Business Associations

Corporations: Role and Purpose

"Waste," or ultra vires: a corporation's duty/purpose is to maximize wealth or value for its shareholders, and it is not allowed to act contrary to that goal. Assets must be used within the corporate purpose of maximizing shareholder value, and thus may not engage in "wasteful" acts. Factors to take into account: (1) Whether the gift was anonymous (an anonymous gift would reduce the value to the firm if the goal of the gift was marketing or good PR) (2) Whether the amount donated was significant when compared to the corporation's earnings; (3) Whether the gift was made to a "pet" charity (A charity that does not have widespread appeal but is merely an interest of an officer or director of the corporation is more suspect because it is less likely that such a gift is truly for the benefit of the corporation) AP Smith Mfg. Co v. Barlow, 1953 à Corporate law adopted after incorporation can affect governance of firm. Limits: common law requires that charitable contribution must benefit corporation, can't be over 1% of capital stock (unreasonable amount) and can't be to a "pet charity" Company contributed $1500 to Princeton's annual giving fund. Shareholder brings suit claiming this is a waste and the expenditure doesn't benefit corporation. Corporation benefits: obtain good will in the community, create favorable environment for their business operations, assuring the free flow of properly trained personnel for administrative and other corporate employment. These are long term benefits, not affecting the value of the share which wouldn't benefit shareholders. Holding: It was a lawful exercise of the corporation's implied and incidental powers under common-law principles and it came within the express authority of the pertinent state legislation. MCBA section 8.30(a): "Each member of the board of directors, when discharging the duties of a director, when discharging the duties of a director, shall act: (i) in the good faith, and (ii) in a manner the director reasonably believes to be in the best interests of the corporation. Dodge v. Ford Motor Co., 1919: A business corporation is organized and carried on primarily for the profit of the stockholders. The power of the directors are to be employed for that end. Ford was running it like a charity against the interests of the shareholders. Question: is it being done in the best interest of the shareholders and for their benefit? 1916 Henry Ford, who owned 58% of the common shares, announced that in the future no special dividends would be paid. Profits would be reinvested in the business for expansion. P: the proposed expansion involving the further use of profits as capital ought to be enjoined because it is in the best interests of the company and its shareholders, and the withholding of the special dividend is an arbitrary action of the directors requiring judicial interference. P sues to force dividend - special dividends being used to reinvest is for humanitarian/employer retention reasons, etc. and don't benefit shareholders. Court holds that FMC must issue the special dividends but can continue with its construction plans. Courts will generally leave dividends to the discretion of the directors but will intervene if refusal to pay amounts to such an abuse of discretion as would constitute a fraud, or breach of good faith. Shlensky v. Wrigley, 1968: in the absence of a showing of fraud, illegality or self-dealing (conflict of interest). Court doesn't challenge Wrigley's motives, even though it is in part motivated by doing good for the neighborhood. Shlensky was a minority shareholder in corporation that owned the Chicago Cubs and operated Wrigley Field. P.K. Wrigley owned 80% of the stock. Wrigley famously refused to install lights. Shlensky sues: P claims that D has refused to install lights not because of interest in the welfare of the corporation but because of personal opinions that baseball is a daytime sport and the installation will have a deteriorating effect on the surrounding neighborhood -- not motivated by 'good faith' or profits. Decision is one properly before directors and the motives alleged in the amended complaint showed no fraud, illegality or conflict of interest in their making of that decision. Wrigley was in part motivated by belief that installing lights would make it a 'low value' neighborhood, which would hurt attendance in the long run - so partly motivated by financial incentives.

Fiduciary Duties of Directors/Officers: Duty to Monitor

Duty to monitor: absent suspicion of wrongdoing, there is no duty upon the Board to install and operate a corporate system to find wrongdoing that the Board does not suspect or believe exists; the Board must make a good faith attempt to ensure that an adequate reporting system is in place so the Board can obtain the necessary information to make informed decisions. (establish compliance programs, etc.). In re Caremark: genesis of compliance and duty to monitor - Courts look to see if these factors are established: (1) establish an appropriate supervisory and compliance structure; (2) create a sophisticated inventory of regulatory and reputational risks faced by the firm's businesses; (3) establish an "early warning system to identify emerging areas of regulatory focus; (4) communicate the board's and senior management's compliance message throughout the organization; (5) conduct specialized training for supervisors; (6) ensure that information concerning regulatory and reputational risks and issues is promptly surfaced to senior management and compliance personnel; (7) use internal discipline effectively to reinforce compliance message when appropriate. Caremark is a publicly traded health care provider -- provides a lot of specialized patient care, treatment for conditions ranging from AIDS to hemophilia. Caremark is subject to the complex provisions of Anti-Referral Payments Law: basically, you're not supposed to pay MDs to refer patients whose treatment is paid for by Medicare or Medicaid. Lower-level officers engaged in enough misconduct to cost $250 million. Shareholders file derivative suit seeking recovery from the board of directors, claiming breach of the duty of care. Chancellor rejects settlement; breach of duty of care because of failure to monitor.

Fiduciary Duties of Directors/Officers: Layers of Protection

(1) Business judgement rule: presumes that the duty of care standard has been met (2) Waiver of Liability -- Can put in bylaws: most DL companies eliminate D&O liability for duty of care violations (3) Corporate indemnification statutes (state): may indemnify for directors and officers' actions in good faith and for those beyond those provided by statute but still in good faith (4) Directors and Officer's Insurance: corporation may buy D&O insurance whether or not the corporation would have the power to indemnify such person against such liability (5) Reimbursement of legal expenses: even if not in good faith, success in a legal action requires indemnification for legal expenses

Agency: Principal's Duties to Agent

(1) Compensation (Express or Implied) If there is no agreement as to the amount of compensation, the law implies a promise that the principal will pay the agent the customary fee paid in the industry. Unless circumstances clearly indicate intent that the relationship be gratuitous. (2) Duty to Reimburse A duty that a principal owes to repay money to the agent if the agent spent his or her own money during the agency on the principal's behalf. (3) Duty to Indemnify A duty that a principal owes to protect the agent for losses the agent suffered during the agency because of the principal's misconduct. Restatement 8.14 (4) Duty of Cooperation A duty that a principal owes to cooperate with and assist the agent in the performance of the agent's duties and the accomplishment of the agency. Rights of Agents Agent can withhold performance and demand an accounting. Agent can recover damages for past services and future damages.

Agency: is an agency relationship at play here?

(1) Is it an agent? Mutual consent Acting on behalf of Control (2) What type of principal is this? Disclosed Undisclosed Partially disclosed (3) What kind of authority does the agent have? Actual Apparent

Agency: Elements

(1) Mutual consent (2) Acting on behalf of (3) Control Restatement 1.01 Agency Defined Agency is the fiduciary relationship that arises when one person (a "principal") manifests assent to another person (an "agent") that the agent shall act on the principal's behalf and subject to the principal's control, and the agent manifests assent or otherwise consents so to act When engaging with someone on business matters, agency becomes the first question/issue to ascertain.

Corporate Formation

1. Incorporator files Articles of Incorporation with the state (secretary of state). 2. Incorporator acquires Employer Identification Number (EIN) from IRS. 3. Erect governance structure - Can issue shares and shareholders elect Directors. - Incorporator can name Directors in Articles. - Incorporator can elect Directors until shares issued. - In Ohio, not required to have a Board of Directors. 4. Adopt Bylaws or Regulations - Can be adopted by Directors or Shareholders. - Statute may require Articles to provide authority to Board, or may assume power unless Articles reserve power to Shareholders alone. - Bylaws include: board composition and elections, notice of meetings of shareholders, quorum requirements, voting requirement, power of officers, rules to adopt, amend, repeal the bylaws 5. Board appoints officer

Partnership Duties/Fiduciary Obligations (Joint Ventures)

A business endeavor undertaken by two or more parties; typically have a limited scope and are usually for a limited time. They frequently are governed by partnership rules. Sandwick v. LaCrosse: Joint venture is a partnership limited in scope, purpose and duration, where partnership duties apply. S purchased three oil and gas leases from LaCrosse for a five year term with the intent to try to sell the leases. They were "horn" leases with standard terms of five years and didn't contain any provision for extending or renewing them. Four years later LaCrosse and a partner of S purchased three more oil and gas leases on the Horn property, or "horn top leases" that were set to begin when the initial leases expired. Offered to buy S's interests in the Horn leases but they refused. Haughton didn't tell S that he and LaCrosse had purchased the other "top" leases. Did LaCrosse and Haughton breach their fiduciary duty by not offering S and Bragg an opportunity to purchase the top leases with them?

Fiduciary Duties of Directors/Officers: Duty of Care -- Business Judgment Rule Factors

A director or officer who makes a business judgment in good faith fulfills the duty under this section if the director or officer: (1) is not interested in the subject of the business judgment; (2) is informed with respect to the subject of the business judgment to the extent that the director or officer reasonably believes is appropriate under the circumstances; and (3) rationally believes that the business judgment is in the best interests of the corporation. Protections afforded under the BJR apply unless a plaintiff can show any of the following conditions: (1) Fraud (2) Illegality or "wrongful" conduct (3) Conflict of interest (a duty of loyalty analysis )(4) Bad faith (intent to harm, intentional dereliction of duty, acts with purposes other than the best interests of the corporation) (5) Egregious/irrational decisions (6) Waste (7) Uninformed decisions; or (8) No decision (no action taken by Board, but plaintiff alleges some action should have been taken) Business judgment elements: (1) Did board fail to exercise business judgment? (2) Did majority of the board engage in self-dealing? (3) Did board cause company to commit illegality? (4) Did board commit waste? (5) Was board grossly negligent in failing to inform itself of all material information reasonably available to it? (6) Did board cause company to commit fraud (or commit fraud itself)? If yes, BJR applies Mere errors of judgment are not sufficient as grounds for equity interference, for the powers of those entrusted with corporate management are largely discretionary. "The directors' room rather than the courtroom is the appropriate forum for thrashing out purely business questions which will have an impact on profits, market prices, competitive situation, or tax advantages.": Kamin v. American Express: complaint reveals no claim of fraud or self-dealing, and no contention that there was any bad faith or oppressive conduct. In actions by stockholders, which assail the acts of their directors or trustees, courts will not interfere unless the powers have been illegally or unconscientiously executed; or unless it be made to appear that the acts were fraudulent or collusive, and destructive of the rights of the stockholders. Court will not interfere unless a clear case is made out of fraud, oppression, arbitrary action, or breach of trust. In 1972 Amex acquired 2.0 million shares of DLJ common stock for $29.9 million; by 1976 the stake was worth approximately $4.0 million. Amex declares a special dividend to all shareholders distributing the DLJ shares in kind. Two shareholders file suit to enjoin the distribution, or for monetary damages, claiming waste of corporate assets. Shareholders claim AMEX could sell the shares for a loss of $26M, which would result in a tax savings of $8M. Directors claim this option was considered but rejected because it would have a negative effect on net income.

Fiduciary Duties of Directors/Officers: Duty of Loyalty

A director shall perform the director's duties in good faith and in a manner the director reasonably believes to be in or not opposed to the best interests of the corporation. Duty of loyalty is implicated when a director is involved in a situation in which there is a conflict of interest: when the director knows that, at the time they are asked to take action with regard to a potential transaction, they or a person related to him (1) is a party to the transaction or (2) has a beneficial financial interest in the transaction, and then exercises his influence to the detriment of the corporation. Analysis: (1) Is there a conflict of interest? (Direct or indirect) (2) If not, there is no duty of loyalty issue. If yes, one must determine whether the transaction has been "cleansed." (3) If it has been "cleansed," the transaction is protected and may proceed. If it has not been "cleansed," the transaction is "voidable" by the corporation, and the directors who violated their fiduciary duty of loyalty may be subject to damages unless the Director can show it was fair and reasonable.

Agency in Partnership Law

Each partner is deemed to be an agent of the other - Partners can enter into contracts binding on the partnership - Actions of one bind the whole if acting within the ordinary course of business, unless that partner had no authority to take that action, and the party it bound them to (the third party) knew they had no authority to take that action - Partner's tortious conduct in conducting partnership business can result in vicarious liability - Each partner is a fiduciary of the other

Agency: Actual Authority (2) What kind of authority does the agent have?

Actual Authority: exists when the principal communicates to the agent about the activities in which the agent may engage and the obligations the agent may undertake. This communication may be spoken or written; it may be through silence or implied in the job. There are two forms of actual authority: express and implied. (1) Actual Express Authority: What did the principal actually say to the agent? Principal's explicit instructions. What is the history of our behavior (Mill Street)? (2) Actual implied authority (two types): examining Principal's explicit instructions and asking what else might be reasonably included in those instructions (i.e. implied) to accomplish the job? (a) Incidental authority "includes such powers as are reasonably necessary to carry out the duties" Was Bill reasonable in thinking he could hire Sam? Was it reasonable for Sam to believe Bill could hire him? (b) Did agent believe based on present or past conduct that he had authority? Past actions of the principal indicate it was reasonable.- Job needed two men and the church had let him hire Sam in the past - No clear instructions to the contrary expressed to agent, even if in principal's "mind" Mill Street Church v. Hogan: implied actual authority, as Bill was reasonable in thinking he could hire Sam, and the past actions of the Church made it seem reasonable

Agency: Fiduciary Duties (Loyalty)

Agent has a duty to act loyally for the principal's benefit in all matters connected with the agency: Kickbacks Secret profits - From transactions with principal - Use of position Usurping business opportunities from principal "Grabbing and Leaving" Grabbing and Leaving: Town & Country v. Newberry: a customer list was a trade secret, and when agency relationship ends the former agent cannot take that with them. The list took "considerable effort and expense" by principal, so agent has a duty to not use that list extends beyond the fiduciary relationship after it ends. D's worked for P for about three years before they severed their relationships and organized a corporation mirroring that of Ps and solicited 20 or 25 of P's customers. Restatement (Third) § 8.04: • Throughout the duration of an agency relationship, an agent has a duty to refrain from competing with the principal and from taking action on behalf of or otherwise assisting the principal's competitors. • During that time, an agent may take action, not otherwise wrongful, to prepare for competition following termination of the agency relationship. Restatement (Third) § 8.05: • An agent has a duty • not to use property of the principal for the agent's own purposes or those of a third party; and • not to use or communicate confidential information of the principal for the agent's own purposes or those of a third party.

Fiduciary Duties of Directors/Officers: Duty of Loyalty -- Waste

Almost impossible to show A transaction constitutes a "waste of corporate assets" if it involves an expenditure of corporate funds or a disposition of corporate assets for which no consideration is received in exchange and for which there is no rational business purpose, or, if consideration is received in exchange, the consideration the corporation receives is so inadequate in value that no person of ordinary sound business judgment would deem it worth that which the corporation has paid. Test: (Burden on director) Director must perform duties in good faith (loyalty), reasonable belief in best interest of company, and with the care of an ordinarily prudent person.

Agency: Fiduciary Duties (Accounting)

An agent may not use property of the principal for the agent's own purposes or the purposes of a third party. (Third Restatement § 8.05(1).) Moreover, an agent may not mingle the principal's property with anyone else's, including the agent's. (Third Restatement § 8.12.) Restatement (Third) 8.12: An agent has a duty, subject to any agreement with the principal, (1) not to deal with the principal's property so that it appears to be the agent's property; (2) not to mingle the principal's property with anyone else's; and (3) to keep and render accounts to the principal of money or other property received or paid out on the principal's account

Agency: Apparent Authority

Apparent Authority: what a third party reasonably believes the principal has authorized the agent to do. Look to manifestations between the principal and the third party Restatement 2.03: Apparent authority is the power held by an agent . . . to affect a principal's legal relations with third parties when a third party reasonably believes the actor has authority to act on behalf of the principal and that belief is traceable to the principal's manifestations. Focus on manifestations - if you can trace to specific examples of manifestations to make you think they are agents of the principal. Restatement 3.03: Creation of Apparent Authority Apparent authority . . . is created by a person's manifestation that another has authority to act with legal consequences for the person who makes the manifestation, when a third party reasonably believes the actor to be authorized and the belief is traceable to the manifestation. What did the princpal take to the third party to make it reasonably believe that they are an agent?: Watteau v. Fenwick: third party is undisclosed. Can't have apparent authority if they are undisclosed as it rests on the manifestations of the principal. Didn't have actual authority as the agent had been explicitly told he couldn't do this. But under the inherent agency doctrine a principal is liable for the acts of an agent who proceeds within the scope of authority typically given to an agent with similar duties, regardless of limitations the principal imposes on that agent.

Fiduciary Duties of Directors/Officers: Duty of Care -- Business Judgment Rule

Applies the duty of care. If met, court doesn't go further in the inquiry: When a director is sued based upon the claim that they violated the duty of care, that director is often entitled to the protection of the business judgment rule. The director of a business corporation is given a wide latitude of action. The law does not seek to deprive him of initiative and daring and vision. Directors of a commercial corporation may take chances, the same kind of chances that a person would take in their own business. The law will not interfere with the internal affairs of a corporation so long as it is managed by its directors pursuant to a free, honest exercise of judgment uninfluenced by personal, or by any considerations other than the welfare of the corporation. Court tries to strike a balance: want to have directors heavily involved, meaning the courts have to give them discretion. But to give them unfettered discretion would be bad. To micro-manage all their business decisions would also be bad. Therefore, the courts defer unless there's a showing of fraud, illegality or self-dealing.

Corporate Formation: Board of Directors

Board Functions: DGCL § 141(a): "The business and affairs of every corporation organized under this chapter shall be managed by or under the direction of a board of directors...." - Select, evaluate, replace senior management. - Oversee strategies, management of corporate resources. - Review, approve major plans and actions. - Other functions prescribed by law. Board Composition: DGCL § 141(b): "The board of directors of a corporation shall consist of 1 or more members, each of whom shall be a natural person. The number of directors shall be fixed by, or in the manner provided in, the bylaws, unless the certificate of incorporation fixes the number of directors, in which case a change in the number of directors shall be made only by amendment of the certificate. Directors need not be stockholders unless so required by the certificate of incorporation or the bylaws. The certificate of incorporation or bylaws may prescribe other qualifications for directors." Board Committees: DGCL § 141(c)(2): "The board of directors may designate 1 or more committees, each committee to consist of 1 or more of the directors of the corporation. ... Any such committee, to the extent provided in the resolution of the board of directors, or in the bylaws of the corporation, shall have and may exercise all the powers and authority of the board of directors in the management of the business and affairs of the corporation, and may authorize the seal of the corporation to be affixed to all papers which may require it; but no such committee shall have the power or authority in reference to the following matter: (i) approving or adopting, or recommending to the stockholders, any action or matter (other than the election or removal of directors) expressly required by this chapter to be submitted to stockholders for approval or (ii) adopting, amending or repealing any bylaw of the corporation." Board Meetings: - Meetings must be properly convened - Notice/purpose required if a special meeting - Must have a quorum present - majority of authorized directors - Can act without a meeting if unanimous consent - Majority of those present Removal of Director: - By shareholders for cause - By shareholders without cause only if specific authority in statute - By Board only if specific statute authority - By court if statute allows (fraud/dishonesty)

Fiduciary Duties of Directors/Officers: Duty of Loyalty -- BJR

Business Judgment Rule: A decision of a disinterested D/O meets the duty of care if an informed D/O rationally believes the decision is in the best interests of the corporation. If director has interest in a transaction, business judgment rule doesn't apply because it presupposes the absence of a conflict of interest. DOESN'T apply if self-dealing, illegality, fraud, gross negligence, or waste occurs If it doesn't apply, the court must assess whether the duty of care was breached Standard: if P meets prima facie case, then burden shifts to director to show that the decision or transaction is entirely fair to the corporation Usually failing to gain business judgment rule protection ends up in a breach of duty of care Deference: if business judgment rule applies, a court will defer to the decision of the director unless it is irrational As soon as there's a conflict of interest, you are outside the realm of duty of care. Then drops to an inquiry of loyalty and 'fairness.' Then the court can get to the merits of the case. Under the business judgment rule the court doesn't even get to the merits. Business judgment rule places heavy burden on shareholders; but is premised on the belief that directors have no conflict of interest. Duty of loyalty, not BJR rule analysis: Lewis v. SLE à burden is placed on interested directors to prove that the transaction was fair and reasonable to the corporation, while burden in a business judgment claim places the burden on shareholders. Rule: a contract between a corporation and an entity in which its directors are interested may be set aside unless the proponent of the contract "shall establish affirmatively that the contract or transaction was fair and reasonable as to the corporation at the time it was approved by the board . . . ." Thus when the transaction is challenged in a derivative action against the interested directors, they have the burden of proving that the transaction was fair and reasonable to the corporation. Self-dealing but not a breach of duty of loyalty: Cookies Food Products v. Lakes Warehouse: Three sets of circumstances under which a director may engage in self-dealing without clearly violating the duty of loyalty: 1. The fact of such relationship or interest is disclosed or known to the board of directors or committee which authorizes, approves, or ratifies the contract or transaction ... without counting the votes ... of such interested director. 2. The fact of such relationship or interest is disclosed or known to the shareholders entitled to vote [on the transaction] and they authorize ... such contract or transaction by vote or written consent. 3. The contract or transaction is fair and reasonable to the corporation

Agency: Fiduciary Duties (Agent to Principal)

COALD: Care; Obedience; Accounting; Loyalty; Disclosure. Care (Accounting) and Loyalty (Obedience, Disclosure) are the main duties.

Corporate Formation: Types of Stock

Common: All shares have the same rights, privileges, and preferences; ownership/equity; right to vote for directors/other matters; right to receive dividends if authorized by the Board; residual interests (what is left after all other claimants are satisfied). Preferred Hybrid stock/senior debt; no promise of repayment and no legal obligation to pay a fixed rate of return; special class with special preference over common stockholders if a dividend; preference is usually a fixed % of par value or a fixed $ amount per share; preference in litigation; often includes a periodic (quarterly) dividend that is cumulative. Control Mechanisms: Staggered board: classes of directors elected in different years for different terms to ensure continuity and as a defense mechanism to hostile takeover Classified board: each board member has different amount of years of service; can be used to silence or minimize dissenting shareholder votes, particularly where cumulative voting is in place Cumulative voting: Designed to give shareholders more power; allows shareholders to distribute votes among their nominees: (# of shares) x (# of directors selected).

Corporate Formation: Corporate Officers and Fiduciary Duties

Corporate Officers: - Officers serve at the pleasure of the Board of Directors. - Act as agents for the corporation. • Have fiduciary duties of agents, plus. - In most states, one can be both officer and director. - Authority comes from corporate law/statute, Board delegation of authority, or express authority in charter or statute Fiduciary Duties: Directors and officers are fiduciaries of corporation - 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. - Duty of Loyalty: subordination of personal interests to the welfare of the corporation. No competition with Corporation No conflict of interests No insider trading No transaction that is detrimental to minority shareholders

Corporations

Corporation: An entity (usually a business) having authority under law to act as a single person distinct from the shareholders who own it and having rights to issue stock and exist indefinitely; a group or succession of persons established in accordance with legal rules into a legal or juristic person that has a legal personality distinct from the natural persons who make it up, exists indefinitely apart from them, and has the legal powers that its constitution gives it.

Partnership Rights

Economic Rights: RUPA 401(b): Each partner is entitled to an equal share of the partnership profits and is chargeable with a share of the partnership losses in proportion to the partner's share of the profits. (one partner = one vote) Right to receive money that is distributed from the partnership to the holder of the economic right. Transferable. Management Rights: RUPA 401(f): Each partner has equal rights in the management and conduct of the partnership business. The right to vote and participate in management of the partnership. Not transferable. RUPA 401(J): A difference arising as to a matter in the ordinary course of business of a partnership may be decided by a majority of the partners. (Majority rules) Nabisco v. Stroud: Absent an agreement to the contrary, partnership decisions are governed by a majority vote of the partners. Since a majority didn't vote to end Freeman's authority to buy bread, the partnership was not bound by Stroud's objection. As each partner is an agent of the partnership, the partnership is therefore bound by Freeman's orders. If the partnership is liable, so is Stroud Stroud and Freeman formed a partnership to run a grocery store. They regularly ordered bread from Nabisco. Stroud told Nabisco that he would not be personally liable for any more bread it sold to the store. Freeman ordered more bread, National Biscuit delivered it, and Stroud refused to pay. Summers v. Dooley: partnership matters are (absent an agreement to the contrary) decided by majority vote. Hiring another person requires a majority vote and Summers doesn't control a majority. Burden on the party trying to change the status quo Summers and Dooley had equal stakes in a trash-collection partnership. Dooley couldn't work, so he hired his own replacement. Summers decided that they needed a third man, but Dooley disagreed. Summers went ahead and hired a third man anyway and tried to bill the partnership for the cost. Day v. Sidley Austin: The partnership agreement makes it clear that the Executive Committee calls the shots at Sidley - all positions at the firm are at the sufferance of the EC. Day thus had no contractual right to the chairmanship. Claim: (a) Day had a contractual right to be sole chairman of the D.C. office, and (b) the Sidley executive committee had broken its promise that no S&A partner would be made worse off by the merger.

Entire Fairness

Court must consider two factors: (1) Fair dealing, and (focuses on the conduct of the corporate fiduciaries in effectuating the transaction, "such as its initiation, structure, and negotiation.") (2) Fair price ("relates to the economic and financial considerations of the [contract], including all relevant factors [such as] assets, market value, earnings, [or] future prospects[.]") * All aspects of the issue must be examined as a whole since the question is one of entire fairness Zahn v. Transamerica: have to call A and tell them because A has an additional right to convert to Class B, and if you're about to take an action to benefit B, you have to tell A, because a rational A would convert to B Zahn (plaintiff) was a holder of Class A stock in Axton-Fisher Tobacco Company (Axton-Fisher). Axton-Fisher had stock in three categories, preferred stock, Class A stock, and Class B stock. Class B is not convertible or callable - making it more powerful. Class A is convertible, callable and entitled to liquidation - a way to raise money. They "called up" Class A stocks to get rid of this class of shareholders. The shares converted Class B because B bought them all back (redeemed by the corporation/different from a sale). Now that they're B and not callable, their price goes up. Transamerica caused Axton-Fisher's board to call the Class A share for redemption at $80. Firm was then liquidated allegedly to appropriate for Transamerica the increased value of tobacco inventory. Plaintiff claims Class A would have receive $240 per share if not called before liquidation. They redeemed without disclosing their intent to liquidate. Plaintiff wanted liquidation without redemption.

Corporate Opportunity Doctrine

Example: Someone comes to clinic asking for help, clinic can't help so Professor refers them to himself. A subset of the duty of loyalty - stands for the principal that a fiduciary (an officer or director) of the corporation may not take, for personal gain, an opportunity like a business venture or a new opportunity or discovery, in which the firm has a property right, and use it for his or her own advantage without first offering it to the corporation. Deterrence from just stealing stuff from the corporations but balancing the incentive to go out and seek opportunities via an active board that isn't overwhelmed by liability and incentivized to do nothing. Objective: to deter appropriations of new business prospects "belonging to" the corporation Targets: Officers and directors of corporation; dominant shareholders who take active role in managing firm Overall analysis for doctrine: (1) Determine whether the opportunity is a "corporate opportunity" (four-step analysis below): (a) Corporation is financially able to take the opportunity (b) Opportunity is in the corporation's line of business (c) Corporation has an interest or expectancy in the opportunity (d) Embracing the opportunity would create a conflict between director's self-interest and that of the corporation (2) If it is not; there is no breach of fiduciary duty; if it is then determine whether the opportunity was disclosed to the Board Presentment: Presenting the opportunity to the corporation acts as a safe harbor. If an opportunity is presented and rejected on an informed basis by disinterested directors, then court will not inquire. (3) If not properly disclosed, there is a breach; If it was properly disclosed and was rejected by the corporation, then there is no breach ("safe harbor"); If it was properly disclosed and not rejected, then there is a breach of the duty of loyalty *Liability is only incurred when the opportunity is taken, but just for possessing or knowing about a corporate opportunity. Broz v. Cis: applies the corporate opportunity factors. CIS had no real interest and were not financially able to take the opportunity. Even though the opportunity was in the corporation's line of business and it created a conflict, that wasn't enough to satisfy the corporate opportunity doctrine. Broz is the President and sole stockholder of RFBC; also a member of the board of directors for CIS. Rhodes contacted Broz and asked if he wanted to acquire Michigan-2. Wasn't offered to CIS and they didn't want it. PriCellular began negotiations to purchase CIS, and then Michigan-2. They purchased it in 1994 and Broz paid them 7.2 million for the license. Do not meet element 1, it's in the line of business, but CIS did not have an interest, and there is a conflict, but it doesn't matter because the rest weren't really met. 'In the line of business' element: In re eBay, Inv. Shareholders Litigation: under the corporate opportunity doctrine eBay was ok to do this: crux of the case is whether it's in their line of business - yes, because all companies invest in other companies. "Line of business" is not precise, has some flexibility - eBay's line of business is auctioning goods for the most part but the court sees investment as still in alignment. Ps allege that Ebay's investment banking advisory, Goldman, engaged in "spinning" which involves allocating share of lucrative initial public offerings of stock to favored clients. Allege Goldman bribed certain eBay insiders, using the currency of highly profitable investment opportunities -- opportunities that should have been offered to, or provided for the benefit of, eBay rather than the favored insiders. Plaintiff's allege wrongdoing under the corporate opportunity doctrine.

Intrinsic Fairness

Intrinsic Fairness: Used in most transactions in which a party must show fairness - involves only the substance of the transaction. Question is whether the price and terms of the transaction were "fair" to the corporation. Intrinsic Fairness: Sinclair's Oil Corp. v. Levien, 1971: if BJR does not apply, the intrinsic (or entire) fairness test is used when parent has received a benefit to the exclusion of the minority SHs of the subsidiary and at the expense of the minority shareholders of the subsidiary. Burden is on Ds to meet intrinsic fairness test. Different rules apply for dominant SH that causes transactions with anything else they own an interest in - BJR doesn't apply. If not a dominant shareholder, BJR applies. Since minority SHs received proportionate share of dividends, no self-dealing. (?) Sinclair Oil Corp. (Sinclair) (defendant) owned about 97 percent of the stock of its subsidiary, Sinclair Venezuelan Oil Company (Sinven) (plaintiff). From 1960 to 1966, Sinclair caused Sinven to pay out $108 million in dividends, which was more than Sinven earned during the time period. The dividends were made in compliance with law on their face, but Sinven contended that Sinclair caused the dividends to be paid out simply because Sinclair was in need of cash at the time. In addition, in 1961 Sinclair caused Sinven to contract with Sinclair International Oil Company (International), another Sinclair subsidiary created to coordinate Sinclair's foreign business. Under the contract, Sinven agreed to sell its crude oil to International. International, however, consistently made late payments and did not comply with minimum purchase requirements under the contract. Sinven brought suit against its parent, Sinclair, for the damages it sustained as a result of the dividends, as well as breach of the contract with International. Business judgment rule applies because there's no self-dealing: Plaintiff failed to show an improper motive and waste. Facts demonstrate that the dividend payments complied with the business judgment standard. Motives for causing the declaration of dividends are immaterial unless the P can show that the dividend payments resulted from improper motives and amounted to waste. P proved no business opportunities which came to Sinven.

Corporations: Securities

Debt: Bonds (contractual obligations to pay) and other debt securities typically consist of two distinct rights: • The bondholder is entitled to receive a stream of payments in the form of interest over a period of years • At the end of the bond's prescribed term (i.e., at maturity), the bondholder is entitled to the return of the principal Creditors; not owners Equity: Equity securities (a.k.a. shares) represent " the units into which the proprietary interests in the corporation are divided" • Residual claimants: equal right to participate in distributions of the firm' s earnings and, in the event of liquidation, to share equally in the firm's assets remaining after all prior claims have been satisfied • A limited right to participate in corporate decision-making by electing directors and voting on major corporate decisions Terminology Authorized shares: The articles must specify the number of shares the corporation is authorized to issue. Outstanding shares: The number of shares the corporation has sold and not repurchased. Authorized but unissued shares: Shares that are authorized by the Articles of Incorporation, but which have not been sold by the firm. So long as the Articles of Incorporation 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.

Corporations: Transfer of Shares and Flexible Capital Structure

Liquidity: Publicly held: secondary trading markets e.g. NYSE and NASDAQ. Can't limit ownership like you can with private companies. Private companies are harder to transfer. Usually put in a buy/sell agreement - other owners get right of first refusal. Don't want free transferability of ownership interest. Flexible Capital Structure: The permanent and long-term contingent claims on the corporation's assets and future earnings issued pursuant to formal contractual instruments called securities. Many ways to package such claims; e.g., stocks and bonds

Corporations: Limited Liability

MBCA § 6.22(b): " A shareholder of a corporation is not personally liable for any liabilities of the corporation (including liabilities arising from acts of the corporation) except (i) to the extent provided in a provision of the articles of incorporation ..., and (ii) that a shareholder may become personally liable by reason of the shareholder's own acts or conduct. "

Limited Liability

MBCA § 6.22(b): "A shareholder of a corporation is not personally liable for any liabilities of the corporation (including liabilities arising from acts of the corporation) except (i) to the extent provided in a provision of the articles of incorporation ..., and (ii) that a shareholder may become personally liable by reason of the shareholder's own acts or conduct. Pros: Really hard to break limited liability. The individuals behind the company are separate from the business entity Promotes capital formation by encouraging small, passive investors Encourages risk taking Reducing monitoring costs for investors Cons: Encourages excessive risk-taking

Agency: Tort Liability and Scope of Employment

Did the tort happen within the scope of employment? Restatement 229 Was the conduct of the same general nature as, or incident to, that which the employee was employed to perform? Was the conduct substantially removed from the authorized time and space limits of the employment (frolic and detour) Whether the conduct was motivated at least in part by a purpose to serve the employer Restatement 7.07 Employee Acting within the Scope of Employment (1) An employer is subject to vicarious liability for a tort committed by its employee acting within the scope of employment. An employee acts within the scope of employment when performing work assigned by the employer or engaging in a course of conduct subject to the employer's control. An employee's act is not within the scope of employment when it occurs within an independent course of conduct not intended by the employee to serve any purpose of the employer. (2) An employee acts within the scope of employment when performing work assigned by the employer or engaging in a course of conduct subject to the employer's control. An employee's act is not within the scope of employment when it occurs within an independent course of conduct not intended by the employee to serve any purpose of the employer. Default rules: - P liable if A, an employee, acts within scope of employment - Default rule: P not liable if independent contractor (non-employee, agent-type) except in special cases i.e. P is exerting control over day-to-day operations - P not liable in agency law if independent contractor (non-agent) commits tort "The reason for distinguishing the independent contractor from the employee is that ... the principal does not supervise the details of the independent contractor's work and therefore is not in a good position to prevent negligent performance .... " Exceptions: (1) Principal retains control over the aspect of the work in which the tort occurs; (2) Principal engages an incompetent contractor; (3) Activity contracted for is a "nuisance per se"; (4) Nondelegable duty Standard: foreseeable vs. not forseeable; was the employee acting in furtherance of their employment? Bushey v. United States: Employer should be held to expect risks to the public also, which arise out of and in the course of his employment if they are forseeable Drunk seaman returning to boat turned a valve and a Coast Guard vessel crashed into a dock. The drydock owner sought compensation. Contract between gov. and Bushey: Personnel assigned shall have access to the vessel at all times, it being understood that such personnel will not interfere with the work or the contractor's workmen Manning v. Grimsley: is the conduct in line with the purpose of his employment? Liability for intentional torts committed in response to conduct that "presently interferes" with the agent's ability carry out the assigned task. P was injured when a pitcher warming up threw a ball at him when he was heckling him.

Agency: Types of Principals

Disclosed Principal: "A principal is disclosed if, when an agent and a third party interact, the third party has notice that the agent is acting for a principal and has notice of the principal's identity." Restatement (Third) § 1.04(2)(a) Undisclosed Principal: "A principal is undisclosed if, when an agent and a third party interact, the third party has no notice that the agent is acting for a principal." Restatement (Third) § 1.04(2)(b) Unidentified (partially disclosed) Principal: "A principal is unidentified if, when an agent and a third party interact, the third party has notice that the agent is acting for a principal but does not have notice of the principal's identity." *See charts in outline

Fiduciary Duties of Directors/Officers: Duty of Care

Duty of care: requires that each member of the BoD, when discharging the duties of a directors, shall act in good faith and in a manner the director reasonably believes to be in the best interests of the corporation. Analysis: (1) Does the BJR apply? *Directors are allowed to be wrong or make mistakes and still have the protection of the business judgment rule. (2) If not (because of illegality, an egregious decision, an uniformed decisions, waste, no decision, conflict of interest, bad faith) did the defendant violate the applicable duty of care? (gross negligence) Duty of loyalty? (in instances of conflict of interest or bad faith) A director or officer has a duty to the corporation to perform the director' s or officer's functions: (1) in good faith, (very hard to show bad faith) (2) in a manner that he or she reasonably believes to be in the best interests of the corporation, and (reasonable person standard) (3) with the care that an ordinarily prudent person would reasonably be expected to exercise in a like position and under similar circumstances.

Partnership Liability

General Partnership form provides for unlimited personal liability RUPA 305: A partnership is liable for loss or injury caused to a person, or for a penalty incurred, as a result of a wrongful act or omission, or other actionable conduct, of a partner acting in the ordinary course of business of the partnership or with authority of the partnership. Liability of each individual partner is unlimited. Each partner receives equal economic share and equal voting right over governance. Concepts are related - since you are sharing equal risk, receive equal rights/control A partner can be personally liable for any liability of the partnership. Any action of any partner that commits a tort, etc. that liability will accrue to the partnership. RUPA 306: Partners joint and severally liable for both Third Parties and Contracts. ▪ Joint and several: creditors can pursue any P individually; if a party is jointly liable, can get contribution from others. ▪ Joint: each Partner liable up to full amount; creditors must sue all Partners in order to sue any of them. ▪ Several: Partner only liable for his share

Corporations: Board of Directors

MBCA § 8.01(b): " all corporate powers shall be exercised by or under the authority of the board of directors, and the business and affairs of the corporation shall be managed by or under the direction, and subject to the oversight, of the board of directors" - Every corporation is governed by a board of directors that are elected by the shareholders. (most state laws don't require this, but Delaware does, which many companies are incorporated in) - Individual directors are not agents of corporation. • Board collectively acts as the corporate principal. "Directing" the corporation's agents. - A director can also be a shareholder, especially in closely-held corporations. Board Rules: Board drives the company in everything it does Subject to statutory limitations, the number of directors is set forth in the articles of incorporation (But can opt out of most rules, including having a Board in Ohio): • Directors appointed at the first organizational meeting. • In closely held companies, directors are generally the incorporators and/or the shareholders. • Term of office is generally for one year. • Director can be removed for cause (for failing to perform a required duty). Each director generally has one vote. Directors hold meetings pursuant to bylaws with recorded minutes. • Special meetings may be called with sufficient notice. • Meetings require quorum (minimum number of directors to conduct official corporate business, usually majority). Rule of thumb: • Boards ACT • Shareholder REACT (at most) Boilermakers Local 154 Retirement Fund v. Chevron Corporation: the challenged bylaws are statutorily valid under the statute and are contractually valid and enforceable as forum selection clauses: DL bylaws have a "procedural, process-oriented nature" and are understood to allow the corporation to set self-imposed rules and regulations that are deemed expedient for its convenient functioning. Even when adopted unilaterally they are not invalid; USSC has made clear that bylaws constitute a binding part of the contract between DL corporations and their stockholders - stockholders are on notice that the board itself may act unilaterally to adopt bylaws. Stockholders can take action and repeal board-adopted bylaws. Chevron board adopted bylaws designating Delaware as the exclusive forum for intracorporate litigation. Ps are stockholders claiming that the bylaws are statutorily invalid because they are beyond the board's authority under the Delaware General Corporation Law; bylaws are contractually invalid because they were unilaterally adopted; boards breached their fiduciary duties by adopting the bylaws.

Corporations: Corporate Officers and Executives

Officers (a.k.a. executives) are hired by the board of directors. Act as agents for the corporation and thus have fiduciary duties. Most states same person can be both officer and director (Board).

Agency: Incidental/Inherent Authority & Implied Authority

Other types of Agent authority can be found within the concepts of Actual and Apparent Authority: Incidental or Inherent Authority: Actions of A that are included within and necessary to the exercise of Actual or Apparent Authority, such as a real estate agent's authority to post pictures in listing a home for sale. Principal may be liable for the acts of an agent who proceeds within the scope of authority typically given to an agent with similar duties, regardless of limitations the principal imposes on that agent. Implied Authority or Agency by Estoppel: Actions of A toward T such that T reasonably believes A has the authority A represents. Judicial remedy imposed when P in best position to monitor A/avoidance of liability unfair to T.

Agency: Consequences of Relationship

P liable to T - contracts P liable to T - torts A liable to P - duties owed

Partnership

Partnership: an association of two or more persons to carry on as co-owners of a business for profit. - Control over enterprise - Profit sharing - Intent/consent of the parties (Revised Act: doesn't care about intent, but courts look to it as a factor) Advantages: simplicity; single layer of taxation (each partner pays their own taxes); more resources than sole proprietorship; cost sharing; broader skill and experience base relative to sole proprietorship Disadvantages: lack of indefinite life; unlimited liability (one person creates liability, the whole is liable); potential for conflict; expansion, succession, termination issues

Partnership Termination

Phases: dissolution (end of the prior constitution of the partnership), winding up (finishing out the work), and termination. Terminable at will. Default rule: Disassociation: when a partner leaves the partnership; the entire partnership is gone. Triggers a right to have the business wound up unless the partnership agreement provides otherwise. Remaining partners have a statutory right to continue the business only when a partner wrongfully dissolves the partnership in breach of the partnership agreement. RUPA rule: RUPA 603 -- After a partner's dissociation, the partner's interest in the partnership must be: ▪ purchased pursuant to the buyout rules in Article 7, unless ▪ there is a dissolution and winding up of the partnership business under Article 8. ▪ Thus, a partner's dissociation will always result in either a buyout of the dissociated partner's interest or a dissolution and winding up of the business. -- provides for greater stability *You should draft a termination contract beforehand to avoid these issues. Partnerships are terminable at will under the default rules. Partners can and should contract around default rules so that withdrawing partner is not a dissolution, partnership assets are not sold, and buyout terms are established. Partners still have a fiduciary duty to one another when dissolving a partnership!: Page v. Page: How long does the partnership last: rule of at-will termination is set, can't get around it. There is no factual basis for implied term; BUT how and when you terminate is built from the fiduciary duties that still apply: Big Page had a duty to act fairly and Little Page is owed compensation for partnership opportunities. Don't want unjust enrichment to flow from at-will termination rule. Big Page (Plaintiff) wants a declaratory judgment that the partnership is terminable at will. Little Page (Defendant) argues that the partnership contained an implied term of years and is not terminable at will.

Agency: Fiduciary Duties (Obedience)

Restatement (Third) 8.09: (1) An agent has a duty to take action only within the scope of the agent's actual authority. (2) An agent has a duty to comply with all lawful instructions received from the principal and persons designated by the principal concerning the agent's actions on behalf of the principal.

Agency: Fiduciary Duties (Disclosure)

Restatement (Third) 8.11: An agent has a duty to use reasonable effort to provide the principal with facts that the agent knows, has reason to know, or should know when (1) subject to any manifestation by the principal, the agent knows or has reason to know that the principal would wish to have the facts or the facts are material to the agent's duties to the principal; and (2) the facts can be provided to the principal without violating a superior duty owed by the agent to another person. *As soon as the agent doesn't disclose, courts will find an issue. If the principal doesn't know, it's a breach. Remedy for agent is to terminate the contract. Secret Profits: Reading v. Regem: agent required to pay over to the principal the secret profits made as a result of his misuse of the agency position -- unjust enrichment principle. As an agent for The Crown and using that for private gain without disclosing to the principal is a breach of fiduciary duty. Have to disclose the interest to the principal. Royal Army sergeant stationed in Cairo used his uniform to help smugglers drive trucks through military checkpoints and was paid thousands for his work. He was discovered and the money was confiscated by The Crown. He sues to get money back. Conflicts of Interest: Rash v. JVIC: Rash breached his fiduciary duties by failing to disclose to JVIC all the facts regarding this matter. Agent has to disclose - if they don't disclose the principal cannot give consent. If consent given, you can contract around fiduciary duties. JVIC alleges Rash actively participated in and owned at least four other businesses that were never disclosed to them, and would often give bids to his own companies under JVIC even when JVIC developed its own branch to provide those services. If agent discloses, told not to do it by principal, and does it anyway: § 8.06 Principal's Consent: "(1) Conduct by an agent that would otherwise constitute a breach of duty ... does not constitute a breach of duty if the principal consents to the conduct, provided that - (a) in obtaining the principal's consent, the agent (i) acts in good faith, (ii) discloses all material facts that the agent knows, has reason to know, or should know would reasonably affect the principal's judgment unless the principal has manifested that such facts are already known by the principal or that the principal does not wish to know them, and (iii) otherwise deals fairly with the principal; and - (b) the principal'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." - An agent's duties concerning confidential information do not end when the agency relationship terminates. - An agent is not free to use or disclose a principal's trade secrets or other confidential information whether the agent retains a physical record of them or retains them in the agent's memory. - If information is otherwise a trade secret or confidential, the means by which an agent appropriates it for later use or disclosure should be irrelevant. - Feats of human memory, however commendable and intriguing in many respects, should not be privileged as instruments of disloyal conduct.

Agency: Fiduciary Duties (Care)

Restatement (Third) § 8.08: Subject to any agreement with the principal, an agent has a duty to the principal to act with the care, competence, and diligence normally exercised by agents in similar circumstances. - Special skills or knowledge possessed by an agent are circumstances to be taken into account in determining whether the agent acted with due care and diligence. - If an agent claims to possess special skills or knowledge, the agent has a duty to the principal to act with the care, competence, and diligence normally exercised by agents with such skills or knowledge.

Agency: Manifestation & Mutual Consent (1) Is it an agent?

Restatement 1.01: Agency is the fiduciary relationship that arises when one person (a "principal") manifests assent to another person (an "agent")... Restatement 1.03: A person manifests assent or intention through written or spoken words or other conduct. Expressive Conduct Non-expressive Conduct • Silence • P puts A "in a position or office with specific functions or responsibilities" • P puts A "in a position in an industry or setting in which holders of the position customarily have authority of a specific scope" Gorton v. Doty: By giving the car and adding "as long as you're the driver" condition is a manifestation of consent, not a loan. Him taking the car and driving it creates mutual consent. Not essential that there is a contract between principal and agent. An expansive interpretation. Jenson Farms v. Cargill: an agency relationship exists between Cargill and Warren even if Cargill didn't want to (doesn't matter how the parties characterize their relationship) via Cargill's interference with the internal affairs of Warren. A manifestation of consent: by procuring grain as part of its ordinary operations. Control: by directing Warren to implement its operations, controlling the end result via their financial means. Warren's consent to act up in the air, as they ignored a lot of Cargill's attempts to control - Court overlooks.

Agency: Liability of Principal to Third Party in Contract

Restatement 6.01 When an agent acting with actual or apparent authority makes a contract on behalf of a disclosed principal, (1) the principal and the third party are parties to the contract; and (2) the agent is not a party to the contract unless the agent and third party agree otherwise.

Agency: Tort Liability & Employee Test

Right to Control/Economic Realities Test: behavior control, financial control, relationship, profit and loss, skills, permanency, etc.: Question: Is the principal exerting enough control to render them liable? (a) the extent of control which, by the agreement, the employer may exercise over the details of the work; (b) whether or not the one employed is engaged in a distinct occupation or business; (c) the kind 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) the skill required in the particular occupation; (e) whether the employer or the workman supplies the instrumentalities, tools, and the place of work for the person doing the work; (f) the length of time for which the person is employed; (g) the method of payment, whether by the time or by the job; (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 employer and employee; and (j) whether the principal is or is not in business Gas Station Cases: Differences in financial control, ownership over equipment etc. and involvement in day-to-day operations: Humble Oil v. Martin (Exxon Mobil): P is liable for torts committed by A against T because A is an employee of P Martins were injured by the Love's car which was being serviced by Humble. It rolled back and hit the Martins before any employee of Humble had touched it. Martins sue car owners, station owner, and Humble. Schneider was Humble's servant as were Schneider's assistants, therefore Humble is a liable principal. Hoover v. Sun Oil (Sunoco): P is not liable for torts committed by A against T because A is an independent contractor Fire at the service station operated by Barone, allegedly caused by negligence of Smilyk, an employee of Barone. Suit brought against Smilyk, Barone, and Sun Oil Company. Lease contract and dealer's agreement fails to establish any relationship other than landlord-tenant, and independent contractor. Franchise Arrangements: Did the franchisor exercise sufficient control over a franchisee to create an agency relationship that might be characterized as an employee/employer relationship? - Extent of franchisor's involvement in franchisee's day-to-day operations; - Franchisor's right to control the franchisee's operations (even if not exercised), suchas pricing requirements, audit rights, approval of advertising, etc.; and - Right of the franchisor to terminate the relationship If yes, the franchisor would be vicariously liable for tortious conduct of the franchisee that occurs within the scope of that employee/employer relationship Miller v. McDonald's Corp.: would likely meet the right to control test, therefore making McDonalds vicariously liable P bit into a stone while eating a Big Mac purchased at McDonalds. 3K owned and operated the restaurant under a License Agreement with D that required it to operate in a manner consistent with the McDonald's system. Agreement set standards and showed control: punishment if you don't adhere to those standards; similar appearance; McDonald sent field consultants, etc.

Partnership Formation

Section 202 Formation of Partnership (c) In determining whether a partnership is formed, the following rules apply: (1) Joint tenancy, tenancy in common, tenancy by the entireties, joint property, common property, or part ownership does not by itself establish a partnership, even if the co-owners share profits made by the use of the property. (2) The sharing of gross returns does not by itself establish a partnership, even if the persons sharing them have a joint or common right or interest in property from which the returns are derived. (3) A person who receives a share of the profits of a business is presumed to be a partner in the business, unless the profits were received in payment: (Just getting a wage/salary doesn't make you a partner because you're not sharing in the risk.) *Sharing profits is prima facie evidence that a partnership exists A) of a debt by installments or otherwise; (B) for services as an independent contractor or of wages or other 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 Vohland v. Sweet: partnership exists; division of profits is the central factor in determining the relationship despite the fact that Sweet put no upfront capital in, he wasn't listed on the company's taxes as a partner. Even if he didn't put capital in his manual labor equates to the same. Sweet worked for Vohland as an hourly employee until V retired. Sweet then received 20% share of the net profit of the enterprise after all expenses were paid on an irregular basis. No SS or income tax was withheld from his checks. Sweet wants to leave and receive the value of his partnership interest, i.e. the value of the nursery stock (inventory). Is he a partner or employee? Control v. Protection for Creditors: Martin v. Peyton: not partners, just taking steps to protect their interests as creditors. Individuals not liable for company's debts. Weigh control vs. protective measures. Financial services company strike deal with individuals for their liquid securities in exchange for stock, with protections. If they make a profit off of the stocks, they receive 40% of profits until cap is hit, informed of all transactions and receive all dividends, right to inspect books and veto decisions, can withdraw excess value, informed of all transactions, option to buy, etc. *Look for day-to-day control vs. oversight

Corporations: Shareholder Rights

Shareholders entitled to vote on a limited range of issues (election of directors, amendments, fundamental transactions, odds and ends, etc.) Receive payment of dividends when and as declared by board Inspect corporate books and records Receive distribution upon termination Purchase proportionate share of a new issuance or corporate stock to maintain current ownership percentage (Preemptive Right) File derivative suit to redress wrong suffered by corporation (recovery belongs to corporation)

Fiduciary Duties of Directors/Officers: Duty of Care -- after Van Gorkom

Standard of liability: directors may be held liable for gross negligence in failing to make an informed decision. A business determination made by a corporation's board of directors is presumed to be fully informed and made in good faith and in the best interests of the corporation. However, this presumption is rebuttable if the plaintiffs can show that the directors were grossly negligent in that they did not inform themselves of "all material information reasonably available to them." ***A rule of abstention: shareholder has the burden to show that the business judgment rule doesn't apply. If a court finds its does apply, then they will defer to the BoD's decision provided its rational (rational basis standard). If it does not apply, there's no business judgment protection and defendants then have to show whether they violated the duty of care. Court will still defer to Board's decision if its fair or reasonable (entire fairness test). (Reality -- Cinerama, Inc. v. Technicolor, Inc. melds business judgement rule and duty of care) Court doesn't review the substance of the Board's decision, will instead examine decisionmaking process and the extent to which the Board made an informed decision. BJR protects informed decisions: Smith v. Van Gorkom: the business judgment rule doesn't protect or apply to an uninformed decision, and court will look at the process the corporation went through. The party attacking the board's decision (shareholder) has the burden of proving gross negligence by directors who failed to inform themselves of "all material information reasonably available to them." Van Gorkom calls a special meeting of the board but does not give them an agenda beforehand; board approves the merger, and deal protection features, within two hours. Trans Union shareholder sues, claiming breach of the duty of care. Argument is that the board did not act in an informed manner in agreeing to the deal. Francis v. United Jersey Bank: business judgment rule doesn't apply: inactivity isn't enough. She does breach the duty of care. Directors have a duty to be informed: basic knowledge, review of financial statements, object to misconduct. She could have informed other directors, openly objected to their acts, or resigned to not be held liable. Pritchard & Baird is a closely-held reinsurance firms with four directors: Charles Pritchard Sr. (founder), Mrs. Pritchard, and two sons Charles Jr. and William. Primary insurer writes the policy to the insured, and then gets reinsurer to take on some portion of the risk, e.g., primary insurer takes the first $X in liability, and then the reinsurer takes the rest. After Charles Sr. dies, his sons run the business but embezzle funds. Mom remains a director but is not involved. Firm goes bankrupt; trustees in bankruptcy bring suit against Mom/her estate for negligence in the conduct of her duties as a director of the corporation, alleged a breach of duty of care by mom.

Obligation of Good Faith

The business judgment rule presumes that directors acted in good faith. Today, under Stone v. Ritter, bad faith is a subset, or example, of duty of loyalty. Two types of fiduciary behavior as possible bases for finding that directors who committed them acted in bad faith: - conduct motivated by subjective bad faith (actual intent to do harm) - intentional dereliction of duty, a conscious disregard for one's responsibilities Gross negligence does not equate to bad faith. Bad faith is an independent basis of liability. Stone v. Ritter: tries to clean up Walt Disney doctrine: bad faith is a subset, or example, of duty of loyalty. No good faith duty separate from loyalty, but you might be able to show a breach of loyalty even if the interest in question isn't financial or you can't see them on each side of the transaction (self-dealing). (1) "Although good faith may be described colloquially as part of a 'triad' of fiduciary duties that includes the duties of care and loyalty, the obligation to act in good faith does not establish an independent fiduciary duty that stands on the same footing as the duties of care and loyalty. Only the latter two duties, where violated, may directly result in liability, whereas a failure to act in good faith may do so, but indirectly." (2) "The fiduciary duty of loyalty is not limited to cases involving a financial or other cognizable fiduciary conflict of interest. It also encompasses cases where the fiduciary fails to act in good faith."

Agency: Tort Liability and Employee Status

The principal is responsible for tortious acts committed by the agent that fall within the scope of the agency/scope of employment. Agent commits a tort towards third party: agent is liable, but first must ask whether they are an employee under the right to control/economic realities test vs. and independent contractor Restatement 7.01 Agent's Liability to Third Party "An agent is subject to liability to a third party harmed by the agent'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." *Agent is acting within their authority, and third party is harmed. Principal is subject to direct liability to a third party harmed by an agent's conduct when: ▪The agent acts with actual authority or the principal ratifies (after the act) the agent's conduct and - They are an EE and ▪The agent's conduct is tortious, or ▪The principal is negligent in selecting, supervising, or otherwise controlling the agent;

Limited Liability: Methods of Getting Past it

Two Methods: (1) Alter Ego Liability: (a) Corporation was the controlling shareholder's alter ego; and (b) Adherence to limited liability would "sanction a fraud or promote injustice" (c) Shareholder personally liable (2) Enterprise Liability: (a) Such a high degree of unity of interest between the two entities that their separate existence had de facto ceased (b) Treating the two entities as separate would sanction fraud or promote injustice (c) All corporations in enterprise liable but not SH Enterprise Liability: Walkovsky v. Carlton: Where a shareholder uses control of the corporation to further his or her own, rather than the corporation's, business, he or she will be held liable for the corporation's acts and debts on a principal-agent theory. There were no allegations that he was conducting business in his individual capacity. Each corp. has two cabs, no assets, and minimum insurance. Walkovszky struck by a cab owned by Seon Corp (driven by Marchese), and seeks to hold Carlton personally liable. Plaintiff claimed (1) all ten corporations were part of a single enterprise, and (2) his multiple corporate structure was an unlawful fraud on the public. Court of Appeals dismisses the complaint w.r.t. Carlton for failure to state a claim, with leave to serve an amended complaint. For plaintiff to recover under the enterprise theory: Show that defendant did not respect the separate identities of the corporations: - Assignment of drivers - Use of bank accounts - Ordering supplies, etc. Alter-Ego Liability: Sea-Land Services, Inc. v. Pepper Source: to pierce corporate veil: (1) the corporation was the controlling shareholder's alter ego; and (2) adherence to limited liability would "sanction a fraud or promote injustice." Pepper Source stiffed sea-Land on the freight bill, which was substantial. Brought this action against Marchese and five business entities he owns to pierce PS's corporate veil and render Marchese personally liable for the judgement. Claim: all these corporations are alter egos of each other and hide behind the veils of alleged separate corporate existence for the purpose of defrauding P and other creditors. Prong 1: commingling of funds; undercapitalization; disregard for corporate formalities (shareholder meetings, board meeting, separate books, board appointment, charters or bylaws); Prong 2: either the sanctioning of a fraud or the promotion of injustice will satisfy the second element

Limited Partnerships

Type of partnership structure where partners are divided into two classes: single general partner, all the other partners would be deemed 'limited partners,' whose personal liability is not nearly as large as for the partner in the general partnership. LP liability doesn't exceed what they put into the partnership. Allows investment into a partnership in a passive way: limited partner doesn't really want to be involved in day to day running of the business and the liability that comes with it, but believe in the idea and are willing to put in capital hopefully for gains in the future General Partner: full personal liability (but a corporation can serve as a general partner). Oversees company, responsible for daily operations Limited Partner: A limited partner shall not become liable as a general partner, unless, in addition to the exercise of its rights and powers as a limited partner, the LP takes part in the control of the business. No company involvement, no daily responsibilities, no liability. Venture capitalists usually join as limited partners. Advantages ▪ Allows passive investment by limited partners. ▪ Allows for pass-through taxation. ▪ Losses generated by the LP can be used to offset other income-producing activities, effectively reducing tax liability of a limited partner. ▪ Particularly appealing where focus is a single long-term project: real estate, film industry, etc. (venture capital) ▪ Limited liability for limited partners. ▪ Complete control for general partners. ▪ Flexibility in structuring management. ▪ Fewer administrative and legal formalities than corporations. ▪ Can add limited partners (and their money) without losing control In re El Paso Pipeline Partners: they made a partnership agreement and their actions complied with the agreement; Court is not going to ex post change the business deal for them. Courts favor freedom of contract. General Partner sells assets to Limited Partnership at a price that limited partners feel is unfair. GP had also declined to buy similar assets at a lower price. Limited partners claim breach of partnership agreement and breach of implied duty of good faith and fair dealing. Court finds for General Partner; example of courts' favor of freedom of contract in business dealings.

Entire Fairness and Intrinsic Fairness Tests

Typically, fiduciary duties do not apply to a corporation's shareholders, unless they are dominant shareholders. If a shareholder has a large enough ownership interest to "control" the Board, any transactions that involve that shareholder being treated in a different way than the other shareholders are suspect - dominant shareholders have an obligation to "minority" shareholders in certain "duty of loyalty" transactions. Analyzed the same way as other duty of loyalty issues, but the Board is not allowed to "cleanse" the transaction. Question becomes whether it was "intrinsically fair", or in the case of a merger, "entire fairness" if a fully informed majority of the minority shareholders have not approved the transaction. Dominant shareholder must show that the transaction was intrinsically/entirely fair.

Partnership Property

UPA (1997) § 204 codified the common law, laying out three rules: 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 • "A partner's duty of loyalty to the partnership and the other partners [includes] to account to the partnership and hold as trustee for it any property, profit, or benefit ... derived from a use by the partner of partnership property, including the appropriation of a partnership opportunity

Corporations: Universes and Types of Corporations

Universes of Corporations: (1) Public: anyone can buy a share of the company, shares traded on an exchange. Have to follow certain rules set by the SEC (annual reports, investor communications, etc.). Stock prices become incredibly important. (2) Close (privately held): smaller, closely held private corporations. Absence of a secondary market for its stock, usually a relatively small number of shareholders who actively participate in the firm's management. *Has a lower tax liability. Types of Corporations: Professional Corporations: • Physicians, dentists, lawyer, accountants • Increasingly use LLPs or LLCs Non-profit corporations • None of the surplus revenue (profit) may be distributed to shareholders (members) • Often have members rather than shareholders • Charities, Churches, Fraternal Organizations Quasi-governmental corporations • E.g., Fannie Mae and Freddie Mac Government corporations • Universities, hospitals, etc. Legal personality: The corporation is an entity with separate legal existence from its owners - Legal fiction but a useful one - Possesses (some) constitutional rights: entitled to due process and equal protection of the law under the Fifth and Fourteenth; not a "citizen" covered by the Privileges and Immunities Clause - Separate taxpayer: can own property; pay taxes; exist for an indefinite period; sue; be sued - Requirement for formal creation

Limited Liability: Veil Piercing Doctrine

Want to get to the individual through their corporation. Can be done through alter ego or enterprise liability. Generally, consist of two components: (1) Evidence of "lack of separateness": e.g., shareholder domination, thin capitalization, no formalities/co-mingling of assets ("Tinkerbell test" - to be protected, shareholder must believe in the separation) (2) Unfair or inequitable conduct: the wildcard in veil-piercing cases Key Factors (not in publicly traded companies) (1) Undercapitalization (2) Nature of plaintiff's claim: contract v. tort (3) Nature of defendant: passive shareholder of close corporation; public corporation shareholder; parent of a subsidiary corporation Ohio Factors - A Guide for Business Planning Purposes ▪ Commingling of funds ▪ Diversion of funds for personal use ▪ Treating assets as your own ▪ No Units issued ▪ Absence of minutes or records ▪ Inadequate capital ▪ Concealment of ownership ▪ Disregard of legal formalities ▪ Diversion of assets to detriment of creditor ▪ Subterfuge to avoid performance Reverse Piercing Go through individual to get the corporate's assets.

Fiduciary Duties of Directors/Officers: Duty of Loyalty -- Safe Harbors

Whenever you have a self-interested transaction, that's not a problem if : DGCL section 144: (Safeharbor/Cleansed - an "or" analysis) (1) You disclose it to the Board and they approve it anyway: 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 If this provision applies, then the business judgment rule applies and burden shifts to plaintiff to show waste. (2) If put to a vote of the shareholders/approved by a majority: 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 shareholders entitled to vote thereon, and the contract or transaction is specifically approved in good faith by vote of the shareholders; or If this provision applies, then the business judgment rule applies and burden shifts to plaintiff to show waste (if defendant is a director) or unfairness (if D is a controlling shareholder) (3) Approved and it's fair to the corporation: 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 shareholders If no safe harbor applies, then burden goes to director to show it was fair and reasonable.

Partnership Duties/Fiduciary Obligations (Disclosure)

With regard to an opportunity presented to the partnership, often the question is what is the nature of the opportunity. Is the "opportunity" just information about the potential to profit in an enterprise outside the scope of the partnership business? If so, disclosure alone might be sufficient. However, if the business opportunity falls within the scope of the partnership business, disclosure alone is probably NOT enough. If the opportunity belongs to the partnership, no partner may take the partnership opportunity for him or herself. When faced with a new opportunity that arises out of, or relates to, the partnership business, the managing partner must: (a) First, disclose the business opportunity to the other partners;(b) Second, decide whether or not to act on behalf of the partnership and take the opportunity. Meinhard v. Salmon: partnership law imposes a strict fiduciary duty on partners to one another, including disclosure. A higher level of loyalty than agency. Meinhard and Salmon are joint venturers in a 20-year lease. When the lease is about to expire, a different lessor offers Salmon the opportunity to acquire a lease on the entire block in order to build a new building. Salmon accepts without disclosing it to Meinhard. What scope of partnership duties exist? If partners can withhold new information—such as the discovery of a new business opportunity—from each other, then each has an incentive to drive the other out so as to take full advantage of the information. As each incurs costs to exclude the other, or to take precautions against being excluded, the value of the firm declines. A legal rule vesting the firm with a property right to the information and requiring disclosure is more efficient. Agency Restatement § 387: "Unless otherwise agreed, an agent is subject to a duty to his principal to act solely for the benefit of the principal in all matters connected with his agency."

Limited Partnerships: Safe Harbors

things limited partners can do that will not be used to lose the status as a limited partner and expand their liability of that as a general partner. ULPA (1985) § 303(b): Safe harbors for conduct not deemed to participate in control (replaced by 2013 Rule) ▪ Being an agent, employee, or contractor for the limited partnership; ▪ Consulting with the advising a general partner with respect to the business of the limited partnership; ▪ Approving or disapproving of an amendment to the partnership agreement; or ▪ Voting on specified matters. 2013 ULPA: does away with concept that they could lose their limited partner status and liability. No matter what you do you're going to remain a limited partner: ULPA (2013) § 303 (a) A debt, obligation, or other liability of a limited partnership is not the debt, obligation, or other liability of a limited partner. A limited partner is not personally liable, directly or indirectly, by way of contribution or otherwise, for a debt, obligation, or other liability of the partnership solely by reason of being or acting as a limited partner, even if the limited partner participates in the management and control of the limited partnership. This subsection applies regardless of the dissolution of the partnership. (b) The failure of a limited partnership 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 limited partner for a debt, obligation, or other liability of the partnership. = greater aggregation of capital and freedom of contract

Partnership Duties/Fiduciary Obligations

§ 409. General Standards of Partner's Conduct: (a) A partner owes to the partnership and the other partners the duties of loyalty and care stated in subsections (b) and (c) Duty of Care (hard to violate, high standard) UPA (1997) § 409. General Standards of Partner's Conduct: (c) A partner's duty of care to the partnership and the other partners in the conduct and winding up of the partnership business is limited to refraining from engaging in grossly negligent or reckless conduct, intentional misconduct, or a knowing violation of law. Duty of Loyalty: UPA (1997) § 409. General Standards of Partner's Conduct: (b) A partner's duty of loyalty to the partnership and the other partners is limited to the following: (1) to account to the partnership and hold as trustee for it any property, profit, or benefit derived by the partner: (account for use of funds) (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 (can't support a third party in conflict with the partnership) (3) to refrain from competing with the partnership in the conduct of the partnership's business before the dissolution of the partnership. (can't compete) ** Perform all duties to the partnership and the other partners consistent with the obligation of good faith and fair dealing. Violations: ▪ Competing with the partnership ▪ Taking a business opportunity away from the partnership ▪ Using partnership property for private profit ▪ Conflicts of interest

Corporations: Benefits

• Eliminates messy problems of personal liability: creditors rely only on business assets. • Allows investors to enter and exit the firm: all they have to do is buy or sell shares. • Prevents minority investors from trying to hold up the firm by threatening to dissolve it. • Makes it easy for third parties who contract with the firm to know whom they are dealing with as an authorized agent.

Corporate Formation: Taxation

▪ A Corporation is subject to double taxation: once at corporate level and again at shareholder level ▪ Debt/interest is deductible. ▪ Dividends are NOT deductible. ▪ Point is that the effective of use of debt - and its tax benefit of deductibility - can increase the value of the firm