court finds "acted arbitrarily, vexatiously, or in bad faith." b. (a well-drafted partnership agreement can replace statutory buyout calculation w whatever calculation the parties choose)

secret profits

a. making money by virtue of agency relationship without P's knowledge or consent (See Reading v. Regem) o R3D § 8.02 - A has a duty not to acquire a material benefit from a TP through A's use of agent position o R3D § 8.05 - A has a duty not to use P's property for A's own purposes or those of a TP o If A's position is the predominant reason for A's obtaining money, A is liable to P / BUT if the position merely gives A the opportunity, no liability

UPA (1997) § 601: Disassociation =

change in the relationship caused by a partners' ceasing to be associated in the carrying on of the business / does not need to lead to dissolution

o INHERENT AUTHORITY

communication between TP and Undisclosed P

Guillotine Clause

don't need to give notice or opportunity to be heard to expel partner / just needs to be good faith

Asset Partitioning

extent to which you can legally separate assets of business and personal assets of owners

(LLC)· ULLCA § 304 Member/Manager Liability

o (a) A debt, obligation, or other liability of a LLC is solely the debt, obligation, or other liability of the company. A member or manager is not personally liable, directly or indirectly, by way of contribution or otherwise, for a debt, obligation, or other liability of the company solely by reason of being or acting as a member or manager o (b) The failure of a LLC to observe formalities relating to the exercise of its powers or management of its activities and affairs is not a ground for imposing liability on a member § A greater degree of compliance with organizational formalities, however, might be expected with respect to matters potentially affecting third party rights. · Accordingly, for example, LLC members should be careful to respect formalities such as keeping a separate bank account, avoiding comingling of funds, signing in the name of the LLC, and the like.

"person" in agency

o (a) an individual; (b) an organization or association that has legal capacity to possess rights and incur obligations; (c) a government, political subdivision, or instrumentality or entity created by government; or (d) any other entity that has legal capacity to possess rights and incur obligations. R3D § 1.04 (5) o Both agent and principal must be persons o Principal and agent retain their separate legal personalities

· Common Clauses in Partnership Ks

o 1. Ownership of partnership and partnership assets § Presumed to be equal unless stated otherwise o 2. Accounting procedures § Including maintenance of capital account belonging to each partner, etc. o 3. Distribution of profits and losses § Presumed to be equal unless stated otherwise o 4. Liability of each partner to the others o 5. Compensation for services § Presumed to be none unless stated otherwise § Partners typically get profits, not revenue or salary § Partners don't get bonuses o 6. In case of death of resignation or death § Presumption is that partnership terminates o 7. Dispute resolution § Including arbitration clause, if desired o 8. Termination and what happens upon termination o 9. Other miscellaneous clauses, as negotiated, including: § How notice is given to each party § How agreement is modified § Costs and attorneys fees § Life insurance agreements o 10. Agreement must be executed by all partners

transferable interest re partnership and policy

o 102 "Transferable interest": The right to get periodic distributions of profits and losses can be transferred § POLICY: Exists because of: · Estate planning · Right of personal creditors

· Partnership by Estoppel (brought by TP) elements?

o 4 elements to establish: 1) There was representation, either express or implied, that one person is the partner of another 2) Representation was made by the person sought to be charged as a partner or with their consent 3) TP reasonabley relied in good faith upon representation 4) A change of position, with consequent injury, by the TP in reliance on representation

DE Factors TEST re corp opp

o A corporate opportunity exists where: 1. Corporation is financially able to take the opportunity 2. Opportunity is in the corporation's line of business · Construed broadly to include areas that the company might logically move its business into · Area in which the company has the knowledge, experience, and ability to pursue 3. Corporation has an interest or expectancy in the opportunity · INTEREST - something to which the firm has a better right o If officer bought land to which the corporation had a contractual right, the officer took an "interest" · EXPECTANCY - something which, in the ordinary course of things, would come to the corporation o If the officer took the renewal rights to a lease the corporation had, the officer took an "expectancy" o Would not have to prove the opportunity is necessary, so long as it might be advantageous · **as a practical matter, tho, interest and expectancy treated as one term of art. 4. Embracing the opportunity would create a conflict between director's self-interest and that of corp. · E.g. would it create competition? · --> Totality of circumstances test / no dispositive factors (though financial ability essential) · Ex ante analysis, don't ask for factors with benefit of hindsight 5. Broz ct calls these Factors but suggests absence of any one is dispositive. must be balanced according to totality of circumstances.

re FIDUCIARY DUTIES OF AGENTS TO PRINCIPALS, what's indemnification?

o A must indemnify P for any harm created outside of A's authority

· Related Party Transactions rule

o A transaction involving an interested director is valid if the material facts as to the director's interest are disclosed or known to BOD AND board in good faith authorizes the transaction by an affirmative vote of the disinterested directors § Once Plaintiffs show violation of duty, BOP shifts to defendants to show that the transaction was fair · BOP on defendant = "rigorous scrutiny," must show transaction was fair to corporation · Compare related party transaction to kind of transaction company might have entered into with unaffiliated part at arm's length § BJR YIELDS TO DUTY OF LOYALTY -- D/Os cannot self-deal

IMPLIED Agency

o Agency agreement is implied from conduct of parties // exists even if parties deny if proved by circumstantial evidence (Cargill) § Extent of agent's authority is determined from the particular situation § Manifestation of assent · Expressive conduct = speech · Non-expressive conduct o Silence (e.g. where you could and should have spoken up to deny an agency relationship) o P puts A "in a position or office with special functions or responsibilities" o P puts A "in a position in an industry or setting in which holders of the position customarily have authority of a specific scope"

PRINCIPAL'S DUTIES TO AGENTS- · Rights of Agents

o Agent can withhold performance and demand an accounting. o Agent can recover damages for past services and future damages.

· Director Rights etc.

o Are elected o Not agents of the corporation o Directors can be SHs o Number of directors specified in AOI o Directors are appointed at first meeting - term for 1 year and can be removed for cause o Directors have 1 vote / they hold meeting with minutes (requires notice and quorum) § Special meetings may be called with sufficient notice. § Meetings require quorum (minimum number of directors to conduct official corporate business, usually majority).

· Principal-Agent "Problem" (Shirking)

o As a public policy matter, why should economic control result in legal obligations? o Those w authority may shirk - i.e. they may use their authority irresponsibly. They do this bc they reap all the befits of shirking, but only part or none of the costs. Thus, those who shirk are able to externalize part of the cost of their shirking while internalizing all the benefits. By imposing liability on Cargill, the ct forces it to internalize the costs associated w running its biz, such as those entailed in monitoring the grain elevator operators Cargill uses to buy grain from farmers. o Agent has incentive to shirk -- A will never work as hard as P does a) E.g. barista paid same no matter how hard she works, but owner makes more the more coffee is sold b) Why do agents shirk? · Value of A's productive labor goes mainly to P as profit, not to A. A makes the same regardless. · A's generated revenues - A's compensation = P's profit · Nonpecuniary benefits of shirking are enjoyed by A and none of their value is realized by P o Need to better align incentives to get rid of shirking

what to do upon formation of a partnership

o Assign a proper value to the noncash assets and liabilities contributed so that it can be easily divided upon dissolution o Distinguish between capital contributions and loans made to the partnership by individual partners o Distinguish between tangible assets owned by the partnership and those specific assets that are owned by individual partners but are used by the partnership

advice to give for corps to avoid alter ego liability:

o Avoiding personal liability in alter ego theory is easy. § Typically enough to respect the corp formalities o Avoiding enterprise liability can be trickier. § In Carlton case for example, Need separate books and bank accounts for each corporation, plus careful accounting for supplies, for borrowing of drivers, etc

· DE v CA RE LLCS

o CA does not permit elimination of all fiduciary duties / DE does o DE more likely to respect drafters' choices, whereas CA more likely to enforce manifestly unreasonable and to prohibit modifications o Veil piercing less likely in DE / CA more likely to enforce Alter Ego veil piercing (see piercing the veil above) § Piercing is a small co issue and most llcs are small cos. So piercing very important to llc clts. o DE gives you more contractual flexibility § LLCs tend to be more diversed in types of companies and people you're dealing w often want less formalities.

Capacity in agency

o Capacity to be Principal - TEST: does the principal have the capacity to do the act for which the agent was appointed? § Generally, any person having capacity to K can appoint an Agent § E.g. minors and incompetents can't appoint an agent if they couldn't themselves do the act in question. · Corp is a person for this purpose. · E.g. E.g. suppose Pam is a minor who lacks capacity to make a binding K. Bc Pam wouldn't have capacity to make a K in person, Pam lacks capacity to retain an agent to do so on her behalf. · Capacity to be Agent - TEST: Includes any person with the physical or mental ability to take action that affects the principal's legal relations (includes

· How to reconcile Owens and Collins?

o Collins inconsistent with Cohen because there was bad blood in both cases but opposite holdings / court should have allowed Collins to dissolve because of impracticable to carry on business o Owen and Cohen's partnership agreement stated they would both work at the bowling alley. Wouldn't be rsbl to have the two owners screaming at each while working. But Collins and lewis' diff bc they don't even have to speak. bainbridge thinks this is the diff that gives us diff outcomes

· Why an Executive Committee v. use of majority approval?

o Consensus vs. authority § Consensus -- Collective decision making · Used when constituents have: similar interests, comparable information, low collective action problems. · Partnership optimized for these characteristics § Authority -- Central decision-making body · Needed when constituents have: differing interests, asymmetric information, serious collective action problems · Corporation optimized for these characteristics o Collective action issues § Large law firm: · High costs of communication and negotiation between all the partners · Risk of hold-out § Merger example: law offices of Bainbridge (400 partners) to merge with Law Officers of Klein (100 partners) · Merger requires unanimous consent · Junior partners with small stake threatens to vote no, unless stake increased · The merger will add value for all other partners more than they would lose by the concession to the hold-out partner

can K remove agency relationship?

o Contractual disclaimer CANNOT remove an agency relationship § "If a franchise K so 'regulates the activities of the franchisee' as to vest the franchiser with control within the definition of agency, the agency relationship arises even though the parties expressly deny it."

· Rights of a Partner Under UPA (1997)

o Control Rights § 401(h) § Each partner has equal rights in the management and conduct of the partnership business (1 P, 1 vote) o Economic Rights § 401(b) § Each partner is entitled to an equal share of the partnership profits [and losses in proportion to their share of the distributions] § Each partner is entitled to a settlement of all partnership accounts upon winding up of business § Only transferable interest of a partner in the partnership = partner's share of the profits and losses of the partnership and the partner's right to receive distributions

§ ULLCA § 409(b) -- Cannot appropriate company opportunity for self interest When is it a corporate opportunity? - factor analysis

o Corporation is financially able to take the opportunity o Opportunity is in the corporation's line of business o Corporation has an interest or expectancy in the opportunity, AND o Embracing the opportunity would create a conflict between director's self-interest and that of the corporation

Fiduciaries may engage in conflicted controller transactions subject to BJR standard if it satisfies the following

o Corporation must appoint a special board committee of independent and disinterested directors empowered to definitively reject the transaction o Transaction must be approved by the fully informed vote of a majority of the minority shares

· Indemnification in CORPORATION STATUTES DGCL § 145(c):

o Corporations must indemnify D/Os who are successful on the merits or otherwise § Must indemnify if director or officer is able to succeed or escape (w out regard to whether AOI allows) · Note: As for directors and officers who are unsuccessful, check whether indemnification is allowed by §145(a) or (b) o If so, the corporation may - but need not - indemnify the director or officer § For multi-claim lawsuits, D/O's right to be indemnified can vary depending on the outcome on each individual claim (prevail on 2, lose on 1 = get indemnified for 2)

BOD

o DGCL § 141(a) - The business and affairs of every corporation organized under this chapter shall be managed by or under the direction of a BOD o Duties § Select, evaluate, and replace senior management § Oversee strategy of management and corporate resources § Review and approve plans and actions o DGCL § 141(b) - BOD must be more than 1 person / number can be fixed in the bylaws unless modified by CoI o DGCL § 141(c) - BOD can create committees / these committees have the power to exercise all powers within the authority of the BOD / however no committee shall have authority over: § (i) Approving stockholders § (ii) Amending the bylaws

Exculpation

o DGCL §102(b)(7): Corporation's article of incorporation may contain provision eliminating or limiting a director's [not officer's] personal liability to the corporation and/or SHs for monetary damages [equitable remedies like injunction cannot be limited] for breach of fiduciary duty as director § PROVIDED that it can't eliminate liability of director for the following things: a. For breach of duty of loyalty; b. For acts or omissions not in good faith (an actual intent to do harm) or which involve intentional misconduct or a knowing violation of law; c. For liability of unlawful dividends; OR d. For transactions where the director derived an improper personal benefit

· 2 Types of Principal Liability

o DIRECT LIABILITY - P independently does something wrong through A's actions o VICARIOUS LIABILITY - P himself committed no tort

· Apparent authority can be created by:

o Direct communication by the principal to the TP such that we can ID words or conduct of the P that led TP to rsbly believe A has authority o Inaction by P. § If in P's presence A tells TP he's P's agent and can act on her behalf, if P doesn't deny it, A has apparent authority by virtue of inaction. o Implied from a course of conduct. o Created by custom. § TP must know P has placed A in a certain position. § It must be customary for an A in that position to have authority to enter into the type of agreement in question. § P, apartment owner explicitly tells A, manager she can't hire TP, a janitor. It's customary for apartment managers to hire janitors. Did A have authority? · No actual authority bc P explicitly prohibited it. · BUT she does have apparent authority by virtue of custom. · Applying cost avoider concept: rarely any owners prohibit janitor hiring. Thus, it'll be cheaper for the few rare owners to tale precautions such as posting notices in the place of biz than to require all potential third parties to take precautions. · In contrast where TP couldn't rsbly have believed A had actual authority, it'll be cheaper to insist that TP take the precaution of making an inquiry into the scope of A's authority. · Regardless of which form P's manifestation takes, apparent authority also reqs that TP must rsbly believe A was authorized to act.

· Types of Principals

o Disclosed Principal -- Identity of P is known to TP o Unidentified/Partially Disclosed Principal -- TP knows A is representing P but doesn't know who P is o Undisclosed Principal -- TP doesn't know he's dealing with an A at all

re agency, what is express agency?

o EXPRESS Agency -- Parties have express agreement to enter into agency agreement § Can be written or oral (depending on Statute of Frauds) § E.g. power of attorney · Matter of state common law (R2D Agency) o Uniform Durable Power of Attorney Act (UDPAA) - some states § Agency may be created that is not affected by subsequent disability or incapacity of P § Agency may also come into existence upon the "disability or incapacity" of P § Designation of an attorney in fact must be in writing

· Agency Relationships (also see next section)

o Each partner is an agent of the other § Partners can enter into Ks binding on the partnership. · Can have actual or apparent authority. o Each partner can enter Ks, binding the partnership to the Ks o Each partner is a fiduciary to the other o Partner's tortious conduct during the partnership can create vicarious liability

· SH Rights (v limited rights)

o Elect BOD o Can amend AOIand generally speaking, bylaws o Can vote on fundamental transactions, such as M&As o Receive dividends when and as declared by BOD o Recv distribution upon termination o Can inspect corporate books and records o Can purchase proportional share of a new issuance or corp stock to maintain current ownership percentage (preemptive right) o Can vot on limited range of issues. o Can file derivative suits if injured by corporation

· Operating Agreement in LLC MAY NOT:

o Eliminate the duty of loyalty, the duty of care and any other fiduciary duty of member in member-managed LLC and manager in a manager-managed LLC, except: · Can identify certain activities that do not violate duty of loyalty, if not manifestly unreasonable · Can specify a % of members who can authorize a specific act that otherwise violates duty of loyalty · Can reduce duty of care, but not unreasonably (doesn't really make sense) o Eliminate good faith and fair dealing

· Types of Partners

o Equity - right to profits, assets, and vote o Non-Equity - right to profits but no interest in assets of firm and they don't get to vote

· LLC by Estoppel test

o Estop contract creditors from holding members personally liable o TEST: If the person dealing with the firm: § Thought it was an LLC all along and was fine w looking to the LLC for performance § Would earn a windfall if now allowed to argue that the firm was not a corporation

R3D § 1 - Agency is a fiduciary relationship (whats a fiduciary relationship and policy behind it?)

o Fiduciary relationship = relation between parties wherein one is duty bound to act with the utmost good faith for the benefit of the other...can take no advantage from his acts relating to the interest of the other party without the latter's knowledge or consent. § CARDOZO: Fiduciaries are held to a higher standard than normal commercial relationship (Not supposed to just act in good faith. Step above this) · Not honesty alone, but the punctilio of an honor the most sensitive, is then the standard of behavior (what does this even mean?? Idk but its provocative it gets the people going!!) o POLICY: Efficiency / to fill in K holes/standard form Ks reduce transaction costs, make it easier for biz to make deals / impossible to create statutes and Ks predicting every type of scenario

· Indemnification in CORPORATION STATUTES DGCL § 145(b):

o For suits brought by or on behalf of corporation: § Corporation shall have power to indemnify D/Os for expenses and legal fees only · IF D/O acted in good faith and in a manner reasonably believed to be in the best interests of the corporation and there was no unlawful conduct · IF D/O was held liable to the corporation, he may only be indemnified with court approval § SH Litigation - derivative suit (covered by § 145(b)) · To recover for a wrong done to the corporation, sue on behalf of the corp. · E.g. when you want to sue the BOD for something they did against the corp., not the SHs themselves · The action is for the benefit of corporation and any recovery belongs to corporation, not SHs

· Profit and Loss Sharing RE LLC

o Funding the LLC - can be cash, property, services, promissory note (no mandatory capital contribution) o Profits and losses are allocated proportionally to member's contribution (compare with partnership where proportioned evenly)

· Torts of Independent Contractors (general rule and exceptions)

o General RULE - Principal is not liable for torts committed by an independent contractor § POLICY - P does not supervise the details of IC's work and therefore is not in a good position to prevent negligent performance § EXCEPTIONS · (a) P retains control over the aspect of the work in which the tort occurs · (b) P engages an incompetent contractor (negligence) · (c) Activity contracted for is a "nuisance per se" or inherently dangerous activity o POLICY: Where something is incredibly dangerous, even if P doesn't have much control, want P to make as safe as possible · (d) Non-delegable duty o Certain types of activities P is not allowed to delegate to IC, and P held liable if she does o E.g. lawyer hiring process server to serve process on someone, but serving process is duty on part of lawyer--even if she outsources that o E.g. construction co. who hired earth movers who messed up wires and lines / statutory duty to check those wires, not allowed to rely on IC

· General Partners in LP

o Has control of the business - management rights o Full personal liability for the obligations of the firm § BUT! Corporations may serve as a general partner (so can avoid personal liability that way. Sneaky sneaky!)

· Fees for Fees?

o If a D/O is obliged to sue the corporation seeking indemnification, is a prevailing officer or director entitled not only to indemnification of attorneys fees incurred in the underlying litigation but also those fees incurred in the indemnification suit? § Probably -- just not explicitly contemplated in statute

· Indemnification in CORPORATION STATUTES DGCL § 145(a):

o In suits brought by SHs or TPs: § Corporation shall have power to indemnify D/Os for expenses plus judgments, fines, and amounts paid in settlement (even if loss) for both civil and criminal proceedings · If D/O acted in good faith and in the manner reasonably believed to be in the best interests of the corporation and there was no unlawful conduct § Prior to DGCL 145(a), corps didn't have the power at common law to indemnify directors bc they aren't agents so were denied indemnification. § SH Litigation - direct suit (covered by § 145(a)) · SHs may sue directly either individually or as members of a class ("all others similarly situated")

(re corp opp) Insolvent Corps.

o Insolvent Corps. · RULE: Director has NO duty to use personal funds to guarantee obligations of a corporation · BUT she owes duty to refrain from intentional activity aimed at allowing a corp. to become insolvent and thereby usurping a corporate opportunity for her own benefit (Collie v. Becknell)

· How could PPF have modified the agreement to provide themselves w additional cover w out sacrificing important protections?

o It was unwise of PPF to demand a right to be consulted on biz decisions and to take the resignation of all the partners. Both tend to give PPF a degree of control consistent w a finding of partnership. § Instead, the agreement should've provided that KNK wouldn't engage in any "speculative or injurious" investments, w out giving PPF a veto power over such investments. o Alternatively, PPF could've avoided any reference to control and simply demand that a min. equity cushion be maintained. If so, they would've also wanted a provision rendering failure to maintain that cushion an act of default, so the loan would become payable and due.

in owen v. cohen, why did owen sue?

o Judicial determination necessary to resolve issue of whether Cohen was entitled to his $6,896 before division of the proceeds from a sale o Receiver probably needed for orderly liquidation o Potential for wrongful dissolution § Partnership might be, and in fact was, a term partnership § An at will partnership can be dissolved at any time, but if it was a term partnership, dissolution would've been wrongful. § 602(b)(2) Cannot dissociate by express will in a partnership for a term · Remember, "there always exists the power, as opposed to the right, of dissolution"

(LLC) · California Corporation Code (CCC) § 17703.04

o LLC Member shall be subject to liability under alter ego liability, and shall also be personally liable like SH of a corporation (except failure to hold meetings or observe meeting formalities not considered a factor)

· Some differences bw corps and LLCs

o LLCs observe fewer legal formalities than corporations. The bod and shs of a corp must hold regular meetings and keep minutes of those meetings. The managers and owners of an LLC -- who are called members - don't have to hold regular meetings and keep written minutes. o LLCs are also treated differently from corps with respect to taxation. Whereas a corp must pay taxes on its profits, an LLC enjoys pass through taxation (only taxed once). By default, the profits of an LLC belong solely to the members -- who are taxed as if they were sole proprietors or partners.

· 5 Critical Attributes that Define a Corporation:

o Legal personality o Limited liability o Separation of ownership and control o Liquidity o Flexible capital structure

· Why doesn't LL rule change with re to small and large firm settings?

o Line drawing problem § Where would limited liability kick in? 10 shareholders? 100? 1000? o Investor choice § Off the rack rules/one size does not fit all. Want to give them options o Penalty default § Force parties to bargain

· Bylaws Items (not listed above)

o Location of Office o Meeting of Shareholders o Board of Directors o Officers o Shares of Stock o Dividends o Amendments o Waiver of Notice o Interested Directors o Indemnification and Advance of Expenses o Miscellaneous

(LLC) · Who gets to call for additional capital?

o Manager-managed co. -- Manager or Manager + approval of percentage of members o Member-managed co. -- Majority or supermajority

· Withdrawal in LLC

o Member may withdraw and demand payment of his/her interest upon giving the notice specified in the statute or the LLC's operating agreement

LPs in LPs

o Minimal control rights o Passive investors § E.g. realtor who wants to run things but needs investors § E.g. oil and gas, oil man and passive investors § E.g. sports teams o Limited liability for the company claims

Multiple Classes of Common Stock

o Multiple Classes of Common Stock: Companies that choose to have multiple classes of common stock issue two classes, usually denoted as Class A and Class B shares. Common practice is to assign more voting rights to one class of stock than the other. (In Benihana, there was "Class A" and "Common" § Typically 1 "common" stock / but companies are allowed to have more than one category, and different classes have different rights (e.g. voting rights) § POLICY: Ensure that insiders remain in control of company

· Partnership Formalities/Legal Requirements

o No formal action required to be partners § Two people who associate as co-owners of a biz for profit are partners. · No formal state action reqd. o State asks that you: § File a fictitious business name statement with the county clerk § Obtain licenses, permits, and zoning clearances § Obtain an Employer Identification Number § You don't pay partnership taxes, but you have to report them

· Certificate of Incorporation Items

o Non-conflicting name o Registered agent name and address within the state of Delaware o Purpose for which corporation is organized o Number and par value of initial shares of stock o Name and street address of organizing incorporator Signature of incorporator

· RATIFICATION

o Often A purports to act on behalf of another, P, w/o any type of authority to do so. It may be that A exceeded A's authority or it may simply be that there was no prior agency relationship bw P and A. o P may still be bound by A's act if P subsequently ratifies the action. if ratified, a transaction will be treated as though it had been authorized when entered into in the first place. So it's a retroactive authorization relating back to the time the agreement was made. Once there has been ratification, both P and TP are bound by the K. For an effective ratification to occur, P must affirm the K

· Test for When a LP is GP

o Old § ULPA (1976) A limited partner shall not become liable as a general partner, unless, in addition to the exercise of his rights and powers as a limited partner, he takes part in the control of the business for personal gain § ULPA (1985) · 303(a) Only limited partners who participate in control can be held liable, but only to those who reasonably believed that they were GPs · 303(b) Safe harbors o New § ULPA (2013) §303 · (a) LP is not personally liable, even if she participates in management or control of partnership, unless she is held out to TP as a GP · (b) Failure of LP to observe formalities is not grounds for imposing liability on LP · Really strong defensive partitioning

· Owen v. Cohen If UPA (1997) Applied

o Owen would be entitled to a judicial decree of dissociation: § UPA (1997) § 601(5): "A person is dissociated as a partner when: ... on application by the partnership or another partner (Owen), the person (Cohen) is expelled as a partner by judicial order because the person: (A) has engaged or is engaging in wrongful conduct that has affected adversely and materially, or will affect adversely and materially, the partnership's business." o Owen would be entitled to a judicial decree of dissolution: § UPA (1997) § 801(4): "A partnership is dissolved, and its business must be wound up ... on application by a partner (Owen), the entry by [the appropriate court] of an order dissolving the partnership on the grounds that: ... (C) another partner (Cohen) has engaged in conduct relating to the partnership business which makes it not reasonably practicable to carry on the business in partnership with that partner"

VICARIOUS LIABILITY (def. and policy?)

o P himself committed no tort § Definitions o R2D §219 - "A master is liable for the torts committed by his servants when the servant is acting within the scope of their employment" · R3D § 7.07 - An employer is vicariously liable for torts committed by employees acting within the scope of their employment § POLICY - Agents are usually insolvent / P will have the money to pray for the damages

DIRECT LIABILITY

o P independently does something wrong through A's actions § R3D § 7.03 P is subject to direct liability to a TP harmed by A when: · (a) A acts with actual authority (compare to K law bc there has to be actual authority, can't be apparent authority) or P ratifies A's conduct, AND o (i) A's conduct is tortious or § e.g. P tells A to destroys T's apartment / A destroys the apartment / P is directly liable to TP / S is independently direct liable to TP § e.g. P employs A to sell / P falsely tells A that the table is an antique / A reasonably believes P / A sells the table to TP, relying on the statement that the table is an antique / P is liable to TP, A is not o (ii) A's conduct, if it were P's, would subject the P to tort liability · (b) P is negligent in selecting, supervising, or otherwise controlling A o e.g. P hires A to be the manager, knowing that A is violent and impatient / A assaults TP / P is liable to TP because negligent hiring of A / it is foreseeable that A would do something dangerous · (c) P delegates performance of a duty to use care to protect other persons or their property to A who fails to perform the duty

control in agency

o P must indicate that A is to act for him, and A must act/agree to act on P's behalf and subject to his control o Doesn't take much on the way of control by the principal in order for an agency relationship to exist. o A principal need not exercise physical control over the actions of its agent, so long as the principal may direct the result or ultimate objectives of the agent relationship. (Green v. H & R Block) o Thus, the required level of control may be found so long as the principal is able to specify the task the agent is to perform, even if the principal is unable to ensure the agent carries out the task. o R3D factors: § "Control is a concept that embraces a wide spectrum of meanings, but: a) W/in any agency relationship, P states in general or specific terms what A is to do and not do b) P has right to give interim instructions or directions · This distinguishes Ps from those who K to receive services provided by non-agent people c) P's control will be incomplete because no person is robot / and A's deviation from instruction is not necessarily evidence of lack of control d) The power to give interim instructions distinguishes principals in agency relationships from those who contract to receive services provided by persons who are not agents. o R2D: "when one ... asks a friend to do a slight service for him, such as to return for credit goods recently purchased from a store," an agency relationship exists even though no compensation or other consideration was contemplated.

(ratification) Agency by Estoppel (claim brought by TP)

o P will be estopped from denying agency relationship if P enables person to appear as an A or manifests that the person is their A / Estoppel only binds P o RULE: Plaintiff must show: § P created an appearance of agent's authority (through act or omission, intentional or negligent) § TP reasonably and in good faith acted in reliance on the apparent authority / AND § TP changed her position in reliance upon the apparent authority

· UPA (1997) § 409 - Duty of Care

o Partner's DOC is limited to refraining from engaging in grossly negligent or reckless conduct, intentional misconduct, or a knowing violation of law § Gross negligence - To prevail on a gross negligence claim P must prove D was "recklessly uninformed" or acted "outside the bounds of reason" / devil-may-care attitude or indifference to duty amounting to recklessness § Partner will be independently liable for actions under his gross negligence / other partners can get him to indemnify

· UPA (1997) § 409 - Duty of Loyalty

o Partner's DOL to the partnership and other partners is limited to: 1) To account to partnership and hold as trustee for it any property, profit, or benefit derived by partner: · (A) in the conduct or winding up of the partnership's business / · (B) from a use by the partner of the partnership's property / or · (C) from the appropriation of a partnership opportunity / 2) To refrain from dealing with the partnership in the conduct or winding up of the partnership business as or on behalf of a person having an interest adverse to the partnership / and 3) To refrain from competing with the partnership in the conduct of the partnership's business before the dissolution of the partnership

CA treatment of partnerships

o Partnerships have some individual aspects and some entity aspects § Treat partnerships as a 'hybrid' org that is viewed as an an aggregation of individuals for some purposes and a sole entity for another Everest Investors v McNeil

in martin v. peyton, did they intend to form partnership?

o Payments of profits as interest on loan or partner profits? § Remember that one of the rebuttal for "sharing of profits" is that the profits were recvd in payment of loans. o Lawyers broke up into 3 parts -- option separate document, and option to become owner implies not yet owners

Sea-land TEST for alter ego finding

o Plaintiff can reach the assets of SHs/pierce the veil when: § (1) SHs controls corporation as its alter ego (gaming the limited liability system) and · Factors to show control (*Key factors) a. Commingling of funds b. *Undercapitalization c. Disregard for corporate formalities: d. *Nature of Plaintiff's Claim - breach of K or tort? e. *Nature of Defendant § (2) Adherence to limited liability would be unfair (fraud or injustice) - (as corp, never want to get to this second prong. Don't reach it if P can't prove alter-ego theory in first prong.) · Not enough that creditor will be unable to collect the full amount owed unless the court pierces the veil / must show fraud or unjust enrichment · Almost never passes this prong

re corp opp, is Presentment/Dislosure reqd?

o Presentment/Dislosure is NOT required · Court will not ask if an opportunity presented and refused was a corporate opportunity · Nor did the board have to formally reject the opportunity. · DE treats presentment as evidence of properly taking an opportunity / creates a safe harbor · When presentment creates a safe harbor, don't need to analyze whether it was a corp opportunity!! DISCUSS -- some academics argue for it as 5th factor

· Are you dealing with a controlling SH?

o Presumptions - in DE, you are presumed a controlling SH, if you own 50% or more stock ownership // federal law: 10% ownership § RULE: SH owes a fiduciary duty to other SHs only if it owns a majority interest in OR exercises control over business affairs of corporation (Kahn v. Lynch Communications) · RULE: SH who owns < 50% of a corporation's outstanding stocks does not become a controlling SH of that corporation, with a concomitant fiduciary status · RULE: For dominating relationship to exist in the absence of controlling stock ownership, a plaintiff must allege domination by a minority SH through actual control of corporation conduct § E.g. Elon Musk owns only 22% of Tesla stock. Evidence he has control: · (1) Musk's ability to influence the stockholder vote to effect significant change at Tesla, including the removal of Board members; (2) Musk's influence over the Board as Tesla's visionary, CEO and Chairman of the Board; (3) Musk's strong connections with members of the Tesla Board and the fact that a majority of the Tesla Board was "interested," as that term is defined in our law, in the Acquisition; and (4) Tesla's and Musk's acknowledgement of Musk's control in its public filings. Eg SEC docs § BOD acts as rubber stamp and just takes marching orders from controlling SH

· Liability for Pre-Incorporation Activity -- "Promotion activities"

o Process of incorporating is so simple and so cheap that nothing remotely connected to the business should happen before incorporation § E.g. should NOT lease office, hire people, make contracts o A corp doesn't exist until its AOI are fied. As a practical matter, however, the co's promoter often begins planning for the biz long before the filing. o Promoter: Someone who purports to act as an agent of the business prior to its incorporation o MBCA § 2.04: All persons purporting to act as or on behalf of a corporation, knowing there was no incorporation, are J&S liable for all liabilities created while so acting

· Advantages of Pass Through Taxation

o Profits are not subject to double taxation o Losses flow through to owners o Capital gains flow through to owners and retain their tax attributes (i.e., are subject to lower rates) o There is no penalty tax for accumulating profits within the entity o There are fewer negative consequences to transfers of assets between the entity and owner(s) o None of the restrictions of S-corps (such as on the # and type of shareholders) -- S-Corps = pass through tax entities (so diff than regular corps??)

Public/Publicly Held vs. closely held corps

o Public/Publicly Held - Characterized by a public secondary market in which shares of the company are listed for trade (NYSE / NASDAQ) Close/Closely Held - No secondary market / often (but not always) a relatively small # of SHs who actively participate in the firm's management / may display many characteristics of partnerships

· Corporate Opportunity Doctrine (purpose and targets?)

o Purpose - To deter D/O appropriation of new business prospects "belonging to" the corporation § Targets: · Officers and directors of the corp · Dominant shs who take active role in managing firm

· Intentional Torts by Agent

o R §228(1)(d): - Intentional torts involving use of force result in liability if use of force "not unexpected by master" § Foreseeability - a direct outgrowth of the employee's instructions or job assignment," It is not enough that an employee's job provides an "opportunity" to commit an intentional tort § intentional torts can be w in scope of employment if use of force forseesable by employment. o R3D §231 - Consciously criminal or tortious acts not per se excluded from scope of employment

· Principal's Liability in K- what does R2D and R3D say?

o R2D § 144 - In order for a K made by Agent to be binding on Principal, the Agent must have authority o R3D § 6.01 — When A with actual or apparent authority makes a K on behalf of a disclosed Principal 1. P and TP are parties to the K / and 2. A is not a party to the K unless A and TP agree otherwise

· Agent's Liabilty to TP (tort)

o R3D § 7.01 - An A is subject to liability to a TP harmed by A's tortious conduct // Unless an applicable statute provides otherwise, an actor remains subject to liability although the actor acts as an Agent or an employee, with actual or apparent authority, or within the scope of employment

· SCOPE OF EMPLOYMENT

o R3D § 7.07 An agent is an employee only when the principal controls or has the right to control the manner and means through which the agent performs his work. o General RULES a) Was the conduct of the same general nature as, or incident to, that which the servant was employed to perform? (R § 229) b) Was the conduct substantially removed from the authorized time and space limits of the employment - "frolic and detour"? · Not a "total abandonment of his employment" (Clover v. Snowbird Ski Resort) c) Was the conduct motivated at least in part by a purpose to serve the master? § (Test applies to gratuitous agencies)

a. "GRABBING AND LEAVING"

o R3D § 8.04 - Throughout the duration of an agency relationship, A has a duty to refrain from competing with P and from taking action on behalf of or otherwise assisting P's competitors § During that time, A may take action, not otherwise wrongful, to prepare for competition following termination of the agency relationship § E.g. solicitation of subordinates, taking trade secrets (can't do it) o R3D § 8.05 - Agent has a duty: 1) Not to use P's property for A /s own purposes or those of a TP / and 2) Not to use or communicate confidential information of P for A's own purposes or those of a TP § Comments · An agent's duties concerning confidential information do not end when the agency relationship terminates · Applies to a physical record and memory retention o R3D § 8.05 Even memorizing the list, instead of printing it out, would be a violation of fiduciary duty o can't compete but can make arrangements to compete. See notes for case info. (Kopka, Landau & Pinkus v. Hansen)

· Indemnification in AGENCY Law

o R3d § 8.14 Principal has a duty to indemnify an Agent: § (1) In accordance with their K, AND § (2) [unless otherwise agreed] · (a) When Agent makes a payment (i) within the scope of Agent's actual authority or (ii) that is beneficial to Principal unless Agent acts officiously (was wrong) in making the payment; or · (b) When Agent suffers a loss that fairly should be borne by the principal in light of their relationship.

· Grabbing & Leaving rule

o RULE: Exiting partners cannot use "Position of Trust" to disadvantage current partners: hiding information, non-disclosure, misleading responses § Allowed fair competition for client business, but cannot take advantage of previous partnership position (stealing clients) / cannot use an unfair advantage (strong focus on whether actions create an unfair advantage.) § Partnership agreement can contract a provision for this, specifying clearly what kind of grabbing is improper and how much notice must be given o Two kinds of taking client files § CAN'T take: Organized by client and sub-categorized by matter § CAN take: Chron file/desk file (copy of everything you do by chronological order) · For personal use, not for discovery

· Expulsion rule

o RULE: When a partner is involuntarily expelled from a business, his expulsion must have been in good faith or in agreement with the duty of loyalty (i.e. fiduciary duties still apply) § In this context, however, the good faith and fair dealing obligation is exceedingly narrow in scope. · As long as you pay him any money he's legally due, you can expel without breach of fiduciary duty

· Waiver

o RULE: You can be agent for one purpose and not another o No disclaimer by K § There are agent-independent contractors and non-agent independent contractors

SH TRANSACTIONS · Basic Principles

o SHS acting as SHs do NOT owe the entity or one another fiduciary duties o Controlling SHs DO owe fiduciary duties to minority SHs § Analogy to vicarious liability

corp · Hierarchy

o SHs -- own the company / and take profits o BOD -- act as the principal for the company / elected by SHs o Managers -- appointed by BOD as agents o Employees -- hired by managers as sub-agents

· Why pay a control premium?

o Stock consists of 2 rights: economic and voting § 1 share of stock gives the owner little control over the company because only 1 vote § Market price of a share of stock thus reflects nothing more than the estimated present value of the future stream of dividends payable on that share § Someone buying a controlling block of stock gets ability to elect entire BOD · (Assuming no cumulative voting) § So purchaser can change corporate management + policies to make firm more valuable

· Duty of Loyalty: defined:

o Subordination of personal interests to the welfare of the corporation o No taking of co opportunity o No competition with corporation § Sometimes contracts are allowed if they do not create outright predatory competition § Should refrain from competing with the business until business dissolves o No conflict of interests o No insider trading o No transaction that is detrimental to minority SHs o Includes duty of good faith (bad faith = illegal dealings)

de facto creation of llc TEST:

o TEST: Grant members limited liability as though in a de jure LLC if the organizers: 1. Tried to incorporate in good faith, 2. Had a legal right to do so, and 3. Acted like an LLC

· Termination of Agency Relationship

o Termination occurs for the following reasons: a) Agreement by parties -- contract defines when the relationship ends (event or date) b) Agency at will § At common law, agency relationships presumed to be at will and thus terminable at any time by either party after notice § Revocation -- P revoked authority of A to act § Renunciation -- A notifies P they quit c) Fulfillment of the purpose of the agency relationship, i.e. completion of task. d) By operation of law (e.g. automatic termination upon death of either A or P)

· Dissociation

o The change in the relationship caused by a partner's ceasing to be associated in the carrying on of the business. o Dissociation of a partner does not necessarily cause a winding up of the business of the partnership.

· Winding Up: UPA (1997) § 802

o The partnership continues after dissolution only for the purpose of winding up its business, after which it is terminated. o Winding up entails concluding all unfinished business pending at the date of dissolution and payment of all debts. § Partner in a winding up partnership can't bring in any new biz. If you bring in new biz, it's not going to be under partnership

· Dissolution

o The partnership's business ends, the affairs of the business wind up, and partnership property is sold.

· Modifying Partnership Rights § 105(a)

o To Modify § 401(k): § If ordinary course of business → need majority vote § If outside the ordinary course of business → unanimous vote § Amendment to the partnership agreement → unanimous vote o To Modify UPA §18(h) § Ordinary course of business → majority § Act in contravention of partners' agreement → unanimous

ACTUAL AUTHORITY

o communication between P and A § R3D — Where Agent reasonably believes the Principal has consented to a particular course of conduct · §2.01 - Exists when A reasonably believes that P wants A to act o Look solely at what A believed about the scope of authority (TP is irrelevant) · §3.01 - Created by a P's manifestation to an A that, as reasonably understood by A, expresses the P's assent that the A act on P's behalf

· Tornetta v. Musk (Del. Ch. Mar. 28, 2018)

o Transaction: § Tesla gave Elon Musk an Incentive Compensation Award · Twelve "milestones" · At each Musk would be given option to buy Tesla stock · If all 12 milestones reached, Tesla would be one of the most valuable public companies in the world · Musk would get between $2.6 and $3.7 billion o Shs sued saying musk had used his position to get compensation at exclusion of minority. o MFW case says if decision is made by a special committee of disinterested directors who had power to say no and left decision about musk compensation up to them and also if they had a fully informed vote of majority of minority shs, then standard of review would be BJR and burden of proof would be on p to show waste.

· Related Party Transactions (AKA Interested Director, Conflicted Interest)

o Transactions where the D/O conducts business with the corporation § Inherent conflict of interest - D/O has obligation to company/SHs to get deals in their best interest / In individual capacity, D/O has self-interest in getting best deal for themselves

· Modification or Limitation of fiduciary Duties- LLC

o ULLCA § 105(d)(3) - So long as the OA is not manifestly unreasonable, the OA can: § (a) Modify duty of loyalty § (b) Identify specific types or categories of activities that do not violate the duty of loyalty

LLC · Creation

o ULLCA § 202(a) - File Articles of Organization in state office and filing fee / cannot be formed without state action o Register name o Designate principal place of business and an agent for service of process Draft operating agreement

· Indemnification in LLCS (def, interpretation, and advancement?)

o ULLCA § 403: LLC shall reimburse member or manager for payments made and indemnify for liabilities incurred in the ordinary course of business or for the preservation of its business or property o Case Law § Interpretation · Under "rule of contra proferentum" court construes ambiguous K terms against drafter o Where an indemnification clause restricts scope of indemnification (which youre allowed to do), these clauses will be construed against the drafter. § Advancement (i.e., prepayment of expenses, as when agent sued) · May expressly provide for advancement in partnership or LLC agreement

· Partnership Liability

o UPA (1914) § 15 "All partners are liable: (a) Jointly and severally for everything chargeable to the partnership under sections 13 and 14 [i.e., mainly torts] (b) Jointly for all other debts and obligations of the partnership...." o UPA (1997) § 306(a): "All partners are liable jointly and severally for all obligations of the partnership unless otherwise agreed by the claimant or provided by law" § A person admitted as a partner into an existing partnership is not personally liable for any partnership obligation incurred before the person's admission as a partner. o Compare with Corporate Liability § MBCA § 6.22(b): "SH of a corporation is not personally liable for the acts or debts of the corporation except that he may become personally liable by reason of his own acts or conduct" o These liability statutes give rise to limited liability entities (section below)

Does UPA consider partnership as a single separate entity or as an aggregate entity?

o UPA (1997) - considers partnerships as a legal entity for most purposes (to avoid historical issues of old "aggregate theory- see below *) BUT need to to look at statute provision by provision. UPA 97 considers a partnership a legal entity for nearly all purposes and considers it a legal aggregate for few purposes: § Single Separate entity for these purposes: · To sue and be sued · To have judgments collected against its assets and individual partners' assets · To own partnership property · To convey partnership property · To keep its own books · To file its own federal/state tax returns § Aggregate (of individual partners) entity for these purposes: · J&S liability of partners · Partnership pays no state or federal income tax o Taxes are "paid" by each partner in their income tax

· Waiver and Modification of Duty

o UPA (1997) § 105 If not manifestly unreasonable, the partnership agreement may: A. Alter or eliminate the aspects of the duty of loyalty stated in § 409(b) · ("Eliminated" very controversial, but DE added) B. Explicity identify specific types or categories of activities that do not violate the duty of loyalty C. Alter the duty of care, but cannot authorize bad faith, willful or intentional misconduct, or a knowing violation of law

· Indemnification in PARTNERSHIPS

o UPA (1997) § 401(c): Partnership will reimburse partners for payments made and indemnify partners for liabilities created in ordinary course of the business of partnership or when necessary to preserve the business or property § Partnership is a type of mutual agency. All partners are agents of each other. So a partner is entitld to be indeminified by its current partners.

can partner transfer partnership prop?

o UPA (1997) § 401(i): A partner can only use or possess partnership property on behalf of the partnership

· Disclosure of Info (1914 and 1997)

o UPA 1914 § 20 - Partners shall render on demand true and full info of all things affecting the partnership to any partner/legal rep of any deceased partner/partner under legal disability § —> Burden is on partner seeking info o UPA 1997 § 408(c) - Each partner and the partnership shall furnish to a partner/legal rep of a deceased partner/partner under legal disability: 1) Without demand, any information concerning partnership's business and affairs reasonably required for proper exercise of the partner's rights and duties under the partnership agreement or this [Act] / and 2) On demand, any other information concerning partnership's business and affairs, except to the extent the demand or information demanded is unreasonable or otherwise improper under the circumstances § —> Burden is on partner with info

· Allocation of Losses - 4 Tiers

o UPA 1914 §18 -- Each partner must contribute towards the losses of partnership according to his share in the profits (and gets profits according to share) § UPA 1914 §40(b) -- Dissolution partnership assets should be distributed as follows: 1) Those owing to creditors other than partners 2) Those owing to partners other than for capital and profits 3) Those owing to partners in respect of capital ** 4) Those owing to partners in respect of profits

· Assignment of LLC Interest

o Unless otherwise provided in the LLC's operating agreement, a member may assign his financial interest in the LLC § An assignee of a financial interest in an LLC may acquire other rights only by being admitted as a member of the company if all the remaining members consent or the operating agreement so provides. o Analogous to partnership rules

APPARENT AUTHORITY

o communication between P and TP § R3D - K is binding on P and TP when TP reasonably believes that A has authority to act for P and that belief is traceable to P's manifestations · § 2.03 - Exists when: 1) P holds A out as having authority (P represents that A is P's agent) / AND 2) TP reasonably believes that A has authority to contract and this belief is based on P's manifestations · § 3.03 - Exists when 1) TP reasonably believes that A is authorized and this reasonable belief is based on P's manifestations 2) P manifests that A has the authority to act on behalf of P

"Convertible" Stock

o fixed securities that can be transformed into common stock after certain time or on a specific date / this gives investor an opportunity to capitalize on rises in stock price

Financial interest RE LLC

o i.e. a right to dividends and liquidation of assets § Right to share of profits (Absent contrary agreement, most statutes allocate profits and losses on the basis of the value of members' contributions) · Compare partnership law's equal division o ULLCA uses partnership like equal shares rule § Can assign financial interest to a TP / other rights (like voting) can be assigned with other members' consent or in accordance with operating agreement § Withdrawal · Member may withdraw and demand payment of his/her interest upon giving the notice specified in the statute or the LLC's operating agreement

whistleblowing rule re expulsion

o no whistle-blowing exception to the at-will nature of partnerships § RULE: Firing whiste-blower partner is not a bad-faith expulsion if done to protect partnership business

"Preferred" Stock

o one class may have a higher claim to assets, earnings, dividends (typically don't have voting rights and typically used in venture capitals, young cos.) § Can have 1 or both of 2 types of preferences · Liquidation Preference -- if company liquidates, preferred stock gets specified dollar amount per share before paying common SHs (but still after creditors) · Dividend Preference -- entitled to annual dividend of certain amount, pay preferred before common dividends o Not required to pay dividend, but preferred can gain right to elect directors if don't get dividend for a while o Dividends are cumulative -- have to pay all years of dividend owed to preferred before paying common

· Distribution of Assets: UPA (1997) § 807 (to who, for what, and in what order?)

o to creditors other than partners, o to partners for liabilities other than for capital and profits, o to partners for capital contributions, o to partners for their share of profits

in Coppola v. Bear Stearns (2007) -- "Essential part of the partnership inquiry is?

o whether the creditor has joined in or assumed control of the borrower's business as a going concern rather than as a means to protect its security for repayment." § So question we have to ask is whether the creditor has just enough control to ensure they get paid back or do they have so much control they're in fact de facto owners of the biz? Is the degree of control creditors exerted enough to reach the partnership pt? · In a case where creditors were effectively telling biz how to make managerial decision, that'd probs be enough control for partnership.

· Partnership Creation under UPA (1997) § 202(c)

o § 202 lays out general rules to decide whether two or more people have associated together for partnership: 1) Joint ownership of property doesn't necessarily make you partners (e.g. joint tenancies) · Even if the co-owners share profits made by the use of the property. 2) Sharing of revenues/gross returns doesn't necessarily make you partners even if the persons sharing it have a joint interest in the property from which the returns are derived. Sharing of profits creates a rebuttable presumption of partnership

nature and transfer of transferable interest

o §502 Nature of transferable interest - A transferable interest is personal property o §503 Transfer of transferable interest - A transfer, in whole or in part, of a transferable interest is permissible § Partner can transfer his interest (share of profits and losses) but the partner remains the partner / the assignee does not become a partner (but the partnership can consent if they choose to)

llc equaivalent of bylaws

operating agreement

(OLD: "Aggregate Theory"

was a "tenancy in partnership" and not an distinct legal entity for any purpose. Created probs on issues like lawsuits and property ownership)

o Opposing Canons of Statutory Construction

§ "There are two opposing cannons [of statutory construction] on almost any point." - Karl Llewellyn § Canon #1: Remedial statutes should be construed broadly so as to effect their purposes § Canon #2: Rules in derogation of the common law should be strictly and narrowly construed · Grant of power · 145(f) grants no new powers

Entity Shielding

§ (Affirmative Asset Partitioning/Entity Shielding) -- personal creditors cannot seize law firm assets · §501/504 - 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 o Personal creditors cannot reach partner's interest without court "charging order"

Limited Liability re asset partitioning

§ (Defensive Asset Partitioning/Limited Liability) -- firm creditors cannot seize personal assets · Firm creditor can get to the personal assets of a partner if the partnership cannot pay debts / no defensive asset partitioning for personal assets · NOT included in partnership law o Many states (not all) have "Exhaustion Rules" -- first assets out of firm and then partners. In states w out this, creditors can go after partner's personal assets first. o All states have joint and several liability o Weak form of entity shielding/affirmative asset partitioning

o UPA 1997 §204 Lays out 3 rules: Partnership Property is:

§ 1) Any asset acquired in the name of the partnership is partnership property, including: · A transfer directly to the partnership in its own name · A transfer to one or more partners acting in their capacity as partners and the name of the partnership appears on the transfer document § (2) If the partnership is not named, property acquired by one or more partners is partnership property if the document transferring title indicates the buyer was acting in his capacity as a partner § (3) Property purchased with partnership funds is presumed to be partnership property

o 2-Prong TEST for finding of enterprise liability

§ 1. There is such unity of interest and ownership that the companies are not truly separate · E.g. Who controls the corporation? Who orders the agents around? Is it another company? a. Single or multiple bank accounts - Do the two companies have single or separate bank accounts? b. How are supplies ordered - Together? In sync? § 2. Disallowing piercing would create fraud or injustice

"...a business for profit." (re partnership def)

§ 101 broadly defines "business" to include "every trade, occupation, and profession." Sweeping enough to cover just about any for profit venture.

actual authority re partnerships

§ 301(1) - Act of a partner is binding if TP knew or had notice that P lacked authority Partners have actual and apparent authority to carry on the biz of the partnership. Actual authority can be restricted/taken away by partnership. If partner doesn't have actual authority (eg bc or a restriction) AND person whom he's dealing w knows that, then there's no apparent authority either. Also, there's no apparent authority if TP knows partnership doesn't provide certain services. Onus is on partnership to notify vendors and creditors who has power to do what Partner who acts without actual authority has to indemnify other partners

o Management rights RE LLC

§ Default: 1 person, 1 vote regardless of contribution or share of profits § Most matters Decided by majority vote § Some votes re significant matters require unanimity (M&A, adding a new member, dissolution) § Manager-managed LLC option available (basically a manager makes most decisions) · The LLC's members appoint a manager (individual or committee) to run the company o Similar to corps. o MEMBER-managed LLCs are in turn similar to partnerships. · Some decisions still reserved for members. Members just have right to vote manager out of office and fill resulting vacancy. · Can be structured as a "BOD," a CEO, or both · Must be specified in AOI · Default rules for this org is that designated manager makes virtually all decisions. Need not be a single person. Can have a committee.

Implied actual authority

§ A must reasonably believe based on present or past conduct of P that he had authority. Key question in all implied authority cases is determining what the agent rsbly believed abt the scope of his authority. · Incidental: absent clear contrary instructions from P, A has authority to use all means rsbly necessary to carry out a particular result expressly mandated by P. Authority that A possesses to do those things reasonably necessary to accomplish assigned task · Acquiescence in past transactions: it's reasonable to rely on past transactions. If P knows A has engaged in a patterm of behavior and P fails to onject to the continuance of that behavior, A has implied actual authority to continue to engage in that type of transaction. · Custom — Local custom (customary in trade or community) gives A authority to act if it is ordinarily reasonable for Agent to believe that following custom will be acceptable to P / If A knows that P is unaware of custom, A has NO authority under custom o P can cut off custom authority, explicitly or implicitly, by giving highly detailed instructions or if the task is at odds with custom o E.g. Paul did not instruct Ann about hiring a janitor for the apartment building / it is custom that managers have the power to hire a janitor / Ann has authority here given no extra facts

Nelson v. Abraham

§ A partnership connotes co-ownership in the partnership property with a sharing in the profits and losses of a continuing business"

o Distinguishing bw Ratification from Authority by Acquiescence

§ Acquiescence by P in a series of acts by A indicates authorization to perform similar acts in the future · Ie unless disavowed by P, acquiescence as to past unauthorized conduct can create actual or apparent authority as to future transactions. § If the unauthorized conduct in which P acquiesced was closely related to A's actual authority, P's acquiescence may be used as evidence that A had actual or apparent authority. If not, the transaction must be ratified. · Rule: So must be a series of acts and must be closely related for acquiescence to be actual or apparent authority. Otherwise, must be ratified.

o Partner's Liability re partnership creditors

§ All partners liable — thus, firm creditor can attach personal assets § But not for liability before becoming partner § LLP liability is solely on partnership, not partner

o DGCL § 145(f) Indemnification by Agreement

§ Allows corporations to enter into written indemnification agreements with D/Os that go beyond statutory indemnification rights · Clearly authorizes indemnification agreements mandating payment of expenses that the statute merely permits · Clearly authorizes indemnification agreements mandating advancement of expenses even though merely permissive under §145(e) · Likely allows indemnification of certain expenses not contemplated by the statute · Basically says you can have provision in articles that gives extra indemnification rights. So statutory indemnification rights aren't exhaustive. Can expand, can't narrow.

o UPA (1997) § 801. Events causing dissolution by act of the partners

§ Any member of an at-will partnership can dissociate at any time, triggering dissolution and liquidation. · The partners who wish to continue the business of a term partnership, though, cannot be forced to liquidate the business by a partner who withdraws prematurely in violation of the partnership agreement. § Any partnership will dissolve upon the happening of an event the partners specified would cause dissolution in their agreement. § A term partnership may be dissolved before its term expires in three ways · If a partner dissociated by death, declaring bankruptcy, becoming incapacitated, or wrongfully dissociates, the partnership will dissolve if within ninety days of that triggering dissociation at least half the remaining partners express their will to wind it up. · The partnership is dissolved if the term expires. · It may be dissolved if all the partners agree to amend the partnership agreement by expressly agreeing to dissolve.

o —> Tips to Avoid Forming a Partnership

§ Avoid terms like · Partnership · Partners · Joint venture · Venturers § Include a disclaimer - "we are not a partnership" · But remember cts not bound by all 4 corners of agreement so make sure conduct doesn't imply partnership. § If profits are shared, make it explicit that the profits are payment for independent contractors · Southex shall receive 55% of the profits as payment for services as an independent contractor o Use express language of UPA (1997) 202

owhat amounts "Manifestly unreasonable" re modifications of duty?

§ COURT determines meaning (UPA said the ct shall decide as a matter of law whether a term of a partnership agreement is manifestly unrsbly.) · Not to be judged based on hindsight or how things played out, but what conditions/circumstances were at time agreement entered into · Court may invalidate the term only if, in light of the purposes and business of the partnership, it is readily apparent that: a. Objective of the term is unreasonable / or b. Term is an unreasonable means to achieve the term's objective

o Violations of loyalty duty

§ Competing with the partnership § Taking a business opportunity away from the partnership § Using partnership property for private profit § Conflicts of interest

o Internal affairs doctrine:

§ Constitutional law - biz affairs of corp shall be governed by law of only ONE state. § Choice of law - internal affairs of corp (ch 3 and 5-8) governed by the law of state in which it's incorporated. So can incorporate in DE and no matter where you get sued, DE law applies.

o DGCL § 145(e) Advancement of Expenses

§ Corporation may advance expenses to D/O so long as they repay the expenses if it turns out they were not entitled to indemnification (i.e. D/O is convicted) Sarbanes-Oxley prohibits corporate loans to D/Os for public companies and firms (but not followed by DE

o Why did ct find a term partnership in owen v. cohen?

§ Ct held that when a partner loans money to the firm, to be repaid from profits, an implied term is created that doesn't expire until the loan is repaid. Other cts have held the same.

o Bonds and other Debt Securities re corp capital structure

§ Debt instruments, getting right to receive interest at stated rate for period of years until bond matures and get principal payment back · Bonds and other debt securities typically consist of 2 distinct rights: o Bondholder is entitled to receive a stream of payments in the form of interest over a pd of yrs. o At the end of the bond's prescribed term (i.e., at maturity), the bondholder is entitled to the return of the principal

o Items an Operating Agreement May Include

§ Economic rights - can define different classes of partners and members and give them different interests § Voting rights - can be assigned in any manner (e.g., on a per capita, number, financial interest, class group or any other basis). § Fiduciary Duty § Indemnification § Exculpation § Informational Rights

o DEMAND (sh lit)

§ FRCP 23.1 - SH must make demand to BOD or state why didn't (i.e. making demand would be futile) § Demand = Efforts made by P to obtain the desired action from the directors or comparable authority and, if necessary, from the SHs or members (typically a letter from SH to BOD) a. MUST request that BOD bring suit on the alleged cause of action b. MUST be sufficiently specific as to apprise BOD of nature of alleged cause of action and to evaluate its merits c. Demand MUST, at minimum (Allison v. Gen. Motors Corp): o Identify the alleged wrongdoers o Describe factual basis of the wrongful acts and the harm caused to corp.; AND o Request remedial relief

o Contemporaneous Ownership

§ FRCP: In derivative suit, Plaintiff must have been SH or member at the time of the transaction and lawsuit filing or that the P's share or membership thereafter devolved on P by operation of law · Some states require plaintiff to retain the shares until the conclusion of the lawsuit · Directors have no standing to sue corporations unless they are no longer in office or are a SH

o FRANCHISING

§ Franchisees are not independent businesses -- franchisee buys the opportunity to run the business based on the franchisor's established operational methods (contained in the operations manual - strict rules about operation to ensure quality and uniformity)

o what does it mean that the agent acted officiously such that they're not entitled to indemnification?

§ Incurred expense where it was not necessary. · EG: If agent voluntarily says "ill do that task" but it wasn't necessary to do it, then not indemnifiable o If principal tells agent "they may try to tell you there will be an extra duty. But they're wrong. So if they do this to you, just let me know." Then agent goes down there, doesn't think she has any authority to pay the extra customs. Yet he pays it anyway bc he likes person asking for it. That would be officious.

o Exoneration V. indemnification

§ Indemnification -- Agent pays out of pocket and seeks reimbursement § Exoneration -- Agent is not required to dip into his/her pocket to carry out task. Holding out until P pays rather than using own funds to pay. · Before Agent pays a debt of Principal's, Agent "may call upon Principal to exonerate him by discharging it" (doesn't have to pay out of pocket first)

o Fiduciary Duty vs. K Law

§ It is often easier to establish a breach of a fiduciary duty than of a contractual duty · Burdens of proof are often shifted against the fiduciary [party that owes the fiduciary duty] § There may be greater remedies for breach of a fiduciary duty than of a contractual duty · Tort remedies, and not merely K remedies, are often available for breach of fiduciary duties / including punitive damages

AOI- what they must and may set forth

§ MBCA § 2.03 Corporate existence begins when AOI filed § § 2.02(a) Articles must set forth: 1) A corporate name for the corporation that satisfies the requirements of section 4.01 2) Number of shares the corporation is authorized to issue 3) Street address of the corporation's initial registered office and the name of its initial registered agent at that office / and 4) Name and address of each incorporator § § 2.02(b) Articles may set forth: 1) Names and addresses of the individuals who are to serve as the initial directors 2) Provisions not inconsistent with law regarding: o (i) the purpose or purposes for which the corporation is organized o (ii) managing the business and regulating the affairs of the corporation o (iii) defining, limiting, and regulating the powers of the corporation, its board of directors, and shareholders / o (iv) a par value for authorized shares or classes of shares o (v) the imposition of personal liability on shareholders for the debts of the corporation to a specified extent and upon specified conditions 3) Any provision that under this Act is required or permitted to be set forth in the bylaws 4) A provision eliminating or limiting the liability of a director to the corporation or its shareholders for money damages 5) A provision permitting or making obligatory indemnification of a director for liability

o 2) Limited Liability

§ MBCA § 6.22 - A SH of a corporation is not personally liable for the acts or debts of the corporation / For the most part, the assets of SHs/owners are not subject to judgment to satisfy the claims of creditors of the corp

o Limited Liability / Defensive AP

§ MBCA § 6.22 - SH of a corporation is not personally liable for the acts or debts of the corporation, UNLESS: · AOI may waive Limited Liability · SH does something that results in personal lability o SH is obliged by creditor to personally guarantee obligations of firm · Reference to what's known as piercing the corporate veil.

o 3) Separation of Ownership and Control

§ MBCA § 8.01(b) - All corporate powers shall be exercised by and all business and affairs of corporation shall be managed by the BOD § MBCA § 8.01(a) - Corporations are required to have a BOD

o Oganizational meeting

§ Name directors, if necessary § Adopt bylaws § Appoint officers 1) C-suite titles have no actual meaning under corporate law, some states require specific officers § In California you must appoint (i) a President and CEO, (ii) a Secretary (officer in charge of keeping books and records of org, usually general counsel), and (iii) a Treasurer or CFO. § Authorize the sale of founders stock § Issue stock

o Most companies incorporate in DELAWARE / Why?

§ No minimum capital requirements § The need for only 1 incorporator (a corporation may be the incorporator) § Favorable franchise tax in comparison to other states § Rules do not require corporations to be physically present in DE § Experienced juries in DE § Foreign companies (Companies doing biz outside DE.) · No corp. income tax · No sales tax, personal property tax · No tax on shares of stock held by non-residents § Highly competent judiciary in co law and extensive and detailed case law on this subject. § 20% of DE's revenue comes from state franchise tax. So they have a lot of incentive to generate a lot of high quality biz law.

o UPA (1997) § 801. Events causing dissolution (3 basic situations in which dissolutions occur):

§ There are three causes of dissolution: · By virtue of certain acts of the partners (SEE BELOW) o Partnership agreement can modify · By operation of law o E.g., it becomes illegal to continue the business, or substantially all of it. · By court order. (SEE BELOW)

***Do the legal consequences of an agent's acts depend on the type of authority the agent possessed?

§ No, e.g. the K will be no less binding if TP proves apparent authority rather than actual. The diff bw actual and apparent authority thus arises out of the way in which TP seeks to prove A was authorized to enter into the K. § Thus, the diff categories of authority really are ways of classifying the proof the P must offer to bind the principal to the K.

o INHERENT AUTHORITY old rule

§ OLD RULE: R2D §8A - A's power derived from not authority but solely from agency relation and which exists for protection of TPs harmed by Agent (created in Watteau v. Fenwick) · P is liable to TP for its A's actions which are normally within the A's scope of authority o § 194 - P liable for A's actions if they are reasonable, usual, or necessary, even if they were explicitly forbidden by P o § 195 - An undisclosed P who entrusts A to manage a business is liable to TP with whom A conducts transaction usual in such businesses, even if contrary to P's instructions o If P is partially disclosed (when an A reveals that he is not P or that he has a P, but does not disclose who P is), then both the P and A are liable to TP § POLICY: we sacrifice fairness to P because we want to protect TPs / P should disclose himself to avoid liability

Legal issues that may arise if promoter enters into Ks on behalf of corp before AOI are filed

§ Once the articles are filed, does the corporation become a party to the contract? · Yes, but not automatically. The corporation must "adopt" the contract. o Adoption can be effected: § Expressly (typically by a novation); or § Implicitly (e.g., ratification by acceptance of benefits) § Once the articles are filed, is the promoter liable if the corporation breaches the contract? · Yes. MBCA § 2.04: "All persons purporting to act as or on behalf of a corporation, knowing there was no incorporation under this Act, are jointly and severally liable for all liabilities created while so acting." · If the corp adopts the K, promoter may be released from liability by other party to the K § If the articles are not filed, is the promoter liable on the contract? · Yes. Absent an agreement to the contrary, the promoter remains liable on the contract if the corporation never comes into existence. MBCA § 2.04.

power v. right to dissociate:

§ Partner always has the power to dissolve the partnership (under both 1914 and 1997), but they don't always have the right to do so Most common occurrence = dissolving term partnership before term is up In a partnership at will, rare to find wrongful dissocaition

can partner transfer membership interest?

§ Partner has no membership interest in partnership that she can sell that carries with it rights of partner §402No one can become a partner without vote/consent of all partners

o UPA (1914) § 32 - Judicial Grounds for Dissolution (on application by or for a partner):

§ Partner is shown to be of unsound mind § Partner becomes in incapable of performing his part of partnership K § Partner is guilty of prejudice § Partner willfully or persistently commits a breach of partnership agreement, or otherwise conducts himself in matters relating to the partnership business that it is not reasonably practicable to carry on the business in partnership with him § Business of the partnership can only be carried on at a loss § Other circumstances render a dissolution equitable

o Capacity re partnership

§ Partners must have legal capacity to be a partner before creating partnership · UPA allows corporations to be a partner

o Partnership Types

§ Partnership for a term - Partnership for a specified term/period of time § Partnership at will - exists until a partner terminates § Partnership agreements can be oral unless Statute of Frauds requires a written K, but rare. · Agreement = meeting of the minds. Parties must intend.

o 5) Flexible capital structure

§ Permanent and long-term contingent claims on the corporation's assets and future earnings issued pursuant to formal contractual instruments called securities § 3 ways to raise money 1. Borrow from bank 2. Retain earnings (make profit and reinvest part of it in business) 3. Selling securities aka shares (contractual claims on firm's assets and earnings)

o Personal Creditor of Individual Partner Seeks to Attach Firm Assets. can they do it under 1914 and 1997 UPA?

§ Personal creditor of partner cannot attach assets of the partnership to collect for partner's personal debt § UPA (1914) § 25: · (1) A partner is co-owner with his partners of specific partnership property holding as a tenant in partnership · (2) The incidents of this tenancy are such that: o (c) A partner's right in specific partnership property is not subject to attachment or execution, except on a claim against the partnership § UPA (1997) § §501/504 - 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 § Personal creditors cannot reach partner's interest without court "charging order"

(re corp opp) o Reimbursement after usurped corp opportunity

§ Principles of Corporate Governance -- D is entitled to reimbursement for what he paid · "When an officer or director breaches his duty of loyalty to the corporation by usurping a corporate opportunity for his personal benefit, the corporation may claim all of the benefits of the transaction for itself" (Billman v. State of Md. Deposit Ins. Fund Corp) o If used corporate money, turn over to company o If used personal money, entitled to cost of asset

o 4) Liquidity

§ Publicly-owned are traded on secondary trading market § For closely-held, have to go find your own buyer because no market so hard to get out

Undisclosed Principal (re P's liability to TP, what does R2D AND R3D say?

§ R2D §194 - Agent for UP subjects his P to liability for acts done on his account if usual or necessary in such transactions, although forbidden by P to do them § R2D §195 - UP who entrusts any type of agent charged with management of business is subject to liability to TP with whom agent enters into usual transactions on P's account, even if contrary to directions of P

o DUTY OF LOYALTY (def and policy?)

§ R3D 8.02: Agent has a duty not to acquire a material benefit from a TP in connection with transactions conducted or other actions taken on behalf of P or otherwise through the A's use of the A's position · POLICY: A is not allowed to gain additional incentives (competition, secret profits) because otherwise it would displace A's single focus on P

INHERENT AUTHORITY new rule

§ R3D classifies inherent authority under expansive view of apparent authority (R3D abandons inherent authority) · DISCUSS -- this is arguably wrong because apparent authority cannot exist where there is an Undisclosed Principal o Restatement (Third) plugged the hole by creating section 2.06, with "no precise counterpart" in the Restatement (Second) (To deal w cases like Watteau, the R3D adopts a new concept called "estoppel of an undisclosed principal."): § "Part" (1) An undisclosed principal is subject to liability to a third party who is justifiably induced to make a detrimental change in position by an agent acting on the principal's behalf and without actual authority if the principal, having notice of the agent's conduct and that it might induce others to change their positions, did not take reasonable steps to notify them of the facts. § "Part (2)" An undisclosed principal may not rely on instructions given to an agent that qualify or reduce the agent's authority to less than the authority a third party would reasonably believe the agent to have under the same circumstances if the principal had been disclosed. Estoppel: UPs are liable for the actions of their Agents acting w/o actual authority when: o TP detrimentally rely on A o P does not take reasonable steps to notify TP of the misplaced reliance o TP reasonably believed that A had authority · Instructions as defense: UP may not rely on instructions given to A that reduce A's authority to less than authority a TP would reasonable believe A to have because something As in general have power to do

o DUTY OF OBEDIENCE

§ R3D § 8.08 · (1) Agent has a duty to take action only within scope of A's actual (express or implied) authority · (2) Agent has a duty to comply with all lawful instructions received from P and persons designated by P concerning A's actions on behalf of P · Good faith belief that disobedience is ok is not a defense -- A cannot infer beyond P's words · (Watch out for honestly/rsbly believes trick. Question is whether A rsbly believed)

o DUTY OF CARE

§ R3D § 8.08 - Agent has obligation to act with reasonable care and with skill that similarly situated person would use under those circumstances · If A claims to possess special skills or knowledge, A will be held to SOC of someone with that expertise · Gratuitous Agents will be treated according to what is reasonable under the circumstances o Providing gratuitious service may subject A to duties of competence and diligence to P same as compensated A

o DUTY OF DISCLOSURE

§ R3D § 8.11 - A has a duty to use reasonable effort (only obliged to use rsbl efforts) to provide P with facts that A knows, has reason to know, or should know when: 1) Subject to any manifestation by P, A knows or has reason to know that P would wish to have the facts or the facts are material to A's duties to P / and 2) The facts can be provided to P without violating a superior duty owed by A to another person § R3D § 8.06 - Conduct by A that would otherwise constitute a breach of duty does not constitute a breach of duty if P consents to the conduct, provided that: a) in obtaining P's consent, A: o (i) Acts in good faith, o (ii) Discloses all material facts that A knows, has reason to know, or should know would reasonably affect P's judgment unless P has manifested that he already knows such facts or does not wish to know them, and o (iii) Otherwise deals fairly with P / and b) P's consent concerns either a specific act or transaction, or acts or transactions of a specified type that could reasonably be expected to occur in the ordinary course of the agency relationship · NOTE: P must consent / P's knowledge of A's dealings is insufficient

o DUTY OF ACCOUNTING

§ R3D § 8.12 Agent has a duty, subject to any other agreements with P: 1) Not to deal with P's property so that it appears to be A' property / 2) Not to mingle P's property with anyone else's / and 3) To keep and render accounts to P of money or other property received or paid out on P's account

o Partial Success

§ RULE: Corporate officers are entitled to partial indemnification if successful on a count of an indictment, even if unsuccessful on another related count

§ "Race to the bottom" theory vs. race to the top theory

§ Race to the bottom" theory · DE has laws that favor managers over shareholders, and managers pick the location § "Race to the top" theory · DE has good laws for SHs

o litigation tends to involve some form of implied affirmation (ratification) like the following:

§ Ratification by accepting benefits of the transaction § Ratification by Litigation · Agency by Estoppel (claim brought by TP)

o Verification

§ Required in derivative suits to avoid strike (non-meritorious/nuisance) suits because of the large incentive to settle / this protects corporations § Federal Rules of Civil Procedure 23.1 & DE courts: derivative lawsuit "complaint shall be verified" · Plaintiff (not lawyer) has to sign the complaint and state that she has verified the facts and believes them to be correct

o Entity Shielding / Affirmative AP

§ Shielding the firm's assets from the claims of the personal creditors of the firm's owners · Creditors can seize my shares of stock in Apple, but they have no claim to Apple's business assets § POLICY: Source of stability -- firm doesn't have to worry about SHs being creditworthy, no mechanism for creditors' charging orders

o Advantages of partnerships

§ Simplicity · Easy to follow rules, v flexible. Rules are default rules usually. § Single layer of taxation ("pass through taxation") · Partnership doesn't pay income tax. Rather any profits go through the firm to partners who then pay taxes on them. § More resources than sole proprietorship § Cost sharing § Broader skill and experience base relative to sole proprietorship § Longevity

· Partner vs. Employee o Why this distinction matters: (esp in fenwick)

§ Taxation: in Fenwick, F would have had to pay unemployment insurance if C was eighth employee § Employee rights: only employees are covered under ADA - partners in law firms can be discriminated against all day long

o Incorporation

§ The corporate existence begins when the articles of incorporation are filed.

o 1) Legal Personality

§ The corporation is an entity with separate legal existence from its owners § Has some constitutional rights 5th and 14th Amendments / but not a citizen under P&I clause or 14th A § Subject to state taxes § Must be formally created by filing with the Secretary of State § —> Can own property, pay taxes, exist for indefinite period, sue, and be sued

o Conveyance of Partnership Property

§ Title can only be conveyed in partnership name · No right to personally use, control, or sell partnership property § Any partner can convey title to property by a conveyance signed on behalf of a partnership if title is in the name of the partnership § If partner improperly transfers, the partnership can recover it UNLESS sold to a subsequent good faith purchaser

o Who Owns Partnership Property (UPA 1914 and 1977)

§ UPA (1914) § 25(1) - A partner is co-owner with his partners of specific partnership property holding as a tenant in partnership § UPA (1997) § 501 - 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 § UPA (1997) § 401(i): A partner may use or possess partnership property only on behalf of the partnership

· Specific Types of Agents

§ Universal Agent -- Authorized to perform all acts that can be lawfully delegated to a representative § General Agent -- Authorized by P to transact all business affairs of P at a certain place § Special Agent -- Authorized by P to handle a specific business transaction § Agency Coupled with an Interest -- Agent has paid for the right to have authority for a business § Gratuitous Agent -- No payment is made to the agent, i.e. a favor or a volunteer § Subagents -- Agent appoints other agents

o Disadvantages of partnerships

§ Unlimited liability -- partners are J&S liable for everything · Biggest disadvantage. If your partner does something resulting in liability exposure, you're on the hook, jointly and severally. Parternship acts as principal so any partner is responsible for torts of another. § Potential for conflict between partners (originally designed for small, local, short-term businesses) § Expansion, succession, and termination issues · lack of indefinite life. Corps remain in exist potentially forever until dissolved. Can long outlive founders. Some even go back past revolutionary war. But partnerships dissolve within life of one partner.

So BB's opinion of what the standard should be: (and how should we apply standard?)

§ analysis should be ground in the economics of deterrence. · Impose liability on party with the cheapest cost avoider. · If the P is the cheapest cost avoider, makes sense to impose liability on him . · But if TP is the cheapest cost avoider (like in Bushey bc dock owner is in best position to take appropriate precautions bc could've just locked the wheels that open valves. · Use standard by asking: o Should either party have anticipated need to take precautions? o Could either party take cost-effective precautions? o If both, who could do so at lowest cost?

Implied apparent authority

§ concerns whether TP reasonably believes that A has authority § RULE: TP need not receive info respecting either the nature or the extent of that conduct directly from P / info that has been channeled through other sources can be used to support apparent authority, as long as that information can be traced back to P (Taylor v. Ramsay-Gerding Construction Co)

Doctrine of organization opportunities

§ if there's a biz opportunity that'd be helpful to the partnership, you as partner can't take it for your own personal profit but must hold it for benefit of partnership and turn it over to partnership.

o Equity/Stocks re corp capital structure

§ include bond holders, have been paid) § Common and preferred stocks · Preferred: some are entitled to be paid dividends first, some have liquidation preference that gives them money first when company goes belly up § Issuance of stock is BOD's prerogative · Shareholders involved only if: o Board wants to sell more shares than are presently authorized in its charter o Board of directors wants to issue a new class of shares not authorized in the charter · So long as the charter authorizes the class of shares in question and there are sufficient authorized but unissued shares, the board is free to sell shares for "any valid purpose" as long as the corporation receives adequate consideration for the shares.

UPA (1914) § 33: Winding up

§ process of selling all assets of a business, paying off creditors, distributing any remaining assets to partners or SHs and then dissolving the business • Once winding down is triggered partners can only wind up, no additional business and all other partnership authority terminated

When attempting ratification will be unavailing:

§ ratify before TP withdraws. · In these settings, TP can choose whether or not to be bound to the K; P can't enforce the K unless the TP elects to be bound.

o UPA (1997) § 801(4). Events causing dissolution by court order

§ the conduct of all or substantially all the partnership's business is unlawful; § the economic purpose of the partnership is likely to be unreasonably frustrated; § another partner has engaged in conduct relating to the partnership business which makes it not reasonably practicable to carry on the business in partnership with that partner; or (THIS IS THE BIG ONE, WHERE MOST OF LITIGATION OCCURS) § it is otherwise not reasonably practicable to carry on the partnership business in conformity with the partnership agreement;

Meinhard TEST

§ to identify if something is business opportunity: a. How related to business o Opportunity has to be more closely related with a JV b. Timing o When opportunity arises c. Geographic o No liability if at location removed d. Status of partnership o Managing partner has more information and more opportunity to gain information / he had obligation to keep passive partner informed

o Partnership Opportunity- who has first claim to it? can duty be waived?

§ §409: Partnership has prior claim to partnership opportunities, and a partner must disclose the opportunity and get consent to take it for herself · WAIVER -- This default can be contracted out under § 105(d)(3) (below) so long as the agreement is not manifestly unreasonable and it must specifically identify permissible activities

§ After formation of a partnership, a person becomes a partner:

· (1) As provided in the partnership agreement · (2) As a result of a transaction effective under Article 11, or o Can't sell your partnership to someone else. As matter of statutory default rules, can only add partner by unanimous vote. · (3) With the affirmative vote or consent of all the partners

formation and tax aspects of LPs

· Formation: The limited partnership is formed by filing documents required by statute. o A certificate of limited partnership must be filed with Secretary of State · Tax aspects: o Pre-Tax Reform Act of 1986, significant tax shelter advantages o Post-TRA, those advantages eroded but still widely used to generate passive losses

(LLC)If someone refuses to pay capital should there be consequences for default?

· (BB thinks all Ks should have this so that agreement isn't toothless.): o Manager may borrow additional capital from member, officer, manager, bank, etc. o ?May include penalty on defaulting member · Can strip certain rights, like voting rights · DLLCA § 18-502(c) permits an LLC agreement to provide for the reduction of a member's interest if that member fails to provide capital when so required · Penalty delusion provision · Treat shortfall as charge on their rights to profits · Treat as adjustment to their capital contribution o Dilution - if someone else makes your contribution, provision can provide that some of your membership shares pass to person who paid your reqd contributions Input a loan provision - that if you refuse a loan will be taken out in your name / put a lien on defaulting investor's dividends

§ R3D uses the term "employee" instead of servant.- whats employee?

· (a) An employee is an agent whose principal controls or has the right to control the manner and means of the agent's performance of work, and o (b) the fact that work is performed gratuitously does not relieve a principal of liability.

PRINCIPAL'S DUTIES TO AGENTS- Duty to Reimburse

· -- P owes duty to repay money to A if the A spent her own money during the agency on P's behalf. Duty to Indemnify -- P owes duty to protect A for losses A suffered during the agency because of P's misconduct o P must repay the costs A took on himself that were rightfully P's to pay o Rest § 8.14: Duty to Indemnify: A principal has a duty to indemnify an agent § (1) In accordance with the terms of any contract between them; AND § (2) Unless otherwise agreed, · (a) When A makes a payment o (i) Within the scope of A's actual authority, or o (ii) That is beneficial to P, unless A acts officiously in making the payment; or · (b) When A suffers a loss that fairly should be borne by P in light of their relationship

OLD: UPA 1914 §29 dissolution statute

· : Dissolution = legal event that occurrs when a partner ceased to be associated with a firm's business o ≠ End of business o Triggers process of "winding up" & liquidation

wholly/subsidiary owned terminology

· A corp has all the legal rights and powers a person has. So it can own shares just like a person. Where it owns the majority share, its considered the parent corporation of the subsidiary corp. o In wholly owned subsdiaries, parent owns 100% of shares. o Where parent owns less than 100%, but more than 50%, it's the parent of the majority-controlled subsidiary o Where SH co owns less than 50%, the subsidiary is referred to as the minority-controlled subsidiary

Agency defined

· Agency is the fiduciary relationship that arises when: o (1) A person (Principal) manifests assent (words or conduct) to another person (Agent) that the agent shall act on P's behalf and subject to P's control; AND o (2) The Agent manifests assent or otherwise consents so to act (3rd Restatement. 2nd Restatement uses "consents" rather than "assents.")

§ Capital structure terminology

· Authorized shares: AOI will specify the maximum amount of shares corp is authorized to issue. o Have to amend AOI to sell more o Co. typically keeps back number of shares to issue later to raise more money or to compensate executives (i.e. stock options) · Outstanding shares: number of shares authorized and issued, and not repurchased · Authorized but unissued shares: shares that are authorized by the charter but which haven't been sold by the firm. o Suppose the charter authorizes the firm to issue up to 20,000 common shares. Suppose the firm sells 4,000 shares to investors. At that point it has 4,000 outstanding shares and 16,000 authorized but unissued shares.

Why omit good faith requirement? in 145c

· Avoids collateral (multisuit) litigation · Allows directors to take risks (bad faith ones too) · Encourages people to serve as directors by providing max protection / if we didn't indemnify then no one would want to serve

duty of loyalty bottom line

· Bottom line: unless P and A have expressly agreed otherwise, the only compensation A may receive by virtue of the agency relationship is the compensation P agreed to pay.

§ DEMAND FUTILITY

· Demand requirement can be excused if deemed futile by ENTIRE BOD · DE TEST (Aronson v. Lewis, also see below Grimes v. Donald) - Plaintiff must allege (pre-discovery) with particularized facts creating reasonable doubt why the BOD cannot make a good faith decision on suit, evidenced by any of: a) Majority of BOD has material financial or familial interest b) Majority of BOD lacks independence (domination and control by wrongdoers) OR c) Challenged transaction not product of valid exercise of business judgment o Demand excused: if Plaintiff alleges with particularity that a majority of BOD was controlled by the accused director or passively approved the accused director's decision

duty of loyalty. what if P wasnt injured? policy?

· Doesn't matter that P didn't suffer damage OR that P couldn't have done act himself Policy: If A only liable if P injured, that'll induce a lot of litigation as to whether P was injured. Might also be difficult for Ps to prove particular conduct injured them. Much easier to gauge benefit recvd by agent, than harm of principal.

PRINCIPAL'S DUTIES TO AGENTS (compensation)

· Express or Implied) -- If no agreement as to compensation amount, the law implies a promise that P will pay A the customary fee paid in the industry o Unless circumstances clearly indicate intent that the relationship be gratuitous

(dark side of LLs)

· Externalities o Allows SHs to avoid social costs of their activities. Society ends up bearing some of the costs associated w those risks. · Encourages excessive risk-taking by owners (SHs) o When you make investments, you have to think about what the expected value/payout of investment is--not best case scenario § { Expected return on investment = probability of outcome x nominal value of that outcome } · See slide 9 class 10 for example. o Risk - to determine how risky a company is, potential SHs can look at expected value of their investment / encourages risk taking when expected value is high even though likelihood is low o Shs will make riskier investments bc if co can't pay bank back, sh are not personally liable. Shs only concerned abt the upside then. Shs in LL will always want to make riskier investments than the creditors do. If you only take enough risk to pay off creditors, and there's nothing leftover, shs get no return on investment.

Freedom of K re LLCS

· Freedom of K is the prevailing norm in LLC law (like in partnership law) as opposed to corporate law which has a lot of mandatory rules you can't modify by agreement

§ Role of Corporate Officers and Executives (Managers)

· Hired by BOD · Are agents of the corporation and thus have duty to corporation · In most states directors can be officers too · Usually comprised of: o CEO - The most senior manager who is responsible for overseeing the entire company / Likely sits on Board of Directors (often as Chairman) / May also holds the statutory title of President. o CFO - Responsible for financial activities of the company: financial planning, controls and accounting. A.K.A. treasurer or controller. o COO - Manages day-to-day operations. o CTO/CIO - Focus on technical issues: IT / information security / R&D o CLO - General counsel

duty of loyalty rule

· If a servant takes advantage of his service and violates his duty of honesty and good faith to make profit for himself, where being a servant was main cause of obtaining money, he is accountable for it to his master

(re corp opp) o Waiver

· In LLC context, fiduciary duties can be waived. · But fiduciary duties in corp law are mandatory. Can't be waived. · BUT there's an exception for corp opportunities: o DGCL § 122 - DE allows you to ex ante waive the doctrine

§ What is the legal standard for fiduciary duties applied in Meinhard (below)?

· Joint venturers, like copartners, owe to one another, while the enterprise continues, the duty of the finest loyalty. Many forms of conduct permissible in a workaday world for those acting at arm's length, are forbidden to those bound by fiduciary ties. A trustee is held to something stricter than the morals of the market place. Not honesty alone, but the punctilio of an honor the most sensitive, is then the standard of behavior. As to this there has developed a tradition that is unbending and inveterate. Uncompromising rigidity has been the attitude of courts of equity when petitioned to undermine the rule of undivided loyalty by the "disintegrating erosion" of particular exceptions . . . Only thus has the level of conduct for fiduciaries been kept at a level higher than that trodden by the crowd. It will not consciously be lowered by any judgment of this court

o An Agency Relationship can arise without:

· K · Consideration · Intention of legal consequences · Agent's promise to act as such · Compensation on either side · Principal's physical control

incorporator

· MBCA § 2.01 - One or more persons may act as the incorporator(s) of a corporation by delivering AOI to the secretary of state for filing Need an incorporator. Person who jumps through hoops of state reqs to form corp. consists of going to state and giving articles of corp and a check for the first franchise tax. You then have a corp.

§ To what extent do business opportunities of which a fiduciary learns belong to the firm rather than the individual?

· Maybe apply the Corporate Opportunity Doctrines Test: o A corporate opportunity exists where: § Corporation is financially able to take the opportunity § Opportunity is in the corporation's line of business · Construed broadly to include areas that the company might logically move its business into § Area in which the company has the knowledge, experience, and ability to pursue § Corporation has an interest or expectancy in the opportunity

LLC funding

· Members typically contribute capital o Contribution may be cash, property, services rendered, a promissory note, or other obligation to contribute cash, property, or to perform services. ULLCA § 401.

in Martin v Peyton (1927, p 88) why did it matter if they were partners?

· Order in which assets are distributed o UPA §40 four tier way to split money § Statute subordinates loans from partner to loans from outside creditors § So 2.5 million goes to pay off other creditors first o UPA §15 all partners are jointly and severally liable § So PPF would be on the hook for any outstanding obligations · i.e. under rules at time time, but basically same today, first you pay off outside creditors when biz dissolves. If anything left over after that, you pay off loans made by creditors. Outside creditors paid off before inside creditors. If PPF was partner, they'd be inside creditors. Since there wasn't enough money to even pay off outside creditors, PPF would've gotten nothing as inside creditors. o Also, as partners, PPF would've been jointly and severally liable to outside creditors. o So it mattered a lot whether PPF was partner.

POLICY behind LL

· Promotes capital formation by encouraging small, passive investors who wouldn't be J&S liable · Turn money over to others who run the company · Permits investors to diversify their portfolios · Encourages risk-taking · Promotes liquidity by making shares fungible · Reduces monitoring costs for investors · In large firms, creditors would find it prohibitively expensive to collect from many SHs · In small firms, voluntary creditors can protect themselves by contract (SH personally guarantees obligations of firm) · Increased equity cushion benefits creditors

(re corp opp)o Best Practice?

· Promptly and fully disclose to BOD in writing an interest in any corporate opportunity · Refrain from participating in any proceedings in which company considers whether to pursue the opportunity and ensure that same is recorded in minutes of meeting · Refrain from voting on any resolutions concerning company's decision to permit the director or officer to pursue the opportunity privately · If board decides not to take opportunity: · Confirm in writing that the company wishes for demonstrable business reasons to reject the opportunity, having made the decision equipped with the director's or officer's previous disclosure

policy for implied (apparent?) authority.

· Purpose of implied authority is for efficiency, so that A does not have to consult P for everything · Responsibility on P to define A's role because P is cheapest cost avoider, easy to instruct A 1) Cheapest cost avoider concept (aka least cost avoider) § Where an activity generates losses, society wants to reduce the size of those losses in the cheapest possible way. Thus, in many situations, it makes sense to impose liability on the cheapest cost avoided (ie the party who could've most cheaply taken precautions against the loss. Doing so gives that party an incentive to take precautions, while minimizing the cost of those precautions. P will often be the cheaper cost avoider.

§ Servant vs Independent Contractor def.

· R§2(2) "SERVANT" = A employed to perform service whose physical conduct in performance of the service is controlled by master · R§2(3) "INDEPENDENT CONTRACTOR" = person who contracts to do something for another but is not controlled by them with respect to performance of the undertaking

§ How to escape liability as a franchisee:

· Take reasonable steps to require that notice be prominently displayed by its franchisees clearly indicating that the franchised units are owned and operated by independent franchise entities · Franchisor should require that its franchisees carry reasonable levels of liability insurance

§ Problems with Bushey Test

· Was the conduct of the same general nature as, or incident to, that which the servant was employed to perform? o Was tortious conduct "characteristic" of assigned task? § Property damage is "characteristic" of blasting o But is scuttling a floating dry dock "characteristic" of employment as a seaman? · Was the conduct substantially removed from the authorized time and space limits of the employment? Frolic and tour? o Most courts now require a "total abandonment" of employment to constitute a frolic and detour o Requirement eviscerates standard · Whether the conduct was motivated at least in part by a purpose to serve the master? o Erosion, especially with respect to intentional torts o Friendly proposed replacing it with a foreseeability standard § Vague and difficult to apply § Tends to morph into a rule of strict liability

Can be voidable if P shows WASTE of corporate assets. what's waste re RPT?

· Waste - "no person of ordinary, sound business judgment would say that the consideration received for the options was a fair exchange" Never seen case where truly disinterested people acting honestly and non-negligently committed waste I.e. BJR standard of review is almost insurmountable to plaintiff. V difficult to prove

ALTER-EGO LIABILITY doctrine

· Where a SH uses control of the corporation to further his own (rather than corporation's) business, he will be held liable for the corporation's acts and debts on a principal-agent theory

ENTERPRISE LIABILITY

· You can treat corporations that make up enterprise as one so that creditor can reach combined assets of all corporations making up business enterprise. Essentially says we're going to treat your entire biz enterprise that you've chopped up into different corps as one single corp and the entire enterprise will be liable. But sh still won't be. o Typically involves lateral veil piercing between different companies, and "reverse alter ego" / is one company's another company's alter ego?

Default Fiduciary Duties re LLCS

· analogous to fiduciary duties of partners and corporate directors o Duty of Care o Duty of Loyalty § ULLCA § 409(b) - Duty not to compete with LLC or appropriate company opportunity (Mcconnell) o Duty of Good Faith Duty of Candor

"on behalf of principal" (agency)

· the agent must be acting primarily for the principal's benefit, not for the agent's own benefit or that of another party. Agent need not produce any actual benefit for the principal, so long as there was an expectation at the outset that the agent would strive to do so. E.g. an agent who loses money in the management of the principal's biz is still an agent. o HYPOS: a) P rents out a storefront to A in P's shopping mall / A must pay P monthly rent / P has final say over A's store's operational plans / Control = Yes / Acting on Behalf of P = No A&P relationship b) Same as above, but P has A collecting rent from the other shopkeepers / Control = Yes / Acting on Behalf of P = Yes / Yes P&A relationship

Intrinsic Fairness TEST analysis

· used when parent has received a benefit to the exclusion of the minority SHs of subsidiary and at the expense of the minority SHs of subsidiary. § If not applicable, apply BJR (less stringent to meet) o If applicable, Ds then have the burden of showing transaction was fair to the corp. § (Question to ask: Would you have entered into a similar arrangement w someone who didn't have a conflict of interest?) o BUT if transaction had been approved by a majority of the minority, then it shifts the BOP from the D to P. § Standard remains fairness. Must show unfairness. o What does fairness require: 2 components, much have both: § Fair dealing- how the deal was structured, who made decisions, how was it initiated, how was it negotiated? Did you have independent committee for eg of directors approve the deal? § Was it fair to the entity in terms of the price?

145c characteristics

•Either third party suits or suits by corporation against director or officer •Mandatory, if director or officer "has been successful on the merits or otherwise." •W out regard to whether Articles allow it •

145b characteristics

•Suits by corporation against director or officer •Including shareholder derivative suits •Permissive •Expenses only, but includes legal fees •Only "if the person acted in good faith and in a manner the person reasonably believed to be in or not opposed to the best interests of the corporation" •If the director or officer was held liable to the corporation, he may only be indemnified with court approval •

145a characteristics

•Third party suits against director or officer •Including shareholder direct suits •Permissive •Expenses plus "judgments, fines, and amounts paid in settlement" •Must have "acted in good faith and in a manner the person reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe the person's conduct was unlawful"