Business Associations I

entity status: general partnership

historically aggregate (UPA), but separate entity under RUPA

RUPA § 202(a) test

relationships that are called joint ventures are partnerships if they otherwise fit the definition of a partnership.

Grimes v. Donald

Facts The board of directors of DSC Communications (DSC) (defendant) approved contracts with DSC's CEO, James Donald (defendant), that promised him employment until his seventy-fifth birthday. The contracts provided that if Donald lost his job without cause, he would be entitled to the same salary he would have earned until the contracts would otherwise have expired. The contracts also included further incentive bonuses, lifetime medical coverage for Donald and his family, and other benefits. Grimes (plaintiff) demanded that the board abrogate the contracts with Donald. The board refused. Grimes filed a suit alleging that the board abdicated its responsibility to oversee the management of the company. Grimes alleged that by granting Donald contracts that allowed him to collect compensation even if the board chose to reject the course of action he chooses as CEO, the board had given up its responsibility to oversee the future of DSC. Additionally, Grimes alleged that the contracts constituted waste and excessive compensation and were the product of the board's failure to exercise due care. Although Grimes did not raise these issues in his demand to the board, he claimed that demand was excused because it would have been futile. The chancery court dismissed Grimes's complaint for failure to state a claim upon which relief could be granted. Grimes appealed. Issue (1) Does a board of directors abdicate its directorial authority simply by making a business decision that limits the board's freedom of future action? (2) If a shareholder demands that the board of directors take action on a claim allegedly belonging to the corporation, and the demand is refused, may the shareholder then assert that demand is excused with respect to other legal theories in support of the same claim? Rule of Law: (1) An informed business decision made by a board of directors is not an abdication of directorial authority merely because the decision limits the board's freedom of future action. (2) If a shareholder demands that the board of directors take action on a claim allegedly belonging to the corporation, and the demand is refused, the shareholder may not then assert that demand is excused with respect to other legal theories in support of the same claim. Holding and Reasoning (Veasey, C.J.) (1) No. An informed business decision made by a board of directors is not an abdication of directorial authority merely because the decision limits the board's freedom of future action. Directors may not delegate away their duties to manage the corporation. However, if independent and informed directors have made a good-faith decision regarding executive compensation, this decision is a business judgment and is entitled to deference by the courts. Specifically, in a competitive market for executive expertise, a board's judgments about the appropriate compensation for an executive, such as salary or severance, will receive deference from the courts unless the facts show that the directors' decision constitutes waste or has not resulted from a valid business judgment. This is true even if the board's decision to grant large severance payments tends to limit the board's future ability to dismiss senior officers. In this case, even accepting all of Grimes's allegations as true and drawing all reasonable inferences in his favor, Grimes's abdication claim fails as a matter of law. Although Grimes has alleged that Donald may be entitled to a significant sum of money from the corporation in the event of a constructive termination, he has not shown that the board has abdicated its directorial authority. The board retains the freedom to direct DSC's strategy and affairs going forward. The board made an informed decision regarding Donald's compensation, and although the contracts might limit the board's ability to disagree with Donald in the future without paying him a significant amount of money, this is simply an odd contract; it is not necessarily an abdication. The chancery court's dismissal of the abdication claim is affirmed. (2) No. If a shareholder demands that the board of directors take action on a claim allegedly belonging to the corporation, and the demand is refused, the shareholder may not then assert that demand is excused with respect to other legal theories in support of the same claim. Because a shareholder's derivative claim belongs to the corporation, the corporation (i.e., the directors) must make the decision whether to assert the claim. Accordingly, a shareholder must make a pre-suit demand that the board of directors assert the claim or explain why the shareholder was justified in not making the demand. If a shareholder makes a demand, and the board refuses it, the shareholder may assert that the board wrongfully refused the demand. However, once the board has refused a demand, the shareholder may no longer claim that demand is excused. Allowing a shareholder to demand action and then, if rejected, claim that demand is excused with respect to other theories of recovery resulting from the same circumstances, would create an unnecessary risk of harassment. In this case, Grimes made a demand to the board regarding the propriety of the contracts with Donald. The board considered the demand and rejected it. Grimes may not now assert other theories regarding the same set of facts and claim that demand is excused. Moreover, Grimes has not made any specific allegations that the board wrongfully refused his demand. The decision of the chancery court is affirmed.

Enterprise liability: Walkovsky v. Carlton

Facts William Carlton (defendant) owned a large taxicab business. Carlton was a controlling shareholder of 10 different corporations, each of which held title to two cabs and no other assets. Each cab carried $10,000 in car liability insurance, which was the minimum required by state law. John Walkovsky (plaintiff) alleged that he was struck and injured by a cab owned by Seon Cab Corporation (defendant), one of Carlton's entities. Walkovsky sued Carlton, Seon Cab Corporation, and each of Carlton's other cab corporations, arguing that they all functioned as a single enterprise and should be treated accordingly. Carlton moved to dismiss the complaint as to him personally for failure to state a cause of action. The trial court granted the motion. Walkovsky appealed, and the appellate court reversed, reinstating the complaint as to Carlton. Carlton appealed. Issue May a party maintain a cause of action to pierce the corporate veil without alleging that a shareholder used the corporate form to conduct business in an individual capacity? Rule of Law: In order to maintain a cause of action for piercing the corporate veil, the plaintiff must allege that a shareholder used the corporate form to conduct business in his individual capacity. Holding and Reasoning (Fuld, J.) No. Under New York law, courts will pierce the corporate veil when necessary to prevent fraud or achieve equity. Agency-law principles guide the inquiry into possible abuse of the corporate form. If a corporation functions merely as an agent of its shareholder, courts will hold the principal vicariously liable for the corporation's conduct on the theory of respondeat superior. At the pleadings stage, it is insufficient to state that a corporation lacked a separate identity, was part of a single enterprise, and was deliberately undercapitalized. Rather, the plaintiff must show that a shareholder used the corporation as his agent to conduct business in an individual capacity. In this case, Seon Cab Company was undercapitalized and carried only the bare minimum amount of insurance required by law. This is relevant, but it is not enough to allow a plaintiff to pierce the veil. Otherwise, owners would be on the hook every time their corporation accrued liabilities outstripping its assets, and limited liability would be meaningless. Instead, there must be some evidence that the owners themselves were merely using the company as a shell. Although Walkovszky alleged that each of Carlton's companies was actually part of a much larger corporate entity, he could offer no proof to that effect. The mere fact that Walkovszky might not have been fully able to recover his damages is not enough to justify letting him pierce Seon Cab's veil. The decision of the appellate court is therefore reversed. Carlton's motion to dismiss is granted, though Walkovsky is given leave to file an amended complaint. Dissent (Keating, J.) When the legislature passed the automobile-insurance minimum, it assumed that companies that could afford insurance above the minimum would in fact purchase additional insurance. The goal of the act was to ensure that there was a pot of money provided for victims of automobile accidents. Seon Cab was profitable enough to afford more than the minimum insurance coverage, but the company was kept intentionally undercapitalized. The insurance minimum should not be used here to prevent Walkovszky from the type of recovery that the law was meant to provide for, and Carlton should not be allowed to benefit from a corporate form he adopted merely to abuse it.

Expulsion: Lawlis v. Kightlinger & Gray

Facts: Lawlis (plaintiff) had been a senior partner in the law firm Kightlinger & Gray (K&G) (defendant) for a number of years when he developed an alcohol problem in 1982. Lawlis missed a lot of work time in 1983 and 1984 as he sought treatment for his addiction. Lawlis revealed his condition to K&G in mid-1983. In accordance with K&G's partnership agreement that Lawlis had signed, K&G reduced Lawlis's work units while he was recovering. Lawlis also signed a Program Outline, which set conditions for Lawlis's continuing partnership with K&G. The Program Outline stated that there was "no second chance" if Lawlis drank again. Lawlis started drinking again in March 1984, but K&G gave him another chance, allowing him to remain as senior partner as long as he stopped drinking permanently and met other conditions. Lawlis subsequently stopped drinking permanently. Two years after he ceased drinking, Lawlis asked K&G's Finance Committee to increase his work units. In late October 1986, Wampler, a member of the Finance Committee, told Lawlis that the committee was going to recommend severing Lawlis's senior partnership with K&G no later than June 30, 1987. K&G's partnership agreement stated that a senior partner may be involuntarily expelled from K&G if two-thirds of senior partners voted to do so. In December 1986, the senior partners voted to accept the Finance Committee's recommendation. All the senior partners except Lawlis voted in favor of the recommendation, which resulted in an addendum to the partnership agreement, providing that Lawlis would be given one unit of work and retain his senior partner status until he was terminated in June 1987. Lawlis refused to sign the addendum, and the remaining senior partners voted to expel Lawlis in February 1987. Lawlis sued K&G, alleging that K&G breached the partnership agreement's implied duty of good faith and fair dealing by expelling him for a "predatory purpose" of increasing the firm's partner to lawyer ratio. Lawlis based his allegation on a November 1986 memo which stated that K&G should increase its lawyer to partner ratio during the coming years in order to increase partner profits. The district court granted K&G's motion for summary judgment. Issue: Does a partnership act in bad faith by expelling an unproductive partner who violated terms and conditions to which that partner agreed? Rule of Law: When a partnership exercises its power under a partnership agreement to expel a partner, it must be done in good faith and for a bona fide reason, otherwise the agreement is breached. Holding: No. A partnership owes a duty of good faith to each of its partners. - That duty includes exercising good faith in critical matters such as involuntary expulsion of a partner. - A partnership that terminates a partner in bad faith breaches its agreement with that partner. This court finds no such breach here. - Lawlis contends that he was expelled because K&G sought to get rid of a senior partner to increase the partner to lawyer ratio to increase partner profits, as stated in the Memo. However, the Memo's purpose was to obtain more billable hour production from the associates in order to increase partner profits, not to reduce the number of senior partners. The Memo also recommended that Lawlis be permitted to retain his senior partnership status for several more months, in order to ease his transition out of the firm. - Moreover, K&G went above and beyond its requirements in the Program Outline, which Lawlis signed. - The Program Outline stated that Lawlis would not get a second chance if he resumed drinking. Lawlis did subsequently resume drinking, but K&G gave him another chance and retained him as senior partner for an extended period of time. This court finds no "predatory purpose" in K&G's expulsion of Lawlis. - As there is no genuine issue of fact concerning K&G acting in good faith when it expelled Lawlis, this court affirms the district court's grant of K&G's summary judgment motion.

The Fiduciary Obligations of Partners: Meinhard v. Salmon

Facts: Louisa Gerry leased to the D, Salmon, the premises of Hotel Bristol in NY City. The lease term was for 20 years. the D undertook to change the hotel building for use as shops and offices at at cost of $200,000. Alterations and additions were to be accretions to the land. D, while in course of treaty with the lessor as to the execution of the lease, was in course of treaty with Meinhard, P, for the necessary funds. The result was a joint venture with terms embodied in writing. D had sole power to "manage, lease, underlet and operate" the building. There were to be certain pre-emptive rights for each in the contingency of death. When the lease was near its end, owner of the reversion, Elbridge Gerry, wished to build and construct new buildings around the Hotel's location. He approached the D with a business plan. The result was a new lease to the Midpoint Realty Co., which was owned and operated by D. D personally guaranteed the performance by the lessee of the covenants of the new lease until such time as the new building had been completed and fully paid for. D had not told P of the new lease. When P found out about it, he made a demand on the Ds that the lease be held in trust as an asset of the venture, making offer upon the trial to share the personal obligations incidental to the guaranty. The demand was followed by a refusal. Court proceedings followed. Trial Court: gave judgment for P, limiting the P's interest in the lease to 25%. - The limitation was on the theory that the plaintiff's equity was to be restricted to 1/2 of so much of the value of the lease as was contributed or represented by the occupation of the Bristol site. Appellate Division: Judgment was modified so as to enlarge the equitable interest to 1/2 of the whole lease. - With this enlargement of P's interest, a corresponding enlargement of his attendant obligations ensued. D appealed judgment. Holding: "Joint adventurers, like copartners, owe to one another, while the enterprise continues, the duty of the finest loyalty. - 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. - To the eye of the observer, D held the lease as owner in his own right, for himself and no one else. In fact, he held it as a fiduciary, for himself and another, sharers in a common venture. If this fact had been proclaimed, if the lease by its terms had run in favor of a partnership, Mr. Gerry would have laid before the partner his plane of reconstruction, not just one of them. - D appropriated to himself in secrecy and silence. - The trouble about his conduct is that he excluded his coadventurer from any chance to compete, from any chance to enjoy the opportunity for benefit that had come to him alone by virtue of his agency. - This chance he was under a duty to concede. The price o fits denial is an extension of the trust at the option and for the benefit of the one whom he excluded. - At all events, notice of termination, even if not necessary, might seem, not unreasonably, to be something to be looked for, if the business was over and another tenant was to enter. In the absence of such notice, the matter of an extension was one that would naturally be attended to by the manager of the enterprise, and not neglected altogether. The very fact that D was in control with exclusive powers of direction charged him the more obviously with the duty of disclosure, since only through disclosure could opportunity be equalized. Here the subject matter of the new lease was an extension and enlargement of the subject matter of the old one. A managing coadventurer appropriating the benefit of such a lease w/o warning to his partner might fairly expect to be reproached with conduct that was underhanded, or lacking, to say the least, in reasonable candor, if the partner were to surprise him in the act of signing the new instrument.

manifestation of assent

both principal and agent must manifest assent to relation, BUT: need not be a K. principal must communicate assent to agent, but agent need not communicate assent to principal. no consideration requirement. label is not dispositive (need not call it agency relation or even be aware or intend legal consequences of agency relation.

Agent's Liability on the Contract

general rule: an agent is NOT liable to a 3rd party for contracts entered into on behalf of a fully disclosed principal. if an agent contracts with a 3rd party on behalf of a fully or partially undisclosed principal, then the general rule is that the agent is liable to the 3rd party (even if the undisclosed principal will also be liable.) Rationale: Cannot expect a 3rd party to agree to a K with an unknown counter-party. If the 3rd party does not know the identity of the counter-party, then cannot confirm their trust or credit worthiness. Reasonable expectation of the 3rd party will therefore be that the agent is liable.

When is an act of dissolution deemed "wrongful" ? UPA § 38(2)

if it violates the obligations set forth in the Partnership Agreement. (1) if an act of dissolution is wrongful, then the wrongfully dissolving partner may be liable for breach of the PA; (2) the remaining partners may be permitted to continue the business w/o the wrongfully dissolving partner; and (3) if the remaining partners forego the wind up, then the wrongfully dissolving partner's buy-out price may be discounted (e.g., no right to the value of the business's good will.)

who are the typical shareholder proponents?

hedge and private equity funds pension funds (unions and state and local employees) individual activists charities (often individuals)

Joint Ventures: RUPA § 202(a) test

the modern approach is to regard a joint venture as nothing more than a general partnership that has a limited purpose or duration. courts will typically apply general partnership rules to the formation and operation of joint ventures, so long as they satisfy the RUPA § 202(a) test.

"Principal's control"

a principal does not need to exercise physical control over the agent's actions, so long as the principal can direct the result or ultimate objectives of the agent relationship.

Liability of principal to 3rd parties in contract

a principal is liable on a K b/t the agent and a third party where the agent acts with actual authority, apparent authority, or "inherent" authority. even if the agent lacks actual, apparent, or inherent authority, the principal may still be liable on a K where the principal ratifies the agreement, or under the doctrine of estoppel.

Actual authority

arises from the manifestation of a principal to an agent that the agent has power to deal with 3rd parties as a representative of the principal. test: if the principal's words or conduct would lead a reasonable person in the agent's shoes to believe that the agent has authority to act in some way on the principal's behalf, the agent has actual authority. key turns on manifestations from the principal to the agent. can be either express or implied.

An agent's apparent authority defined

arises from the manifestations of a principal TO THIRD PARTIES that would lead a reasonable third party to conclude that the agent is authorized to act on the principal's behalf (regardless of whether that agent has actual authority to act. key: is that it turns on some MANIFESTATION (or holding out as) BY THE PRINCIPAL TO THE THIRD PARTY. rationale: to protect 3rd parties who might have been misrepresented by an agent.

RUPA § 103 "Non-waivable provisions"

among the nonwaivable rules is 404(b)'s demand of loyalty and 404(d)'s demand of good faith - but: (3)(i) "the partnership agreement may identify specific types or categories of activities that do not violate the duty of loyalty, if not manifestly unreasonable... (5) "... the partnership agreement may prescribe the standards by which the performance of the obligation [good faith] is to be measured, if the standards are not manifestly unreasonable. For example: Partners may agree in advance (in the interest of efficient firm management) to include a "guillotine" expulsion provision.

Principal's consent Restatement § 8.06

an agent can usually avoid a breach of the duty of loyalty to simply disclosing her intentions to the principal in advance and receiving the principal's informed consent. ....LOOK AT HIS SLIDES TO FINISH THIS

RUPA § 201(a) Partnership

an entity distinct from its partners. one consequence of regarding a partnership as a separate legal entity, is that partnership property is owned by the partnership as an entity - not by the partners individually. so - if one partner contributes property to the partnership, it becomes partnership property. while creditors of an individual partner can reach partnership property upon dissolution, they are only entitled to that partner's partnership interest. (In Re Fulton)

Who is an agent?

any business enterprise (unless it is a sole proprietorship w/o employees) will involve an agency relationship. legal persons like a corporation have no physical bodies, so everything they do, they do through agents.

actual implied authority

authority that can be reasonably INFERRED by the agent from the principal's words or conduct (including the agent's expectations from prior dealings with the principal and customs associated with this type of agency relation in general.

What are the consequences of an agency relationship?

the most important consequence of the creation of the agency relationship is that the principal can be held responsible/liable for the actions of the agent.

Partnership by Estoppel

the only way the law will find a person to be a partner in fact is by satisfying the statutory definition of partnership laid out in RUPA §202(a). Even if a person is not a partner in fact, the law may still treat that person as a partner by estoppel. Usually requires: (1) representation (express or implied) of partnership - some holding out as partnership (2) representation must have been made by the party charged as partner (or with that person's consent) (3) reasonable reliance by the person bringing the claim on the above representation. Young v. Jones case

Partnership by estoppel

the only way the law will find a person to be a partner in fact is by satisfying the statutory definition of partnership. even if a person is not a partner in fact, the law may still treat that person as a partner by estoppel.

member fiduciary obligations ULLCA § 105(d)(3)

"if not manifestly unreasonable, the operating agreement may: (a) alter or eliminate the aspects of the duty of loyalty; (b) identify specific types or categories of activities that do not violate the duty of loyalty."

ULLCA § 304 LLC formalities for veil piercing

"the failure of a limited liability company 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 or manager for a debt, obligation, or other liability of the company."

Restatement (Third) and "Inherent Agency Authority"

The Restatement (3rd) of Agency does not expressly recognize the concept of "inherent agency authority," but it effectively preserves the effect of the doctrine in undisclosed principal situations in § 2.06(2): "an undisclosed principal may not rely on instructions given an agent that qualify or reduce the agent's authority to less than the authority a third party would reasonably believe an agent to have under the same circumstances if the principal had been disclosed."

de jure corporation

When we introduced the role of the promoter in launching a corporation, we noted that, prior to the formation of a de jure corporation (i.e., one that is officially recognized by the appropriate agent of the state), a promoter may be personally liable for any contracts entered into on behalf of or in anticipation of the new corporation if: (a) that corporation never ratified the contract; or (b) is never officially formed at all....

Problem of Stalemates

Whenever there are an even number of partners, the possibility of a stalemate or deadlock arises - and issues of rights and authority abound.

Delaware's approach to the corporate opportunity doctrine: (2) the opportunity is in the corp.'s line of business

ask whether the business opportunity is intimately or closely associated with the existing or prospective businesses of the corp.

limitation to Wilkes

duties of good faith and loyalty will not typically protect minority shareholders from termination or forced stock repurchases that comply with the terms of shareholder agreement (agreed to by ALL the shareholders in advance) that sets out termination of employment, buy/sell agreements - in such cases courts may find the minority shareholder received all that she bargained for....

blue sky laws

early state laws focusing on protecting investors from securities fraud in primary markets. first implemented by Kansas in 1911, these laws were referred to as blue sky laws b/c they were intended to protect investors from fraudulent securities that had "no more basis than so many feet of blue sky" these laws were limited in scope and the states had limited resources to enforce them.

the registration process § 5 of the Securities Act

generally prohibits the sale of securities unless: 1) a registration has been filed with the SEC; 2) that registration statement has become effective; and 3) the prospectus (which is a disclosure document) must be delivered to the purchaser before the sale. this process typically involves extensive accountant and attorney involvement investment banking firm will be required to provide underwriting services (find investors) b/c of the costs, issuers will sometimes try to avail themselves of one of the securities act's two types of exemptions from the registration requirement

Common social/policy issues

global human rights policies contract supplier standards sexual orientation non-discrimination - gender identity non-discrimination global warming reporting

the LLC operating agreement

most of the LLC members rights and duties will be spelled out in the LLC Operating Agreement. Though state statutes will offer default rules concerning management and control, most state will grant the members a great deal of freedom and flexibility to opt out of those default provisions.....

control: general partnership

owners manage and control

negative impacts of limited liability

results in the potential of negative externalities from corporate conduct. it allows shareholders to externalize at least part of the costs of their risky investments or hazardous behavior on society at large. it can leave creditors of a corporation holding the bag in the event of failure. --creditors will protect against loss from loans or small or "closely held" corporations by demanding that the controlling shareholder(s) guarantee any loan to the corporation. it can also leave victims of torts w/o recovery if the corporation is under capitalized. -- this can happen even if the failed/negligent corporation has only one shareholder who is herself quite wealthy. --these victims can protect themselves by insurance or government regulations.

internal affairs

rights and duties of directors, officers, and shareholders, but NOT the corporation's obligations to third parties.

Corporate Opportunity Doctrine

while most states address the problem of interested director transactions expressly by statute, the Corporate Opportunity Doctrine has developed by common law

Control Rule under RULPA § 303(a)

"... a limited partner is not liable for the obligations of a limited partnership unless he is also a general partner or, in addition to the exercise of his rights and powers as a limited partner, he participates in the control of the business..."

RUPA § 202(c)(3) Profits

"A person who receives a share of the profits of a business is presumed to be a partner in the business, unless the profits were received in payment" of (among other things listed) a "debt," wages," "rent," "interest" on a loan, etc.

RUPA § 306(c) LLP

"An obligation of a partnership incurred while the partnership is a limited liability partnership, whether arising in contract, tort, or otherwise, is solely the obligation of the partnership. A partner is not personally liable, directly or indirectly, by way of contribution or otherwise for such a partnership obligation solely by reason of being or so acting as a partner."

duty of care more broadly § 8.30(b) of the RMBCA provides that directors...

"shall discharge their duties with the care that a person in a like position would reasonably believe appropriate under the circumstances."

Ordinary Business Operations Test under Trinity Wall Street (1-3)

(1) Discern the subject matter of the proposal (look to substance of the proposal, not its mere wording or form). (2) Discern whether the subject matter relates to the company's ordinary business operations. - in other words, does it relate to day-to-day matters of business (merchandizing decisions for a retailer) that management is in the best position to decide. (3) if it DOES relate to an ordinary business operation, it may be excluded UNLESS: (a) it addresses a significant policy concern (b) the significant policy issue "transcends" the company's ordinary business: - may transcend by failing to address the core business concern (employment discrimination at a retailer) - may also transcend as addressing an existential (life or death) question for the corp. (stop selling tobacco products for a cigarette co.).

Important statutes for corporation law

(1) The Model Business Corporation Act (2) Delaware General Corporations Law - it is extremely influential b/c so many major corporations have chosen to incorporate in Delaware.

Three basic elements of an agency relationship b/t persons

(1) manifestation of assent to relation by the principal and agent (agreement) (2) action by the agent is on behalf of the principal; and (3) control by the principal.

Requirements of Articles of Incorporation (4)

(1) name - must not be the same or confusingly similar to another corporation in that state. - must also include some word indicating incorporation (inc., co., ltd., corp.) (2) authorized shares - must state the maximum number of shares the corporation may issue (3) registered agent - must include name and address of registered agent. - cannot be a P.O. Box b/c it must be the designated location for service of process. (4) incorporators - name and address - the only functions of the incorporator is to sign the articles of incorporation; deliver them to the Secretary of State, and complete the formation of the corporation (by naming the initial directors [if not already named in the articles.]

Member fiduciary obligations ULLCA § 409(b)

(b)(1) "to account to the company... for... any property, profit, or benefit...derived from use by the member of the company's property, including the appropriation of a company's opportunity" (b)(3) "to refrain from competing with the company in the conduct of the company's business before the dissolution of the company." may be limited in scope by assent of the members in the operating agreement.

two most important statutes for our purposes

1) Securities Act of 1933 2) Securities Exchange Act of 1934

how can the corporation respond if it wishes to challenge or exclude a shareholder proposal from its proxy materials?

1) exclude it on procedural grounds (show the shareholder has not held the share for one year) 2) challenge it by including an opposing statement in its proxy materials. 3) negotiate with the proponent 4) exclude it pursuant to 14a-8(i) b/c it addresses an improper subject matter.

Federal securities laws: two types of markets

1) primary market 2) secondary market

the market for information

1) the average American investor picking stocks underperforms the market. 2) the average corporate insider, trading his own company's stock, beats the market by 7% a year. 3) the average hedge fund beats the market by 7 and 8 % a year. 4) the average senator beats the market by 12% a year.

contractual solutions to problems of control in close corporations

1) voting trust 2) shareholder agreements a) agreements relating to election of the BOD (vote pooling agreements) b) agreements relating to limitation on the board's discretion.

Corporation by estoppel

Another way promoters/shareholders may escape personal liability even if a de jure corporation never comes into being is through the equitable doctrine of Corporation by Estoppel: Estops creditors from holding shareholders personally liable—as against only contract creditors—if the person dealing with the firm: -Thought it was a corporation all along; -Would earn a windfall if now allowed to argue that the firm was not a corporation BUT these are corporate doctrines—do they apply to LLCs?.....

Ownership Comment to RUPA §202

Ask - does the person share any of the typical rights and obligations of ownership? sharing of losses - owners share the losses of businesses, but employees and creditors do not. ability to inspect the books control over Affairs of Business "To state that partners are co-owners of a business is to state that they each have the power of ultimate control."

legal authority for insider trading liability

Congress and the SEC have been content to allow it to develop through the courts and by administrative action.

The Consequences of Dissolution (3)

Dissolution typically leads to the winding up of the partnership: (1) sale of the partnership's assets. (2) repayment of creditors. (3) distribution of any remaining proceeds to the partners in proportion to their relative partnership interests.

Fisk Ventures, LLC v. Segal

Facts Dr. Andrew Segal (defendant) founded Genitrix, LLC, a Delaware limited liability company, and retained 55 percent of Genitrix's Class A membership interest. H. Fisk Johnson held much of the Class B membership interest, along with Fisk Ventures, LLC (Fisk) (plaintiff), Stephen Rose, and William Freund. Fisk was owned and controlled by Johnson. Under Genitrix's LLC agreement, the board of member representatives, which managed the company's business and affairs, consisted of five members: two appointed by Johnson, one by Fisk, and two by Segal. Johnson appointed Rose and Freund, his employees, to the board. Section 9.1 of the LLC agreement stated that no member has any duty to any other member, except as expressly set forth in the LLC agreement itself, and that no member is liable for damage to the company unless it is the result of gross negligence, fraud, or intentional misconduct. The LLC agreement also required approval of 75 percent of the board for most actions, thus requiring the cooperation of both the Class A and the Class B members. The Class B members had a "Put Right" clause in their contracts, which stated that at any time, they could sell back to Genitrix any or all of their Class B interests for a price determined by an independent entity. Since it was formed, Genitrix continually had financial difficulty and trouble attracting investors. Segal felt that the Put Right contractual clauses scared off potential investors, but despite his multiple requests, the Class B members refused to suspend their Put Rights. Segal then drafted a private-placement memorandum he planned to use to attract investors, but the Class B members refused to approve it. Throughout this time, the plaintiffs infused Genitrix with operating cash, but not enough to allow Genitrix to succeed. Genitrix soon ran out of operating cash and was eventually left with Segal as the only employee, no office, no funds, and no revenue. Fisk brought suit in the Delaware Court of Chancery, seeking dissolution of Genitrix. Segal filed counterclaims, charging that Fisk breached the LLC agreement and the covenant of good faith and fair dealing implied in the agreement by allegedly blocking Genitrix's chances at funding. Fisk filed a motion to dismiss Segal's counterclaims. Issue (1) May a court insert itself into an LLC agreement to decide which member's business judgment was more in line with the LLC's best interests? (2) May the fiduciary duties of an LLC member or manager be expanded, restricted, or eliminated by the LLC agreement? Rule of Law: (1) An LLC agreement regulates the terms by which members control the LLC, and a court will not insert itself into the agreement to decide which member's business judgment was more in line with the LLC's best interests. (2) The fiduciary duties of an LLC member or manager may be expanded, restricted, or eliminated by the LLC agreement. Holding and Reasoning (Chandler, C.) (1) No. Delaware's Limited Liability Act provides for freedom of contract for LLCs. An LLC agreement regulates the terms by which members control the LLC, and a court will not insert itself into the agreement to decide which member's business judgment was more in line with the LLC's best interests. In this case, the LLC agreement splits the power in Genitrix between Class A and Class B members. The agreement by no means requires Fisk or other Class B members to go along with Segal's wishes simply because Segal feels strongly about how Genitrix should be funded. It is entirely possible that Segal was correct in his assessments of Genitrix's financial future and need for funding. But it is not a place for the court to insert itself into the agreement and determine whether Segal or Fisk's business judgment was better for Genitrix at the time the decisions were made. Fisk did not violate the agreement by voting against Segal; thus, Segal's breach of contract counterclaim fails. In addition, Segal's implied covenant of good faith and fair dealing claim must fail, because this implied covenant covers only matters that are actually bargained for within the contract. Nowhere in the agreement did Segal bargain for unilateral power over the direction of Genitrix's finances. Similarly, a party cannot use the implied covenant of good faith and fair dealing if a matter is expressly provided for in the contract. Here, the covenant does not apply to Fisk's voting actions, because the agreement grants Fisk the right to vote on how Genitrix should acquire funding. Fisk is merely acting within his bargained-for rights. (2) Yes. Delaware's Limited Liability Act allows a member or manager's fiduciary duties to be expanded, restricted, or eliminated by the LLC agreement. Accordingly, LLC members cannot be liable for breach of fiduciary duty if the LLC agreement states that members have no duties other than those articulated in the agreement, and the agreement does not articulate any fiduciary duties. In this case, Segal argues that Fisk, Johnson, Rose, and Freund breached their fiduciary duty to Genitrix. However, the LLC agreement states that members have no duties other than those articulated in the agreement. Because the agreement does not articulate any fiduciary duties, they are eliminated. Furthermore, even if the agreement expressed a fiduciary duty not to act in bad faith or with gross negligence, Segal fails to allege facts supporting a breach of such a duty. Because Segal fails to state a claim for breach of contract, the implied covenant of good faith and faith dealing, or fiduciary duty, his counterclaims and third-party claims must be dismissed.

G&S Investments and Belman

Facts G & S Investments (plaintiff) and Thomas Nordale (defendant) were two of four partners in an enterprise to own and operate an apartment building. The partnership agreement stated that in the event of the death or disability of one of the partners, the remaining partners may continue the business, but that if the partners continued the business, they must buy out the departing partner using a formula based on the partner's capital account and the partnership's profits. Nordale, who lived in one of the apartments in the building, became erratic and unreliable starting in 1979. Nordale stopped going to work, he threatened the other partners, he sexually solicited an underage tenant in the apartment complex, he refused to pay rent on his apartment, he caused disturbances which led to the loss of at least one tenant, and he insisted on business decisions that caused severe economic loss to the partnership. In 1981, G & S filed suit to dissolve the partnership and buy out Nordale's interest. The complaint filed by G & S alleged that Nordale had become incapable of performing under the partnership agreement and that his conduct made it impracticable for the other partners to carry on the partnership with him. In February 1982, Nordale passed away, and his estate continued the suit through his personal representative, Fred Belman (defendant). In June 1982, G & S filed a supplemental complaint that invoked their right under the partnership agreement to carry on the partnership and buy out Nordale's interest. Nordale's estate argued that the original filing of the complaint acted as a dissolution of the partnership that required liquidating the partnership and distributing the assets to the partners. The trial court held that G & S had the right to continue the partnership and owed Nordale's estate $4,867.57. The trial court calculated the buy-out amount based on Nordale's capital account, calculated on a cost basis. Nordale's estate appealed, and G & S cross-appealed to recover attorney's fees. Issue (1) Does the filing of a complaint seeking remedies including the judicial dissolution of a partnership act as a dissolution of the partnership? (2) Is a partner's capital account calculated by adding up the cost basis of all contributions the partner has made to the partnership and then subtracting all distributions the partner has received? Rule of Law: (1) The mere filing of a complaint seeking remedies including the judicial dissolution of a partnership does not act as a dissolution of the partnership. (2) A partner's capital account is calculated by adding up the cost basis of all contributions the partner has made to the partnership, then subtracting all distributions the partner has received. Holding (Howard, J.) (1) No. The mere filing of a complaint seeking remedies including the judicial dissolution of a partnership does not act as a dissolution of the partnership. If a partner acts in contravention of a partnership agreement, so that it would be impracticable to carry on the partnership with that partner, the partner's wrongful conduct gives a court the power to dissolve the partnership. The Uniform Partnership Act provides for dissolution of a partnership upon a court's decree. However, the filing of the complaint seeking a dissolution is not what effectuates the dissolution; rather, the dissolution does not occur unless the court decrees it or other acts bring it about. In this case, Nordale's conduct was clearly in contravention of the partnership agreement. It affected the partners' ability to carry on the business and made it impracticable to carry on the partnership with Nordale as a partner. Nordale's wrongful conduct gives the court the power to dissolve the partnership, but the dissolution occurs when the court decrees it and not upon the filing of the complaint. (2) Yes. A partner's capital account is calculated by adding up the cost basis of all contributions the partner has made to the partnership, then subtracting all distributions the partner has received. General accounting principles require the books of a partnership to be kept on a cost basis. If a partner contributes money to the partnership, the partner's capital account is equal to the money he contributes. If the partner contributes more in the future, that new sum is added. If the partner receives a distribution from the partnership, that amount is subtracted from his account. This amount will stay the same, regardless of the value of the partnership as a whole. In this case, the partnership agreement did not explicitly define the term "capital account," but this is not an ambiguous term. At trial, it became clear that cost basis is the customary way of calculating a capital account. In the partnership agreement, the term "capital account" means the total amount of a partner's contributions, plus partnership profits minus losses, minus any distributions received, without any regard to total partnership assets. Accordingly, the decision of the trial court is affirmed. G & S's motion for attorney's fees on appeal is granted.

Sea-Land Services, Inc. v. Pepper Source

Facts Gerald Marchese (defendant) owned six separate business entities (defendants). Marchese ran all of the companies out of a single office. The companies shared expense accounts in common and lent funds to each other, as well as regularly lending money to Marchese for his personal expenses. None of these companies had internal governing documents such as bylaws. One of those businesses, Pepper Source, contracted with a shipping company, Sea-Land Services, Inc. (plaintiff) for the delivery of some peppers. Pepper Source failed to pay for these services, and Sea-Land filed a collection suit against Pepper Source. Pepper Source never appeared, and had in fact been dissolved for failure to pay business taxes. Sea-Land then brought suit against Marchese and all of his companies, seeking to pierce Pepper Source's veil and collect from Marchese, and then to "reverse pierce" Marchese's other companies and collect from them. The lower court held that Sea-Land could collect Pepper Source's debt from Marchese and the companies he owned. The defendants appealed. Issue When multiple companies share all the funds and staff with each other and with their owner, can a creditor to one of those businesses collect its debt from the other companies? Rule of Law: When a company's owner does not take care to observe the formal separation between himself and his business, the business's creditors can collect their debts directly from him. Holding and Reasoning (Bauer, C.J) Yes. Veil piercing requires two things: first, that there be a strong alignment of interest between the shareholders and the business itself, and second, that observing the corporate form would promote injustice or fraud. The courts look for a handful of factors that suggest that the interests of a corporation and those of its shareholders are sufficiently aligned to allow veil-piercing. The following factors are relevant: (1) if the corporation fails to observe corporate formalities; (2) if the business fails to keep its assets separate from those of shareholders and each other; and (3) if the business is undercapitalized. In this case, the first requirement for veil-piercing was met. Marchese shared money with his companies, and they shared money with each other. Because Marchese often withdrew money from Pepper Source, it was not sufficiently capitalized to meet its obligation to Sea-Land, and did not even have enough assets to maintain its own existence. None of the companies had bylaws, articles of incorporations, or minutes from regular board meetings. However, simply because Sea-Land would not have been able to collect its debt does not mean that an injustice was being perpetrated. Plaintiffs only seek to pierce the veil when there are insufficient assets in one company; if this was always an injustice, the second requirement would be meaningless. Injustice must mean that there is some wrong beyond the harm to the creditor. Often, this means that some legal obligation or rule would be undermined, or that some scheme to place liabilities and assets in different companies would be successful. In this case, there may in fact be such a scheme, but there is not enough evidence to justify such a holding. Instead, the court reverses the lower court and orders them to hold a new hearing on whether the scheme will allow an injustice in the absence of veil-piercing.

In re Ebay, Inc. v. Shareholders litigation

Facts In 1998, eBay hired Goldman Sachs to underwrite the initial public offering (IPO) of eBay stock. In doing so, Goldman Sachs allocated shares of the eBay IPO stock to eBay "insiders," including members of eBay's board of directors. Goldman Sachs's purpose in making the allocations was allegedly to increase the likelihood that eBay would hire Goldman Sachs again by bribing the recipients with the valuable IPO shares. This practice of allocating valuable IPO shares to favored clients was known as "spinning." Three of the directors on eBay's seven-member board received the IPO allocations and sold the shares on the open market for a significant profit. Shareholders of eBay (plaintiffs) brought derivative actions against the directors (defendants). The shareholders alleged that the directors' acceptance of the private allocations of the valuable IPO stock violated their fiduciary duty to eBay by usurping eBay's corporate opportunity, because eBay could and would have purchased the stock that was allocated. The plaintiffs alleged that Goldman Sachs aided and abetted the directors in their breach of their fiduciary duty. It is undisputed that eBay could afford the stock financially, that it was in the business of investing in securities, and that eBay was never given an opportunity to turn down the allocations. The directors filed a motion to dismiss for failure to state a claim and for failure to make the necessary pre-suit demand on eBay's board of directors. The shareholders claimed that demand was excused as futile because three of the directors participated in the spinning, and the remaining four directors had close personal and professional ties to the involved directors and received eBay stock options that provided a significant financial incentive for them to retain their positions on the board. Issue (1) Are shareholders required to make a pre-suit demand on a corporation's board of directors prior to bringing a derivative action if the independence of a majority of the board's members is reasonably questionable? (2) Are directors of a corporation personally permitted to accept private stock allocations in an initial public offering of the corporation's stock when the corporation itself could have purchased the stock? Rule of Law: (1) Shareholders are not required to make a pre-suit demand on a corporation's board of directors prior to bringing a derivative action if the independence of a majority of the board's members is reasonably questionable. (2) Directors of a corporation are not permitted to personally accept private stock allocations in an initial public offering of the corporation's stock when the corporation itself could have purchased the stock. Holding and Reasoning (Chandler, J.) (1) No. Shareholders are generally required to make a demand that the corporation's board of directors pursue litigation before the shareholders file a derivative action on the corporation's behalf. However, this pre-suit demand is not required if the independence of a majority of the board's members is reasonably questionable, because the demand would be futile. If shareholders do not make a demand on the board prior to bringing the action, they must plead with factual particularity why demand is excused. Here, three of eBay's directors participated in the spinning and realized significant profits when they sold the allocated IPO shares on the open market. The shareholders' allegations about the remaining members' ties to the involved directors and the financial incentives they had to remain on eBay's board were sufficient to raise a reasonable doubt about the independence of a majority of the board's members, and thus, demand is excused as futile. (2) No. Directors of a corporation are not permitted to personally accept private stock allocations in an initial public offering of the corporation's stock when the corporation itself could have purchased the stock. There was a clear conflict of interest between the self-interest of the defendants in acquiring the valuable eBay stock and the interest of eBay, Inc., which could have acquired the stock for itself. The acceptance by the eBay directors in this case is a violation of the corporate opportunity doctrine. eBay could afford the stock financially, eBay was in the business of investing in securities, and eBay would have surely been interested in purchasing the stock had it been given the opportunity. Further, even if it is assumed in this case that the allocations in question do not constitute a "corporate opportunity" under the doctrine, it might still be a breach of the directors' fiduciary duty of loyalty as it is likely that Goldman Sachs intended the allocations to be bribes designed to induce the eBay directors to hire Goldman Sachs for future business. As a result of the foregoing, the defendants' motion to dismiss is denied.

NetJets Aviation, Inc. v. LHC Communications, LLC

Facts NetJets Aviation, Inc. (NetJets) (plaintiff) leased to LHC Communications, LLC (LHC) (defendant) an interest in an airplane for a term of five years. LHC was a limited liability company (LLC) whose only member-owner was Zimmerman (defendant). Zimmerman had sole authority to make all financial decisions with respect to LHC. He often withdrew money from LHC's account for personal use and transferred money into LHC's account from his own personal account. Zimmerman did not have any written agreements with LHC regarding this comingling of funds. Many withdrawals from LHC's account were for personal expenses, including a residence, phone and cleaning bills, a car, and health insurance for his family. Much of the flight time used by LHC under the lease with NetJets was used by Zimmerman and his family for personal trips. LHC terminated the lease agreement with NetJets about one year into the agreement. The next year, LHC ceased operations, owing NetJets a balance of $340,840.39. NetJets brought suit against LHC and Zimmerman. NetJets presented evidence that, among other things, Zimmerman took more money out of LHC's account than he put in, continued withdrawing money for personal uses even while refusing to pay debts LHC owed to NetJets, and identified his deposits to LHC as loans when other evidence suggests that they were capital contributions. NetJets filed a motion for summary judgment. The district court granted the motion with respect to LHC, but denied the motion with respect to Zimmerman's personal liability. The district court sua sponte granted Zimmerman, personally, summary judgment and dismissed the claims against him. NetJets appealed. Issue Will a court pierce the limited liability company veil if (1) there is overall injustice or unfairness and (2) the LLC is a mere instrumentality or alter ego of its owner? Rule of Law: A court will pierce the limited liability company veil if: (1) there is overall injustice or unfairness; and (2) the LLC is a mere instrumentality or alter ego of its owner, in that the LLC and the owner operate as a single economic unit. Holding and Reasoning Yes. A court will pierce the LLC veil if: (1) there is overall injustice or unfairness and (2) the LLC is a mere instrumentality or alter ego of its owner, in that the LLC and the owner operate as a single economic unit. Factors relevant to the alter ego analysis include whether: the LLC was adequately capitalized, the owner siphoned LLC funds, and "in general, the [LLC] simply functioned as a facade for" the owner. In this case, taking all the facts in the light most favorable to NetJets, (1) LHC was the mere alter ego of Zimmerman, and (2) there was a sufficient levels of fraud or at least overall injustice or unfairness to pierce the LLC veil. First, evidence indicates that Zimmerman used LHC as his personal cash machine whenever he needed. He deposited funds into LHC's account and withdrew funds for his personal and his family's use. Zimmerman also had sole control over all financial decisions of LHC. There is enough evidence that a reasonable fact finder could find that LHC was simply Zimmerman's alter ego. Next, Zimmerman did not put any of the above-referenced deposits or withdrawals in writing and failed to consistently characterize the transactions as loans or capital contributions. There is enough evidence that a reasonable fact finder could find that Zimmerman's withdrawals from LHC amounted to improper distributions that led LHC to go out of business. This would be sufficient for a finding of overall unfairness or injustice in the operation of LHC. As a result, summary judgment in favor of Zimmerman and against piercing the LLC veil was inappropriate. The order of the district court is vacated, and the case is remanded.

Owen v. Cohen

Facts Owen (plaintiff) and Cohen (defendant) entered into an oral agreement to become partners in a bowling alley. Owen loaned the partnership $6,986.63 to buy the necessary equipment, which the parties agreed would be paid back to Owen from the profits of the business. While the business proved immediately profitable, the parties started quarreling over issues such as management and policies of the enterprise, and their rights and duties under their partnership agreement. Cohen insisted on being the dominant partner, and was openly hostile toward Owen in front of customers and employees. Cohen refused to do any manual work, and appropriated partnership funds for personal use. Cohen further demanded that a gambling room be added to the bowling alley, which Owen vehemently opposed. The partners' constant arguments resulted in a steady decline of the bowling alley's monthly receipts. Realizing that the parties could not resolve their differences, Owen offered Cohen the choice of either buying out Owen's interest in the bowling alley, or selling Cohen's interest to Owen. Cohen refused to reasonably entertain either option, insisting that the business be continued until he was ready to sell at a price he would set himself. Owen subsequently filed an action in equity to dissolve the partnership. The trial court found that Cohen's behavior in relation to the business made it impossible for the partnership to continue, and decreed dissolution of the partnership. The trial court also appointed a receiver to sell the partnerships' assets, ordering that Owen receive half the proceeds, plus $6,986.63 as payment for the loan he made to the partnership. Issue Should a partnership be dissolved when one partner engages in a series of hostile actions that harm the partnership? Rule of Law: A court may order the dissolution of a partnership when the parties' quarreling makes it impossible for them to cooperate, or when one partner's acts materially hinder the partnership's business. Holding (Curtis, J.) Yes. A partner has a duty to act in the best interest of the partnership. When a partner continually antagonizes the other partner to the extent that business is adversely affected, the partnership can rightly be dissolved. Cohen contends that he and Owen's arguments were trivial, and that such minor disagreements do not warrant dissolution of a partnership. While it is true that small quarrels between partners would not justify breaking up a partnership, if such quarrels in the aggregate work to the detriment of the partnership's business, a court will properly grant a complaint for dissolution. Cohen's persistent cajoling and belittling of Owen, and his insistence on having his own way in policy matters, severely harmed the partnership's business. This is illustrated by the monthly reduction in gross receipts that grew worse as the partners' business relations deteriorated. The evidence shows that under these circumstances, it would be impractical for the partnership to continue. Cohen also argues that Owen should not be paid $6,986.63 out of the proceeds, as the parties agreed that Owen's loan would be repaid from the business's profits. This court disagrees. Cohen's behavior made it impossible for the business continue, let alone remain profitable. Cohen's acts violated his fiduciary duty to act in the best interest of the partnership. Accordingly, the trial court was justified in dissolving the partnership, decreeing the sale of assets, and ordering the distribution of the proceeds as it did. The decision of the trial court is affirmed.

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

Facts Warren Grain & Seed Co. (Warren), an agricultural company that operated a grain elevator, contracted with several local farmers (plaintiffs) to purchase grain for resale. In 1964, Warren sought financing for working capital from Cargill (defendant). The parties executed a security agreement by which Cargill would loan money to Warren on "open account" financing with a limit of $175,000, and Warren would receive funds and pay expenses through drafts drawn on Cargill through Minneapolis banks. The drafts were imprinted with Warren's and Cargill's names. In exchange for the financing, Cargill became Warren's grain agent, and Cargill was given right of first refusal to buy grain sold by Warren. In 1967, the parties executed a new contract which increased Warren's credit line and gave Cargill authority over some of Warren's internal operations, including requiring Warren to give Cargill annual financial statements, granting Cargill access to Warren's books, and requiring Cargill's approval before engaging in certain financial transactions. Cargill exercised its contractual authority and commenced a pattern of reviewing Warren's finances and operations and making business recommendations to Warren. By the mid-1970s, Warren was shipping 90% of its grain to Cargill. Cargill later discovered that Warren was engaging in some questionable uses of funds, but instead of calling the loan, Cargill executed new security agreements with Warren, increasing its limit to $1,250,000. Warren's debt later exceeded its credit line and Cargill became increasingly involved with Warren's finances, including keeping daily debit positions and opening a bank account in Warren's name, funded by drafts drawn on Cargill through a local bank. Warren subsequently went bankrupt. The farmers who sold grain to Warren sued Cargill for recovery of $2 million, alleging that Cargill had acted as principal for the grain elevator and was thus liable for its agent Warren's contractual obligations. At trial, the jury found in favor of the farmers. Issue Is a creditor liable as a principal for the contracts of a debtor when the creditor takes control of the debtor's business functions? Rule of Law: A principal-agent relationship exists between a creditor and debtor when the creditor intervenes in the business affairs of the debtor. Holding and Reasoning (Peterson, J.) Yes. When a creditor exerts control over the operations of a debtor, a principal-agent relationship is created between the parties, and the creditor is liable for the contractual obligations of the debtor. Cargill consented that Warren would be its agent when Cargill made its operational recommendations to Warren. Warren consented to be Cargill's agent when it obtained grain for Cargill under the operations financed by Cargill. Moreover, Cargill's influencing Warren's internal affairs, particularly its finances, demonstrates control over the grain elevator. Cargill contends that its business dealings with Warren were nothing more than that of a typical creditor-debtor relationship. But, the record shows that the main purpose of Cargill's financing of Warren was to obtain a source of grain for its business, not to make money from its loans to Warren. Cargill kept purchasing grain from Warren while increasing its financing of Warren, even when it became apparent that Warren was becoming a great financial risk. Cargill also asserts that its relationship with Warren was that of a buyer-supplier, not a principal-agent. However, in order for two businesses to have a strict buyer-supplier relationship, they must be independent businesses. In this instance, Warren's operations were financed by Cargill, Cargill established control over Warren's operations, and Warren sold nearly all of its grain to Cargill. Hence, Warren's business was not independent from Cargill's. Therefore there was ample evidence for the jury to find a principal-agent relationship in this case, and the decision of the district court is affirmed.

Day v. Sidley & Austin

Facts: Involves a dispute b/t a former senior partner of SA, a Chicago law firm, and some of his fellow partners. The controversy centers around the merger b/t that firm and another Chicago law firm, Liebman, and the events subsequent to the merger which ultimately led to P's resignation. P seeks damages claiming a substantial loss of income, damage to his professional reputation, and personal embarrassment which resulted from his forced resignation. P, Day, was associated with SA in 1938. He then had to leave for WWII service. When he came back, he established a law firm in Washington. As a senior underwriting partner, he was entitled to a certain percentage of the firm's profits, and was also privileged to vote on certain matter which were specified in the partnership agreement. He was never a member of the executive committee, which focused on day-to-day matters. He remained an underwriting partner until his resignation. The firm's executive committee then began thinking about merging with Liebman. The other non-executive partners were informed of the merger and all agreed to do what the executive committee thought best. Further meetings were held to discuss the merger, but P did not go even though he had sufficient and timely notice. Agreements were then drafted, P signed them but then requested a minor change be made to the memorandum. The merge happened b/t the two firms, and committees were set which incorporated members of both firms' last committees. The new committees decided to move the office to Pennsylvania Ave., thus eliminating the old office in which P was a chairman of. P objected to the move, but it happened anyways. P then resigned from SA claiming that the changes which occurred after the merger in the Washington office - the appointment of co-chairman and the relocation of the office - made continued service with the firm intolerable for him. P alleges that certain misrepresentations about the results of the proposal also had the effect of voiding the approval of the merger. (1) "that no Sidley partner would be worse off in any way as a result of the merger, including positions on committees..." Issue(s) 1: Fraud - -P interpreted the "fraudulent" statement above, to mean that he would continue to serve as the sole chairman of the Washington office and that he would wield the commanding authority regarding such matters as expanding office space. 2. breach of fiduciary duty - P alleged that defendants breached their fiduciary duty by beginning negotiations on a merger with the Liebman firm w/o consulting the other partners who were not on the executive committee and by not revealing information regarding changes that would occur as a result of the merger, such as the co-chairman arrangement for the Washington office. Rule of Law: Fiduciary Duty: "Partners have a duty to make a full and fair disclosure to other partners of all information which may be of value to the partnership.... The essence of a breach of fiduciary duty b/t partners is that one partner has advantaged himself at the expense of the firm.... - The basic fiduciary duties are: (1) a partners must account for any profit acquired in a manner injurious to the interests of the partnership, such as commissions or purchases on the sale of partnership property; (2) a partner cannot w/o the consent of the other partners, acquire for himself a partnership asset, nor may he divert to his own use a partnership opportunity; and (3) he must not compete with the partnership within the scope of the business. Holding: (1) fraud: "This misrepresentation regarding P's status cannot support a cause of action for fraud b/c P was not deprived of any legal right as a result of his reliance on this statement. - No mention is made of the Washington office or P's status within the partnership agreement, whereas special arrangements are specified for certain other partners. - P's allegations of an unwritten understanding cannot now be heard to contravene the provisions of the Partnership Agreement which seemingly embodied the complete intentions of the parties as to the manner in which the firm was to be operated and managed. - Nor can P have reasonably believed that no changes would be made in the Washington office since the SA agreement gave complete authority to the executive committee to decide questions of firm policy, which would clearly include establishment of committees and the appointment of members and chairpersons. - Having read and signed the partnership agreements which implicitly authorized the executive committee to create, control or eliminate firm committees, P could not have reasonably believed that the status of the Washington Office committee was inviolate and beyond the scope and operation of the Partnership agreements. - Since P had no right to remain chairman of the Washington office, a misrepresentation regarding his chairmanship does not form the basis for a case of action in fraud." (2) Breach of fiduciary duty: "An examination of the case law on the partner's fiduciary duties reveals that courts have been primarily concerned with partners who make secret profits at the expense of the partnership. - No court has recognized a fiduciary duty to disclose the type of information in this case, the concealment of which does not produce any profit for the offending partners nor any financial loss for the partnership as a whole. - There was no financial gain for defendants, but the remaining partners did not acquire any more power within the firm as the result of the alleged withholding of information from P. They were already members of the executive committee and as such had wide-ranging authority with regard to firm management. - P's claim of breach of fiduciary duty must fail." - P suffering from a bruised ego but that the facts fail to establish a legal cause of action. - When P signed the 1970 Partnership Agreement he bound himself to the agreement; even if he did not sign it, the merger would have happened regardless. - The Partnership Agreement to which P freely consented denies the existence of a contractual right to any particular status within the firm for P. - It is clear that their alleged activities did not amount to illegality, and that any personal humiliation or injury was a risk that he assumed when he joined with others in the partnership."

Hoddeson v. Koos Bros.

Hoddeson (P) paid money for the purchase of furniture to an impostor salesperson in Koos Bros (D). Rule: if a business proprietor by his dereliction of duty enables one who is not his agent to act conspicuously as such and to transact to proprietor's business with a patron in the establishment, estoppel prevents the proprietor from defensively availing himself of the impostor's lack of authority in order to escape liability for the customer's consequential loss. Proprietor is ESTOPPED from claiming lack of authority if reasonable diligence could have prevented the actions.

de facto corporation

If a de jure corporation is never formed, the promoter(s)/shareholders may still be able to escape personal liability because a de facto corporation was formed. The doctrine of de facto corporation grants promoters/shareholders limited liability as though in a de jure corporation if the promoters: -In good faith tried to incorporate; -Had a legal right to incorporate; and -Subsequently acted as a corporation.

Member fiduciary obligations

LLC members have the same basic default fiduciary duties as do partners: duty of loyalty (no secret profits, no competition, candor) duty of care duties of good faith/fair dealing

Partnership Dissolution Generally

The termination of a partnership as a going concern is a three-phase process: (1) Dissolution (UPA § 29) (2) Winding up for liquidation (RUPA § 801, comment 2) (3) Termination (RUPA § 801, comment 2)

Where should a corporation be formed?

a company can incorporate in ANY state. there are a number of factors that play into the question of where to incorporate - but ultimately the decision is (1) local incorporation, or (2) Delaware.

features of general partnerships: (4) agency

all partners are considered agents of the partnership

Corporation: perpetual existence

b/c the corporation is separate from the natural persons who own and run it, it can (at least theoretically) exist forever.

Tax Consequences of LPs

both limited and general partners enjoy pass-through taxation: -- so no double taxation on profits -- and limited partners can personally "write off" the limited partner's real and paper losses as well -- historically, this was a BIG advantage for limited partners.

Securities Exchange Act of 1934

focuses more on disclosure and prevention of fraud in the SECONDARY market transactions. it covers a whole host of issues including: 1) periodic disclosures for large publicly traded companies (annual 10-K; quarterly 10-Q 2) fraudulent misrepresentations in investor communications 3) short-swing trades in company stock by senior management 4) insider trading act also created the Securities and Exchange Commission (SEC)

formation of LLCs

formed by filing "articles of organization" or a "certificate of formation," with a state agency and paying a fee. must include: name of the LLC; address of its registered office; and the name and address of its registered agent most of the details concerning the governance of the LLC will be provided in the separate, non-public LLC "operating agreement" or LLC "agreement"

Transferability of ownership: traditional Corp.

free transferability of shares

When an act of dissolution will be "rightful" RUPA §38(1)

if it complies with the express and implied obligations of the partners under the Partnership Agreement and under the law. - if dissolution is rightful, then each partner has the right to compel a wind up and to receive her full interest any resulting distribution. (RUPA § 38(1)).

Corporation: legal entity

it is an entity legally distinct from the natural persons that run it.

Limited Partnership statutes

just like general partnerships, limited partnerships are governed by state statutes: -- The Revised Uniform Limited Partnership Act (RULPA), which was first adopted in 1976 and was amended in 1985. -- The Uniform Limited Partnership Act of 2001 (ULPA 2001). ULPA was designed to address the more marginalized role of LPs after the advent of LLCs and LLPs in the late 1980s and 1990s.

Transfer of interest in limited partnerships

like in general partnerships, unless the limited partnership agreement provides otherwise, no partner (general or limited) can substitute another person as partner w/o the other partners' consent.

liability: traditional corporation

limited liability

RUPA § 202(a) Co-owner requirement

look at receipt of profits as well as if they are carrying on as co-owners. ask - does the person share any of the typical rights and obligations of ownership? -sharing of losses - owners share losses of businesses, but employees and creditors do not. -ability to inspect the books -control over affairs of business comment to RUPA § 202 states: "Ownership involves the power of ultimate control. To state that partners are co-owners of a business is to state that they each have the power of ultimate control."

requirement of demand

most states require plaintiffs in derivative suits to first approach the board and demand that the corporation sue the alleged wrongdoers on its own. may be excused under certain circumstances, but if demand is NOT excused, then failure to make demand is a procedural barrier and the suit will be dismissed.

voting trust: advantages

no possibility of shareholder deadlock, since everybody puts their shares in the trust and trustee votes

What is a security? § 2 of the Exchange Act

offers a two-part definition of a security. to qualify as a security, the instrument must either be (1) of a specific type identified in the statute or (2) it must fit under one of the statutes more general descriptions: 1) it offers a list of specific instruments that are securities (stock, notes, and bonds) 2) it offers a list of more general descriptions (evidence indebtedness, investment contracts and any instrument commonly known as a security. context should inform the determination of whether an instrument is a security.

(3) termination (RUPA § 801, comment 2)

once the process of winding up is complete, the partnership is terminated and ceases to exist as an entity or going concern.

tax: general partnership

pass-through taxation

Indemnification: Del. Gen. Corp. Law § 145(f)

permits corp.s to provide indemnification rights BEYOND those provided by the other subsections, so long as they are "consistent with" those other provisions....

Del. Gen. Corp. Law § 102(b)(7)

provides that any corporation may include in its cert. of incorp.: "a provision eliminating or limiting the personal liability of a director to the corp. or its stockholders for monetary damages for breach of fiduciary duty as a director, provided that such provision shall not eliminate or limit the liability of a director: (i) for any breach of the director's duty of loyalty to the corp. or its stockholders; (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law."

Indemnification

reimbursement - the corp. agrees to reimburse its directors or officers for expenses and attorney's fees incurred due to litigation brought b/c of her role as a director or officer of the corp.

Entity status: traditional corp.

separate entity

control: traditional corp.

separation of ownership and management/control

The Sharing of Profits and Losses

subject to an alternate arrangement in the PA, RUPA § 401(b) provides that "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." - If the parties are not comfortable with such a distribution, they can arrange for an alternate distribution of losses in the partnership agreement.

common corporate governance issues

takeover defenses board diversity and independence CEO compensation pay disparity political contribution disclosure separate CEO and chair

"on the principal's behalf"

the agent must act primarily for the principal's benefit - not for the agent's own benefit or for a third party.

RUPA § 202(a) General Partnership defined

the association of two or more persons to carry on as co-owners a business for profit. formed whenever a business relationship satisfies this definition - even if the persons involved did not realize they were forming a partnership.

oversight of management - nonfeasance

the board fails to act as duty requires (it is inattentive or disengaged) and some harm to the corp. results. requires both proof that: 1) the board member breached the duty of care, and 2) that breach caused the harm to the corp.

breach in decision-making - misfeasance

the board makes a decision that ends up harming the corp. the BJR presumption will apply in these cases, but beach of the duty of care (usually only by gross negligence in failing to become informed or deliberate before making that decision) can overcome that presumption.

(1) Dissolution (UPA §29)

the change in the relation of the partners caused by any partner ceasing to be associated in the carrying on ... of the business. "The commencement of the winding up process." RUPA § 801

RUPA § 801 "dissolution"

the commencement of the winding up process

How is a corporation formed?

the corp. comes into being when the state official accepts the articles of incorporation ("certificate of incorporation" or "charter") for filing with the Secretary of State or some other official in the state of incorporation - once filed, a de jure corporation is formed. the person who signs the articles is the incorporator.

What is the standard of review for corporate philanthropy after A.P. Smith?

the court appears to retain the common-law requirement that the gift somehow benefit the corporation (NJ statute's requirement that the gift will "contribute to the protection of the corporate interests"). but consistent with the Business Judgment Rule, the court is unwilling to second-guess the board's judgment on this score, so long as: - not arbitrary - no fraud - no illegality - no self-dealing (no "pet charities")

Profit and Loss Sharing in an LP

the default rule is that both general and limited partners in an LP will share in profits and losses in proportion to their respective capital contributions. -- limited partners' losses are capped.

General Partnerships - History/Formation

the law governing is statutory. National Conference of Commissioners on Uniform State Law (NCCUSL) promulgated the Uniform Partnership Act (UPA) in 1914. Revised Uniform Partnership Act was promulgated (1977) 34 states have adopted this. many statutory provisions of the UPA/RUPA are just default rules that the parties are free to opt out of in their partnership agreement.

Fiduciary duties of directors and officers: loyalty

they are expected to subordinate their personal interests to the welfare of the corp: - no competition - no taking of corporate opportunities - no conflict of interests - no insider trading - no misrepresentation

Delaware's approach to the corp. opp. doctrine: (4) embracing the opp. would create a conflict b/t the director's self-interest and that of the corp.

this final test demonstrates how the corp. opp. doctrine is related to other duty of loyalty test like the duty not to compete. ask whether taking the corp. opp. would place the director in a position that is "inimical" to the corp.

federal securities laws: secondary market

this is where investors trade in securities amongst themselves w/o the issuer's involvement. ex: trading on the NYSE (NY Stock Exchange)

Federal securities laws: primary market

this is where the issuer of the security (the company that created the stock or bond) sells them directly to investors ex: an initial public offering (IPO)

Role/responsibilities of the promoter of a corporation

those with the vision and initiative to launch new corporate enterprise. once launched, the promoter may receive payment and then have nothing further to do with the corporation.

Advantages of limited liability

unlimited upside and downside limited to investment as an incentive for increased capital investment - offering a major boost to the economy.

Classical Theory after Chiarella

while fraud typically requires an affirmative misrepresentation, insider trading on the secondary markets usually involves silence or a failure to disclose. duty to disclose arises from the fiduciary relationship of trust and confidence b/t the actual parties to the trade: a corporate insider who seeks to benefit from material or nonpublic information by trading in their own company's shares thereby violates a fiduciary or other similar duty of trust and confidence to the current or prospective shareholders of the company on the other side of the trade. such an insider as a "duty to disclose or abstain" recognizing such a duty to disclose guarantees that those who have an obligation to place the shareholder's welfare before their own, will not benefit personally (at the expense of the shareholder) through [the] use of material, nonpublic information. later rejected.

Exculpation Del. Gen. Corp. Law § 102(b)(7)

provides that any corporation may include in its cert. of incorp.: "a provision eliminating or limiting the personal liability of a director to the corp. or its stockholders for monetary damages for breach of fiduciary duty as a director, provided that such provision shall not eliminate or limit the ability of a director: (1) for any breach of the director's duty of loyalty to the corp. or its stockholders; (2) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law statutes are limited in scope - typically only permit the corp. to exculpate directors from breaches of their duty or care, not their duty of loyalty.

Corporate bylaws

rules adopted by a corp. to govern its internal affairs. (1) far more detailed than articles of incorporation - and they deal with such matters as: -number and qualifications of directors - functions of each corporate office -how shareholder and director meetings are called and conducted -formalities of shareholder voting, etc. (2) there is no requirement that bylaws be filed with the state (as articles of incorporation must be) (3) in the event of a conflict b/t the articles of incorporation and bylaws, articles of incorporation win out. - as such, articles of incorporation are like the corporation's constitution, and bylaws are like its statutes. (4) and (like statutes v. constitutions) it is much easier to pass and amend bylaws than to pass and amend articles of incorporation.

Fiduciary duties of directors and officers: duty of care

they are expected to act in good faith and due care while acting in the best interests of the corporation: - must be informed - must be attentive - must deliberate and not arbitrary

Model Business Corp. Act optional provisions: director and officer indemnification and limited liability provisions

though generally directors and officers are not liable for corporate acts, they may sometimes be liable for negligence or other misconduct. with some limitations, a corp. may indemnify or limit the liability of its officers and directors in the articles.

If the partnership is at will...

then the presumption is that each partner has the contractual right to dissolve at any time.

Close corp. shareholders

- often undiversified - interested in the company's performance and dividends, not share price. - minority shareholders may have little influence on BOD or management - personality conflicts can lead to deadlock or oppression.

When the partnership is term then...

any act of dissociation prior to the conclusion will typically be in breach of the partnership agreement and will be wrongful.

UPA § 18(h)

any difference arising as to ordinary matters connected with the partnership business may be decided by a majority of the partners." If there are 3 partners and they disagree as to an "ordinary" matter, the decision of the majority controls.

UPA's aggregate theory

any dissociation of a partner MUST result in the end/dissolution of that partnership.

LLC financial interests: withdrawal

members may withdraw and demand payment of his/her interest upon giving the notice specified in the statute or under the terms of the LLC's operating agreement.

voting trust: disadvantages

loss of control duration - most states limit to ten years still possible for board to oppress once elected.

Public corp.

owned by numerous shareholders, most of whom are passive investors, in no way involved in management and their shares are readily marketable.

The Right vs. The Power of Dissolution/Dissociation

partners will always have the POWER to dissolve the partnership [under the UPA] or dissociate from it [under RUPA], but they may not have the RIGHT to do so.

Indemnification: Del. Gen. Corp. Law § 145(a)

permits indemnification in certain circumstances for "expenses, judgment, fines, and amounts paid in settlement" in suits brought by 3rd parties

Indemnification: Del. Gen. Corp. Law § 145(b)

permits indemnification in certain circumstances for suits brought by the corp. itself or DERIVATIVELY but only for expenses (not damage awards), and if the person seeking indemnification has been judged liable, only with judicial approval.

Indemnification: Del. Gen. Corp. Law § 145(e)

permits the corp. to ADVANCE EXPENSES to an officer or director

Guillotine expulsion provision

permits the partners to expel other partners w/o cause by a two-thirds majority vote (See Lawlis)

liability: general partnership

personal liability for partners

Expulsion RUPA § 601

"A partner is dissociated from a partnership upon the occurrence of any of the following events: ... (3) the partner's expulsion pursuant to the partnership agreement."

RUPA § 404(d): Partner discharging duties

"A partner shall discharge the duties to the partnership and the other partners under this [Act] or under the partnership agreement and exercise any rights consistently with the obligation of good faith and fair dealing."

two kinds of Securities Act Registration Exemptions

1) based on the type of security involved (securities issued by the U.S. Government, Municipal bonds, public utility stocks) these securities are always exempt from registration - both in its initial sale and in all subsequent transactions. 2) based on the type of transaction involved (private placements) these are one-time exemptions - and registration may be required for subsequent transactions.

historical advantages of limited partnerships

1) corporations are typically permitted to be a general partner of an LP - which means that no natural persons will be exposed to unlimited liability. -- so structured, the advantages of pass through taxation made limited partnerships ideal as publicly traded "tax shelters" - permitting individual investors to write off the businesses (sometimes artificial) losses off on their personal returns. -- this made limited partnerships a very popular form of investment from many years up until 1986. 2) in 1986, a tax reform closed this "loophole" and forced most publicly-traded limited partnerships structured to take advantage of this form to pay double taxes like a corporation. -- then LLC and LLPs came about and there was even less reason for the LP.

Basic requirements for the private placement exemption

1) number of offerees and their relationship to the issuer - should be offered to only a few people (preferably among people who know each other) - preferably reasonably sophisticated - must have access to information needed to make an informed decision about whether to invest 2) number of units (should involve only a few shares) 3) size of offering (should raise only a relatively small amount of money) 4) manner of offering (should not involve public advertising)

Levin, Rosenfeld, and the General rules of reimbursement of proxy fight

1) the corp. may not reimburse either party unless the dispute concerns questions or policy 2) the firm may reimburse only reasonable and proper expenses 3) the firm may reimburse incumbents whether they win or lose 4) the firm may reimburse insurgents only if they win, and only if shareholders ratify the payment.

Dissociation ("withdrawal") and dissolution of an LP

RULPA refers to dissociation as "withdrawal" and a general partner has the power to withdraw at any time upon written notice. if dissolution occurs, the consequences are basically the same as under a general partnership.

Duty of Loyalty generally

Dodge v. Ford - directors have a duty to maximize shareholder wealth: "A business corp. is organized and carried on primarily for the profit of stockholders." BJR precludes courts from second-guessing the effects on shareholder wealth of most board decisions. BJR's presumption does not apply where there is a conflict of interest. In such cases, the burden shifts to the board to show they complied with the duty of loyalty.

Insider trading after O'Hagan

Absent an affirmative misrepresentation, Section 10(b) insider trading liability can arise only from fraudulent deception through the breach of a duty to disclose. The Supreme Court recognizes only two theories under which such a duty arises, which it regards as complimentary: First, under the classical theory, the duty is breached where an insider trades in a security on the basis of material nonpublic information in violation of a relation of trust and confidence to the firm's shareholders (the counterparties to the trades). Second, under the misappropriation theory, the duty is breached where ANYONE (regardless of insider status) trades in a security on the basis of material nonpublic information in violation of a fiduciary duty of trust and confidence to the source of the information (whomever that may be).

what is the purpose and social role of a corp.?

Dodge v. Ford Motor Co. - "A business corp. is organized and carried on primarily for the profit of the stockholders. The powers of the directors are to be employed for that end."

risks of litigation for directors and other corporate officers

The Delaware Supreme Court held in Smith v. Van Gorkom the board of Trans Union Corp. personally liable for breach of their fiduciary duty of care by failing to adequately inform themselves in advance of approving a tender offer...

Settlement, Attorney Fees, and Associated Agency problems in Derivative actions

Attorneys Fees in Derivative Actions: If a derivative action is settled before judgment, then the corporation is generally free to pay the legal fees of BOTH the plaintiffs and the defendants. If, however, there is no settlement, and the judgment is against the defendants, then (unless covered by insurance), the board member/officer defendant may be required to bear the full costs of the defense in addition to paying damages. This reality generates a perverse incentive for defendant board members to seek settlement to reduce risk for themselves....

SEC v. Switzer

Barry Switzer overheard an insider privately discussing material nonpublic information concerning a publicly traded company while Switzer was sunbathing on the bleachers at his son's track meet. Switzer immediately acquired positions in the company and encouraged his friends to do the same. When the information was finally announced, Switzer and his friends profited from a 16.5-point jump in the stock's price. Finding Switzer not liable, the court quoted the following passage from Dirks: "As we emphasized in Chiarella, mere possession of nonpublic information does not give rise to a duty to disclose or abstain; only a specific relationship does that. And we do not believe that the mere receipt of information from an insider creates such a special relationship between the tippee and the corporation's shareholders." Liability is crucially derivative. Because the insider in this case did not intend to disclose to Switzer, and did not seek to personally benefit, he violated no duty to his shareholders—so no derivative liability for Switzer.

Note on Delaware Approach

Delaware courts have refused to recognize a special fiduciary duty for shareholders in a non-statutory close corp. - instead, they apply the controlling shareholder rule that applies to public corps. (where a controlling shareholder dominates the board) to close corps. as well.

derivative suit

alleges a loss to the shareholder that derives from a loss to the corporation.

Gifting information: an open question for Tipper/tippee liability

In Salman v. United States (2016), an insider passed inside information along to his brother (who then traded and tipped). One of the arguments offered by Salman in defense of the insider trading charges against him was that there was no breach of fiduciary duty by the original tipper because he gave the inside information to his brother as a "gift" and therefore did not receive a personal benefit.... The Supreme Court found Salman guilty while reaffirming the Dirks requirement that there be some personal benefit to a tipper in order for there to be a breach of fiduciary duty. The Salman Court just turned to the following passage in Dirks (which is not included entirely in your text) to address the "personal benefit" requirement when one brother tips another.... "The elements of fiduciary duty and exploitation of nonpublic information also exist when an insider makes a gift of confidential information to a trading relative or friend. The tip and trade resemble trading by the insider himself followed by a gift of the profits to the recipient." BUT does every gift/gratuitous disclosure personally benefit the tipper—or just those given to relatives or friends? Who counts as a "relative"? Who counts as a "friend"?

decline of the LP with the advent of the LLC and LLP

LLCs and LLPs can offer the same pass-through tax advantages, but w/o the full personal liability for GPs, and w/o the requirement that LPs be excluded from management or control. -- as a consequence, the LP has been regulated to two specialized uses where advantageous tax treatment persists under federal tax law: -- family LPs for estate planning -- oil and gas exploration and real estate speculation ("Master Limited Partnerships").

SEC v. Maxwell

Maxwell worked for a publicly traded company. Jehn was his barber. During a haircut, Maxwell mentioned to Jehn there was a rumor that some buyers were interested in his company. Maxwell had been instructed to keep this information confidential. Jehn leveraged everything he had and made $200K in trading on the stock.... The court ruled there could be no section 10(b) liability for either Maxwell or Jehn because there was not evidence Maxwell benefited from the disclosure directly or indirectly. The court found that, given 'the parties' relative stations in life, any reputational benefit to...Maxwell in the eyes of his barber is extremely unlikely to have translated into any meaningful future advantage." There as no evidence of a close friendship. The relationship between the two was "no more than the relationship between a barber and his client.... But see United States v. Martoma (2d Cir., 2017) (held that there need not be a "meaningfully close personal relationship" between tipper and tippee for a tip to personally benefit the tipper under Dirks).

Delaware Test for Demand Futility - Aronson Test:

Must be able to plead with particularity sufficient facts that "reasonable doubt" exists that the board is capable of making and independent decision. This may be done by showing that: "(1) a majority of the board has a material financial or familial interest; (2) a majority of the board is incapable of acting independently for some other reason such as domination or control; or (3) the underlying transaction is not the product of a valid exercise of business judgment. "If the stockholder cannot plead such assertions," then the "stockholder must make a pre-suit demand on the board." Note: If demand is made (and refused), then plaintiff waives the right to claim demand is futile. Note Also: If demand is made and rejected, then the business judgment rule applies to that decision, unless plaintiff can show that there was a conflict or breach of duty that overcomes the BJR.

Partnership Property - Generally

One consequence of the entity model is that partnership property is owner by the partnership as an entity - not by the partners individually (§203) If one partner contributes property to the partnership, it is the partnership's property. Also, while creditors of individual partners can reach partnership property upon dissolution, they are only entitled to that partner's partnership interest in the partnership's property.

Agency - Who is an Agent? Case 1: Gorton v. Doty

Overview: The son, Richard Gorton, was injured in a car accident while being transported to a school football game. The son's coach was the driver of the owner's car. The son and father's theory of recovery against the owner was based upon the alleged negligence of the coach, acting as the special agent of the owner. The owner argued that no agency relationship existed, b/c she loaned her car to the coach. However, the court determined that the evidence supported a finding that the relationship of principal and agent existed b/t the coach and the owner. The court found that the trial court did not err in denying the owner's motion for mistrial and concluded that the trial court properly instructed the jury. The court concluded that no substantial error occurred in the trial court. Procedural Posture: Ps, father and son, brought suit against D owner for injuries sustained in an automobile accident. The District Court of the Fifth Judicial District, Idaho, entered judgments in favor of the Ps. The trial court denied the owner's motions for new trials. The owner appealed. Outcome: The court affirmed the trial court's judgment in favor of the Ps in their negligence action against the owner. The court denied the owner's petition for rehearing. Rule: Restatement of Agency §1 "Broadly interpreted - Agency indicates the relation which exists where one person acts for another. It has 3 principal forms: (1) principal and agent (2) master and servant (3) employer or proprietor and independent contractor." - This case is concerned with the first form only "Specifically interpreted - agency is the relationship which results from the manifestation of consent by one person to another that the other shall act on his behalf and subject to his control, and consent by the other so to act." Analysis: "This court has not held that the relationship of principal and agent must necessarily involve some matter of business, but only that where one undertakes to transact some business or manage some affair for another by authority and on account of the latter, the relationship of principal and agent arises." "Appellant could have driven the car herself, but instead of doing that, she designated the driver (Garst) and, in so doing, made it a condition precedent that the person she designated should drive her car. That appellant thereby consented ... that Garst consented to so act for appellant is equally clear." "It is not essential to the existence of authority that there be a contract b/t principal and agent or that the agent promise to act as such, nor is it essential to the relationship of principal and agent that they, or either, receive compensation." The Court relied on Willi v. Schaefer Hitchcock Co. - "... that the fact of ownership alone (conceded here), regardless of the presence or absence of the owner in the car at the time of the accident, establishes a prima facie case against the owner for the reason that the presumption arises that the driver is the agent of the owner...." The Dissent: "As I read the entire record there is a total lack of evidence to support the allegation in the complaint that Garst was the agent of appellant Doty at or prior to the time of the accident in which respondent Richard Gorton was injured and as such agent was acting within the scope of his authority." "Agency means more than mere passive permission. It involves request, instruction or command." "... Doty simply loaned her car to Garst. ... It was nothing more or less than a kindly gesture." "The Majority opinion believes Doty is held legally liable for each and every act done or performed by Garst as though she had been personally present and personally performed each and every act that was done or performed by Garst, this in the absence of any contractual relationship b/t her and Garst or b/t her and the school district."

Town and Country House & Home Service, Inc. v. Newbery

Plaintiff started a home cleaning business wherein appellants worked with plaintiff for 3 years, solicited his customers, and then left and started their own company. Special Term court dismissed complaint on the ground that the appellants were not subjected to negative covenants under any K with plaintiff, and methods used by plaintiff were not confidential or secret. Appellate court reversed. Supreme Court held: (1) the only trade secret is plaintiff's list of customers. Concerning that, even where a solicitor of business does not operate fraudulently under the banner of his former employer, he still may not solicit the latter's customers who are not openly engaged in business in advertised locations or whose availability as patrons cannot readily be ascertained but "whose trade and patronage have been secured by years of business effort an advertising, and the expenditure of time and money, constituting a part of the good will of a business which enterprise and foresight have built up. Appellants only liable for soliciting plaintiff's customers.

Indemnification: Del. Gen. Corp. Law § 145(c)

REQUIRES indemnification of expenses if the person seeking indemnification was SUCCESSFUL on the merits

Reading v. Regem

Reading (P) obtained payments for accompanying unlawful contraband past civilian police checkpoints while employed by the British Army. Rule: a servant is accountable to his master for profits he obtains b/c of his position, if the servant takes advantage of his position and violates his duty of good faith and honesty to make profit for himself. Holding: The sergeant had to surrender illegal bribe money to the Crown b/c he was acting as employee under the Crown at the time, and thus it was entitled to it. "... the wearing of the King's uniform and his position as a soldier is the sole cause of his getting the money and he gets it dishonestly, that is an advantage which he is not allowed to keep. ... The plaintiff go the money by way of virtue of his employment, and must hand it over.

can shareholders contracts bind director discretion?

Ringling stands for the rule that vote pooling agreements for the election of directors are enforceable.

General Partnership law is a mixture of statutory and common law rules.

The Uniform Statutes: (1) Uniform Partnership Act (UPA)(1914) (2) Revised Uniform Partnership Act (RUPA) (1997) -Most common today (3) RUPA (2013) Though the law of General Partnership is mostly statutory, many of the statutory provisions of the UPA/RUPA are just default rules that the parties are free to opt out of in their partnership agreement.

Grabbing and Leaving

a concern for general partnerships as it is under general principals of agency law.

How do we determine who are partners?

We apply the definition of General Partnership found in RUPA § 202(a) to answer this question ... -We pay special attention to evidence of sharing in profits and evidence of ownership/control.

ownership exit: traditional corp.

only if there is a market

The Fiduciary Obligation of Partners: RUPA § 404 - General Standard of Partners Conduct

"(a) The only fiduciary duties a partner owes to the partnership and the other partners are the duty of loyalty and the duty of care set forth in subsections (b) and (c). (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 in the conduct and winding up of the partnership business or derived from a use by the partner of partnership property, including 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 a or on behalf of a party having an interest adverse to the partnership; and (3) to refrain from competing with the partnership in the conduct of the partnership business before the dissolution of the partnership.... (c) [Covers duty of care—partners must refrain from "grossly negligent or reckless conduct, intentional misconduct, or a knowing violation of law."]

Test for whether claim is direct or derivative

(1) Who suffered the alleged harm? ○If the corporation, then it is probably derivative. ○If the stockholders individually, then it is probably direct. (2) Who would receive the benefit of any recovery? ○If the corporation, then it is probably derivative. ○If the stockholders individually, then it is probably direct.

Note on charitable giving statutes: Delaware General Corp. Law § 122

"Every corporation created under this chapter shall have the power to ... (9) make donation for the public welfare or for charitable, scientific or educational purposes, and in time of war or other national emergency in aid thereof...." this identifies charitable giving as a power of corp.s to act in furtherance of the basic purpose of business corp.s "to maximize profits" courts will rarely second-guess the business judgment of directors and officers on this score

Rule 14(a)-8 Shareholder proposals

"This rule addresses when a company must include a shareholder's proposal in its proxy statement and identify the proposal in its form of proxy when the company holds an annual meeting of shareholders. In summary, in order to have your shareholder proposal included on a company's proxy card, and included along with any supporting statement in its proxy statement, you must be eligible and follow certain procedures. Under a few specific circumstances, the company is permitted to exclude your proposal, but only after submitting its reasons to the Commission...."

Amendments to the articles of incorporation - three-step process

(1) amendment must be recommended by the board to the shareholders; (2) shareholders must approve the amendment (3) amendment must be filed with the state.

Public Benefit Corporation: DGCL § 362

"for-profit corp....that is intended to produce a public benefit or benefits and to operate in a responsible and sustainable manner..." that a company is a PBC must be specified in its articles of incorporation and must identify the positive effects it intends to have on stakeholders OTHER than shareholders, "including but not limited to, effects of an artistic, charitable, cultural, economic, educational, environmental, literary, medical, religious, scientific or technical nature." in Delaware, the PBC must report to shareholders on its progress in this mission at least every other year.

Related theories: enterprise liability doctrine

"horizontal" veil piercing -- used to disregard the multiple incorporations of "sister" companies that are in reality functioning as one single business under common ownership. --if enterprise liability is imposed, then ALL the assets of the multiple sister corporations are pooled together and they are held jointly and severally liable. test: similar to vertical piercing. --courts will look to whether the sister corp.s function as one person (co-mingling funds, officers do not identify with any one company, use common trade names, common stationary, common facilities, etc.)

Subject to an alternate arrangement in the PA, RUPA § 401(b) provides:

"that 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." see Kovacik

MBCA § 6.22(b)

"unless otherwise provided in the articles of incorporation, a shareholder 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."

Nonfeasance v. malfeasance RMBCA § 8.30(b) then provides that the duty of care applies to directors...

"when becoming informed in connection with their decision-making function [BJR] or devoting attention to their oversight function."

NY Rule for Demand Futility

(1) Demand is excused because of futility when a complaint alleges with particularity that a majority of the board of directors is interested in the challenged transaction. Director interest may either be self-interest in the transaction at issue..., or a loss of independence because a director with no direct interest in the transaction is controlled by a self-interested director. (2) Demand is excused because of futility when a complaint alleges with particularity that the board of directors did not fully inform themselves about the challenged transaction to the extent reasonably appropriate under the circumstances.... (3) Demand is excused because of futility when a complaint alleges with particularity that the challenged transaction was so egregious on its face that it could not have been the product of sound business judgment of the directors."

the importance of buyout provision in PAs:

(1) buyout agreements can and ought to be tailored to the needs and circumstances of the relevant partnership. - should identify "trigger" events such as: death; disability; and retirement - should offer objective method of determining buyout price: book value; appraisal value; and formula (Partnership account + sum of profits for past three years) see G&S Investments -method of payment cash overtime

what are the functions of promoters? (4)

(1) discovery of business opportunity for future corporation; (2) forming the business plan and arranging the startup capital for the future corporation; (3) laying the groundwork for the planned incorporation so that the business can "hit the ground running" upon formation; and (4) arranging for the promoters own compensation (cash or equity in the new business) though one person may be both the promoter and incorporator (person who signed the articles of incorporation), the mere fact that someone becomes an incorporator does not make them a promoter.

Veil Piercing - Multi-Factored Test: traditional factors include:

(1) is the business closely held (few shareholders,not publicly traded, and shareholders are engaged in management)? (2) were corporate formalities observed? -- were shareholder and director meetings held? --were corporate minutes kept? --was stock issued? -- were directors and officers elected? (3) were corporate funds co-mingled with the shareholder/defendants? (4) Was the business undercapitalized? (5) did the shareholder/defendant completely control the business? --did she (or family members) have sole ownership of all the stock and run it accordingly to their whim? (6) Did the shareholder/defendant deceive creditors?

If articles of incorporation are like a corporation's constitution...

(1) its bylaws are like its statutes addressing the more detailed rules of how its internal affairs will be governed. - They deal with such matters as: --functions of each corporate office --how shareholder and director meetings are called and conducted --formalities of shareholder voting, etc. (2) Bylaws are adopted, amended, or repealed by majority approval of either the board of directors or the shareholders. --so much easier to change bylaws than the articles of incorporation. (3) there is no requirement that bylaws be filed with the state (as articles of incorporation must be). (4) in the event of a conflict b//t the articles of incorporation and bylaws, articles of incorporation win out.

MBCA offers bare-bones approach to incorporation: § 2.02(a) requires four items

(1) name - must not be the same or confusingly similar to another corporation in that state. - must also include some word indicating incorporation (2) authorized shares - must state the maximum number of shares the corporation may issue. (3) registered agent - must include name and address of registered agent. - cannot be a P.O. Box b/c it must be the designated location for service of process. (4) incorporators - name and address. the only functions of the incorporator(s) is to: (1) sign the articles of incorporation; (2) deliver them to the Secretary of State, and (3) complete the formation of the corporation (naming the initial directors [if not already named in the articles.]

the process of winding up the partnership that commences upon dissolution: (3)

(1) sale of the partnership's assets; (2) repayment of creditors; (3) distribution of any remaining proceeds to the partners in proportion to their relative partnership interests.

RULPA § 201(a) requires only:

(1) the name of the LP - cannot be deceptively similar to other LPs and must include "Limited Partnership" in the name; (2) the address of the office and name and address of the agent for service of process; (3) the name and business address of each general partner; and (4) the latest date on which the limited partnership is to dissolve.

Types of Partners in an LP

(1) there must be at least two separate-person partners in an LP (2) at least one general partner - the GPs are responsible for the day-to-day management and control of the LP. -- each General Partner is personally liable for the partnership's debts, just as if the partnership were an ordinary GP. (3) at least one Limited Partner -- the limited partner(s) are, for the most part, not permitted to share in the management of the LP. -- Limited Partner has limited liability. Just like a shareholder in a corp., the limited partner enjoys the potential for unlimited upside, but losses are limited to the amount of her initial investment.

Big questions of corporate governance...

(1) who is in charge? - who has the final say in making corporate decisions? (2) to what end? - when a zero-sum decision has to be made, whose interests must prevail?

Public corp. shareholders:

- usually own small % of shares as part of diversified portfolio - interested in share price - have little influence on BOD or management - if dissatisfied, typically follow "Wall Street Rule": easier to switch than fight.

Some examples of substantive grounds for exclusion are:

(i)(1) - not proper subject under state law (i)(2) - would be contrary to state/federal law if implemented (i)(3) - contains false or misleading statements (i)(4) - contains personal claims/grievances (i)(5) - not significantly related to the company's business (i)(6) - company lacks power or authority to implement (i)(7) - deals with a matter relating to the company's ordinary business operations.

The SEC (Security Exchange Commission)

- 5 commissioners (no more than 3 from one political party. primary role is that of issuing and amending securities regulations, and oversight of staff.) - staff (provides interpretive guidance to market participants concerning SEC rules; supports the securities registration and disclosure regime; advises the commission on new Rules or Amendments; and investigates and prosecutes enforcement actions for violations of securities regulations.)

Optional provisions of articles of incorporation

- The Model Business Corporation Act allows for a number of optional provisions as well, including: (1) statement of purpose (2) classes and series of shares (3) director and officer indemnification and limited liability provisions

SEC's proxy rules under 34 Act are modeled after 33 Act's registration and disclosure requirements for primary market transactions...

1) the person soliciting the proxy must file the proxy materials with the SEC at or before the time they are used to solicit proxies; Note: the SEC will sometimes comment on the materials and require changes. 2) the rules detail the timing and type of information (and format) that must be included in the solicitation materials delivered to the shareholders being solicited. a) cannot solicit a proxy w/o first providing an annual report and then a proxy statement/proxy card. - the proxy statement is a comprehensive disclosure statement (similar to a prospectus under the 33 Act) b) rule also details the format of the "proxy card" that must be filled out by the shareholder. 3) the rules also provide for civil (and potentially criminal) penalties for materially false or misleading statements.

Tipper/Tippee Liability after Dirks

Basic elements: The Tipper must breach a fiduciary or similar duty of trust and confidence (under either classical or misappropriation theory) by disclosing the information. (The tippee's liability is then derivative from this breach.) Note: For the tipper to breach the duty, she must seek to personally benefit in some way by the "tip." The Tippee must trade on (or tip) the information, and Know that the tipper has breached her duty of loyalty in disclosing the information. And courts have held that this means the tippee must know of the tipper's personal benefit.

Citadel Holding Corp. v. Roven

Facts Alfred Roven (plaintiff) was a director of Citadel Holding Corporation (Citadel) (defendant). Roven and Citadel entered into an Indemnity Agreement that had a specific indemnity provision. The Indemnity Agreement also contained a provision granting Roven a right to advance payment from Citadel of costs and expenses Roven incurred as a result of defending himself against claims arising from his business with Citadel. Citadel brought suit against Roven for violating Section 16(b) of the Securities Exchange Act of 1934. To defend himself in that suit, Roven asked for an advance payment for legal fees from Citadel pursuant to his Indemnification Agreement. When Citadel refused to pay, Roven brought suit for breach of contract. The lower court ruled in favor of Roven, holding that he was entitled to the advances. Citadel appealed on the grounds that if Roven was not going to be entitled to indemnification in the suit against him, he should not be awarded advance payment for his defense either. Issue May a director be entitled to advance payment from a corporation for his legal fees even if he is eventually not entitled to indemnification for those fees? Rule of Law: A director may be entitled to advance payment from a corporation for his legal fees even if he is eventually not entitled to indemnification for those fees. Holding and Reasoning (Walsh, J.) Yes. A director may be entitled to advance payment from a corporation for his legal fees even if he is eventually not entitled to indemnification for those fees. The case at bar is a suit for advances under an Indemnification Agreement, not a suit for indemnification. The advances provision in the agreement has nothing to do with the indemnification provision. The fact that Roven may not be entitled to indemnification of his legal fees is immaterial to his claim for advances. Consequently, according to the terms of the Indemnification Agreement, Roven is entitled to his advance and the lower court is affirmed.

Kamin v. American Express Co.

Facts American Express (defendant) authorized dividends to be paid out to stockholders in the form of shares of Donaldson, Lufkin and Jenrette, Inc. (DLJ). Kamin, et al. (plaintiffs), minority stockholders in American Express, brought suit against the directors of American Express, alleging that the dividends were a waste of corporate assets in that the stocks of DLJ could have been sold on the market, saving American Express about $8 million in taxes. The American Express directors filed a motion to dismiss the case. Issue Can a stockholder maintain a claim against the directors of a corporation if the stockholder alleges only that a particular course of action would have been more advantageous than the course of action the directors took? Rule of Law: Courts will not interfere with a business decision made by directors of a business unless there is a claim of fraud, bad faith, or self-dealing. Holding and Reasoning (Greenfield, J.) No. Courts will not interfere with a business decision made by directors of a business unless there is a claim of fraud, bad faith, or self-dealing. An error of judgment by directors, as long as the business decision was made in good faith, is not sufficient to maintain a claim against them. In the present case, the plaintiffs do not allege any bad faith on the part of the directors. The only wrongdoing that the plaintiffs claim is that the directors should have done something differently with the DLJ stock. This allegation without more is not sufficient to maintain a claim. Consequently, the directors' motion to dismiss is granted.

Benihana of Tokyo, Inc. v. Benihana Inc.

Facts Benihana of Tokyo, Inc. (BOT) (plaintiff) and its subsidiary, Benihana, operated restaurants across the world. Many of Benihana's restaurants needed renovation, but the company did not have the necessary funds. Benihana hired Fred Joseph to analyze the company's financial needs and determine a plan of attack. Joseph recommended that Benihana issue convertible preferred stock, which give the company the funds necessary for renovation. Subsequently, John Abdo, a Benihana board member, informed Joseph that BFC Financial Corporation (BFC) was interested in buying the convertible stock. Abdo was also a director of BFC, and he negotiated with Joseph for the sale of the stock on behalf of BFC. At a subsequent Benihana board meeting, Abdo made a presentation on behalf of BFC regarding its proposed purchase of the stock. He then left the meeting. The Benihana board (defendants) knew that Abdo was a director of BFC and Joseph informed the Benihana board that Abdo had approached him about the sale on behalf of BFC. At the same meeting, the Benihana board voted in favor of the sale to BFC. Two weeks later, BOT's attorney sent a letter to the Benihana board, asking it to abandon the sale on account of concerns of conflicts of interests, the dilutive effect on voting of the stock issuance, and the sale's "questionable legality." The board nonetheless again approved the sale. BOT then brought suit against the Benihana board of directors, alleging breach of its fiduciary duties. Issue Can a corporation's transaction directly benefitting one of the corporation's directors be valid? Rule of Law: A transaction involving an interested director is valid if the material facts as to the director's interest are disclosed or known to the board of directors and the board in good faith authorizes the transaction by an affirmative vote of the disinterested directors. Holding and Reasoning (Berger, J.) Yes. A transaction involving an interested director is valid if the material facts as to the director's interest are disclosed or known to the board of directors and the board in good faith authorizes the transaction by an affirmative vote of the disinterested directors. In this case, the court determines that the Benihana board knew enough information about Abdo's involvement in the transaction to validate the sale. Although the board may not have known the full facts at first, by the time the board approved the sale, it knew that Abdo was a director of BFC, that he was the proposed buyer, and that he had made the initial contact about the purchase with Joseph. This is sufficient information to deem the board knowledgeable on the material facts of Abdo's interest. Therefore, because the board approved the transaction (without Abdo's vote), it is valid. The court finds in favor of the Benihana board of directors.

Galler v. Galler

Facts Benjamin and Isadore Galler were brothers and equal partners in the Galler Drug Company (GDC). In 1955, they executed an agreement to ensure that after the death of the one of the brothers, the immediate family of the deceased would maintain equal control of GDC. In 1956, Benjamin created a trust with his shares of GDC and named his wife, Emma (plaintiff), as trustee. Benjamin died in December 1957. Prior to Benjamin's death, Isadore, Isadore's wife, Rose, and Isadore's son, Aaron (defendants) had decided that they were not going to honor the agreement. When Emma presented Benjamin's stock certificates to the defendants to transfer the certificates into her name, the defendants tried to convince Emma to abandon the agreement. Emma refused, but agreed to let Aaron become the president of GDC for one year without interference in exchange for Aaron reissuing Benjamin's stock in Emma's name. Subsequently, Emma demanded enforcement of the terms of the agreement guaranteeing her equal control, dividends each year, and a continuation of Benjamin's salary. The defendants refused and Emma brought suit. The lower court ruled that the agreement was void because "the undue duration, stated purpose and substantial disregard of the provisions of the Corporation Act outweigh any considerations which might call for divisibility" of the agreement. The court thus ruled that the public policy implications of the agreement rendered it void. Emma appealed. Issue Is an agreement between directors in a close corporation valid if it calls for the election of a certain person to an office, a minimum dividend to an individual each year, and a continuation of salary to the successor in interest of a deceased director? Rule of Law: In a close corporation, an agreement as to the management of the corporation agreed to by the directors must be valid where there is no complaining minority interest, no fraud or apparent injury to the public or creditors, and no violation of clearly prohibitory statutory language. Holding and Reasoning (Underwood, J.) Yes. In a close corporation, an agreement as to the management of the corporation agreed to by the directors must be valid where there is no complaining minority interest, no fraud or apparent injury to the public or creditors, and no violation of clearly prohibitory statutory language. For a number of reasons due to the nature of close corporations, its directors need to be able to exercise their control and effectively protect their interests and this is usually done by a detailed shareholder agreement. The court has upheld a number of such agreements that have "technically violated" the Business Corporation Act and have done so because of the agreements' important role in protecting close corporation shareholders. The agreement in this case is not complained of by a minority interest, fraudulent, injurious to the public or creditors, or a violation of "clearly prohibitory statutory language." Accordingly the court determines that it is a valid agreement and must be enforced. The court rules in favor of Emma and the appellate court is reversed.

Ramos v. Estrada

Facts Broadcast Group partnered with another group, Ventura 41, to obtain a permit from the FCC to run a television station. Each group owned 50 percent of the combined entity, Television, Inc. The Ramoses (plaintiffs) owned 50 percent of Broadcast Group (and thus 25 percent of Television, Inc.) and Tila Estrada (defendant) owned 10 percent of the Broadcast Group (five percent of Television, Inc.). The members of Broadcast Group entered into an agreement to vote all of their shares in Television, Inc. the same way, as determined by a majority of the members. The agreement provided that if anyone did not vote with the majority, their shares would be sold to the other members of the Broadcast Group. Mr. Ramos was elected president of Television, Inc. at the first meeting of the combined entity, but after that, Estrada "defected" from the Broadcast Group. She voted with the Ventura 41 members of Television, Inc. to remove Ramos as president and replace him with a member from Ventura 41. The Ramoses sued Estrada for breach of contract, seeking specific performance of the agreement, causing her shares to be sold. The trial court found in favor of the Ramoses and Estrada appealed on the grounds that the agreement constituted a proxy, which expired when Estrada revoked it. Issue Are pooling agreements valid if one of the parties seeks to get out of the agreement? Rule of Law: Pooling agreements are valid and may be enforced equitably. Holding and Reasoning (Gilbert, J.) Yes. Pooling agreements are valid and specifically enforceable even if one of the parties seeks to get out of the agreement. A pooling agreement does not constitute a proxy that may be revoked by a party at any time. California law states that a proxy is a written authorization giving another shareholder power to vote with the authorizer's shares. The Broadcast Group agreement in this case contains no such authorization. It states the members will consult each other, try to obtain a consensus, and eventually all vote according to the majority of the group. This in no way creates a proxy. The agreement is valid and should be specifically enforced with the sale of Estrada's shares to the other members of the Broadcast Group. The trial court is affirmed.

Francis v. United Jersey Bank

Facts Charles, Jr. and William Pritchard (sons) were directors of Pritchard & Baird Intermediaries Corp. (Pritchard & Baird), a reinsurance broker that controlled millions of dollars of client funds in an implied trust. The only other director was their mother, Mrs. Pritchard. The sons siphoned large sums of money from Pritchard & Baird in the form of "loans." Eventually, the corporation went insolvent because of the siphoned funds. During the time the funds were misappropriated, Mrs. Pritchard did nothing in her role as director. She never went to the corporate office; she never received or read financial statements; and she knew nothing of the corporation's business affairs. Her husband, the deceased founder of Pritchard & Baird, had actually warned her to watch out for the sons before he died. Subsequently, Mrs. Pritchard died and the trustee in bankruptcy (representing the interests of many creditors) brought suit against the estate of Mrs. Pritchard (defendant) to recover the siphoned funds. Mrs. Pritchard's estate appealed the ruling of the appellate court in favor of the trustee. Issue Can a director be held liable for failure to monitor the business affairs of the corporation? Rule of Law: A director has a duty to know generally the business affairs of the corporation. Holding and Reasoning (Pollock, J.) Yes. A director has a duty to know generally the business affairs of the corporation. This duty includes a basic understanding of what the company does; being informed on how the company is performing; monitoring corporate affairs and policies; attending board meetings regularly; and making inquiries into questionable matters. In the case at bar, Mrs. Pritchard did none of the above. She did not seem to know what a reinsurance agency does; she never received or read financial statements; and she generally knew nothing of the corporation's business affairs. Her failure to keep herself informed breached not only a duty of care to the corporation, but a fiduciary duty to Pritchard & Baird's clients. It would have only taken a brief, non-expert reading of the financial statements to know that something was wrong and money was being misappropriated. Her failure to do so was the proximate cause of the misappropriations of the clients' money not being discovered. The fact that her husband had warned her about the sons, but she still made no effort to monitor them is even more evidence that she violated her fiduciary duties. Consequently, the estate of Mrs. Pritchard is liable to the clients and the judgment in favor of the trustee in bankruptcy is affirmed.

Boilmakers Local 154 Retirement Fund v. Chevron Corporation (2013)

Facts Chevron Corporation's (Chevron) (defendant) articles of incorporation authorized the company's board of directors to adopt bylaws without a vote by stockholders. Because Chevron was often subjected to litigation in multiple forums involving the same issue, the board adopted bylaws providing that any litigation involving the company would be conducted in Delaware. Certain Chevron stockholders (plaintiffs) brought suit in the Delaware Court of Chancery, alleging that the bylaws were both statutorily and contractually invalid. The plaintiffs' statutory claim rested on the notion that the bylaws in question referred to an external matter, rather than an internal matter, such as stockholder meetings, the board of directors, and officerships. Relevant Delaware law stated: "bylaws may contain any provision, not inconsistent with law or with the certificate of incorporation, relating to the business of the corporation, the conduct of its affairs, and its rights or powers or the rights or powers of its stockholders, directors, officers or employees." Issue Are forum selection bylaws adopted pursuant to articles of incorporation without a vote by stockholders facially invalid? Rule of Law: Under Delaware law, forum selection bylaws adopted pursuant to articles of incorporation without a vote by stockholders are not facially invalid. Holding and Reasoning (Strine, J.) No. Forum selection bylaws adopted pursuant to articles of incorporation without a vote by stockholders are not facially invalid. In terms of statutory validity, the proper subject matter for bylaws under Delaware law includes "process-oriented" directives "relating to the business of the corporation," such as regulation of stockholder meetings and the board of directors. Forum selection bylaws, while not traditional bylaw subject matter, are "process-oriented," because they determine where stockholders can file lawsuits, as opposed to whether stockholders can file lawsuits. Accordingly, the forum selection bylaws at issue in this case are not statutorily invalid, and the plaintiffs' claim on that ground must fail. Simply because forum selection is not a traditional subject matter for bylaws does not make bylaws involving that subject invalid. In terms of contractual validity, bylaws are a part of any contract between a company and its stockholders and, as such, regulate the rights of stockholders. However, if the articles of incorporation so provide, the board may take unilateral action to amend those bylaws without stockholder vote. The stockholders are still bound by bylaws adopted in that manner. Indeed, when stockholders initially obtain stock under such a contractual framework, they are assenting to allowing the board to amend the bylaws unilaterally and without their vote. The plaintiffs in this case thus had notice that the board could unilaterally amend the bylaws. The fact that an amendment under this framework alters the contractual agreement does not make it invalid. In sum, the forum selection bylaws in this case are not statutorily or contractually invalid. As a result, the plaintiffs' claims are dismissed.

Rosenfeld v. Fairchild Engine and Airplane Corp.

Facts In a policy-related proxy contest (as opposed to a personal contest for power) for a board of directors election in Fairchild Engine & Airplane Corp. (Fairchild) (defendant), Fairchild's treasury paid $106,000 in defense of the old board of director's position; $28,000 to the old board by the new board after the change to compensate the old board for their failed campaign; and $127,000 reimbursing expenses that the new board members incurred in their campaign. That reimbursement was ratified by a majority vote of the stockholders. The policy question behind the proxy contest was the long-term and very expensive pension contract of a former director, Carlton Ward. Rosenfeld (plaintiff), brought suit to compel the return of the above payments to the Fairchild treasury. The lower court dismissed Rosenfeld's complaint. He appealed. Issue In a proxy contest over policy, may directors make expenditures from the corporate treasury in order to solicit stockholders' support? Rule of Law: In a proxy contest over policy, corporate directors have the right to make reasonable and proper expenditures from the corporate treasury for the purpose of persuading the stockholders of the correctness of their position and soliciting their support for policies which the directors believe are in the best interests of the corporation. Holding and Reasoning (Froessel, J.) Yes. In a proxy contest over policy, corporate directors have the right to make reasonable and proper expenditures from the corporate treasury for the purpose of persuading the stockholders of the correctness of their position and soliciting their support for policies which the directors believe are in the best interests of the corporation. The stockholders may also reimburse new directors for costs that the new directors incur in their policy campaign. Because corporations have so many stockholders, if directors were not able to use corporate funds for solicitation of proxies, it is very possible that corporate business would be "seriously interfered with." There are so many stockholders that each individual stockholder cannot make much of a difference in a vote. Use of proxies is a way to pool stockholders' votes, making corporate business conductible. And proxies would likely not be used as much as they are if the directors had to pay for their solicitation out of their own pockets. Consequently, directors, if acting in good faith, may incur reasonable expenses in the solicitation of proxies in a policy-related proxy contest. Because this is exactly what had occurred in the case at bar, the lower court's dismissal of Rosenfeld's complaint is affirmed.

Chiarella v. U.S.

Facts Chiarella (defendant) was an employee for a printing company that handled documents concerning corporate takeovers. The companies to be acquired were redacted until the final draft of the takeover agreements. In one instance, Chiarella was able to discover the companies involved in a takeover bid through the information provided in the draft takeover agreement. He then traded on this information, which was not public, and enjoyed earnings of $30,000. When it was discovered he was trading on nonpublic information, the United States (plaintiff) brought charges against him for violation of § 10(b) of the Securities Exchange Act of 1934, prohibiting fraud in the purchase or sale of securities, based on Chiarella's nondisclosure of information. At trial, Chiarella testified that the information he used in the stock trading was confidential, and that he obtained the information by deciphering the documents that the companies had provided to his employer. The trial court instructed the jury, among other things, that the jury must decide whether Chiarella used material nonpublic information to which he knew other people in the securities-trading market did not have access. A jury convicted Chiarella of insider trading, and the court of appeals affirmed Chiarella's conviction. The United States Supreme Court granted Chiarella's petition for certiorari. Issue Will an allegation of securities fraud based upon nondisclosure of information succeed if there is no duty to speak? Rule of law: An allegation of securities fraud based upon nondisclosure of information will not succeed unless there is a duty to speak. Holding and Reasoning (Powell, J.) No. There is no general duty that all participants in a stock transaction must refrain from taking actions based on material, nonpublic information. Rather, an allegation of securities fraud based upon nondisclosure of information will not succeed unless there is a duty to speak. A duty to speak arises from a fiduciary or other trusting relationship between the parties. For instance, there is a relationship of trust and confidence between a corporation's insiders (e.g., officers, directors, or controlling shareholders) and the corporation's shareholders, and the corporate insider has a duty to disclose based on this relationship to avoid taking advantage of uninformed minority shareholders. If the purchaser of stock has no fiduciary relationship or insider status with respect to the seller, there is no duty of disclosure. In this case, Chiarella was not a corporate insider of the companies in which he traded stock, and he received no confidential information from the companies. Moreover, he was a total stranger to the sellers. There was thus no fiduciary relationship between Chiarella and the sellers, and he had no duty to disclose the information in his possession prior to executing his trades. The jury was not given any instructions regarding an affirmative duty to disclose; the jury was simply instructed to determine whether Chiarella used nonpublic information to which he knew not everyone in the market had access. This effectively imposed a duty of disclosure on Chiarella to the entire securities market, which was incorrect. Because Chiarella had no duty to disclose the information in his possession, he cannot be found guilty of insider trading. The judgment of the court of appeals is reversed.

Clark v. Dodge

Facts Clark (plaintiff) owned 25 percent of each of two corporations. Dodge (defendant) owned the other 75 percent of each. Clark was a director and the general manager of Bell & Co., Inc. (Bell), one of the corporations. The corporations manufactured medicinal preparations by secret methods and formulas known only to Clark. Dodge and Clark entered into an agreement that provided that Clark would disclose the secret formula to a son of Dodge and in return, Dodge would vote his stock so that (1) Clark would continue to be a director of Bell; (2) Clark would continue to be the general manager of Bell as long as he was "faithful, efficient and competent;" (3) during his lifetime, Clark would receive ¼ of the net income of the corporations; and (4) no unreasonable salaries would be paid to other officers of the corporations which would reduce the net income. Clark brought suit, claiming that Dodge did not use his stock to maintain Clark as director and general manager and that Dodge hired "incompetent persons at excessive salaries" so as to reduce the portion of net income paid to Clark. The appellate court dismissed the complaint. Clark appealed. Issue Is a contract between directors that are the sole stockholders in a corporation to vote for certain people as officers illegal? Rule of Law: If the enforcement of a contract between directors that are the sole stockholders in a corporation damages no one, not even the public, it is not illegal. Holding and Reasoning (Crouch, J.) No. The court in McQuade v. Stoneham, 189 NE 234 (1934) effectively held that public policy and possible detriment to the corporation require that there may be no variation, however slight, from the idea that the board of directors manages the business of the corporation without any influence other than the best interests of the corporation. However, this court holds that McQuade should be limited to the facts in that case because if a contract between directors that are the sole stockholders in a corporation damages no one, not even the public, it should not be held to be illegal. The McQuade decision is too restrictive as directors in a closely held corporation should have the freedom to choose the officers they see fit unless their decision clearly harms the corporation. In this case, the contract between Clark and Dodge harms no one and does not interfere with the directors' ability to manage the corporations with their best interest in mind. - Requirement (1) is a "perfectly legal contract" as Dodge, as stockholder, is entitled to vote for whomever he chooses as director. - Requirement (2) certainly keeps Bell's best interests in mind by ensuring that Clark is a faithful, efficient, and competent general manager. - Requirement (3) is proper because the net income of the corporations will only be what is left after the directors in good faith determine dividends, salaries, etc. And r - Requirement (4) to not overpay any incompetent employees is clearly a reasonable clause that has the corporation's best interests in mind. As a result of the foregoing, the contract between Clark and Dodge does not fall into the category proscribed by McQuade. The court determines that it is valid and enforceable. The appellate court is reversed.

Elf Atochem North America, Inc. v. Jaffari

Facts Elf Atochem North America, Inc. (Elf) (plaintiff) and Cyrus Jaffari (defendant) agreed to form an LLC (Malek LLC) to develop and distribute solvent-based maskants. Elf and Jaffari entered into an operating agreement, which established and set forth governance provisions for Malek LLC. The agreement contained an arbitration clause providing that all disputes arising from the agreement would be resolved by arbitration. Malek LLC itself never signed the agreement. Subsequently, Elf sued Jaffari and Malek LLC individually and on behalf of Malek LLC for breach of fiduciary duty to Malek LLC, breach of contract, and tortious interference with prospective business relations, among other claims. The Delaware Court of Chancery dismissed the claims on account of the arbitration clause in the LLC agreement. Elf appealed. Issue Are contractual provisions in an LLC operating agreement stating that all disputes would be resolved by arbitration valid if the LLC that the agreement formed did not sign the agreement? Rule of Law: A contractual provision in an LLC operating agreement stating that all disputes are to be resolved by arbitration is valid even if the LLC that the agreement formed did not sign the agreement. Holding and Reasoning (Veasey, C.J.) Yes. A contractual provision in an LLC operating agreement stating that all disputes are to be resolved by arbitration is valid. This is the case even if a party is bringing a suit on behalf of the LLC that the agreement formed, and even if the LLC that the agreement formed never signed the agreement. Delaware LLC law provides broad discretion and great flexibility for freedom of contracting for the establishment of LLCs. LLC operating agreements are thus generally enforced according to their terms. In the case at bar, Elf's claims have arisen under the operating agreement and thus are governed by the terms of the agreement, including the arbitration clause. The fact that Malek LLC did not sign the agreement is immaterial because Elf signed the agreement as a member of the LLC. It is Elf and Jaffari as members that are "the real parties in interest." It is their execution of the agreement containing the arbitration clause that binds the current claims to arbitration. The Delaware Court of Chancery is correct in its dismissal of Elf's claims due to the arbitration clause in the LLC operating agreement.

Giles v. Giles Land Co.

Facts Giles Land Company, L.P. (partnership) (defendant) was a family-owned farming company. The partners were all related. The partnership held a meeting to consider converting the partnership to a limited liability company (LLC). One of the Giles children, Kelly (plaintiff), was unable to attend the meeting, but later received notice of the partnership's determination to convert to an LLC. Kelly formally requested the partnership's books and records for his review. He was not satisfied with the books and records turned over, so he brought suit against the partnership and the other partners (defendants), claiming that he was improperly denied access to the books and records. The defendants filed a counterclaim, arguing that Kelly should be dissociated from the partnership. The defendants presented evidence that Kelly had threatened them and that the family relationship was broken beyond repair. The defendants also presented evidence that they did not trust Kelly and vice versa. The trial court ruled in favor of the defendants on all counts, finding that it was not practicable to continue the partnership with Kelly as a partner. Kelly appealed the trial court's order regarding his dissociation from the partnership to the Kansas Court of Appeals, arguing that he had not engaged in conduct relating to the partnership. Issue Is dissociation appropriate where the partner engaged in conduct relating to the partnership business that makes it not reasonably practicable to carry on the business in partnership with the partner? Rule of Law: Under Kansas law, dissociation is appropriate if a partner engaged in conduct relating to the partnership business that makes it not reasonably practicable to carry on the business with the partner. Holding (Green, J.) Yes. Dissociation may be proper based on impracticability or a partner's wrongful conduct. Dissociation on account of impracticability is based on dissolution law. Dissociation is appropriate if the partner engaged in conduct relating to the partnership business that makes it not reasonably practicable to carry on the business in partnership with the partner. Just as "an irreparable deterioration of a relationship between partners is a valid basis to order dissolution, [it is also, therefore] a valid basis for the alternative remedy of dissociation." Alternatively, dissociation may be ordered if a partner has engaged in wrongful conduct that adversely and materially affected the partnership. Under the impracticable route to dissociation, despite Kelly's claims that he had not engaged in the alleged conduct relating to the partnership, threats against family members are related to a business when: (1) the business is a family business, and (2) those threatened family members are the other partners in the business. Kelly's threats against his family members were thus related to the partnership, because his family members were the other partners in the partnership. Those threats combined with the lack of trust make it not reasonably practicable to carry on the partnership with Kelly as a partner. The trial court thus did not err by ordering Kelly's dissociation. Additionally, the trial court did not err by finding that Kelly was subject to dissociation for the same actions based on the wrongful conduct route to dissociation. Due to Kelly's wrongful conduct, the partnership was essentially at a standstill until the issues with him were resolved. Accordingly, Kelly's conduct adversely and materially affected the partnership. As a result, the trial court's ruling in favor of dissociation is affirmed.

Ingle v. Glamore Motor Sales, Inc.

Facts Ingle (plaintiff) was one of four directors and shareholders of Glamore Motor Sales, Inc. (GMS) (defendant); Ingle was also GMS's sales manager. Ingle did not have an employment contract that specified any kind of employment duration. The other three directors/shareholders were James Glamore and his two sons (defendants). The four directors entered into an agreement that provided that if "any Stockholder cease[d] to be an employee of the Corporation for any reason," James Glamore would have the option to purchase all the shares owned by that stockholder. Subsequently, Ingle was voted out of his director position and fired from his job at GMS. Ingle brought suit, alleging a breach of fiduciary duty and arguing that as a minority shareholder in a close corporation his employment rights are attached to the fiduciary duties owed to him. The lower courts dismissed the complaint and Ingle appealed. Issue Does a minority shareholder in a close corporation, by that status alone, acquire a right from the corporation or majority shareholders against discharge from his employment in the corporation? Rule of Law: A minority shareholder in a close corporation, by that status alone, acquires no right from the corporation or majority shareholders against discharge from his employment in the corporation. Holding and Reasoning (Bellacosa, J.) No. A minority shareholder in a close corporation, by that status alone, acquires no right from the corporation or majority shareholders against discharge from his employment in the corporation. The duty a corporation owes to a shareholder as a shareholder is different from a duty that the corporation might owe to a shareholder as an employee. Here, Ingle did not present any evidence of an employment contract setting a definite duration of his employment. As a result, he was simply an employee at will of GMS and the defendants had a right to terminate his employment at any time. By doing so, they did not violate any fiduciary duty to Ingle as the signed shareholder agreement provided that his shares would be eligible to be sold upon termination of his employment. His employment was not tied to his role as director. The lower courts are affirmed.

Smith v. Van Gorcom

Facts Jerome Van Gorkom, the CEO of Trans Union Corporation (Trans Union), engaged in his own negotiations with a third party for a buyout/merger with Trans Union. Prior to negotiations, Van Gorkom determined the value of Trans Union to be $55 per share and during negotiations agreed in principle on a merger. There is no evidence showing how Van Gorkom came up with this value other than Trans Union's market price at the time of $38 per share. Subsequently, Van Gorkom called a meeting of Trans Union's senior management, followed by a meeting of the board of directors (defendants). Senior management reacted very negatively to the idea of the buyout. However, the board of directors approved the buyout at the next meeting, based mostly on an oral presentation by Van Gorkom. The meeting lasted two hours and the board of directors did not have an opportunity to review the merger agreement before or during the meeting. The directors had no documents summarizing the merger, nor did they have justification for the sale price of $55 per share. Smith et al. (plaintiffs) brought a class action suit against the Trans Union board of directors, alleging that the directors' decision to approve the merger was uninformed. The Delaware Court of Chancery ruled in favor of the defendants. The plaintiffs appealed. Issue May directors of a corporation be liable to shareholders under the business judgment rule for approving a merger without reviewing the agreement and only considering the transaction at a two-hour meeting? Rule of Law: There is a rebuttable presumption that a business determination made by a corporation's board of directors is fully informed and made in good faith and in the best interests of the corporation. Holding and Reasoning (Horsey, J.) Yes. Under the business judgment rule, 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." The court determines that in this case, the Trans Union board of directors did not make an informed business judgment in voting to approve the merger. The directors did not adequately inquire into Van Gorkom's role and motives behind bringing about the transaction, including where the price of $55 per share came from; the directors were uninformed of the intrinsic value of Trans Union; and, lacking this knowledge, the directors only considered the merger at a two-hour meeting, without taking the time to fully consider the reasons, alternatives, and consequences. The evidence presented is sufficient to rebut the presumption of an informed decision under the business judgment rule. The directors' decision to approve the merger was not fully informed. As a result, the plaintiffs are entitled to the fair value of their shares that were sold in the merger, which is to be based on the intrinsic value of Trans Union. The Delaware Court of Chancery is reversed, and the case is remanded to determine that value. Dissent (McNeilly, J.) The combined experience of the Trans Union board of directors warrants a finding that they would not have entered into the merger without being fully informed. They were "more than well qualified" to make an informed business judgment and under the business judgment rule, they should not be liable.

Fliegler v. Lawrence

Facts John Lawrence acquired certain properties under a lease-option. Lawrence was the president of Agau Mines (Agau) and offered to transfer the lease option to Agau, but Agau's board of directors determined that the acquisition would not be prudent for the corporation at the time. Instead, Lawrence and the Agau directors created the United States Antimony Corporation (USAC), and Lawrence transferred the lease option to USAC. USAC then granted Agau a long-term option to purchase USAC if it ever became financially viable for Agau. Subsequently, the Agau board of directors resolved to exercise the option and the resolution was approved by a majority of the Agau shareholders—although the majority of shares that voted in favor of exercising the option were held by directors of Agau who were also directors of USAC. In fact, only about one-third of disinterested shareholders voted. The plaintiffs brought a shareholder derivative action on behalf of Agau against the officers and directors of USAC for usurping a corporate opportunity of Agau and for wrongfully profiting by causing Agau to exercise the purchase option. The lower court found in favor of the defendants. The plaintiffs appealed. Issue Will shareholder ratification of a transaction in which directors are personally interested automatically shift the burden of proof to an objecting shareholder to demonstrate that the transaction is unfair? Rule of Law: Shareholder ratification of a transaction in which directors are personally interested will not shift the burden of proof to an objecting shareholder when the majority of shares that voted in favor of the transaction were held by interested directors. Holding and Reasoning (McNeilly, J.) No. Generally, shareholder ratification of a transaction in which directors are personally interested shifts the burden of proof to an objecting shareholder to demonstrate that the transaction is unfair. However, this is not the case when the majority of shares that voted in favor of the transaction were held by interested directors. In such a case, a departure from the intrinsic fairness standard of corporate opportunities is not warranted because it is essentially the interested directors that ratify the transaction. In the instant case, only about one-third of disinterested shareholders voted. So, although a majority of the total shareholders voted in favor of the transaction, a majority of those shares that voted were held by interested directors of both Agau and USAC. Therefore, "the entire atmosphere [of the transaction] has [not] been freshened" by the shareholder's ratification and the burden remains on the directors to show that the transaction is objectively fair. The court determines, though, that the defendants have made such a showing. In the transaction, Agau received valuable property that was also a "profit generating enterprise" at a fair price. Accordingly, the transaction was intrinsically fair. The court finds in favor of the defendants, the lower court is affirmed.

McConnel v. Hunt Sports Enterprises

Facts John McConnell (plaintiff) and Lamar Hunt (defendant) were part of a group that formed Columbus Hockey Limited, LLC (CHL) in order to try to obtain a National Hockey League franchise in Columbus. CHL began negotiations with Nationwide Insurance Enterprise (Nationwide) about building an arena, which CHL would then lease. Hunt, purporting to act for CHL, but without consulting other CHL members, repeatedly rejected Nationwide's lease offers. Nationwide then approached McConnell individually, and McConnell said that if Hunt would not agree to the lease on behalf of CHL, McConnell would individually. Subsequently, McConnell and his individual group signed a lease independently of CHL and Hunt. There was a clause in CHL's operating agreement which stated that members of CHL had a right to engage in business ventures that may compete with CHL. McConnell then filed suit, seeking a declaratory judgment to establish his right to operate the NHL franchise without CHL or Hunt. Hunt filed a counterclaim, alleging that McConnell violated a fiduciary duty to CHL. The trial court directed a verdict in favor of McConnell. Hunt appealed. Issue May an LLC operating agreement limit the scope of the fiduciary duties of its members? Rule of Law: An LLC operating agreement may limit the scope of the fiduciary duties of its members. Holding and Reasoning (Tyack, J.) Yes. An LLC operating agreement may limit the scope of the fiduciary duties of its members. In this case, therefore, the clause in CHL's operating agreement that provides that members of CHL have a right to engage in business ventures that may compete with CHL is valid. Moreover, McConnell seeking to receive an NHL franchise independently from CHL is not a violation of his fiduciary duty to CHL. The trial court is affirmed.

Wilkes v. Springside Nursing Home, Inc.

Facts Wilkes (plaintiff), Riche, Quinn, and Connor were the four directors of the Springside Nursing Home, Inc. (Springside) (defendant), each owning equal shares and having equal power within the corporation. Eventually the relationship between Wilkes and the other three directors (defendants) soured. When Springside became profitable, the defendants voted to pay out salaries to themselves, but did not include Wilkes in the group to whom salary would be paid. Then, at an annual meeting, Wilkes was not reelected as director and was informed that he was no longer wanted in the management group of Springside. Over the course of these events, Wilkes faithfully and diligently carried on his duties to the corporation. Wilkes brought suit against the defendants for breach of their fiduciary duty owed to him. The lower court dismissed Wilkes's complaint. He appealed. Issue Are majority shareholders in a close corporation liable for breach of a fiduciary duty to a minority shareholder if they remove him from office and cut off his salary without any showing of misconduct? Rule of Law: Majority shareholders in a close corporation owe minority shareholders a strict duty of the utmost good faith and loyalty, unless a legitimate business purpose can be demonstrated to justify a breach of that duty. Holding and Reasoning (Hennessey, J.) Yes. Majority shareholders in a close corporation owe minority shareholders a strict duty of the utmost good faith and loyalty, unless a legitimate business purpose can be demonstrated to justify a breach of that duty. Where no legitimate business purpose can be shown, the majority shareholders are liable for their breach of that duty. In this case, there has been no showing of misconduct or poor performance in Wilkes's role as director. It was merely a "personal desire" of the defendants to remove Wilkes from office and deny him salary. The defendants' actions constitute an unlawful corporate freeze out and because they did not show any legitimate business purpose for the freezing out of Wilkes, they are liable for breach of their fiduciary duty to him. The lower court is reversed and the case is remanded for a final determination on damages.

Kovacik v. Reed

Facts Kovacik (plaintiff) and Reed (defendant) entered into a partnership to remodel kitchens. Kovacik would contribute funds to the enterprise in the amount of $10,000. Reed would contribute labor and skill, acting as an estimator and superintendent of the projects without compensation. The partners did not discuss the apportionment of losses. While the two received some jobs, they lost money. Kovacik asked Reed to contribute money to cover half of the total losses. Reed refused, and Kovacik filed this lawsuit. The lower court held that the partners had agreed to share profits and losses equally, and Reed was thus liable for half the shortfall. Issue Is a partner who contributed only skill and labor liable for the monetary losses of the enterprise? Rule of Law: Monetary losses will be apportioned equally between partners who make capital contributions. Holding (Schauer, J ) No. Generally, when there is no explicit agreement as to losses, losses are to be divided equally between the partners, without regard to the amount each partner contributed to the venture. That rule, though, is only applied in cases where each of the partners contributed capital to the enterprise. In cases where one party contributed only labor and the other only capital, the rule is not applied because the partner contributing labor takes a loss in the form of his lost labor. In this case, both partners have endured losses: Kovacik with the loss of his monetary investment, and Reed through the time and effort he contributed that went uncompensated. Reed is not liable for any of Kovacik's monetary losses. Accordingly, the decision of the lower court is reversed.

Frigidaire Sales Corp. v. Union Properties

Facts Mannon and Baxter were the co-owners of Union Properties, Inc. (Union) (defendant). Mannon and Baxter were also the limited partners of Commercial Investors, a limited partnership in which Union was the general partner. Commercial had a business relationship with Frigidaire Sales Corporation (plaintiff). Frigidaire sought to hold Mannon and Baxter directly liable for the obligations of Union, because neither Union nor Commercial were adequately capitalized, and because Mannon and Baxter directly controlled Commercial's operations through Union. The trial court and court of appeals both held that Frigidaire could not get past Union's limited liability. Frigidaire appealed. Issue Can a creditor that has never dealt with a company's owners as anything other than representatives of the company hold those owners generally liable for the company's debts? Rule of Law: The corporate directors of a parent corporation that exerts control over a subsidiary do not incur liability for the subsidiary for acting in their role as directors. Holding and Reasoning (Hamilton, J.) No. Mannon, Baxter, Union and Commercial chose a very specific corporate form, one which shielded Mannon and Baxter from the general liability which Commercial incurred, and which Union incurred through Commercial. Frigidaire was never told that Mannon or Baxter would be responsible, only that Commercial and Union would be. While Union acted through its owners and officers to control the operations of Commercial, those officers were only acting as agents of Union. Union exerted sufficient control over the operations of Commercial to be held liable for Commercial's obligations, as the corporate setup explicitly allows for that. Nothing bars a corporation from being a partner in a partnership, and there was no fraud involved in Union being the managing partner for Commercial. As such, there's no reason to allow Frigidaire to pierce Union's veil.

In Re Medtronic, Inc. v. Shareholder Litigation

Facts Medtronic, Inc., a Minnesota corporation, agreed to merge with Covidien plc, an Irish company. The merged entity became an Irish corporation. Under the merger agreement, Medtronic shareholders retained a reduced, 70 percent interest in the merged entity. Further, the Internal Revenue Service taxed the merger, subjecting Medtronic shareholders to a capital gains tax. Medtronic did not compensate the shareholders for this tax liability. In contrast, the Medtronic directors were required to pay an excise tax on their stock compensation as part of the merger, but Medtronic reimbursed the directors for that tax liability. Kenneth Steiner (plaintiff) brought a class action suit against Medtronic and its board of directors (defendants). Steiner alleged three injuries: (1) on account of the shareholders' unreimbursed capital gains tax liability; (2) on account of the corporation's excise tax reimbursement to directors; and (3) on account of the shareholders' diluted voting power in the new corporation. Medtronic filed a motion to dismiss, arguing that the suit was actually a shareholder derivate suit and that Steiner had failed to make a demand of the board of directors. The district court granted the motion. The court of appeals affirmed in part and reversed in part, agreeing with the district court that the excise tax reimbursement claim was derivative but finding that the other two claims were direct and could proceed. The Minnesota Supreme Court granted review. Issue Is an action brought against a corporation's board of directors to redress direct injury to the corporation's shareholders not shared with the corporation itself a shareholder derivative action? Rule of Law: An action brought against a corporation's board of directors to redress direct injury to the corporation's shareholders not shared with the corporation itself is not a shareholder derivative action. Holding and Reasoning (Gildea, C.J.) No. An action brought against a corporation's board of directors to redress direct injury to the corporation's shareholders not shared with the corporation itself is not a shareholder derivative action. Such an action is a direct action on behalf of the shareholders. In contrast, an action brought to redress injury to shareholders that is indirect and that incurred only by reason of a direct injury to the corporation is derivative. A shareholder derivative action is one that a shareholder brings on behalf of the corporation. In this case, the court of appeals applied the incorrect standard but did not err in its conclusions that the excise tax reimbursement claim was derivative but that the other two claims were direct and could proceed. Steiner's excise tax claim alleges that the corporation was injured due to improper compensation to directors to cover their excise tax liabilities. If the claim were upheld, the recovery would go to the corporation. Accordingly, as any injury to shareholders is by reason of a direct injury to the corporation, the claim is derivative and must be dismissed for Steiner's failure to make a formal demand of the board of directors. In contrast, the shareholders' injuries due to their unreimbursed capital gains tax liabilities and diminished voting power are unique to the shareholders. The corporation did not incur capital gains liability and would not recover if these claims were upheld. These claims are not shared with the corporation and are not incurred by reason of a direct injury to the corporation. Accordingly, the claims are not derivative but are direct and can proceed. The judgment is affirmed.

A.P. Smith Mfg. Co. v. Barlow

Facts New Jersey law was amended in the 1930s to provide that corporations could make charitable contributions to support the community. As long as a donation did not exceed 1 percent of the company's capital stock, the board did not need to give notice to the shareholders of the donation. A.P. Smith Manufacturing Company (defendant) was a New Jersey corporation, founded in the late nineteenth century, which made a donation to Princeton University. This sort of donation, while mentioned in New Jersey law, was not specifically authorized in A.P. Smith's articles of incorporation. A.P. Smith claimed that, as a corporation, it had a duty to support the public good, and that it was to the company's benefit to make sure that there was an educated public from which to draw future employees. Barlow (plaintiff), a shareholder in A.P. Smith, filed suit seeking declaratory judgment that the company should not have made the donation, and alleging that the application of New Jersey's statute would be unconstitutional. The trial court entered a judgment for A.P. Smith, and Barlow appealed. Issue Can a company make a donation to an important local university, as authorized by state law, when its certificate of incorporation is silent on the matter? Rule of Law: A corporation may take any action including authorizing contributions as long as it is consistent with state law. Holding and Reasoning (Jacobs, J.) Yes. The terms on which corporations received their articles of incorporation from the state can be changed at any time. Moreover, corporations have a great deal of the wealth in modern America, and contributions to help the community must come from somewhere. In this case, the law changed to allow donations after A.P. Smith had been chartered, but Smith's charter was subject to changes in the law. While the corporate charter did not specifically authorize these kinds of donations, it did not bar them. Barlow did not and could not contend that A.P. Smith's small donation to Princeton harms his interest as a shareholder. Additionally, the United States Supreme Court has repeatedly held that "public interest" statutes, such as the one at issue here, are constitutional, even though those statutes might lead to a loss of value for shareholders. The trial court's declaratory judgment in favor of A.P. Smith is affirmed.

Marx v. Akers

Facts New York law stated that in a shareholder derivative action, a complaint must state what steps the plaintiff took to get the board of directors to take the plaintiff's preferred course of action. The board of directors of International Business Machines (IBM) (defendant) voted for compensation for three members of the board who were also IBM executives, including Akers (defendant), a former CEO. The board also voted for compensation for directors who were not executives. Marx (plaintiff) was displeased with this course of action, and filed a derivative action, without first making a demand of the board of directors. The trial court dismissed for failure to make a demand, and Marx appealed. Issue Does New York's law stating that a complaint in a derivative case must detail a plaintiff's efforts to change board policy mean that New York has a universal demand requirement? Rule of Law: In New York, the demand requirement will be excused only when a complaint alleges that the majority of the board has an interest in the transaction, that it failed to inform itself before making a decision, or that the decision challenged is so egregious that it could not have been the product of reasoned business judgment. Holding and Reasoning (Smith, J.) No. While legal theorists have commented on the virtues of a universal demand requirement, the legislature has not adopted it. The demand requirement exists to ensure that the courts are not flooded by unnecessary litigation, to protect the board's ability to make decisions, and to discourage shareholders from bringing suits merely for personal gain. New York has chosen not to have a universal demand requirement, and has excused demand in the past when a plaintiff could show that the board of directors had a direct financial interest in the challenged board decisions. However, the complaint cannot simply name directors and allege improper motives; the allegations must be particularized. In this case, Marx alleges that IBM's executives were overcompensated. However, only three directors benefited from the allegedly improper executive compensation scheme. While there are sometimes "back-scratching" schemes where directors will vote for compensation for each other, in this case, not enough members of the board benefited for the board as a whole to be implicated. The trial court was thus correct to dismiss those parts of the complaint dealing with executive compensation only. On the other hand, the entire board benefited from the proposal to increase director's compensation, and because of that, Marx's demand was excused with regard to that claim. However, because Marx failed to properly plead that the compensation to directors was wasteful, that portion of his complaint was rightfully dismissed. The trial court's dismissal is thus affirmed.

Waltuch v. Conticommodity Services, Inc.

Facts Norton Waltuch (plaintiff) was a silver trader for Conticommodity Services, Inc. (Conti) (defendant). When the silver market crashed, silver speculators brought multiple lawsuits against Waltuch and Conti. All of the suits settled with Conti paying the settlements. As a result of Conti's payments, Waltuch was dismissed from the suits with no settlement contribution. However, in defending himself in the suits, Waltuch spent approximately $1.2 million out of his own pocket. In addition to the civil suits, the Commodity Futures Trading Commission (CFTC) brought an enforcement proceeding against Waltuch. That proceeding settled as well, with Waltuch agreeing to a fine and a six-month ban on trading. Waltuch spent an additional $1 million in defending himself in the CFTC proceeding. Waltuch brought suit against Conti, seeking indemnification of his various legal expenses. Waltuch first claimed that a provision in Conti's articles of incorporation categorically required Conti to indemnify him. Conti claimed that a Delaware law barred the claim by allowing indemnification only if the corporate officer acted in good faith, which Waltuch did not establish. Waltuch's second claim was that a different provision of that Delaware law required Conti to indemnify him because he was "successful on the merits or otherwise" in the civil suits (this statute did not apply to the CFTC proceeding). Conti responded that its settlement payments were partially on Waltuch's behalf so he was not actually successful in the suits. The United States District Court for the Southern District of New York agreed with Conti on both claims. Waltuch appealed. Issue For purposes of indemnification, is a defendant "successful" in defense of the claim against him if he assumes no liability and does not have to pay the settlement because his employer paid the whole settlement payment? Rule of Law: For purposes of indemnification, a defendant is "successful" in defense of the claim against him if he assumes no liability and does not have to pay the settlement. Holding and Reasoning (Jacobs, J.) Yes. For purposes of indemnification, a defendant is "successful" in defense of the claim against him if he assumes no liability and does not have to pay the settlement because his employer paid the whole settlement payment. A court will not go "behind the result" and inquire as to why a defendant assumes no liability or payment in a claim against him. The fact that the defendant is dismissed from the case, even if his employer paid the settlement, is sufficient to warrant indemnification of his legal expenses because he is "successful on the merits or otherwise." Therefore, in this case, Waltuch is entitled to indemnification from Conti for legal expenses for the civil claims because he was dismissed from the suits and thus "successful." The United States District Court for the Southern District of New York is reversed on that issue, Waltuch's second claim. However, the United States District Court for the Southern District of New York is affirmed on Waltuch's first claim that Conti's articles of incorporation categorically provide for his indemnification, specifically on the CFTC proceeding. Although articles of incorporation may broaden indemnification rights beyond what the Delaware statute provides, the indemnification rights granted may not be inconsistent with the scope of a corporation's indemnification powers as provided by the statute. The court determines that requiring indemnification without a finding of good faith on the part of the corporate officer is inconsistent with the Delaware statute because requirement of such a finding is "explicitly imposed" in the statute. Accordingly, that indemnification provision of Conti's articles of incorporation is invalid and Waltuch is not entitled to indemnification for legal expenses related to his defense in the CFTC proceeding. As a result of the foregoing, the United States District Court for the Southern District of New York is reversed in part and affirmed in part.

Formation: Duray Development, LLC v. Perrin

Facts On September 30, 2004, Duray Development, LLC (Duray) (plaintiff) entered into a contract with Perrin (defendant), under which Perrin would excavate certain property that Duray owned. Subsequently, on October 27, 2004, Duray entered into a second contract that contained the same language and provisions as the Perrin contract and was meant to supersede that first contract. The second contract, however, was with Outlaw Excavating, LLC (Outlaw), and Perrin was not a party to the contract. Perrin, who had recently formed Outlaw and was Outlaw's owner, signed the second contract on Outlaw's behalf. Outlaw did not perform under the contract satisfactorily or timely, so Duray brought suit. During discovery, Duray learned for the first time that Outlaw did not officially become a "filed" limited liability company (LLC) until November 29, 2004, after the parties signed the second contract. The trial court ruled in favor of Duray on the merits and ruled that Perrin personally owed damages to Duray, because Outlaw was not an LLC at the time the parties executed the contract. Perrin appealed, arguing that he was not personally liable because of the de facto corporation and corporation by estoppel doctrines. Issue Are the de facto corporation and corporation by estoppel doctrines applicable to limited liability companies? Rule of Law: Under Michigan law, the de facto corporation and corporation by estoppel doctrines are applicable to limited liability companies. Holding and Reasoning (Per Curiam) Yes. The de facto corporation and corporation by estoppel doctrines are applicable to limited liability companies. The Limited Liability Company Act is very similar to the Business Corporation Act that gave rise to the de facto corporation doctrine and coexists with the doctrine of corporation by estoppel. Both acts relate to the purpose of forming similar business associations, and both acts contemplate the time at which such associations come into being. Accordingly, the acts "should be interpreted in a consistent manner," and the de facto corporation and corporation by estoppel doctrines should apply to LLCs as well as corporations. As such, the doctrines apply to Outlaw in this case. At the time of the execution of the second contract, both parties thought that Outlaw was a valid LLC and proceeded to perform under the contract as if that were the case. Indeed, Duray did not learn that Outlaw was not a valid LLC at the time of execution until discovery in the instant litigation. Outlaw thus met the requirements for the doctrines of de facto corporation and corporation by estoppel at the time of execution. Because the doctrines apply to LLCs, Outlaw was a de facto LLC at that time. Accordingly, pursuant to the liability structure of an LLC, Outlaw—not Perrin as an individual—is liable to Duray for the damages resulting from Outlaw's breach of the contract. The trial court's ruling is so modified.

Doran v. Petroleum Management Corp.

Facts Petroleum Management Corp. (PMC) (defendant) formed a limited partnership for the purpose of operating drilling wells. PMC offered an interest in the drilling program to eight investors. There were only a small number of shares offered for relatively low value, and the offering was made to the eight investors personally, without any public advertising. PMC did not file a registration statement in connection with this offering of securities. William Doran (plaintiff) was the only one out of the eight who ended up investing in PMC. A little more than a year after Doran invested in PMC, the Wyoming Oil and Gas Conservation Commission ordered the drilling wells sealed for about a year due to deliberate overproduction by PMC. As a result of the shutdown, a note on which Doran was liable went into default, and Doran lost a state-court case requiring him to pay significant costs. Doran then brought suit against PMC seeking damages for breach of contract, as well as rescission of his contract with PMC based on a failure to register the offering in violation of the Securities Acts of 1933 and 1934. The district court found that the PMC offering was exempt from registration because the offering was private, as Doran was a "sophisticated investor" and did not need federal securities protection. Doran appealed. Issue Can a sale constitute a private offering if the offeree is not furnished with and does not have access to information about the issuer that a registration statement would have disclosed? Rule of Law: To constitute a private offering and thus be exempt from the registration requirements of the Securities Act of 1933, the offeree in a sale must be furnished with or have access to information about the issuer that a registration statement would have disclosed. Holding and Reasoning (Goldberg, J.) No. In determining whether an offering is private, and thus exempt from the registration requirements of the Securities Act of 1933, courts look at four factors: (1) the number of offerees and their relationship to each other and the issuer, (2) the number of units offered, (3) the size of the offering, and (4) the manner of the offering. The first factor is the most important. In order to constitute a private offering under this factor, the relationship between the issuer and offeree must be such that the offeree is furnished with or has access to information about the issuer that a registration statement would have disclosed. In this case, although the latter three factors all weigh in favor of a finding of a private offering, the first factor remains the most important, and the PMC offering cannot be deemed private without satisfying that first factor. It is not clear from the record whether Doran had the necessary information about PMC. Although the offeree's investment sophistication is taken into account under the first factor, it is not dispositive. No investor can be deemed sophisticated in regards to an offering without basic information about the issuer. Accordingly, the case must be remanded for a determination of whether Doran was furnished with or had access to information about PMC that a registration statement would have disclosed.

Prentiss v. Sheffel

Facts Prentiss (defendant) and two other individuals, Sheffel et al. (plaintiffs), made an oral agreement to enter into a partnership to buy and operate a shopping center. The agreement did not specify any term for the partnership's existence, nor did it delineate the operational or management duties of the respective partners. Sheffel et al. owned a total of 85% interest in the partnership, while Prentiss owned 15% interest. The partners engaged in many serious arguments concerning the title of partnership property, which resulted in an irreparable rift between Prentiss and Sheffel et al. Prentiss added to the problems by being unable to pay his proportionate share of the shopping center's operating losses. Sheffel et al. subsequently excluded Prentiss from all management duties and sought dissolution of the partnership, alleging that Prentiss had been derelict in his partnership duties. Sheffel et al. also sought a court-supervised dissolution sale whereby they would bid on all the partnership assets. Prentiss filed a counterclaim, seeking to prevent Sheffel et al, from bidding on or purchasing the partnership assets. Prentess contended that he had been wrongfully frozen out of the partnership, and would be unfairly disadvantaged if Sheffel et al. were permitted to buy the partnership assets at a judicial sale. The trial court found that a partnership at will existed, and that Sheffel et al. dissolved it when they froze out Prentiss. The trial court also ordered a judicial sale of the assets and denied Prentiss's request to prohibit Sheffel et al. from bidding on the partnership's assets at that sale. Sheffel et al. were the high bidders in the judicial sale, and the trial court entered an order confirming the sale of the assets to them. Issue May partners who legally excluded a third partner from management duties be permitted to buy partnership assets at a judicially-supervised dissolution sale? Rule of Law: When a partnership is legally dissolved, any partner acting in good faith may purchase the assets. Holding and Reasoning (Haire, J.) Yes. Partners may dissolve a partnership-at-will by excluding another partner from management duties, as long as they act in good faith. Such partners may also bid on and purchase any assets in a dissolution sale. The record shows that Sheffel et al. excluded Prentiss from management duties and broke up the partnership because the dissention Prentiss caused made it impossible for the partnership to effectively continue. Prentiss did not offer any evidence that Sheffel et al. acted in bad faith or had any ulterior motive in dissolving the partnership-at-will. Consequently, there is nothing to prevent them from purchasing the assets at a dissolution sale. Also, Prentiss was not disadvantaged by Sheffel et al.'s participation in the asset sale. Sheffel et al.'s bids vis-à-vis the other participants resulted in a final sales price that was higher than it would have been had they not bid on the assets. Consequently, Prentiss's 15% interest in the partnership was enhanced by Sheffel et al.'s bidding. The judgment of the trial court is affirmed.

Additional capital: Racing Investment Fund 2000, LLC v. Clay Ward Agency, Inc.

Facts Racing Investment Fund 2000, LLC (Racing Investment) (defendant) purchased insurance from Clay Ward Agency, Inc. (Clay Ward) (plaintiff). In May 2004, after falling behind on payments, Racing Investment agreed to a judgment. Racing Investment, which by then had become defunct, failed to pay the entire judgment when due. The trial court found that a provision of Racing Investment's Operating Agreement (Operating Agreement) requiring members to make occasional capital infusions for business expenses was an available means to satisfy the judgment. The trial court ordered Racing Investment to satisfy the judgment accordingly. The Court of Appeals affirmed. Issue Can a standard capital call provision be invoked to satisfy a judgment against a limited liability company? Rule of Law: A standard capital call provision may not be invoked to satisfy a judgment against a limited liability company. Holding and Reasoning No. The Kentucky Limited Liability Act immunizes a member of a Kentucky limited liability company (LLC) from personal liability for the debts and obligations of the LLC. Notwithstanding this provision, the Act provides that members of an LLC may, pursuant to a written agreement, agree to be personally liable for the debts and obligations of the LLC. However, a member's intent to become personally liable must be stated in clear and unequivocal language. A standard provision in an operating agreement calling for occasional capital infusions, without more, does not constitute a clear and unequivocal statement of a member's intent to be personally liable. As such, the trial court erred in ordering Racing Investment to pay the judgment by means of the capital infusion provision of the Operating Agreement. The judgment of the Court of Appeals is reversed.

Broz v. Cellular Info. Systems, Inc.

Facts Robert Broz (defendant) was a director of Cellular Information Systems, Inc. (CIS) (plaintiff). He was also the president and sole stockholder of RFB Cellular (RFBC), a competitor of CIS in the cellular telephone service market. At the time in question, CIS had recently undergone financial difficulties and had begun divesting its cellular licenses. Mackinac Cellular Corp. (Mackinac), a third party cellular service provider, was seeking to sell one of its licenses. Mackinac thought that RFBC would be a potential buyer and contacted Broz about the possibility. The license was not offered to CIS. Broz spoke informally with other CIS directors, all of whom told him that CIS was not interested in the license and could not afford the license even if it were interested. At about the same time, a fourth service provider, PriCellular, had undergone discussions with CIS about PriCellular purchasing CIS. PriCellular had also been in negotiations with Mackinac about purchasing the license in question. In September 1994, PriCellular agreed on an option contract with Mackinac about purchasing the license. The option was to last until December 15, 1994, but if any competitor offered Mackinac a higher price during that time, Mackinac would be free to sell the license for that higher offer. On November 14, 1994, Broz, on behalf of RFBC, offered Mackinac a higher price for the license and Mackinac agreed to sell to RFBC. Nine days later, PriCellular completed its purchase of CIS. CIS then brought suit against Broz, alleging that Broz breached his fiduciary duties to CIS by purchasing the license for RFBC when the newly formed PriCellular/CIS corporation had had the option open to make the same purchase. The Delaware Court of Chancery found that Broz had violated his fiduciary duties to CIS because he did not take into account PriCellular's future plans regarding the purchase of CIS, and because Broz did not formally present the opportunity to CIS's board of directors. Broz appealed. Issue Under the corporate opportunity doctrine, must the director in question formally present the opportunity to his corporation's board of directors if the corporation does not have an interest in or the financial ability to undertake the opportunity? Rule of Law: Under the corporate opportunity doctrine, it is not required that the director in question formally present the opportunity to his corporation's board of directors if the corporation does not have an interest in or the financial ability to undertake the opportunity. Holding and Reasoning (Veasey, C.J.) No. The Delaware Court of Chancery improperly wrote additional requirements into the corporate opportunity doctrine. There is no requirement that the director take into consideration future interests of an at-that-time third party corporation, and there is no requirement that the director in question formally present the opportunity to his corporation's board of directors if the corporation does not have an interest in or the financial ability to undertake the opportunity. In the instant case, at the time Broz closed the deal for the license on behalf of RFBC, PriCelluar had no equitable interest in CIS. He was under no duty to consider the "the contingent and uncertain plans of PriCellular." In addition, it was clear that at the time CIS could not financially afford to purchase the license and that it in fact had no interest in purchasing the license. This was not only clear given CIS's financial troubles and divesting of other licenses, but because directors of CIS told Broz as much during informal discussions. Consequently, Broz did not violate any fiduciary duty to CIS and the Delaware Court of Chancery is reversed.

Dirks v. SEC

Facts Ronald Secrist, a former officer of Equity Funding of America (Equity Funding), told Raymond Dirks (defendant) that Equity Funding's assets were exaggerated due to fraudulent corporate practices. Secrist told Dirks to verify the fraud and publicly disclose it. Dirks investigated Equity Funding and over the course of his investigation, he discussed his findings with various investors, including some investors who had stock in Equity Funding and who sold the stock after they spoke with Dirks. As a result of the stock sales, Equity Funding's stock fell abruptly and the SEC opened an investigation. The SEC found that Dirks aided and abetted insider trading in violation of SEC Rule 10b-5. The court of appeals affirmed. Dirks appealed. Issue Does a tippee violate a fiduciary duty to the shareholders of the corporation on which he received a tip if the insider from whom he received the tip did not receive a benefit of any kind from giving the tip? Rule of Law: A breach of an insider's fiduciary duty must occur before a tippee inherits the duty to disclose inside information. Holding and Reasoning (Powell, J.) No. A tippee assumes a fiduciary duty to the shareholders of the corporation not to trade on the material nonpublic information only when the insider giving the tip has breached his fiduciary duty to the shareholders by disclosing the information to the tippee, and the tippee knows or should know that there has been a breach. An insider breaches that duty only if he gives the information to the tippee in order to personally benefit, directly or indirectly, from his disclosure. Where the insider does not violate any fiduciary duty, the tippee cannot be deemed to violate a fiduciary duty either. In the instant case, Secrist's motivation in telling Dirks about the fraud within Equity Funding was for the purpose of exposing the fraud, not to benefit personally in any way. Therefore, because Secrist in fact did not benefit either directly or indirectly from telling Dirks, he did not violate a fiduciary duty to the Equity Funding shareholders. Consequently, Dirks did not violate any resulting fiduciary duty to the Equity Funding shareholders. The court of appeals is reversed.

McQuade v. Stoneham

Facts Stoneham (defendant) was the majority owner of National Exhibition Company (NEC). McGraw (defendant) and McQuade (plaintiff) each bought 70 shares of Stoneham's stock. As part of the purchase, the three entered into a contract that provided that the parties would "use their best endeavors" to make sure that each would remain directors of NEC. Stoneham became president of the board, McGraw vice-president, and McQuade treasurer. Stoneham selected and controlled the other four directors. McQuade and Stoneham began quarreling about the corporate treasury. At a board meeting at which the position of treasurer was up for election, Stoneham and McGraw did not vote, McQuade voted for himself, and the four other directors voted for a Leo Bondy to succeed McQuade; McQuade thus lost his position as treasurer. At the next board meeting, the board dropped McQuade as a director. McQuade's removal was due to personal conflict with Stoneham, not for any misconduct by McQuade. McQuade brought suit for breach of contract, alleging that Stoneham and McGraw did not use their best efforts to keep him on as a director. The defendants claimed that the contract was void because the duty to act in the best interests of the corporation superseded the contract. The lower courts did not reinstate McQuade as treasurer but did award him damages for the breach. Issue Is a contract that requires directors of a corporation to refrain from changing officers, salaries, or policies or retaining individuals in office without consent of the contracting parties void? Rule of Law: A contract is void if it requires directors of a corporation to refrain from changing officers, salaries, or policies or retaining individuals in office without consent of the contracting parties. Holding and Reasoning (Pound, C.J.) Yes. A contract that requires directors of a corporation to refrain from changing officers, salaries, or policies or retaining individuals in office without consent of the contracting parties is void. A director's primary duty is to the corporation and its shareholders. Shareholders may combine their votes to elect directors, but they may not extend this power to limit directors' authority to run the corporation, such as in the selection of officers or fixing salaries. A contract adding a concurrent duty to other directors brings with it the likelihood that the director will not always make personnel decisions in the best interests of the corporation. Accordingly, an outright ban of such contracts is appropriate so as not to put the courts in a position of judging the motives of directors in individual cases. In addition, McQuade was also ineligible to be a director because he was a city magistrate at the time and thus prohibited by law from engaging in other business. The contract in question is therefore void and the lower courts are reversed.

Dodge v. Ford Motor Co.

Facts The Ford Motor Company (defendant) was incorporated in 1903, and began selling motor vehicles. Over the course of its first decade, despite the fact that Ford continually lowered the price of its cars, Ford became increasingly profitable. On top of annual dividends of $120,000, Ford paid $10 million or more in special dividends annually in 1913, 1914, and 1915. Then, in 1916, Ford's president and majority shareholder, Henry Ford, announced that there would be no more special dividends, and that all future profits would be invested in lowering the price of the product and growing the company. The board quickly ratified his decision. Henry Ford had often made statements about how he wanted to make sure people were employed, and generally run the company for the benefits of the overall community. The Dodge brothers (plaintiffs), who owned their own motor company, were minority shareholders in Ford, and sued to reinstate the special dividends and stop the building of Ford's proposed smelting plant. The lower court ordered the payment of a special dividend and enjoined Ford from building the smelting plant. Ford appealed. Issue Can a company choose to stop paying dividends and instead invest its profits in the communities in which it is active? Rule of Law: A company cannot take actions that harm its shareholders and are motivated solely by humanitarian concerns, not by business concerns. Holding and Reasoning (Ostrander, J.) No. A business exists to conduct business on behalf of its shareholders. It is not a charity to be run for its employees, or neighbors. In this case, Ford was even more profitable in 1916 than it was in 1915, when it paid over $10 million in dividends. However, in 1916, Ford paid only its $120,000 dividend. While a corporation may choose to invest in future ventures, and may choose to maintain cash on hand to plan for future shortfalls, Ford had done that in prior years and still managed to pay special dividends. These actions, combined with Henry Ford's statements about putting profits into the business to provide for the workers, suggest that the decree against new special dividends was not motivated by any business concern. By taking an action with no business concerns motivating it, Henry Ford and the Ford directors who supported his decision were acting arbitrarily, to the direct detriment of the shareholders in whose interest they were supposed to be acting. The portion of the lower court opinion enjoining Ford from investing in the smelting plant is reversed, but the portion ordering Ford to pay out a multi-million dollar special dividend is sustained.

Bayer v. Beran

Facts The directors (defendants) of the Celanese Corporation of America (CCA) started a radio advertising campaign for the corporation. CCA had advertised before, but never on the radio. In making its decision to start advertising on the radio, the directors reviewed studies given to them by CCA's advertising department, brought in a radio consultant to help them determine the station and time to advertise, and hired an advertising agency to produce the ad. In addition, the advertising commitments were subject to cancellation at any time, and the board voted to renew the advertising contract after it had been running for a year and a half. One of the singers on the program on which CCA decided to advertise was the wife of Camille Dreyfus, one of CCA's directors. The plaintiff brought suit, claiming that the advertising campaign was started due to the benefit to Mrs. Dreyfus as it "subsidized" her career and was "a vehicle for her talents." Issue Does a director necessarily breach his duty of loyalty to a corporation by advertising the corporation's product on a program on which the director's wife is a singer? Rule of Law: Directors have an obligation not to put their own interests before the interests of the corporation. Holding and Reasoning (Shientag, J.) No. Directors have an obligation not to put their own interests before the interests of the corporation. This duty of loyalty supersedes the business judgment rule so that fraud may be avoided. The burden of establishing that the duty of loyalty is not violated is on said directors. However, that burden may be met if after "rigorous scrutiny" it is determined that the transaction in question was made in good faith and would have been made even in the absence of the personal interests of the director. In the present case, the court finds that the directors did not violate their duty of loyalty to CCA by advertising on Mrs. Dreyfus's program. The directors went through an involved process to determine whether to advertise on the radio, and on what station and channel to advertise. Although the advertising choice may have enhanced Mrs. Dreyfus's career, it also greatly benefited CCA and the evidence supports a conclusion that the same decision on advertising would have been made if Mrs. Dreyfus was not on the program. Accordingly, the court finds in favor of the CCA directors.

Shlensky v. Wrigley

Facts The first game of night baseball was played in 1935, and since then, every team except the Chicago Cubs began playing night games. Most major league games were night games, except those played on weekends. The Cubs did not play night games. As a result, the Cubs sold fewer tickets and were less profitable than any other major league team. Philip Wrigley (defendant), the President of the Chicago National League Ball Club (defendant), which owned the Cubs, was opposed to playing night games, claiming that night games would be damaging to the neighborhood in which the Cubs played. Shlensky (plaintiff) filed a suit claiming that it would be financially practicable for the Cubs' stadium to install lights and begin playing night games, and would be very profitable in the long run. Shlensky alleged that the only reason the Cubs did not play night games is because Wrigley felt it was somehow against the spirit of baseball. The trial court dismissed the action, and Shlensky appealed. Issue Can a single aggrieved shareholder sue a board of directors alleging that the board is not maximizing profits? Rule of Law: As long as a corporation's directors can show a valid business purpose for their decision, that decision will be given great deference by the courts. Holding and Reasoning (Sullivan, J.) No. A corporation's president and board have authority to determine what course of action is best for the business. While the president and board must have a valid business purpose behind their actions, a decision motivated by a valid business purpose will be given great deference. In this case, while Shlensky may disagree with the board's course of action, Wrigley could have reached the legitimate business conclusion that the Cubs were better off not playing night games. Wrigley and the board may be concerned about maintaining goodwill in the community from which the Cubs draw their fans; or they may be concerned about the costs of operating the lights. Wrigley and the board may have determined that night games would not have brought in additional revenue. Indeed, while Shlensky was able to prove correlation between night games and ticket sales for other teams, he did not prove that night sales would actually be beneficial to Cubs shareholders. Shlensky did not prove that night games would increase ticket sales, and did not prove that any potential increases in ticket sales would offset potential increases in costs. No convincing showing has been made that Wrigley and the board were acting in anything but the corporation's best interest. Accordingly, the trial court's determination that the complaint should be dismissed is affirmed.

Trinity Wall Street v. Wal-Mart Stores, Inc.

Facts Trinity Wall Street (Trinity) (plaintiff) owned shares of Wal-Mart Stores, Inc. (Walmart) (defendant). Trinity filed a shareholder proposal with Walmart, proposing that Walmart adopt a policy to not sell guns with high-capacity magazines. Walmart declined to include the proposal in its 2014 proxy statement. Trinity brought suit arguing that Walmart's exclusion of its proposal violated the Securities Exchange Act of 1934. Trinity claimed that the proposal related to Walmart's corporate governance rather than being a good corporate citizen. Trinity argued that selling guns with high-capacity magazines would hurt Walmart's reputation and brand. The district court found in favor of Trinity. Walmart appealed. Issue Can a company exclude from a proxy statement a shareholder proposal that focuses on a matter of significant social policy related to the company's day-to-day business operations if the policy issue transcends those operations? Rule of Law: A company cannot exclude from a proxy statement a shareholder proposal that focuses on a matter of significant social policy related to the company's day-to-day business operations if the policy issue transcends those operations. Holding and Reasoning (Ambro, J.) No. A company cannot exclude from a proxy statement a shareholder proposal that focuses on a matter of significant social policy related to the company's day-to-day business operations if the policy issue transcends those operations. Generally, a company can exclude a shareholder proposal from a proxy statement if the proposal relates to the company's ordinary business operations. To make such a determination, courts consider the subject matter of the proposal and whether that subject matter relates to the company's ordinary business operations. However, even if a proposal involves the company's ordinary business operations, the company cannot exclude the proposal if its focus is a matter of significant social policy that goes beyond the company's day-to-day business operations. In this case, the sale of guns with high-capacity magazines is an issue of significant social policy. But the social policy does not transcend Walmart's day-to-day business operations. The subject matter of Trinity's proposal is the products that Walmart sells, which is a matter of Walmart's day-to-day business operations. And while the sale of high-capacity guns is a significant social matter, the social policy matter does not transcend Walmart's ordinary business operations. The heart of a retailer's business is the decisions as to which products the retailer sells. It is rare that a social policy matter will transcend something so inherent to retail operations as product choices, and it does not do so here. A retailer's weighing of consumer and community safety in deciding which products to sell is inextricably intertwined with the retailer's ordinary business operations. Accordingly, Walmart was entitled to exclude Trinity's shareholder proposal from its proxy statement. The judgment of the district court is reversed.

Levin v. Metro-Goldwyn-Mayer, Inc.

Facts The stockholder annual meeting for Metro-Goldwyn-Mayer, Inc. (MGM) was coming up and two different groups of stockholders wanted to nominate two different slates of directors for MGM's board. Both groups solicited proxies for the meeting. MGM's proxy statement stated that MGM would "bear all cost in connection with the management solicitation of proxies." One group, the O'Brien group (defendants), used MGM funds in its solicitation of proxies, including use of MGM funds to retain attorneys, hire a public relations firm, and hire proxy soliciting organizations. The other group, consisting of Philip Levin and other stockholders (plaintiffs), brought suit against MGM and the O'Brien group, seeking injunctive relief against the O'Brien group's continued solicitation of proxies in that manner. Issue Is using corporate funds to hire attorneys or a proxy soliciting organization in a proxy solicitation contest illegal or unfair? Rule of Law: Using corporate funds to hire attorneys or a proxy soliciting organization in a proxy solicitation contest is not illegal or unfair if the amounts paid by the corporation are not excessive. Holding and Reasoning (Ryan, J.) No. Using corporate funds to hire attorneys or a proxy soliciting organization in a proxy solicitation contest is not illegal or unfair if the amounts paid by the corporation are not excessive. This method does not violate any federal statute or SEC regulation and it is in line with MGM's proxy statement filed with the SEC. In addition, the court determines that the amounts paid by the O'Brien group in its solicitation of proxies are not excessive. Accordingly, the plaintiffs' motion for injunctive relief is denied.

Ringling Bros. - Barnum & Bailey Combined Shows v. Ringling

Facts There were 1000 outstanding shares of Ringling Bros.-Barnum & Bailey Combined Shows (Ringling Bros.). Edith Conway Ringling (Mrs. Ringling) (plaintiff) owned 315; Aubrey Ringling Haley (Mrs. Haley) (defendant) owned 315; and John Ringling North (Mr. North) (defendant) owned 370. Mrs. Ringling and Mrs. Haley entered into an agreement which provided that they would always vote their shares jointly and in the same way. The agreement provided that if they could not agree on how to vote their shares, the issue would be submitted to binding arbitration. At a 1946 annual meeting, the women disagreed on whom to elect to one of the Ringling Bros. director positions. They agreed that Mrs. Ringling would vote for herself and her son, and that Mrs. Haley would vote for herself and Mr. Haley. However, they could not agree on a fifth director. The arbitrator directed the women to cast 4/5 of their votes as provided above, but the final 1/5 of their votes in favor of a Mr. Dunn. Instead of doing this, Mr. Haley (as proxy for Mrs. Haley) cast all of Mrs. Haley's votes for himself and Mrs. Haley, omitting Mr. Dunn. Mr. North, meanwhile, voted for himself, a Mr. Woods, and a Mr. Griffin as he was entitled to do since he was not a party to the agreement between Mrs. Ringling and Mrs. Haley. The chairman of the Ringling Bros. board ruled that the following were elected to the seven-member Ringling Bros. board: Mrs. Ringling, her son, Mrs. Haley, Mr. Haley, Mr. Dunn, Mr. North, and Mr. Woods. Thus, Mr. Dunn was elected, and not Mr. Griffin, as would have been the case the way Mrs. Haley voted in violation of the agreement. At the next stockholders' meeting, Mr. Griffin attempted to join in the voting despite the arbitrator's and the chairman's ruling and Mrs. Ringling brought suit, seeking declaratory relief. The Delaware Court of Chancery ruled that the agreement between Mrs. Ringling and Mrs. Haley was valid and binding and ordered a new election to be held before a master to see that the terms of the agreement were followed. Issue Is an agreement between two shareholders in a closely held corporation to vote jointly a binding and enforceable contract? Rule of Law: An agreement between two shareholders in a closely held corporation to vote jointly is binding and enforceable as a contract. Holding and Reasoning (Pearson, J. ) Yes. A shareholder generally has significant freedom in how he or she votes and an agreement between two shareholders in a closely held corporation to vote jointly is a binding and enforceable contract. Although the contract in the current case provided that the arbitration was binding, there was no enforcement instrument in the contract to make it so. However, by not voting according to the arbitration, Mr. Haley (on behalf of Mrs. Haley) breached the contract and Mrs. Ringling is therefore entitled to relief. The court determines that the most appropriate relief is to reject and invalidate the votes of Mr. Haley. Therefore, because Mrs. Ringling voted in accordance with the valid contract and because Mr. North was not a party to the contract and his votes were therefore valid, the court determines that the six people for whom those parties voted (Mrs. Ringling, her son, Mr. Dunn, Mr. North, and Mr. Woods, and Mr. Griffin) are elected. This leaves one vacancy on the seven-member board, which the court determines should be filled at the next annual meeting of Ringling Bros. The decision of the Delaware Court of Chancery is hereby modified.

Robinson v. Glynn

Facts Thomas Glynn (defendant) was the chairman of GeoPhone Company, LLC (GeoPhone). James Robinson (plaintiff) agreed to loan Glynn $1 million so that Glynn could test a technology he had developed called Convolutional Ambiguity Multiple Access (CAMA). Robinson agreed to a letter of intent to invest an additional $24 million if the CAMA technology worked in the field test. Glynn then performed the field test without the CAMA technology, and told Robinson that the test had been a success. Robinson then invested the rest of the money according to the letter of intent. Under the ensuing contract, Robinson appointed two members of the GeoPhone board and assumed one of the seats himself, in addition to assuming the role of treasurer. Eventually, Robinson found out that the CAMA technology had not been used in the initial test and he filed suit, alleging that Glynn had committed federal securities fraud, in that Robinson's interest in GeoPhone was an investment contract, stock, or both. The district court dismissed the claim on the grounds that Robinson's membership interest in GeoPhone did not constitute a "security" under the Securities Exchange Act of 1934, which defines "security" as any note, stock, security future, bond, debenture, investment contract, or any instrument or interest commonly known as a security. Robinson appealed. Issue Does a membership interest in an LLC where the individual holding the interest maintains active control over the interest qualify as a security? Rule of Law: To qualify as a security, the economic reality of a membership interest in an LLC must be that the interest holder is a passive investor relying on the efforts of others. Holding and Reasoning (Wilkinson, J.) No. To qualify as a security, the economic reality of a membership interest in an LLC must be that the interest holder is a passive investor relying on the efforts of others. Thus, where the individual holding the interest maintains active control over the interest, the membership interest does not qualify as a security. In the case at bar, Robinson was on the board of directors and was the treasurer of GeoPhone. The "economic reality" of Robinson's membership interest then was that he was not a passive investor relying on the efforts of others. However, he clearly maintained a certain level of control over the business of GeoPhone and thus his interest in the LLC. Accordingly, Robinson's interest may not be classified as a security and so he may not maintain a claim for securities fraud. The district court's dismissal of the complaint is affirmed.

Buyout Agreements

a PA provision that allows a partner to end her relationship with the other partners and receive payment in return for her interest in the firm. can and ought to be tailored to the needs and circumstances of the relevant partnership. the provision can be limited to certain "trigger" events (death, disability, retirement, upon the election of the partner). it can/should also include an objective means of determining the price (book value, appraisal value, or some set of formula), as well as the method of payment (cash or over time). a well-crafted buy-out agreement can save all partners headaches when the time comes for one partner to end the relationship.

Duty of Loyalty: Usurpation of Corp. Opportunities

a breach of the duty of loyalty may occur where an officer or director of a corp. takes for herself an opportunity that "belongs" to the corp. - or should have been offered to the corp. so it could decide for itself where to pursue it. by seizing such an opportunity for herself, the officer/director "usurps" a corp. opportunity and any benefit may be disgorged...

Limited Partnership veil piercing "Control Rule"

a central feature of LPs is the limited liability of limited partners (imposing personal liability only on the general partners - those who manage and control the LP). BUT, under RULPA, the limited liability of limited partners can be pierced under some circumstances where limited partners step out of their roles and assume control of the LP.

MBCA § 8.61 and Delaware G.C.L. § 144

a corp. is not permitted to avoid a K solely b/c of a conflict if the director shows (burden is on the director) one of three things: 1) that the transaction was approved by disinterested directors, or 2) that the transaction was approved by disinterested shareholders, or 3) that the transaction was fair to the corp. when entered into....

Delaware's Approach to the Corporate Opportunity Doctrine:

a corp. opportunity exists where: 1) the corp. is financially able to take the opportunity 2) the opportunity is in the corporations line of business 3) the corp. has an interest or expectancy in the opportunity 4) embracing the opportunity would create a conflict b/t the director's self-interest and that of the corp. NOTE: there is some ambiguity in how courts should apply this test: Delaware courts sometimes refer to these as "factors" BUT the actual test articulated in Guth v. Loft conjoins them with an "and"

corporation: owned by shareholderes

a corp.'s shareholders are its owners - and shares of stock are the units of corporate ownership, which are freely transferable. Although shareholders are owners, do not manage.

Shareholder Derivative Suits

a corporation can sue and be sued and sometimes a lawsuit must be filed by a corporation or it cannot be filed at all.

Corporation: Double taxation

a corporation must pay income tax on its profits, and its shareholders (owners) must also pay income tax on dividends they take. This means that corporate profits are usually taxed twice.

What is a corporation?

a legal person with the following qualities: (1) formed by filing: (2) legal entity (3) limited liability (4) owned by shareholders (5) managed by a board of directors (6) perpetual existence (7) double taxation.

Shareholder proxies

a proxy is granted by a shareholder of the power to vote her shares to someone else. the person who grants the power is the "proxy giver" and the person who receives the power is the "proxy holder." the relationship of proxy giver to proxy holder is usually just that of principal and agent. the proxy holder (the agent) must vote as the proxy giver (the principal) directs - and the grant of the right to vote is revocable at any time. if the proxy holder has obtained an ownership interest in the stock, then the proxy may be deemed to be "coupled with an interest" and irrevocable. every state allows shareholder voting by proxy - and VAST majority of shareholders of publicly held companies vote by proxies that are solicited by management.

Control Premium

a single share of stock gives the shareholder almost no control over the company, so its value is limited to the present value of the future stream of dividends due to that share. someone buying a controlling block gets the power to elect her own board of directors and changes policies to make it more profitable.

Limited partnerships

a statutory entity that (like a corp., but unlike general partnership) is formed by state filing -- an LP must be formed by 2 or more separate persons: a) at least one person must be a general partner, who will be a managing owner. b) at least one person must be a limited partner, who is a passive investor.

Direct suits

a suit is direct if it alleges a direct loss to the shareholder. example: if the directors of ABC reconfigured the shareholder rights to harm preferred shareholders to the advantage of the common shareholders, then the preferred shareholders would have a direct claim.

financial interests: profit and loss sharing of the LLC

absent contrary agreement, most LLC statutes allocate profits and losses on the basis of the value of members' contributions. this is contrasted with the GP's default of equal division (regardless of capital contribution) the ULLCA does embrace the GP rule of equal division

a limited partner's withdrawal

absent contrary provision in the partnership agreement, are free to withdraw their capital from the limited partners on six (6) month's written notice. -- b/c limited partners are not essential to running the limited partnership, their withdrawal does not automatically lead to dissolution.

Federal Regulation of shareholder proposals: Exchange Act Rule 14(a)-8

allows eligible shareholders to put a qualifying proposal before their fellow shareholders and to have proxies solicited in favor of them in the company's proxy statement, with the expense being borne by the corp.

ownership exit: general partnership

always power (if not right) of dissolution (UPA) and/or dissociation (RUPA)

voting trust

an agreement among shareholders under which all of the shares owned by the parties are transferred to a trustee, who becomes the nominal, record owner of the shares. the trustee votes the shares in accordance with the provisions of the trust agreement, if any, and is responsible for distributing any dividends to the beneficial owners of the shares.

Howey Test for what constitutes an "investment contract"

any transaction in which a person: 1) invests money (can take forms other than money) 2) in a common enterprise (must involve more than one person) 3) is led to expect profits from earnings 4) solely interpreted as predominantly from the efforts of others.

Basic elements of Exchange Act § 16(b) Short-Swing Trading Proscription

applies only to statutorily defined insiders: directors, executive officers, and owners of 10% or more of issuer's stock. short-swing profits from trades (sale/purchase or purchase/sale) of company equity securities within 6 months of each other by statutory insider must be disgorged. basically strict liability - no need to prove intent. the disgorged funds go to the issuer. the issuer corp. may bring directly. but if the issuer does not bring the action, then shareholders may bring it derivatively.

corporations: limited liability

as a legal person, it is legally liable for its contracts, torts, debts and crimes. BUT the people who manage and own it are NOT typically liable for what the corporation does. Shareholder risk of loss is limited to investment. such limited liability is one of the greatest advantages of the corporate form.

capital call provisions in an LLC Operating Agreement...

as a means of determining in advance how and under what circumstances additional capital will be raised by the members if needed. In Racing Investment Funds 2000, courts will not permit creditors to rely on such a provision to make an end-run around the liability protection that LLCs afford their members.

Delaware's approach to the corp. opp. doctrine (1) the corp. is financially able to take the opportunity...

ask whether the corp. was in a financial position to avail itself of the opportunity. if not, then the corp. could not take advantage of the opportunity even if it wanted to.

intro. to fiduciary duties of shareholders in close corporations

at early common law, shareholders had no fiduciary obligations to firm or fellow shareholders - there has been some erosion of this rule vis-a-vis controlling shareholders of public corporations whose controlling interest allows them to dominate the board.

Partners v. employees

b/c general partnerships can be formed w/o any filing with the state, and even w/o the parties having subjectively committed to the partnership association, persons can sometimes be surprised to find that they are (or are not) partners. There are sometimes disputes as to whether a person is a partner or an employee. Fenwick v. Unemployment Compensation Commission

less uniformity among state LLC statutes

b/c there was little opportunity to draft and propose uniform statutes before states adopted their own versions. Uniform Limited Liability Company Act ("ULLCA") & Revised Uniform Limited Liability Company Act ("RULLCA") state limited liability company acts display a dazzling array of diversity.

Introduction to the LLC

basically a hybrid of the GP and the Corp. combines the limited liability of the corp. with the pass-through taxation of the GP unlike LPs and GPs (general partners are exposed to unlimited liability), none of the members of an LLC are exposed to unlimited liability unlike corps and LPs (where shareholders and limited partners respectively are not typically permitted to share in management), the LLC statutes grant a great deal of flexibility in the choice of management structures pursuant to the LLC operating agreement. like GPs, LP, and Corps, its formation and structure are governed by state statute. like the corp. and LP but unlike the GP, it is formed by filing with a state agency

federal regulation § 14(a) of the Securities and Exchange Act of 1934.

came to light in a series of hearings after the market crash of 1929 that the proxy solicitation process was being abused - and there were few state laws at the time that addressed the problem. Congress decided to act by imposing Federal proxy solicitation requirements for publicly held companies" and it gave the SEC authority to promulgate and enforce rules to that effect.

Corporation: Formed by filing

can only be formed by a statutorily prescribed public filing

Internal Affairs Doctrine

choice of law principle that, no matter where a corporation is sued, the law of the state of incorporation will apply to its "internal affairs" leads many large corporations to choose Delaware

locked in as shareholders

close corp.s often restrict share transfers even if no formal restrictions, there is no secondary market for the shares.

buy/sell agreements

contract that requires either the corporation (entity purchase) or other shareholders (cross-purchase) to purchase a shareholder's shares upon the occurrence of a triggering event decided upon by the parties in advance. important terms: 1) triggering event - death - disability - retirement 2) valuation - appraisal - book value - formula agreed to in advance 3) funding - insurance (if triggering is death) - payments - lump sum an effective buy/sell agreement can give shareholders: 1) some assurance of liquidity upon a triggering event - and 2) give the other shareholders assurance that they will not be forced to work with strangers or uncooperative/incapable family members who inherit shares.

Exculpation, Indemnification, and Insurance

corporations typically offer their directors and officers three layers of protection against litigation: 1) exculpation 2) indemnification 3) insurance

Piercing the LLC veil

courts have been willing to apply corporate law doctrines (de facto corp. and corp. by estoppel) to LLCs courts also willingly apply corporate veil piercing doctrines to LLCs also

Veil Piercing doctrine

courts will generally look for some unfairness or fraud on the part of shareholders who fail to respect the separate existence of a corporation and use the company as a mere "instrumentality" or "alter ego" - in determining whether the corporate veil should be pierced, courts typically look at a number of factors (none of which is necessarily determinative)...

From corp. philanthropy to the Business Judgment Rule

courts will not second-guess the motives of Board of Directors who engage in philanthropy with corporate assets so long as there is no evidence of: - bad faith - fraud - illegality - conflict of interest special application of a much broader rule

cumulative voting

directors are not elected seat-by-seat, but in one at-large election. each shareholder gets the following number of votes: # of shares (x) # of director slots - so if you own 100 shares, and there are 4 director slots, then you get 400 votes (100 shares x 4 directors = 400) each shareholder gets to cumulate ALL her votes for one candidate if she chooses (or she can spread them out). since minority shareholders can vote all their shares for one candidate, they have a better chance of gaining some representation on the board.

fiduciary duties of limited partners

do not typically owe fiduciary duties to the partnership b/c they are excluded from management and control

general partner's withdrawal

does not necessitate dissolution, as long as: 1) there are other general partners who remain and the limited partnership agreement allows the remaining general partners to continue; or 2) within 90 days after the withdrawal, all the remaining partners (both general and limited) agree in writing to continue the partnership RULPA § 801

tax: traditional corp.

double taxation

straight voting

each shareholder is entitled to case one vote per share for each director slot. so, the majority shareholder can elect the entire slate of directors minority shareholders are powerless.

Rule from Galler v. Galler

extends further than the NY rule: shareholder agreements limiting director discretion are valid for shareholders in close corporations where: 1) no minority shareholder objects, and 2) the terms are reasonable.

member fiduciary obligations Delaware Code tit. 6 § 18-1101(c)(2)

fiduciary "duties may be expanded, restricted or eliminated by provisions in a LLC agreement; provided, that the LLC agreement may not eliminate the implied contractual covenant of good faith and fair dealing." to be effective, any modification of fiduciary duties must be EXPRESS and UNAMBIGUOUS in the LLC operating agreement.

Related Theories: Reverse Veil Piercing

flip-side of "forward" piercing. the creditor of a shareholder seeks to hold a closely held corporation liable for the personal debts of the dominant shareholder. justification is the same as for "forward" piercing: that based on the shareholder's actions, equity demands that the shareholder and the corporation should be treated as the same person. the test is also basically the same as for forward piercing (is the shareholder using the corporation as an alter ego to perpetuate a fraud or otherwise defeat a rightful claim). NOTE: Courts will not typically reverse veil pierce if it will harm other innocent shareholders. ALSO: some courts refuse to recognize reverse veil piercing b/c it allows creditors to circumvent normal collection procedures.

Securities Act of 1933

focuses on PRIMARY market transactions. designed to insure that market participants are adequately and accurately informed about any security being issued through required disclosures. provisions prevent fraud and place investors on notice of the potential risks. NOTE: the federal disclosure (not merit based) approach to securities regulation differs from some state "blue sky" laws, which do sometimes impose merit-based requirements. ex: Apple's IPA could not be sold in Massachusetts b/c state regulators regarded it as too speculative. through a Form S-1 registration statement, (which is filed with the SEC) and a prospectus (which is distributed to potential buyers and included in the registration statement), the 33 Act requires companies issuing stock to disclose a host of information about their business and capital structure. requires that the issuers honestly disclose the risks, so that the average investor can make an educated risk/reward decision on their own.

traditional corp.: formation

formalities required: articles of incorporation must be filed with the state.

Limited Partnership distinguished from general partnership

formation: like a corp., but unlike a GP, an LP can only be formed by public filing. -- to form an LP, a "certificate of limited partnership" must be filed with the secretary of state (or other government official) pursuant to the terms of the relevant state's statutory regime. -- the information required for the filing is fairly simple and straightforward. NOTE: in addition to the filing of the certificate, the formation of an LP always involves a Limited Partnership Agreement - which lays out the contractual relationship are usually reserved for that document.

Corporate responses

if a corp. wishes to challenge or exclude a shareholder proposal from its proxy materials, it can: - exclude it on procedural grounds (show the shareholder has not held the shares for one year) - challenge it by including an opposing statement in its proxy materials. - negotiate with the proponent - exclude it pursuant to 14(a)-8(i) b/c it addresses an improper subject matter

procedure for exclusion

if a corp. wishes to exclude the proposal, it must: give the shareholder notice within 14 days of receipt. the shareholder will then have 14 days to respond. if the company still intends to exclude, it must file its reasons with the SEC staff (along with an opinion of counsel) at lease 80 prior to date of mailing the proxy statement. the shareholder may also submit a response to the SEC (though it is not required) the SEC staff may then either issue a "no action letter" (indicating it agrees to its excludable), or notify the corp. that exclusion would not comply with the law.

Ratification

if often happens that one person, A, purports to act on behalf of another, B, w/o any type of authority (actual, apparent, or inherent) to do so. When this happens, B may still be bound by A's act if B subsequently ratifies the action. If ratified, the transaction is treated as if it has been authorized when entered into.

Note on Dividend Distributions

in Dodge, the general rule is that courts will leave the distribution of dividends to the discretion of directors and will only intervene if the refusal to distribute amounts to "such as abuse of discretion as would constitute a fraud, or breach of... good faith."

intro to shareholder proposals

in addition to the power to vote on directors and on certain fundamental issues, corp. shareholders also have a voice pursuant to the shareholder proposal process. shareholder proposals involve issues of free speech and corp. democracy - and they have played an increasingly important role in corp. governance.

Objective or intrinsic fairness

in the absence of informed ratification by the disinterested members of the board or shareholders, the the board members will have the burden showing that the deal was fair under the "intrinsic" or "entire" fairness test: must show that the (1) process followed was fair and the (2) substantive terms of the deal were fair to the corp.

reimbursement of costs in proxy fight

in uncontested proxy solicitation, the law will typically permit management to charge the firm for 100% of any costs associated with the solicitation of proxies. this makes sense b/c the corp. simply cannot function if a quorum is not reached.

Person

includes natural persons and legal persons (corporations)

forum/jurisdiction of corporations

incorporating outside headquarter state opens one to personal jurisdiction in both states.

general partnership: formation

informal - no filing - only question is whether satisfies definition of partnership in RUPA § 202(a)

vote pooling agreements

instead of entering into a trust, shareholders of a close corporation may instead look to maximize their voting power by contracting with one another to vote their shares as a block. such vote pooling agreements can be an effective means of overcoming minority shareholder status and obtaining board representation.

Delaware's approach to the corp. opp. doctrine: (3) the corporation has an interest or expectancy in the opportunity

interest: a director takes a corp.'s interest in something if she takes something to which the firm has a better legal or equitable right. (ex: the director buys land to which the corp. had a pre-existing legal right. expectancy: the director takes an expectancy if he takes something which, in the ordinary course of things, would come to the corp., or an opportunity the corp. would expect to receive.

Rule from Clark v. Dodge

limits the rule from McQuade (that director discretion cannot be constrained by shareholder contract) to the facts of that case (where there were minority shareholders who were not party to the agreement) where ALL the shareholders by UNIVERSAL CONSENT agree to limitations on director discretion in advance - so long as it does not negatively affect the rights of others (creditors) not party to the contract.

"Rightful" or "Wrongful"

many issues associated with dissolution (and with dissociation under RUPA) will turn on whether the act of dissolution (or dissociation) is "rightful" or "wrongful".

Can Fiduciary Duties be waived?

many of the statutory provisions pertaining to general partnerships are merely default rules that parties are free to contract around. Are fiduciary duties similarly options for parties when drafting a partnership agreement? the answer is yes and no. RUPA § 103 "nonwaivable" provisions

long-term employment contracts...

may be another way in which minority shareholders in a close corporation can protect their interests. 1) duration - careful b/c commitment runs both ways 2) termination provisions - for cause - what constitutes cause? 3) compensation - salary, equity, bonuses 4) duties 5) non-competition

Model Business Corp. Act optional provisions: (1) statement of purpose

may state the nature of the corp.'s business or its purpose. some states require a statement of purpose, but accept a general statement like, "the purpose of the corporation is to engage in any lawful act or activity."

risk of being frozen out of decision-making and compensation:

minority shareholders may have no control over company's activities may be denied compensation if denied employment.

Costs associated with acting as a foreign corporation

more taxes (franchise tax) separate registration as foreign corporation in headquarter state

Proxy fights

most of the time, the solicitation of proxies is a routine matter (where management solicits proxies in advance of the annual shareholder meeting where board elections are uncontested and there are no major issues to be addressed), but sometimes shareholders will find themselves in the midst of a hotly contested battle for control over the company. rivals for control of the company will each nominate a different set of directors and compete with each other to solicit enough proxies to elect their referred candidates.

insurance

most public and many privately held corp.s carry director and officer insurance. Note, however, that D&O insurance has become extremely expensive (and often exclude certain categories of harm), and corporations have started to look to creative ways to get this protection for its directors and officers: E.g., corporations pooling resources to form their own "captive" insurance companies (wholly owned and controlled by its insured) for writing D&O policies.

What are problems for corp. in holding these shareholders meetings?

most shareholders are uninformed - and do not have a sufficient financial stake to make it worth their while to invest time in researching the issues and becoming adequately informed. do not have enough shares to make a difference even if they were informed - so not worth the costs of showing up at the meeting but if no shareholders show up to the annual meeting, then there will be no quorum (usually a majority of shares must be present) to vote the directors in and address other major issues.

actual express authority

oral or written statement by the principal to the agent that the agent is authorized to do X. Agent has ACTUAL EXPRESS AUTHORITY to do X.

Who are partners? RUPA § 202(c)(3) partners

one important thing to look for when trying to decide if someone is a partner is whether they received profits. § 202(c)(3) states: "A person who receives a share of the profits of a business is presumed to be a partner is a business, unless the profits were received in payment: (i) of a debt by installments or otherwise; (ii) for services as an independent contractor or of wages or other compensation to an employee; (iii) of rent; (iv) of an annuity or other retirement or health benefit to a beneficiary, representative, or designee of a deceased or retired partner; (v) of interest or other charge on a loan ...; and (vi) for the sale of the goodwill of a business or other property by installments or otherwise.

LLC management structure

one principal advantage is its flexibility in management and operation states usually favor freedom of contract and impose only default rules to address these issues most LLC statutes impose the default rules that: - all management rights are assigned to its members (like a GP) - each member has equal management rights - most matters decided by majority vote - significant matters require a supermajority or even a unanimous vote BUT the above is only a default, and a corp.-like manager-managed structure may be opted for: "board of directors or CEO or both

fiduciary duties of general partners

owe fiduciary duties to the limited partnership - due to their role in management and control

Close Corp.

owned by a few shareholders who are usually active in the management of the business. there is not market for their shares (particularly if they are minority shareholders), b/c while those shares are legally transferable, finding a willing buyer is often difficult, if not impossible.

fiduciary duties of promoter

promoters act like an agent for the future corp. (in preparing the launch of the enterprise), courts have found promoters to owe fiduciary duties of loyalty to the corp. so no "secret profits" - though promoters are free to profit if there is full disclosure.

contractual liability of promoter

promoters can be held personally liable for pre-incorporation contracts if: (1) the corp. never comes into existence, or (2) the corp. comes into existence but refuses to ratify the agreement. idea is that promoter cannot (as agent) bind a non-existent principal.

Rule 14(a)-8 Shareholder proposals: eligibility

proponent must have owned at least 1% or $2K (whichever is less) of the issuer's securities for at least one year prior to the date on which the proposal is submitted. proposal plus supporting statement cannot exceed 500 words. must be submitted to the corp. 120 days before the calendar date on which the proxy materials were mailed the previous year. only one proposal per corp. per year. if the proponent fails to show up at the meeting to present the proposal in person, the proponent will be ineligible to use the rule for the following two years.

Statutory Authority for modern insider trading laws: § 10(b) of the Securities Exchange Act of 1934

proscribes the employment of "any manipulative or deceptive device or contrivance" in "connection with the purchase or sale, of any security."

Insurance: Del. Gen. Corp. Law § 145(g)

provides that: "A corporation shall have power to purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the corporation.... against any liability asserted against him and incurred by him in any such capacity, or arising out of his status as such, whether or not the corporation would have the power to indemnify him against such liability under this section."

Piercing the corporate veil

recognized as an equitable exception to limited liability. when the corporate veil is pierced, the court may impose personal liability on shareholders for corporate debts. BUT keep in mind that courts will pierce the corporate veil only rarely, under exceptional circumstances. if it were easy to veil pierce, then all the advantages of limited liability would be undermined. THUS, veil piercing will typically only occur where a court finds that shareholders have abused the privilege or incorporation and recognizing limited liability would result in an injustice.

General Rules for Veil Piercing in context of LLCs

same as for corporations. courts will typically ask whether the LLC member: 1) completely controlled the LLC in such a way that it is a mere alter ego of the member and 2) abused that control of the LLC to defeat justice or perpetrate a fraud. many of the same factors (undercapitalization, co-mingling of funds, etc.) will inform the court's answers to these questions, but most courts will not apply the "observing of corp. formalities" factor to LLCs b/c LLCs are, by nature, intended to be "much more flexible" in operation than corps."

Rule from Wilkes

seems to suggest that shareholders in a close corporation owe an intermediate fiduciary duty. two-part test: 1) if breach of good faith or loyalty is alleged by a minority shareholder, a controlling group in a firm must show a legitimate business objective for its action. 2) even if a legitimate purpose can be shown, the plaintiff minority shareholder can still prevail upon a showing that the controlling group could have accomplished its business objective in a manner less harmful to the minority shareholder's interest.

Corporation: managed by board of directors

shareholders elect a board of directors which are responsible for managing the corporation.

Note on LLPs

simply a GP that has elected to file a "statement of qualification" with its Secretary of State an LLP. once filed, the only difference b/t a GP and an LLP is that the LLP will enjoy limited liability. Partnership must include notice of limited liability (e.g., "LLP") in its name. Not all states are so generous in the limitation of liability for LLPs—many only limit liability for torts, and not for debts arising out of contract. The are referred to as "partial shield" statutes. Some states only permit professional partnerships (e.g., law firms or accounting firms) to become LLPs. Some states require LLPs to carry minimum insurance and/or minimum capitalization.

statutory provisions

since McQuade and Clark, the NY Legislature promulgated a statute that expressly permits vote-pooling agreements and also permits restrictions on board discretion in the articles of incorporation - so long as they are approved by the UNIVERSAL consent of ALL shareholders.

problems of control in close corporations

some contractual means of protecting minority shareholders from being locked in (can't sell) and frozen out (excluded from management, employment, and income) of a close corp. - voting trusts - shareholder vote pooling agreements - shareholder agreements that limit the discretion of directors - employment contracts - buy/sell agreements

Model Business Corp. Act optional provisions: classes and series of shares

stock can be issued in different classes with different voting rights and dividend preferences. if different classes will be issued, they must be spelled out in the articles.

The Business Judgment Rule

the presumption that when directors make a decision, they act "on an informed basis, in good faith, and in the honest belief that the action was in the best interests of the company." unless there is a: - breach of duty of loyalty (fraud, illegality, or conflict of interest) or - breach of the duty of care (failure to be reasonably informed) courts will be looking for something closer to gross negligence to overcome the presumption. then, courts will not second-guess the decisions of directors.

How are proxies solicited?

the proxy rules: only apply to "publicly held companies" as defined under § 12 of the 34 Act. 1) has a class of securities listed on a national securities exchange; or 2) has assets of $10 million and 500 or more unaccredited shareholders (or 2000 or more shareholders, regardless of accreditation). then it must register under the 34 Act, and as a result of that registration, it becomes a "publicly held company" and the 14A Proxy Rules apply.

duty of care in focus

the reference to the "ordinarily prudent person" was dropped out of fear that: it might make directors too conservative - to afraid to be bold and entrepreneurial, and to take appropriate risks. focus on ordinary prudent person might lead courts to focus on the substantive correctness of business decisions - which would undermine the BJR (which is there in part to encourage directors to not simply follow the pack and take the conventional or "ordinary" approach to problem solving)

Duty of Loyalty: Interested Director transactions

the risk of breach of the fiduciary duty of loyalty (by self-dealing) arises any time a director is personally interested in the transaction.

RUPA's entity theory

the same general partnership (as an independent legal entity) can persist after one or more of its partners "dissociate".

Introduction to Shareholder Voting

the shareholders own the corp., but they do not typically participate in the management of the business (which is done by the directors and officers) shareholders do have some powers/rights to influence the direction of the corp. - one such power is the power to VOTE to elect directors and to decide certain fundamental issues (merger or acquisition). all state corp. statute require that shareholders meet regularly to elect directors - and special meetings may be called to vote on fundamental issues that arise in between regular meetings. the details concerning shareholder meeting and voting rights and duties are typically contained in the corp.'s bylaws.

curing by presentment:

though presenting the business opportunity to the board of directors is not required, doing so "creates a kind of 'safe harbor' for the director, which removes the specter of a post hoc judicial determination that the director or officer has improperly usurped a corp. opportunity in short, a court will not ask whether an opportunity presented and refused was corporate opportunity.

transferability of ownership: general partnership

transfer only by consent of other partners.

Related Theories: Parent-subsidiary piercing

vertical veil piercing imposes liability on shareholders, but remember that corporations can be shareholders too. when a corporation ("the parent") owns controlling shares of another corporation (the "subsidiary"), but fails to respect the separate corporate form - treating the subsidiary as an alter ego - then the corporate veil may be pierced to hold the parent liable for the debts of the subsidiary. traditional veil-piercing test applies - only difference is that the controlling shareholder is another corporation.

Dissociation under RUPA

while the UPA often treats the general partnership as nothing more than an aggregate of its partners instead of a separate legal identity, RUPA wholeheartedly embraces the entity theory. refers to the cessation of partnership status. the events that warrant "rightful" and "wrongful" dissocation are laid out in RUPA §§ 601 & 602: -When a partner dissociates, one of two things can happen: (1) dissolution (commencement of wind up and termination) (RUPA § 801) (2) the partnership continues its existence and the remaining partners simply buy out the interest of the dissociated partner. (RUPA § 701)

Rule from McQuade:

while the three shareholders were free to enter into a vote pooling agreement to elect themselves as directors, they have precluded them from contractually binding themselves concerning what they will DO as directors once elected. rationale: a contrary rule would violate public policy by undermining the directors' free exercise of their business judgment to protect the interests of ALL shareholders (not just those who are party to the agreement).

parity of information or equal access theory

§ 10(b) and Rule 10(b)(5) precludes any trading by anyone based on material nonpublic information as fraudulent and subject to civil and criminal penalties. the law would require that everyone have the same (or same access to) market information (striving towards a "level" playing field) later rejected by the Supreme Court

(2) Winding up for liquidation (RUPA §801, comment 2)

entails selling its assets, paying its debts, and distributing the net balance, if any, to the partners in cash according to their interest.

What is a partnership?

general partnership is unique b/c it can be formed w/o any public filing with the state. RUPA § 202(a) defines a general partnership: "the association of two or more persons to carry on as co-owners a business for profit."

What are the 4 ways for a principal to ratify?

(1) express affirmation by the principal; (2) implied affirmation through acceptance of benefits of the transaction at a time when it is possible to decline to accept such benefits; (3) implied affirmation through silence or inaction - a principal can't wait forever before repudiating an unauthorized transaction (no cost-free options); and (4) implied affirmation through bringing a lawsuit to enforce the K.

Restatement § 8.05 - An agent's duty of loyalty

(1) No secret profits/benefits - not to use property of the principal for the agent's own purposes or those of a third party; and (2) No secret competition with principal - not to use or communicate confidential information of the principal for the agent's own purposes or those of a third party. In summary: the agent's duty of loyalty is summarized as follows: -no secret profits/benefits -no secret competition BUT in general none of the conduct above will violate a fiduciary duty if the agent first obtains the principal's consent. - if you are up front and ask for permission, you won't have to worry about any of the above.

Fiduciary Obligations of Agents Restatement (Third) § 8.01 - General Fiduciary Principal

"An agent has a fiduciary duty to act loyally for the principal's benefit in all matters connected with the agency relationship." All agents owe their principals a duty of loyalty: "The agent may not put her own interests or the interests of some 3rd party ahead of the interest of the principal. While an agent may be entitled to compensation under the agency agreement, the agent may not derive any benefits from the agency relationship w/o the principal's consent ("no secret profits")." Three common situations in which this fiduciary duty of loyalty is violated by an agent during the agency: (1) Benefit from position: "An agent has a duty not to secretly acquire a material benefit from a third party in connection with transactions conducted or other actions taken on behalf of the principal or otherwise through the agent's use of the agent's position w/o the principal's consent." (Restatement § 8.02) (See also Reading v. Regem) (2) benefit from acting as (or for) a Part Adverse to the Principal: the agent may not obtain secret profits from secretly transacting with the principal himself or on behalf of a 3rd party. (Restatement § 8.03) (3) Benefit from Use of Principal's Property: the agent may not use her position (or the principal's property) to make a personal profit from some third party who has no relation with the principal. (Restatement §§ 8.02 and 8.05.) (Reading v. Regem)

Grabbing and Going in the Law-Partner setting: Graubard Mollen Dannen & Horowitz v. Moskovitz - exiting law partner's fiduciary duties

"At one end of the spectrum, where an attorney is dissatisfied with the existing association, taking steps to locate alternative space and affiliations would not violate a partner's fiduciary duties... "As a matter of ethics, departing partners have been permitted to inform firm clients with whom they have a prior professional relationship about their impending withdrawal and new practice, and to remind the client of its freedom to retain counsel of its choice.... Ideally such approaches would take place only after notice to the firm of the partner's plans to leave.... "At the other end of the spectrum, secretly attempting to lure firm clients (even those the partner has brought into the firm and personally represented) to the new association, lying to partners about plans to leave, and abandoning the firm on short notice (taking clients and files would not be consistent with a partner's fiduciary duties. (Meehan v. Shaughnessy)

Partner as Agent for Partnership and Apparent Authority: RUPA § 301(1)

"Each partner is an agent of the partnership for the purpose of its business. - An act of a partner, including the execution of an instrument in the partnership name, for apparently carrying on in the ordinary course the partnership business or business of the kind carried on by the partnership binds the partnership, unless the partner had no authority to act for the partnership in the particular matter and the person with whom the partner was dealing knew or had received a notification that the partner lacked authority." - This section establishes that: (1) a partner is an agent of the partnership, and (2) the circumstances under which a partner will have apparent authority to bind the partnership.

RUPA § 202(a) General Partnership

"The association of two or more persons to carry on as co-owners a business for profit forms a partnership, whether or not the persons intend to form a partnership." Can be formed whenever a business relationship satisfies this definition - even if the persons involved did not realize they were forming a partnership. Common Issues: employee or partners/ (Fenwick case) creditor or partner (Martin case) General Partnerships are unique among BA b/c it can be formed w/o any public filing with the state.

Duties after termination of agency - "grabbing and leaving" Restatement § 8.04 - Duty Not to Compete

"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." Termination of Agency Relation and Duties that persist after termination ("Grabbing and Going"): the agency relation is consensual and therefore can be terminated whenever either side withdraws its consent. Once the agency relation is terminated, the duty of loyalty will typically terminate as well, BUT some duties may persist. (Restatement (Third) § 8.05) some fiduciary duties on the part of the (former) agent will, however, persist even after the termination of the relation. example: the duty "not to use or communicate confidential information of the principal for the agent's own purposes or those of a third party will generally persist after termination of the relation.

Estoppel - Restatement (Third) § 2.05 - Estoppel to Deny Existence of Agency Relationship

"a person who has not made a manifestation that an actor has authority as an agent and who is not otherwise liable as a party to a transaction purportedly done by the actor on that person's account is subject to liability to a third party who justifiably is induced to make a detrimental change in position b/c the transaction is believed to be on the person's account, if: (1) the person intentionally or carelessly caused such a belief, or (2) having notice of such belief and that it might induce others to change their positions, the person did not take responsible steps to notify them of the facts. (See Hoddeson v. Koos Bros. below)

Agency defined (Restatement (Third) of Agency § 1.01

"agency is the fiduciary relationship that arises when one person ("principal") manifests assent to another person ("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."

Restatement (Third) of Agency § 1.01 - Agency defined

"agency is the fiduciary relationship that arises when one person (principal) manifests assent to another person (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." (1) manifestation of assent by the principal and agent (agreement) (2) action by the agent on behalf of the principal (3) control by the principal once formed, the principal may be held liable for the actions of the agent.

UPA § 18(e) in the absence of an agreement to the contrary...

"all partners have equal rights in the management and conduct of the partnership business."

RUPA § 308 - Partnership by Estoppel

"if a person, by words or conduct, purports to be a partner, or consents to being represented by another as a partner, in a particular partnership or with one or more persons not partners, the purported partner is liable to a person to whom the representation is made, if that person, relying on the representation, enters into a transaction with the actual or purported partnership."

How to Reconcile National Biscuit and Summers (2)

(1) in National Biscuit, the suit was brought by a third party seeking to hold the partnership liable. - Under § 301(1) principles of apparent authority apply. - Was usual course of partnership business to order bread (so there was apparent authority for one of the partners to do it),and if only ONE of the two partners had objected (even publicly) to the transaction, the third party KNOWS there is no majority vote to remove otherwise assumed authority for the order of the other partner. § 301(1) does not apply to Summers (where one partner seeks relief from the other - no third party involved, so no issue of apparent authority. (2) Notice that in both National Biscuit and Summers, the court places the burden of winning a majority vote on the partner seeking to change the statute quo. - National Biscuit - the status quo was buying bread, so would take a majority vote to change that . - Summers - the statue quo was two workers, so it would take a majority vote to change that.

Important features of general partnerships (5)

(1) unlimited liability for partners (2) pass-through taxation (3) right to participate in management (4) agency (5) fiduciary duties

Partner Agency and Apparent Agency: RUPA § 301(1)

(a) a partner is an agent of the partnership and (b) the circumstances under which a partner will have apparent authority to bind the partnership: "Each partner is an agent of the partnership for the purpose of its business. An act of a partner, including the execution of an instrument in the partnership name, for apparently carrying on in the ordinary course the partnership business or business of the kind carried by the partnership binds the partnership, unless the partner had no authority to act for the partnership in the particular matter and the person with whom the partner was dealing knew or had received a notification that the partner lacked authority."

When is property partnership property? RUPA §204

(a) property is partnership property if acquired in the name of: (1) the partnership... (2) one or more partners [in their capacity as partners]... (If the purchase is made in the name of the partnership, it is partnership property.) (c) property is presumed to be partnership property if purchased with partnership assets, even if not acquired in the name of the partnership. (d) property acquired in the name of one or more of the partners, w/o an indication in the instrument transferring title to the property or of the existence of a partnership and w/o use of partnership assets, is presumed to be separate property, even if used for partnership purposes.

When we looked at how we determine whether property is partnership property: RUPA § 204

(a) property is partnership property if acquired in the name of: (1) the partnership.... [or in the name of] (2) one or more partners [in their capacity as partners] (c) property is presumed to be partnership property if purchased with partnership assets, even if not acquired in the name of the partnership (In Re Fulton). BUT ALTERNATIVELY (d) property acquired in the name of one or more of the partners, w/o an indication in the instrument transferring title to the property of the person's capacity as a partner or of the existence of a partnership and w/o use of partnership assets, is presumed to be separate property, even if used for partnership purposes.

Rights and Authority of Partners in Management: RUPA § 401

(f) Each partner has equal rights in the management and conduct of the partnership business.... (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. - An act outside the ordinary course of business of a partnership and an amendment to the partnership agreement may be undertaken only with the consent of all the partners. - Such consent results in ACTUAL authority to bind the partnership. NOTE: these voting rules are default rules that partners can alter in the partnership agreement.

Partners' rights and authority in management of the partnership: RUPA § 401

(f) each partner has equal rights in the management and conduct of the partnership business... (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. - an act outside the ordinary course of business of a partnership and an amendment to the partnership agreement may be undertaken only with the consent of all partners. - such assent results in ACTUAL authority to bind the partnership. NOTE: these voting rules are default rules that partners can alter in the partnership agreement.

Atlantic Salman A/S v. Curran

Curran (D) purchased imported salmon from the plaintiffs, and the plaintiff sought to recover unpaid money from Curran (D) individually. Partially disclosed principal, is party to the contract. Rule: an agent is personally liable for his principal's debts if he fails to disclose to a 3rd party that he is acting as an agent and his principal's identity. "it is not the plaintiff's duty to seek out the identity of the defendant's principal; it was the defendant's obligation fully to reveal it." "it is not sufficient that the plaintiffs may have had the means, through a search of the records of the Boston city clerk, to determine the identity of the defendant's principal. ..." ACTUAL KNOWLEDGE IS THE TEST: "the duty rests upon the agent, if he would avoid personal liability, to disclose his agency, and not upon others to discover it. It is not enough that the other party has the means of ascertaining the name of the principal; the agent must either bring to him actual knowledge or, what is the same thing, that which to a reasonable person is equivalent to knowledge or the agent will be bound. There is no hardship to the agent in this rule, as he always has it in his power to relieve himself from personal liability by fully disclosing his principal and contracting only in the latter's name. If he does not do this, it may well be presumed that he intended to make himself personally responsible."

Watteau v. Fenwick case

Facts Humble transferred his tavern to some brewers (defendants), but stayed on to manage the tavern after the transfer. Humble's name remained painted on the tavern and the tavern license continued in his name. The transfer agreement gave most of the purchasing authority to the brewers. Humble was authorized to purchase ales and mineral water exclusively for the tavern. However, for several years after the transfer, Humble bought cigars, Bovril, a salty meat extract, and other supplies on credit to be sold at the tavern. The supplier (plaintiff) sued the brewers to collect for the price of the supplies Humble purchased. At trial, the brewers argued that since they limited Humble's purchasing power and did not hold him out as their agent, Humble lacked authority to purchase the forbidden supplies and they should not be liable to pay for them. The trial court held that the brewers were liable to pay for the cigars and Bovril because Humble was acting as tavern manager when he purchased those items, which were typically sold in taverns. Issue Is a principal bound by an agent's unauthorized actions in the course of duty when the agent does not disclose the identity of the principal to a third party with whom the agent contracts. Rule of Law: 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. Holding and Reasoning (Wills, J.) Yes. An undisclosed principal who employs an agent to run a business is liable to third parties who contract with the agent for transactions typical in the line of business, even if the agent's actions violate an agreement between the agent and principal. While the brewers are the owners of the tavern, they allowed it to remain in Humble's name and employed Humble to manage it. Although the brewers did not hold out Humble as their agent and remained undisclosed to the suppliers, under these circumstances Humble appeared to have authority to engage in transactions on behalf of the business. Humble's purchase of items normally sold in taverns, cigars and Bovril, were within the reasonable scope of an agent acting on behalf of a tavern owner. The supplier had no knowledge of Humble's limited purchasing authority, but rather had every reason to believe that Humble had authority to buy supplies for the tavern. Accordingly, the judgment of the lower court is affirmed, and the brewers are liable to pay for the cigars and Bovril purchased by Humble.

Botticello v. Stefanovicz

Facts Mary and Walter Stefanovicz (defendants) own a farm as tenants in common. Mary and Walter each have an undivided half interest in the farm. When Mary and Walter purchased the farm, Walter attended to many of the business matters of running the farm, including paying the mortgage, taxes, and insurance. Botticello (plaintiff) subsequently visited the farm and commenced negotiations with Walter to buy it. Walter and Mary discussed selling the farm, and Mary said that she would not sell it for less than $85,000. Botticello and Walter agreed to a price of $85,000 and executed a lease with an option to purchase the farm. Walter signed the lease/option-to-purchase agreement (Agreement) on his own, without representing that he was acting on behalf of Mary. After taking possession of the farm, Botticello regularly paid rent and openly made extensive improvements to the property. Several years later, Botticello exercised the option to buy the farm. Walter and Mary refused to honor the purchase option and Botticello sued to enforce it. At trial, Botticello argued that regardless of whether a principal-agent relationship existed between Mary and Walter, the Agreement was binding on Mary because her actions, including accepting Botticello's rent payments and acknowledging his land improvements, showed that she had ratified it. The trial court decided in favor of Botticello and ordered specific performance of the Agreement. Issue Does a person's acceptance of the benefits of an agreement to which she was not a party constitute ratification of that agreement? Rule of Law: Ratification of an act allegedly done on behalf of a person by another requires that the person accept the results of the act with intent to ratify and complete understanding of the material circumstances of the act. Holding and Reasoning (Peters, J.) No. The mere receiving of benefits, without more, does not prove ratification of an agreement. A person's acceptance of benefits can be illustrative of ratification if an intent to ratify and knowledge of material circumstances are also proven, which they were not in this case. Botticello argues that by accepting his rent payments and acknowledging his property improvements, Mary demonstrated her intent to ratify the Agreement and displayed knowledge of the material circumstances surrounding it. This court disagrees. Mary's actions do not indicate intent to be bound to the Agreement, nor do they show that she understood all the relevant circumstances of the Agreement. Mary's actions simply illustrate that she knew that Botticello's rent payments and development of the property were pursuant to an agreement she had not signed and concerned land in which she has one-half interest. Moreover, Walter did not represent that he was acting on behalf of Mary when he negotiated and signed the Agreement. Because there is no evidence that Mary ratified the Agreement, the trial court's holding against her is reversed, and the case is remanded to the trial court with instructions to rule in her favor.

Mill Street Church of Christ v. Hogan

Facts Mill Street Church of Christ (Church) (defendant) regularly hired Bill Hogan to paint and maintain the church building over a period of time. The Church had routinely allowed Bill Hogan to hire his brother Sam Hogan (plaintiff) as an assistant on painting projects. In 1986, Church Elder Dr. Waggoner hired Bill Hogan again to paint the church. No mention of hiring a helper was made during the discussion between Dr. Waggoner and Bill Hogan. During his painting, Bill Hogan reached a point where he could not finish the job without an assistant. Bill Hogan approached Dr. Waggoner about hiring a helper. The parties agreed that a helper was necessary and discussed the possibility of hiring a Mr. Petty to assist, but Dr. Waggoner acknowledged that Mr. Petty was hard to reach. The next day, Bill Hogan offered Sam Hogan the helper job. After hearing the details of the position, Sam Hogan accepted the offer and commenced work. A half hour after he started work, Sam Hogan fell and sustained an injury that required hospitalization. Bill Hogan reported the accident to the Church treasurer, who paid Bill Hogan for hours spent on the project, including the half hour Sam Hogan worked. Sam Hogan filed a claim for workers' compensation. The Old Workers' Compensation Board (Old Board) ruled that Sam Hogan was not an employee of the Church and denied his compensation claim. The New Board reversed the Old Board's ruling, concluding that Bill Hogan had implied authority as a Church agent to hire Sam Hogan, and that Sam Hogan was a Church employee entitled to compensation. The Church petitioned for review of the New Board's decision. Issue Can implied authority be established by evidence showing a course of conduct between two parties which would lead an agent to reasonably believe that a principal intended the agent to have authority under the circumstances? Rule of Law: Implied authority to act as an agent exists when it is shown that a principal acted in a manner that would lead an agent to reasonably believe that the principal intended for the agent to have such powers as are practically necessary to carry out the duties delegated. Holding and Reasoning (Howard, J.) Yes. When a principal has routinely granted an agent certain powers, implied authority is assumed when the agent exercises those powers. Implied authority is proven circumstantially when it is shown that the principal intended the agent to have such authority as was necessary to perform the duties the principal assigned. The Church had previously allowed Bill Hogan to hire Sam Hogan to assist in painting projects. In this case, Bill Hogan could not have finished his work without a helper, and Dr. Waggoner acknowledged that fact when he and Bill Hogan discussed the possibility of hiring an assistant and recognized that Mr. Petty would be hard to reach. Additionally, the Church paid Bill Hogan for the time Sam Hogan worked on the project. The evidence shows that the Church's actions led Bill Hogan to reasonably believe that he had authority to hire Sam Hogan. Hence, Bill Hogan had implied authority to hire Sam Hogan. Based on the evidence, this court finds that Sam Hogan was an employee of the Church at the time of the accident and affirms the New Board's decision.

Three-Seventy Leasing Corp. v. Ampex Corp.

Facts Three-Seventy Leasing Corporation (370) (plaintiff), which buys computer hardware for lease to end-users, sued Ampex Corporation (Ampex) (defendant) for breach of contract to purchase computer core memories. After a meeting between 370's sole employee, Joyce, Ampex salesman Kays, and Kays' boss, Mueller, the parties commenced negotiations which resulted in Kays giving Joyce a written document containing the terms of sale of memory units from Ampex to 370. The document had signature blocks for a representative of each party to sign. Joyce signed on behalf of 370, but no one from Ampex signed the document. Shortly after Joyce signed the document, Mueller circulated an intra-office memorandum stating that Ampex had an agreement with 370 for the purchase of computer core memories, and that at Joyce's request all communications with 370 concerning the sale would be handled through Kays. A few days later, Kays sent a letter to Joyce confirming the delivery dates and installation instructions for the core memories. At trial, Ampex contended that the only employees who had authority to enter into a contract were Ampex's contract manager or supervisor, not salespeople. The district court nonetheless held that an enforceable contract existed between the parties. Issue Does a salesperson have authority to bind a company to a sales agreement when the company apparently holds the salesperson out as its agent? Rule of Law: Apparent authority for an agent to bind a principal exists when the principal acts in a way that would lead a reasonable person to believe the agent has such authority, particularly when the agent does things that are usual and proper to the principal's business. Holding and Reasoning (Dyer, J.) Yes. When a company gives a salesperson various powers in a sales transaction, it is reasonable for the customer to believe that the salesperson, acting in that capacity, has the power to bind the company to a sales contract. Ampex authorized Kays to negotiate with Joyce and to act as the sole point of contact with him. Those facts alone would give Joyce good reason to believe that Kays was acting as Ampex's agent regarding the sales agreement. Additional reason for that belief is provided by the letter that Kays sent to Joyce delineating the delivery and installation terms of the core memories. Ampex's argument that salespeople do not have authority to bind the company to a contact is irrelevant to the issue of apparent authority, unless the customer was notified of that fact. In this case, Joyce was not told of Kays' purported lack of authority to sign contracts, and Ampex gave no other indication to Joyce that Kays was not acting as its agent in the sales transaction. It was manifestly reasonable that Joyce would believe that Kays had the authority as Ampex' agent to execute the sales agreement. The subject document, when signed by Joyce, was an offer by him to buy the core memories. Kays' letter to Joyce was an acceptance, on behalf of Ampex, of the offer. Therefore, the district court did not err in its holding that an enforceable contract existed between 370 and Ampex.

The Rights of Partners in Management; National Biscuit Co. v. Stroud

Facts: D, Stroud, and Freeman entered into a general partnership to sell groceries under the firm name of Stroud's Food Center. There is nothing in the agreed statement of facts to indicate or suggest that Freeman's power and authority as a general partner were in any way restricted or limited by the articles of partnership in respect to the ordinary and legitimate business of the partnership. Several months prior, Stroud advised P that he personally would not be responsible for any additional bread sold by P to Stroud's Food Center. After such notice to P, it, at the request of Freeman, sold and delivered bread in the amount of $171.04 to Stroud's Food Center. Rule of Law: The General Assembly of North Carolina enacted a Uniform Partnership Act. G.S. § 59-39 "Partner Agent of Partnership as to Partnership Business": subsection (1) "Every partner is an agent of the partnership for the purpose of its business, and the act of every partner, including the execution in the partnership name of any instrument, for apparently carrying on in the usual way the business of the partnership of which he is a member binds the partnership, unless the partner so acting has in fact no authority to act for the partnership in the particular matter, and the person with whom he is dealing has knowledge of the fact that he has no such authority." G.S. § 59-39(4): "No act of a partner in contravention of a restriction on authority shall bind the partnership to persons having knowledge of the restriction." G.S. § 59-45: "all partners are jointly and severally liable for the acts and obligations of the partnership." G.S. § 59-48 "Rules Determining Rights and Duties of Partners": (e) "All partners have equal rights in the management and conduct of the partnership business." (h): "Any difference arising as to ordinary matters connected with the partnership business may be decided by a majority of the partners; but no act in contravention of any agreement b/t the partners may be done rightfully w/o the consent of ALL the partners." Holding: "Freeman as a general partner with Stroud, with no restrictions on his authority to act within the scope of the partnership business so far as the agreed statement of facts shows, had under the Uniform Partnership Act "equal rights in the management and conduct of the partnership business." Under G.S. § 59-48(h) Stroud, his co-partner, could not restrict the power and authority of Freeman to buy bread for the partnership as a going concern, for such a purchase was an "ordinary matter connected with the partnership business," for the purpose of its business and within its scope, b/c in the very nature of things Stroud was not a majority of partners. The partnership got the benefit of the bread sold and delivered by P to Stroud's Food Center, at Freeman's request... But whether it did or not, Freeman's act, as stated above, bound the partnership and Stroud. Affirmed.

Fenwick v. Unemployment Compensation Commission

Facts: Fenwick opened a beauty shop in 1936. Chesire was employed late 1937 or early 1938 at $15 per week (this was during the depression). Chesire then wanted a raise. The two entered into a "partnership agreement" that stated if the shop received more business, then she would get paid more. Chesire then quit in 1942 to stay at home with her child. The D commission held that the agreement was nothing more than an agreement fixing the compensation of an employee. The Supreme Court held that the parties were partners. The court gave great weight to the fact that the parties had entered into the agreement, and called themselves partners, had designated the relationship one of partnership, and held that the surrounding circumstances, the conduct of the parties, etc., were not such as to overcome the force and effect to be given the declaration of the agreement. This is an appeal from the judgment of the Supreme Court reversing a determination of the Unemployment Compensation Commission. Issue: Whether Chesire was a partner or an employee of the respondent, Fenwick. Rule of Law: Uniform Partnership Act defines a partnership as an association of "two or more persons to carry on as co-owners a business for profit." The Act further provides that sharing of profits is prima facie evidence of partnership but "no such inference shall be drawn if such profits were received in payment... as wages of an employee..." Analysis: There are several elements that the courts have taken into consideration in determining the existence or non-existence of the partnership relation: (1) intention of the parties (2) rights to share profits (3) obligation to share in the losses (4) ownership and control of the partnership property and business (5) community of power in administration (6) language in the agreement (7) conduct of the parties toward third persons (8) rights of the parties on dissolution. Holding: "We think that the partnership has not been established, and that the agreement b/t these parties, in legal effect, was nothing more than one to provide a method of compensating the girl for the work she had been performing as an employee." Reversed.

Rash v. J.V. Intermediate, Ltd.

Facts: JVIC, industrial process plants, hired Rash (P) to start and manage a Tulsa office. The parties signed a contract stating, among other things, that he was to "devote his full work time and efforts" to JVIC. This agreement was supposed to last only two years, but when on for longer. JVIC claimed that Rash actively participated in and owned at least 4 other businesses, none of which were ever disclosed to JVIC. One of those businesses, a scaffolding business, TIPS, where Rash was the manager, often was hired by JVIC as a subcontractor. JVIC has paid over $1 million dollars to TIPS. Rule: TX common law: the agent to principal relationship also gives rise to a fiduciary duty. 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." Rash was an agent of JVIC for several reasons: (1) Rash was hired to build the Tulsa division of JVIC from scratch and had sole management responsibilities for operations at the branch. (2) Rash contractually agreed to perform the duties of an agent (3) Rash claims that the scope of his agency did not include scaffolding-related ventures. Rash violated TX law: (1) He had a fiduciary relationship (3 factors listed above) (2) he breached his fiduciary duty by failing to disclose his interest in TIPS to JVIC. Rash had a "duty to deal fairly with the principal in all transactions b/t them and to fully disclose to the employer information about matters affecting the company's business."

Partners compared with lenders: Martin v. Peyton, 158 N.E. 77 (1927).

Facts: KN&K's made a series of bad investments, which resulted in them suffering severe financial difficulties. In order to save KN&K, one of the partners, Hall, entered into a transaction with Peyton (D) and others for a loan of $2.5 million worth of securities to KN&K. In return for the loan, the lenders were to receive 40% of KNK's profits until the debt was repaid. Guarantees/conditions were put in place for the granting of this loan. Plaintiff, creditor of KNK, sued the lenders claiming that their transaction with KNK, as illustrated by the agreement, indenture, and option, made them partners in that firm and thereby liable for KNK's debts. Trial court held that lenders were not partners to KNK. Issue: Do agreements intended to protect the financial interests of creditors necessarily make them partners of a debtor firm? Rule of Law: In order for a creditor to be a partner in a firm, the creditor must be closely enough associated with the firm so as to make it a co-owners carrying on the business for profit. Holding: A partnership is not formed unless 2 or more parties are closely associated so as to be co-owners carrying on a business for profit. (did it satisfy the definition under 202 for partnership?) In this case, no partnership was formed. When creditors have executed loan documents with a debtor firm that contains provisions for the collateral, this court must examine the extent to which those documents associate the creditors with the business operations of the firm. Trustees were only in charge of transactions affecting their collateral, and they were prohibited from co-mingling the collateral with KNK's other securities. The indenture was basically a mortgage, containing terms of KNK's performance of the loan. The option's provision giving Hall the right to demand the registration of KNK members was unusual, but as the intent was to protect the lenders against speculative transactions that could render the option itself worthless, it does not show that a partnership was formed.

Grabbing and Leaving: Meehan v. Leaving

Facts: Meehan and Boyle (plaintiffs), disgruntled partners in the law firm of Parker, Coulter, Daley & White (Parker Coulter) (defendants), decided to quit that firm and form their own legal partnership. Meehan and Boyle were subject to a Parker Coulter partnership agreement which provided that partners leaving the firm could, for a fee, take clients who they themselves had originated, subject to the right of the clients to remain at Parker Coulter. While still employed at Parker Coulter, Meehan and Boyle secretly began preparing to take some clients with them. Meehan met with a big client to discuss transferring that client's business to the new firm. Boyle prepared form letters on Parker Coulter letterhead addressed to a number of clients, inviting them to become clients of the new firm. During Meehan and Boyle's last few months at Parker Coulter, various partners asked them if they were planning to leave. Meehan and Boyle denied their intentions, preferring to wait until the end of the year to give Parker Coulter one month's notice of their resignation. Almost immediately after tendering his resignation, Boyle sent his solicitation letters to selected Parker Coulter clients, and contacted attorneys who could refer additional clients to the new firm. The Parker Coulter partners asked Boyle for a list of clients he and Meehan planned to take with them, so they could inform the clients that they could stay with Parker Coulter if they wished. Boyle waited several weeks to provide that list. Meanwhile, Meehan and Boyle obtained authorizations from many Parker Coulter clients, agreeing to become clients of the new firm. After leaving Parker Coulter, Meehan and Boyle sued their former firm for compensation they claimed was unfairly withheld from them. Parker Coulter filed a counterclaim alleging that Meehan and Boyle had breached their fiduciary duty by unfairly acquiring consent from clients to remove cases from Parker Coulter. The trial court found in favor of Meehan and Boyle and denied Parker Coulter's counterclaim. Issue: Is it a breach of fiduciary duty for partners, while associated with a partnership, to secretly solicit the partnership's clients for their own gain, while denying their intentions to other partners? Rule of Law: A partner has a fiduciary duty to provide, on demand of another partner, true and complete information of any and all things affecting the partnership. Holding: Yes. Partners owe each other a fiduciary duty to act with loyalty and in good faith to each other. Consequently, partners may not use their status as partners to purely benefit themselves, particularly if their actions harm the other partners. - Meehan and Boyle took unfair advantage of the other Parker Coulter partners by acting in secret to solicit clients, falsely denying their plans to the other partners, and delaying the release of the list of clients they planned to take with them until after they had won their business. - Also, the content of Boyle's client letters was unduly harmful to Parker Coulter. Pertinent ethical standards require that when attorneys planning to leave a firm solicit clients, they must state that the clients have a choice of staying with the firm or transferring their business to the departing attorneys' new firm. Boyle did not put that information in his solicitation letters. - This court finds that Meehan and Boyle's actions constituted a breach of their fiduciary duty to the other Parker Coulter partners. The decision of the trial court is reversed and remanded for further findings and hearings consistent with this opinion.

Partnership Property: In Re Fulton (1984)

Facts: P and D had a trucking company together wherein P provided the semi-truck and D drove it. The profits were to be split b/t the two men. P's grandmother gave him $9,000 in which he used the money to buy a trailer for the business. The trailer stated the company name as the purchaser and the AR title certificate listed the company's name as the owner. In Dec. 1982, D filed a voluntary Chapter 7 bankruptcy petition. Issues: (1) who owns the trailer? (2) whether the Chapter 7 estate has any interest in the trailer? Rule of Law: In determining whether property is partnership property or property owned by an individual, the court must focus primarily on the intentions of the partners at the time the property was acquired. "The intent of the partners determines what property shall be considered partnership property as distinguished from separate property. Such intention of the partners must be determined from their apparent intention at the time the property was acquired, as shown by the facts and circumstances surrounding the transaction of purchase, considered with the conduct of the parties toward the property after the purchase." 60 Am.Jr.2d Partnership § 92 at 21 (1972). - Bankruptcy law: The estate consists of: "... all legal or equitable interest of the debtor in property as of the commencement of the case." - Since a partnership is a legal entity separate from its partners, a partner cannot claim title in partnership property. - The partner may only claim the rights in specific partnership property as bestowed upon the partner under partnership law. - When a partner files for bankruptcy, the partner's estate obtains whatever partnership interest was held by the filing partner. UPA §31(5) "Upon dissolution, partnership property must be used to pay the liabilities of the partnership in the priority established in UPA § 40(b). (1) Debts to creditors other than partners are paid first; (2) debts to partners for contributions other than for capital and profits are paid second; (3) debts owing to partners in respect of capital contributions are paid third; and (4) debts owing to partners in respect of profits are paid last. Holding: (1) issue answer: "The trailer in question is indeed partnership property." - Trailer was purchased by P for use in the company and D used the trailer in furtherance of the company. (2) For purposes of this distribution, the court holds that the money loaned by the P, Holcomb, to the P, Carroll, was a loan to Carroll and not to the partnership of the company. - The purchase of the trailer by P and his subsequent contribution of that trailer to the company constitutes a capital contribution to the partnership of the company. Court ordered that the equity in the trailer shall be distributed in accordance with UPA § 40(b).

Summers v. Dooley

Facts: Summers, P, and Dooley, D, entered into a partnership agreement for the purpose of operating a trash collection business. The business was operated by the two men, and when either was unable to work, the non-working partner would provide a replacement workers at his own expense. in 1962 - D became unable to work, and at his own expense, hired an employee to take his place. in 1966 - P approached his partner D regarding the hiring of an additional employee but D refused. P hired the man anyways and paid him out of his own pocket. D, upon discovering that P had hired the man, stated that he did not feel additional labor was necessary and he refused to pay for the new employee out of the partnership funds. P continued using the third man and in 1967 - P initiated this action for $6,000 against his partner. The gravamen of the complaint was that P had paid $11K out of his own pocket for the help of the 3rd man without any reimbursement from the partnership funds. P's main argument is this: in spite of the fact that one of the two partners refused to consent to the hiring of additional help, nonetheless, the non-consenting partner retrained profits earned by the labors of the 3rd man and therefore the non-consenting partner should be estopped from denying the need and value of the employee, and has by his behavior ratified the act of the other partner who hired the additional man. Rule of Law: I.C § 53-318(8) [UPA (1914 § 18(h))] provides: "Any difference arising as to ordinary matters connected with the partnership business may be decided by a majority of the partners." 5 [UPA (1914) § 18(e)] bestows equal rights in the management and conduct of the partnership business upon all of the partners. The concept of equality b/c partners with respect to management of the business affairs is a central theme and recurs throughout the Uniform Partnership law. The only reasonable interpretation of I.C. § 53-318(8) [UPA (1914) § 18(h)] is that business differences must be decided by a majority of the partners provided no other agreement b/t the partners speaks to the issues. Holding: The trial court was correct in its disposal of the issue since a majority of the partners did not consent to the hiring of the third man. "In the case at bar one of the partners continually voiced objection to the hiring of the third man. He did not sit idly by and acquiesce in the actions of his partner. Under these circumstances it is manifestly unjust to permit recovery of an expense which was incurred individually and not for the benefit of the partnership but rather for the benefit of one partner."

Partnership by Estoppel: Young v. Jones

Facts: · Young and other investors (investors) (plaintiffs) deposited more than $500,000 in a bank, and the entire amount disappeared. · The investors claimed that when they deposited their money in the bank, they relied on an audit letter from Price Waterhouse, Chartered Accountants (PW-Bahamas) confirming a financial statement that turned out to be falsified. · The audit letter was printed on letterhead with a trademark signed "Price Waterhouse." · The investors contend that PW-Bahamas and Price Waterhouse's partnership in the U.S. (PW-US) operated as partners by estoppel, and therefore PW-US can be held liable for the alleged negligence of PW-Bahamas regarding the audit letter. · The investors argue that Price Waterhouse held itself out as a partnership with offices around the world, and PW-US made no distinction between itself and other PW entities around the world. · As proof that PW-Bahamas and PW-US held themselves out as partners, the investors offer a Price Waterhouse brochure stating that Price Waterhouse is a large and respected global entity, with 400 offices throughout the world. · The investors aver that the brochure was intended to present an image of a large international accounting firm, and that PW-US promoted that image to give the public confidence in Price Waterhouse's stability and expertise. Issue: Does a partnership by estoppel exist when a 3rd party does not rely on any statement or act by two companies it alleges were holding themselves out as partners, and when no credit was extended based on the representation of a partnership? Rule of Law: A person who represents, or permits another to represent, that he/she is a partner in an existing partnership or with other persons who are not partners, is liable to 3rd parties who rely on that representation. Holding: A partnership by estoppel is created when a 3rd party relies on the representation of a person that he/she is part of an actual or apparent partnership. The investors present no evidence that they relied on any statement or act by PW-US that it was a partner of PW-Bahamas. Nor do the investors claim that they relied on the brochure when they decided to put their money in the bank. According to the state statute cited by investors in their complaint, a person who holds him or herself out as a partner is liable to a third party who has given credit to the partnership based on the person's representation. There is no allegation that the investors extended credit to PW-Bahamas or PW-US. Additionally, there is no contention that PW-US had anything to do with the audit letter upon which the investors claim they relied when depositing their money in the bank. This court finds no evidence of the existence of a partnership by estoppel. The investors claim against PW-US for US-Bahamas' alleged negligence is denied.

features of general partnerships: (3) right to participate in management (advantage is flexibility of management)

absent agreement to the contrary, all partners have a right to participate in the management of the business.

features of general partnerships: (5) fiduciary duties

all partners have fiduciary duties to the partnership and to one another.

Features of general partnerships: (1) unlimited liability for partners

each partner will have joint and several personal liability for any debts and obligations of the business. persons with claims against the business can go after all the personal assets of the partners - not just those tied to the business. Note: In most jurisdictions, the "exhaustion rule" applies and a third-party creditor of the partnership must first exhaust the partnership's assets before going after the personal assets of any partner.

what is a business association?

just a device through which persons conduct business. what counts as a business association is extremely broad.

Partners compared with lenders

just as an issue may arise over whether a relationship reflects partnership or employment, sometimes the lines may be blurred b/t lenders and partners. partners are joint and severally liable for the partnership debts. So, if one person lends money to an enterprise that fails, and the law later determines that the terms of the loan made the lender a partner in the enterprise, then that lender/partner may stand to lose, not just the loan amount, but her entire personal fortune....

Notes on Partnership as Entity or Aggregate

one relatively academic question that occasionally comes up in the context of partnership law is whether a partnership is a separate legal entity in itself - or just an aggregate of its separate members. The UPA did not come down squarely on one side or the other - treating a partnership as a separate legal entity for some purposes as and an aggregate for others. RUPA purports to offer a single approach - treating a "partnership as an entity distinct from its partners" § 201(a)

Inherent authority/undisclosed Principal liability

when agent is acting on behalf of an "undisclosed principal". where a reasonable 3rd party would assume the agent had authority to act under the circumstances. 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 (3rd) of Agency § 1.04(2)(B). a court may find the principal liable for the agent's actions where the agent has "inherent authority." Undisclosed principal situations Restatement (Third) §2.06(2): "an undisclosed principal may not rely on instructions given an agent that qualify or reduce the agent's authority to less than the authority a 3rd party would reasonably believe an agent to have under the same circumstances if the principal had been disclosed."

features of general partnerships: (2) pass-through taxation (advantage of general partnerships)

while the partnership will file an informal tax return, taxes are only paid at the personal level by the partners. no double taxation

Stalemate Solutions?

with only limited exceptions, the statutes governing General Partnerships are not mandatory, but rather default provisions. The default rule is that disagreement over ordinary business decisions are decided by majority vote.