Business Associations

Duty of Loyalty (Breach displaces BJR)

SAY: Directors and officers are fiduciaries and subject to a duty of loyalty to the corporation including a general duty to act in good faith, to not compete with corporation, use corporate property for fiduciary's own benefit, or take opportunities which are corporate opportunities. Breach of Duty of Loyalty Only Proven by Demonstrating Actual Harm to Corporation - Benihana of Tokyo v. Benihana (2006) (Benihana restaurants needed financing to give its facilities a facelift; board member Abdo of Benihana who was also director of BFC told board that BFC was interested in buying some stock that would help them finance): Duty of loyalty breach determined not based on aspirational ideals but only on whether corporation was in fact harmed. Court found duty of loyalty not breached because Abdo did not use confidential information, did not set terms of deal, did not deceive the board, or dominate/control the directors' approval of the transaction.

Excusal

SAY: There is a jurisdiction split. Some states such as DL are a demand excused jurisdiction. If Arcadia is similar to DL a demand is not brought until after litigation is initiated because otherwise it would be admitting the board is disinterested. In other jurisdictions a demand is required before filing suit unless it is excused. Tool for Proving Futility: Books and Records Request (DGCL 220)

Applies Even If Other Directors Have Acted Differently

Shlenksy v. Wrigley (1968) (owner of Cubs baseball stadium refused to install lights and play night games; P sued claiming it was a waste of corporate assets): Directors are elected for their business abilities and cannot forego their judgment based on what other directors do. Other directors may have installed night lights but failure to follow the crowd is not a dereliction of duties.

Applies Even if Appears Director Does Not Appear to Be Maximizing Profits

Shlenksy v. Wrigley (1968) (owner of cubs baseball stadium refused to install lights and play night games; P sued claiming it was a waste of corporate assets): Court found director could have legitimate business reasons such as the possibility that night games would damage the surrounding community and ultimately result in less sales. Failure to install lights is not negligence because P did not even prove there would be a net benefit. Up to director to determine how to maximize profits.

Oversight Liability Demand Excusal Test

Whether there is a reasonable doubt that the Board could properly exercise its independent and disinterested BJ (Ritter/Barnhill) If directors face a substantial likelihood of liability (must be majority) they are personally interested in the decision about the litigation (Agritech). · Majority of board is involved OR · Only one is involved but relationship with directors means they can't be trusted to make an independent decision · Normally oversight liability means the entire board is involved and therefore relationships between members not relevant They will be considered independent if (China Agritech): 1. Majority of the board has been replaced (e.g. Broz v. CIS) OR 2. Subject of the derivative suit is not a decision of the board (e.g. Stone v. Ritter where challenge was concerning failure of board to act, not something board did). Demand Excused because Majority of Board was Interested - Marchand v. Barnhill (DL 2009) (derivative claim brought alleging VP and CEO breached their oversight duties of care and loyalty by knowingly disregarding contamination risks and failing to oversee the safety of BlueBell ice cream's food-making operation by having a food safety compliance system; 3 people died): Demand excused because complaint alleged enough facts to raise doubt about the impartiality of the majority of the board. - In Re China Agritech (China Agritech had accessed US securities market incorrectly and was delisted eventually; oversight case; D tried to dismiss claims because of exculpation but P alleged breaches of duty of loyalty and good faith): 5 of the 7 members of the demand board were directors at that time and there were issues relating to terminating outside auditors, the SLC's decision to not take action, etc so demand was excused for futility. Members of the board faced substantial risk of liability for their service on audit committee, Board member's daughter was VP of finance and head of internal audit department, board member could not consider a demand that would place certain individuals at risk who controlled employment of daughter Impartiality May be Affected by Deep Longstanding Friendship (DL) (more than acquaintance) - Marchand v. Barnhill (DL 2009) (derivative claim brought alleging VP and CEO breached their oversight duties of care and loyalty by knowingly disregarding contamination risks and failing to oversee the safety of BlueBell ice cream's food-making operation by having a food safety compliance system; 3 people died): Family appeared to have helped member of board in becoming a business person. Can be affected by things other than money including love, friendship, and collegiality. Mere acquaintance/social relationship would not be enough but board member had very warm ties of respect and loyalty to CEO Kruse who helped him become a business man and would not be able to impartially decide on whether to sue him. Independence of Directors Who Refuse Demand Affected by Friendships and Economic Relations - Delaware County Employees v Sanchez (DL 2015) (Transfer of value from the Sanchez public company was made to an LLC that was wholly owned by the Sanchez family; parties agreed that 2 of 5 directors were not independent; D claimed demand could not be excused because other 3 directors were independent): Alan Jackson found to not be independent because: Close Friendship: Friend of chairman for 5 decades. Not a thin social circle friendship (Beam v. Steward) but a long-lasting one. Economic Relations: His wealth was attributable to business interests over which chairman had substantial influence. Earnings at Sanchez were 30-40% of his total earnings.

Oversight Liability (Failure to Implement OR Monitor)

· BJR Only Displaced If Sustained and Systemic Failure (Caremark) · Books and Records: Information Found and Not Found Can Prove Oversight Breach o Records May Not be Trustworthy · No Oversight Liability Found o Compliance System in Place and Delegated Monitoring Duties · Oversight Liability Found o Board can be Nominally in Compliance with Federal Regulations and Still Violate Oversight Duties o Non-Compliance in Mission Central Aspect of Business Creates Inference Violated Oversight Duties o Presence of Compliance System Insufficient if Do Not Monitor It o Board's Allowance of Outright Criminal Enterprise Violates Duty to Monitor

Challenge Rejection of Demand

· Demand letter extends to all legal claims arising out of the facts set forth in the demand letter · Decision to reject the demand will benefit from the BJR presumption unless P can allege facts with particularity creating a reasonable doubt that the board was protected by the BJR. Grimes v. Donald

Fiduciary Duties

· Fiduciary duties can all be eliminated except implied contract of good faith and fair dealing (DL LLC Act) but in other jsx like FL it is more limited in ability to contract around, only if manifestly unreasonable. · In Delaware, the MORE SPECIFIC a contract is the more likely duties can be done away with completely, and if contractual duties want to be applies the Courts will NOT engage in gap filling · If LLC agreement does not mention fiduciary duties, then they all apply (Delaware LLC Act § 18-1104) · Maximum effect given to principle of freedom of contract and to the enforceability of limited liability company agreements

Registration (Securities Act of 1933)

· Issuance of securities requires registration with SEC. (e.g. SEC v. Kik Interactive) · Ensures investors provided with information relevant to decision of whether or not to buy the securities. · Very limited exemptions (e.g. offerings within 1 state; outside US) · Statutory Exemptions (regulatory safe harbor): e.g. Private offering exemption of §4(2) of the 1933 Securities Act. Public v. Private distinction is an extremely fuzzy area of law (court cares more about protecting investors than ensuring corporations know how to act). · In 2019, SEC proposed simplifying the exempt offering framework to encourage capital formation. 70% of offerings were unregistered.

Limited Liability Partnerships

· LLP Requirements (formalities for LLP Shield) · Reinstatement · Personal Liability

Limited Liability Partnerships (LLPs)

· RUPA § 306(c): A limited partnership is a partnership entity that is required to have one limited partner and one general partner · FL Stat 620.8306(3): Partnership obligations (contract or tort) occurred while partnership is a LLP, are solely the obligation of the partnership. o Limited Partner cannot be personally liable solely by reason of being a partner (still liable if partner is tortfeasor) o General Partner has liability for debts of LPs · Examples of LLP are El Paso Pipeline and Giles v Giles

Veil Piercing

· Requirements · Intentional Undercapitalization When Setting Up Business May Lead to Veil Piercing · Reverse Veil Piercing

Controlling Stockholders

· When Parent Corporation Is Self-Dealing With Respect to Subsidiary the BJR Does not Apply and D Must Prove that Intrinsically Fair · Majority Stockholders Have Right To Control But Have Fiduciary Duty to Minority Stockholders Controlling Stockholders and Transactions · Is There a Controlling Stockholder? o Don't Need Majority Share to Be Controlling Stockholder o Ability to Control is Sufficient Even If Don't Exercise (Inherent Coercion) · No Controlling Stockholder: BJR Applies If Decision Approved by Disinterested, Uncoerced, and Fully Informed Majority of Stockholders (focuses on vote) · Controlling Stockholder: BJR Applies if Negotiated by Special Committee of Fully Empowered and Informed Independent Directors AND Approved by Majority of the Minority Stockholders o Must Have Beneficial Documented Process o Must Have Full Disclosure (Fully Informed): Requirements (Haley) · Material Facts Wrongfully Not Disclosed to Shareholders · Immaterial Facts Do Not Need to Be Disclosed o Must be Independent Directors · Procedure Above Defective? Entire Fairness Review Court considers process (how reached) and result

Definition of a Security (Securities Act of 1933; 15 USC §77)

"Any note, stock, bond, debenture, evidence of indebtedness, certificate of interest or participation in any profit-sharing agreement, collateral-trust certificate, preorganization certificate or subscription, transferable share, investment contract, voting-trust certificate, certificate of deposit for a security, fractional undivided interest in oil, gas, or other mineral rights, option, or privilege on any security, certificate of deposit, or group or index of securities (including any interest therein or based on the value thereof), or any option or privilege entered into on a national securities exchange relating to foreign currency, or, in general, any interest or instrument commonly known as a "security" Note: Defined very broadly to include a large range of things

Partnership Formation

(Compare/contrast with Fenwick) Description of Agreement is Not Conclusive of Whether Partnership Formed - Fenwick v. Unemployment Commission (1945) (Fenwick made agreement with girl that she would receive 20% of net profits if the business warrants it in Fenwick's opinion): Court found no partnership b/c there was no co-ownership. Agreement called the relationship a partnership but not conclusive. Agreement Which Differs from Too Many Default Rules (see above) of Partnership is Likely Not Partnership - Fenwick v. Unemployment Commission (1945) (Fenwick made agreement with girl that she would receive 20% of net profits if the business warrants it in Fenwick's opinion): The terms of the agreement were not inherently inconsistent with partnership but at some point you can have rules so different from default rules that there is no co-ownership. Share of Profits as Compensation for Services/Employment Does Not Constitute Partnership - Fenwick v. Unemployment Commission (1945) (Fenwick made agreement with girl that she would receive 20% of net profits if the business warrants it in Fenwick's opinion): Profits agreement was only for compensation of services and not as share in actual profits. No Partnership Found When No Co-Ownership - Fenwick v. Unemployment Commission (1945) (Fenwick made agreement with girl that she would receive 20% of net profits if the business warrants it in Fenwick's opinion): Court found no partnership b/c there was no co-ownership. Girl made: 1. No Contribution of Capital (Emphasized capital; could argue she contributed human capital/services) 2. No control over management of business (but partners can be responsible for different aspects of business) 3. Fenwick was responsible for all debts/no loss sharing (individual liability can be contracted around) 4. Relationship continued as before but agreement only allocated profits as a compensation for services arrangement. Note: Court was deciding whether agreement would constitute a partnership for the purposes of the unemployment compensation law. Thus, motivated by their policies; might have been different if deciding only whether partnership between themselves.

Reverse Veil Piercing

(allows creditor to access an entity's assets in satisfaction of an owner's liability) - Sealand v. Pepper Source (1991) (Marchese owned 6 separate businesses but ran them all from the same office; all businesses shared accounts and lent money to each other; one of the businesses, Pepper Source, contracted with Sealand for some peppers and failed to pay; Sealand sued attempting to pierce veil and hold Marchese liable): Corporation suing owner. Court suggested creditor could look to another one of Marchese's corporations' assets (Tie-Net), despite fact that other shareholders owned that corporation.

Displacing the BJR

- 102(b)7 exculpates directors from damages unless fraud, illegality, oppression, conflict of interest, dereliction of duty - Officers Do not Benefit From 102b7 Exculpation · Duty of Loyalty o Breach of Duty of Loyalty Only Proven by Demonstrating Actual Harm to Corporation o **Revlon Duty o **Conflict of Interest § It is a Conflict of Interest 1. Financial interest, position, family member 2. Liquidity or Prospective Employment as Conflict of Interest § If Yes, Can the Transaction Be Approved Approved by Proper Process Approved under Intrinsic Fairness Standard o **Corporate Opportunities and Waiver o **Entrenchment · Duty of Good Faith o Process which Looks Sound Will Prevent Displacement o **Dereliction of Duty o **Oppression of Minority Shareholders Displacing BJR o **Illegality Displacing BJR (e.g. accepting Bribes); NOT A TYPE OF BAD FAITH SAY: Nevertheless, the business judgment rule may be displaced in limited circumstances. After DGCL §102(b)7 (mandatory in some jsx; optional in DL), directors (but not officers) are exculpated from all liability in damages except for breaches of the duty of loyalty, acts not in good faith or which involve intentional misconduct or knowing violation of the law, and any transaction for which the director received improper personal benefit. Conduct falling into these categories include (Shlenksy v. Wrigley): · Fraud · Illegality · Oppression · Conflict of interest and · Dereliction of duty (i.e. failure to take action). However, breaches of the duty of care may still warrant injunctive relief. Officers not exculpated from damages.

Proving Materiality and Reliance: Fraud on the Market Reliance Presumption (Basic v. Levinson)

- Basic v Levenson (Plaintiffs were not told about potential huge merger which was likely to occur; they sold their shares; merger occurred, and everyone else's shares went up; plaintiff's sued claiming material omission): Theory suggests that in an efficient market, public information is incorporated into securities prices and people trade in reliance on the integrity of the market price. Two presumptions: 1. Materiality: Price Impact: If P shows a misrepresentation was public and material and the stock traded in an efficient market, then there is a presumption that the misrepresentation affected the stock price. If the market price adjusts after corrective information is released, then we can assume that information was material. Material Omissions: Court balances likelihood event will occur with magnitude of the event. If it is likely and huge then material. Unlikely and small is not. Everything in between is a grey area. In Basic, merger was likely and huge. 2. Reliance: If P bought at market price during relevant period, there is a presumption that P bought in reliance on misrepresentation even if he did not directly rely on the misstatements. Individuals who bought before a correction had been made bought at price reflecting false information so they de facto relied on that false information as well. D has the Right to Rebut the Basic Presumption of Reliance - Halliburton v Erica P John Fund (2014) (Halliburton made a number of misrepresentations to the market in regard to revenue, merger, and liabilities; he later made corrective disclosures; class action suit brought; Halliburton claimed reliance presumption not applicable because misrepresentations had not affected the price): Basic presumption does not require P to prove price impact directly. Defendants may assert price impact evidence early (i.e. lack of impact). Ways D can Rebut Fraud on the Market Reliance Presumption 1. The market was not efficient (can prove with economic experts) 2. The market did not treat this information as significant (no price impact) (relevant to both transaction causation and loss causation) 3. The plaintiff traded for other reasons (e.g. wanted vacation money)

Corporate Opportunity Determined At Time of Transaction (does not look to future)

- Broz v. Cellular Information Systems Inc (1996) (Broz was President and sole shareholder of RFBC and director of competing CIS corporation; both companies were looking for managing licenses for cellphones but CIS was in financial difficulties; Broz acquired license for RFBC; Pricellular later acquired CIS putting them in financial position to buy a license and then claimed Broz had breached duty of loyalty in taking the opportunity for RFBC): Court found no corporate opportunity because at the time the opportunity was taken CIS could not have afforded the contract and Pricellular's interest in CIS was speculative so Bros had no obligation to take into account its interests as a potential shareholder. Even though PriCellular acquired CIS only 9 days later, CIS at the moment would not have financial capability. Note: If Broz had been an officer the answer could have been different as officers are usually subject to requirement of dedicating entire resources and time to corporation. Also, Broz had duty to RFBC so there could be a dual fiduciary duties conflict issue.

Directors Have Duty of Care to Corporation and Creditors to Monitor Other Directors' Actions and Respond When Wrong Conduct

- Francis v United Jersey Bank (1981) (Mrs. Pritchard and her two sons were directors of a reinsurance broker; sons were siphoning large sums of money as loans; mother Pritchard did not even come to corporate office, read financial statements; husband had warned her to watch out for sons; creditors sued her for breach of duties to monitor): Pritchard breached duty to exercise her duties in good faith and with the care and skill an ordinarily prudent man would use in similar circumstances in a like position. Even a cursory view of the finances would have revealed the sons' actions and she should have objected, resigned, or threatened legal action. Higher level of expectations in directors in this context because business was reinsurance company which depends on trust. Pritchard's actions were also a dereliction of duty as director to monitor actions of her sons. JSX Split: No Duty to Creditors Until Insolvent (Majority) - NACEPF v. Gheewalla: When in a zone of insolvency (not insolvent but headed towards) have duty to corporation and shareholders but not to creditors. When insolvent should consider interests of creditors. Creditors may bring derivative claims on behalf of insolvent corporation.

Corporate Opportunities Can be Broader Than Narrow Purpose of Business

- In Re EBay Shareholders Litigation (2004) (EBay hired Goldman Sachs to handle its IPO offering and Goldman gave preferable stock to Ebay insiders hoping to bribe them into hiring Goldman again; shareholders brought derivative action suing directors for taking the opportunity from Ebay who would have certainly purchased the stock): Even though EBay's business was not about investing, it was an integral part of its cash management plan and therefore it was an opportunity of Ebays. Directors knowing participation of taking preferred stock instead of offering to Ebay constituted a breach.

If Benefit of Remedy Applies to Shareholders AND Corporation Claim is Derivative

- In Re Medtronic (2017) (Medtronic acquired an Irish company and combined pre-existing American company with it in a holding company located in Ireland; each company's shareholders were given new shares in holding company; Medtronic shareholders sued b/c they had diluted voting power in new company and had to pay taxes which directors were reimbursed): Court recharacterizes the director's reimbursement of taxes as a claim of waste which injured the corporation instead of viewing as taxes shareholders were injured by paying since director did not have to pay them.

Process Which Looks and Is Sound Including Adequate Record Keeping Will Help Prevent Displacement of BJR

- In Re Walt Disney (2006) (Michael Ovitz was hired with a very generous compensation package to encourage him to leave his current job to direct Disney; his leadership was a failure and the shareholders brought a derivative suit on behalf of the corporation alleging breach of directors' duties in his hiring): Best practices would involve a detailed spreadsheet which would form the basis of the committee's deliberations and be an exhibit to the minutes of the committee's meeting. Minutes of meetings of committees of board are an opportunity for board to explain the thought process went through and spell out how they did their job effectively.

No Bad Faith Found: Considered Form AND Substance (Normally courts only consider form for displacement)

- In Re Walt Disney (2006) (Michael Ovitz was hired with a very generous compensation package to encourage him to leave his current job to direct Disney; his leadership was a failure and the shareholders brought a derivative suit on behalf of the corporation alleging breach of directors' duties in his hiring): Court found the board's actions were below the level of best practices but not below the level required for due care. The generous compensation was to compensate Ovitz for risk in moving and that it might not turn out. Court looked to substance here (reason for compensation) although courts normally look to form to determine whether BJR applies.

Duty of Care Not Violated Simply Because Different Course of Action Was More Advantageous

- Kamin v. American Express (1976) (American Express directors issued dividends to stockholders; P sued claiming corporate waste because the money could have been used in a sale which would have saved the company 8M in taxes): Derivative claim on behalf of corporation. Court found under BJR that distribution of dividends is up to the directors and even if a different course of action possibly saving 8M would be more advantageous that is not sufficient. Policy: Bad decisions are not breaches of director's duties because business decisions inherently involve risk.

Illegality Displacing BJR (illegality always breaches duty of loyalty b/c not in best interests of the corporation Ritter)

- Kamin v. American Express (planning to distribute dividends to intentionally hide loss and make finances look better): Intentional misstatement of material information regarding earnings management constituted securities fraud and therefore illegality warranting displacement of BJR. Accepting Bribes to Maintain Business with Party in Future - In Re EBay Shareholders Litigation (2004) (EBay hired Goldman Sachs to handle its IPO offering and Goldman gave preferable stock to Ebay insiders hoping to bribe them into hiring Goldman again; shareholders brought derivative action suing directors for taking the opportunity from Ebay who would have certainly purchased the stock): Breach of duty of loyalty because offering preferable stock was bribe to maintain the business relationship in the future.

Duty of Loyalty: Duty to Disclose Opportunities Connected to Business to Joint Venturer/Partner (RUPA §409)

- Meinhard v. Salmon (1928) (Meinhard and Salmon entered into a 20 year lease for building that Salmon would develop and manage; Gary later approached Salmon and they agreed to enter a subsequent 20 year lease on a property which included the current one; Meinhard claimed breach of fiduciary duties of joint venture): Court found breach of fiduciary duties and Meinhard was entitled to half of lease. As joint venture each owes the finest duty of loyalty. The opportunity for the new lease was an incident of the enterprise (came to Salmon b/c he was in the joint venture) and Salmon was wrong to appropriate it to himself in secrecy and silence. Note: Not clear how close the connection between existing relationship and future opportunity must be. This was a joint venture so fiduciary duties are more limited. Hypo: If it were a partnership? Would likely have to disclose any opportunity relating to same type of business that they were in partnership about. - Sandvick v. LaCrosse (2008) (group of individuals bought gas leases together; 2 of the group the others out and when they refused bought top leases without notifying the others): No partnership but joint venture found. Breach of joint venture duty of loyalty by taking advantage of opportunity to buy leases without informing Sandvick and Bragge. Partner Does Not Have to Demonstrate Harm From Lack of Knowledge of Opportunity (Meinhard) - Lack of Harm to Partnership as Valid Defense (RUPA §409/Meehan JSX Split) "It is a defense to a claim law that the transaction was fair to the partnership" (May have changed outcome of Meinhard) Meehan v. Shaughnessy (1989) (Law firm partners became dissatisfied and left their firm taking clients with them, requesting permission from clients secretly on old firm letterhead, lying about rumors of them leaving): Court found that the speaking of improper conduct was not a breach of fiduciary duty b/c no harm. Remedy: Opportunity Must be Shared - Meinhard v. Salmon (1928) (Meinhard and Salmon entered into a 20 year lease for building that Salmon would develop and manage; Gary later approached Salmon and they agreed to enter a subsequent 20 year lease on a property which included the current one; Meinhard claimed breach of fiduciary duties of joint venture): Court found breach of fiduciary duties and Meinhard was entitled to half of lease. Exception: Partnership at Will Can be Terminated Anytime Allowing Former Partner to Pursue Undisclosed Opportunity - Page v. Page (1961) (Partner advanced money to partnership with understanding that the amount would be repaid with profits as soon as possible; other partner saw a better opportunity and wanted to cut partner out of it so terminated partnership): Because partnership was at will there was no fiduciary duty once he terminated the partnership.

Principal's Past Actions Established Implied Actual Authority For Agent's Action

- Mill Street Church of Christ v. Hogan (1990) (Church hired Bill as it had done in the past, to paint; Bill discussed with Elder possibly hiring someone but decided it might be difficult; Bill hired his brother Sam who then fell while working): Sam sued Church and court found hiring Sam was within the agent's implied actual authority. Implied actual authority is based on agent's reasonable belief because of present or past conduct of the principal that the principal wishes him to act in a certain way. Bill had been allowed to hire people in the past whenever he needed assistance and discussion with elder suggested he should be able to hire someone. Hypo: Would Bill have had apparent authority if no implied actual? Yes, because Church treasurer paid Sam for his work making manifestation that Sam had the power to hire. Under either apparent or implied actual, Sam was an employee. But under apparent authority Bill would be in breach of his duties to the principal.

DL (Stricter): SLC Decision to Terminate Litigation Evaluation Process (Maldonado)

1. Inquiry as to the independence, good faith, and reasonable investigation of the SLC (corporation has BOP) (consider process) 2. If Court is satisfied, then court applying its own independent judgment should decide whether litigation should be terminated (consider substance) 3. There could be cases where committee acts appropriately but court comes to different conclusion Zapata v. Maldonado (1981) (Zapata stock option plan by board had been modified; claims were brought against 10 officers and directors for breaches of fiduciary duty and there were also claims of breaches of securities law): Corporations must have a balance being able to get rid of harmful litigation while still allowing stockholders to initiate good litigation. When a demand is excused must be more cautious of SLC decisions that litigation should stop. Directors are passing judgment on fellow directors in the same corporation and so there is a huge risk for empathy, so NY test is not enough.

Approved by Proper Process (but shareholder has BOP to show unfair)

1. Material facts of transaction and director's interest were disclosed or known to BOD that authorizes the transaction and transaction was approved or ratified by vote of majority of qualified/independent directors (even if less than quorum) OR 2. Material facts of transaction and director's interest in the transaction were disclosed or known to shareholders who voted on transaction and the transaction was approved by a majority of the votes cast by disinterested (See Fliegler) shareholders. "Disclosed Or Known" Satisfied Even Though Not Directly Told As Long As Board Was Aware** - Benihana of Tokyo v. Benihana (2006) (Benihana restaurants needed financing to give its facilities a facelift; board member Abdo of Benihana who was also director of BFC told board that BFC was interested in buying some stock that would help them finance): Court found this was an interested transaction under DGCL §144 but the board had knowledge of Abdo's involvement. Although Abdo never stated he was negotiating the deal for BFC the directors knew he was a represaentative of BFC. **See Controlling Stockholders for more disclosure cases Majority of Qualified/Independent Directors Approval Satisfied - Kamin v. American Express (4 of 20 directors benefited from increased shares): 4 of 20 interested directors did not control board. No conflict in decision to act in way increasing shares.

Approved Under Intrinsic Fairness Standard (if cannot prove proper process)

1. Must be fair in terms of the director's dealings with the corporation in connection with that transaction; AND 2. Comparable to what might have been obtainable in an arm's length transaction. Directors Can Have Interest In Both Companies and Transaction Still be Fair Fliegler v Lawrence (1976) (Majority of shareholders voted in favor of conflicting interest transaction but majority of that was composed of directors that had interest in both companies): Directors met burden showing it was objectively fair under intrinsic fairness standard despite directors that had interests in both companies. Board Member Improperly Acting Alone Still Fair If Board as Whole Ratified by Accepting - Bayer v. Beran (1944) (Corporation wanted to avoid association of their product with poor man's silk so entered into expensive classical music radio advertisement program in which the CEO's wife was hired as a singer): Board should have acted collectively because board members do not have power to act alone. However, the board as a whole ratified the radio program decision by retaining it and its benefits. Arms-Length Transaction Met (agreement where not trying to do any favors) - Bayer v. Beran (1944) (Corporation wanted to avoid association of their product with poor man's silk so entered into expensive classical music radio advertisement program in which the CEO's wife was hired as a singer): Decision about advertising would be under BJR but because wife is involved must be reviewed by court. Court found intrinsic fairness met because no evidence that radio program was to foster wife's career or that different soprano would have enhanced the artistic quality of the program. Compensation was equivalent to what would receive for comparable work and negotiated through her agent. Note: If it was a transaction which benefited the other party/parties rather than the corporation it isn't fair. If it involves the sort of terms that would be agreed on by parties negotiating at arm's length where they have no interest in benefiting other parties then it is fair.

Controlling Stockholder: BJR Applies if (Kahn v. MF&W)

1. Negotiated by Fully Empowered + Fully Informed Special Committee of Independent Directors AND 2. Approved by Majority of the Minority Stockholders (uncoerced, fully informed, disinterested) Must Have Beneficial Documented Process In Re Mindbody Stockholders Litigation (2020) (Vista had acquired Mindbody for $36.50 a share; Mindbody shareholders claimed breach of fiduciary duties and that the sale was titled in favor of Vista): Had setup a transaction committee but existence alone not helpful. No process: · Date of formation is unclear · No board minutes memorialized · Committee's mandate was narrow and did not include strategic alternatives until later · Committee took backseat to Stollmeyer who made decisions about outreach/information to bidders Must Have Full Disclosure (Fully Informed): Requirements (Haley): 1. Whether key fiduciary's conflicts were material to him 2. Whether the board would have viewed information concerning those conflicts as material Material = similar to "substantial likelihood reasonable investor" standard - In Re Mindbody Stockholders Litigation (2020) (Vista had acquired Mindbody for $36.50 a share; Mindbody shareholders claimed breach of fiduciary duties and that the sale was titled in favor of Vista due to conflicts of interest; CEO Stollmeyer was motivated by need of liquidity and new job with Vista): There was at least some evidence that Stollmeyer affirmatively courted Vista and expected remuneration in form of new position which was not disclosed to board. Board's decision not trusted when not given all the information required to reach a decision. Benihana: Although board not told explicitly of Benihana's interest, they knew so disclosure met. Shareholder Vote: Not Fully Informed - In Re Tesla Motors Stockholder Litigation (2020) (Tesla acquired SolarCity company which had been setup by Elon Musk and his cousins; shareholders sued board for breach of fiduciary duties in approving the transaction; Musk claimed BJR applied under Corwin): Not clear that shareholders received all information regarding Solarcity acquisition. Insolvency of SolarCity was not made clear, the timing of the solar roofs hitting the market was exaggerated, and not clear Musk recused himself completely. - In Re Mindbody Stockholders Litigation (2020): The stockholder vote was uniformed because they were: not made aware of Stollmeyer's conflicts with Vista and lowered guidance on revenue provided. Immaterial Facts Do Not Need to Be Disclosed - In Re Tesla Motors Stockholder Litigation (2020) (Tesla acquired SolarCity company which had been setup by Elon Musk and his cousins; shareholders sued board for breach of fiduciary duties in approving the transaction; Musk claimed BJR applied under Corwin): Shareholders entitled to a fair summary of work of the investment bankers but not all the details. Tax assumptions used for determining growth rate not material either. Must be Independent Directors (See Sanchez; Barnhill) - In Re Mindbody Stockholders Litigation (2020): Stollmeyer was heavily involved in the transaction committee. 3. If Procedure Above Defective? Entire Fairness Review. Court considers process (how reached) and result/price (see Sinclair Oil) Fairness Not Found - In Re Mindbody Stockholders Litigation (2020) (Vista had acquired Mindbody for $36.50 a share; Mindbody shareholders claimed breach of fiduciary duties and that the sale was titled in favor of Vista due to conflicts of interest; CEO Stollmeyer was motivated by need of liquidity and new job with Vista; CFO and COO motivated by future employment with Vista; Liaw wanted to exit his Mindbody investment): Directors have a duty to maximize the sale price of the corporation (Revlon). Based on need for liquidity and new position he would receive reasonably conceivable that Stollmeyer tilted the sale process in Vista's favor. Total divergence from shareholders interest to his own. White had special role in revenue guidance (CFO) and used it to make the vista shares offer look better than it was. Conflict of interest. BJR does not apply because no process: stockholder vote was uninformed due to the lack of disclosure about Stollmeyer's conflicts and dealings with Vista Note: Generous compensation or allowing a new member to do other activities in spare time might also affect fairness Fairness Found: Benihana of Tokyo v. Benihana (2006) (Benihana restaurants needed financing to give its facilities a facelift; board member Abdo of Benihana who was also director of BFC told board that BFC was interested in buying some stock that would help them finance): Court found duty of loyalty not breached because Abdo did not use confidential information, did not set terms of deal, did not deceive the board, or dominate/control the directors' approval of the transaction. Note: If it was a transaction which benefited the other party/parties rather than the corporation it isn't fair. If it involves the sort of terms that would be agreed on by parties negotiating at arm's length where they have no interest in benefiting other parties then it is fair.

Agent Liability Under K

3rd Party could potentially be able to sue Agent if: · A is not agent · A is not actually or even apparently authorized · Principal does not exist (Atlantic Salmon) Agent Personally Liable When Fails to Make Full Disclosure of Existence + Identity of Principal - Atlantic Salmon v. Curan (1992) (Curran purported to act as an agent of Boston International Seafood Exchange which was a fake corporation; a previous company he owned called Marketing Designs had dissolved; Curran bought thousands of dollars of seafood from Atlantic Salmon and the checks were not honored): Agent acting for a principal has the obligation to make full disclosure of the 1. existence and 2. identity of the principal to avoid personal liability. Here Curran could do neither b/c of his fake corporation, so he is personally liable. Policy: Risk of liability for the agent encourages them to make the disclosure. Hypo: Beerhouse case: Humble is liable unless he disclosed the existence and identity of his principal: that there was a principal and that Fenwick was the principal. P thought he was dealing with Humble and had no idea that Fenwick was involved. When it turns out that Humble was an agent, Watteau is also able to sue the principal

Donations: Made in Reasonable Belief that Will Advance Interest of Corporation and Community in Which It Exists are Within Corporation's Power and Director's Power (DGCL 122) (FL Stat. 607.0302)

AP Smith Manufacturing v Barlow (1953) (director of corporation that made fire hydrants donated money to Princeton University): This case was before the broad rule allowing corporations the purpose of any lawful business. Cannot use corporate funds for philanthropic causes unless the expenditure was to the benefit of the corporation. Here court found donation could be beneficial to corporation indirectly by increasing the pool of good workers and protecting against threat of communism. NJ Statute allowed philanthropic donations and even though it was in effect only after the corporation was chartered, the charter granted by the state was made to change with the law. Thus, donation was within implied, incidental, and under the NJ statute express authority. Note: If it were made without any justification of benefit to company, directors had particular interest in a charity (pet charity), or it was a larger rather than modest amount, then it might not be valid. Contrast Dodge v. Ford where Ford was not allowed to withhold dividends in order to benefit mankind generally. Policy: Court wrestling with encouraging corporate social benefit while also ensuring maximizing profits.

Secret Profits

Agent Has Fiduciary Duty not to Receive Personal Profit by Means of Principal Granted Position, Assets, or Facilities - Reading v. Regem (1948) (Sergeant took money to ride along with trucks so they could cross inspection points without stopping; no one stopped him because of his uniform): It is a breach of fiduciary duty to the position, assets, or facilities, for personal gain. Employer's assets must play the predominant part in obtaining the benefit. Sergeant was only able to make the money because of his uniform. Note: It is possible to do things during employment without breaching duty. Duty to Disclose/Provide Information Before Accepting Personal Benefit - Rash v. JVIC (2007) (Rash worked for JVIC but did not tell JVIC that he owned his own scaffolding business TIPS; Rash used the business to work on one of JVIC's projects): Rash violated fiduciary duty by failing to disclose his ownership in TIPS to JVIC. Had a duty to deal openly. Even if he had hypothetical permission to use his own company, he did not have explicit. Before an agent does something that might benefit them (diverting opportunity to themselves) they must disclose to the principal so the principal can make a decision. Not Material Whether Employer Lost Anything by Virtue of Employee's Actions - Reading v. Regem (1948) (Sergeant took money to ride along with trucks so they could cross inspection points without stopping; no one stopped him because of his uniform): Crown was not hurt by sergeant's actions but sergeant still had to give it back to the employer. Remedy = Disgorgement (breaching party must hand over the value of the benefit derived from breach regardless of whether actually caused harm to the person to whom the duty is owed)

Inherent Agency

Agents Presents Himself as Owner; unknown to principal R2 § 194: An undisclosed principal is liable for acts of an agent "done on his account, if usual or necessary in such transactions, although forbidden by the principal." - Watteau v. Fenwick (1892) (Humble appears to be owner of beerhouse but is actually only an agent who is not allowed to buy cigars on credit; since his name is on the beerhouse door he does not look like an agent and cigar supplier sued brewery to recover cost of cigars): Because Humble appeared to be the owner and was acting within the reasonable scope of an agent's authority the beerhouse is liable via inherent agency power. Apparent agency would not work as the Principal did not make manifestations, the agent did. Policy: Disfavoring secrecy; The brewer created a situation where though Humble was an agent he looked like an owner so it is not fair to a third party who relies on that representation assuming Humble has enough to pay for the cigars.

NY: SLC Decision to Terminate Litigation Legitimate If Proper Process (See factors)

Auerbach v Bennett (NY 1979) (Shareholders alleged General Telephone had made bribes to obtain business outside US; corporation set up internal investigation; decisions made would now be illegality and not be protected by BJR under Foreign Corrupt Practices Act; BOD setup special litigation committee of 3 disinterested directors who joined the board after challenged transactions had occurred): Court refuses to evaluate substance of decision. Court considers whether 1.) investigation was completed in good faith, 2.) subject was reasonably examined, 3.) good faith pursuit of the inquiry, and 4.) independence of committee. Here, they hired eminent special counsel and process was legitimate. Note: If these bribes had been made today even if not by the BOD, still could be implicated for compliance issues under Caremark/Stone v. Ritter. Note: The demand was excused in this case but only 4 of 15 directors were involved so it seems given this is an oversight case (not a board decision case), there was sufficient independence that demand should have been required.

Oversight Liability Found

Board can be Nominally in Compliance with Federal Regulations and Still Violate Oversight Duties - Marchand v. Barnhill (DL 2009) (derivative claim brought alleging VP and CEO breached their oversight duties of care and loyalty by knowingly disregarding contamination risks and failing to oversee the safety of BlueBell ice cream's food-making operation by having a food safety compliance system; 3 people died): Even though company was in compliance with FDA regulations they still did not fulfill their oversight obligations by ensuring food safety at the board level. Non-Compliance in Mission Central Aspect of Business Creates Inference Violated Oversight Duties - Marchand v. Barnhill (DL 2009) (derivative claim brought alleging VP and CEO breached their oversight duties of care and loyalty by knowingly disregarding contamination risks and failing to oversee the safety of Blue Bell ice cream's food-making operation by having a food safety compliance system; 3 people died): Because company produced ice cream, its food safety was mission critical. No board level monitoring system on food safety. Presence of Compliance System Insufficient if Do Not Monitor It - In Re Clovis Oncology (2019) (Shareholders brought suit because company produced a drug for lung cancer and the board ignored red flags in the proper conducting of clinical trials; ignored multiple warnings regarding efficacy of cancer drug): Although a compliance system was in place, the board failed to monitor clinical trials and ignored multiple warnings about the efficacy of the drug. Compliance trials was mission critical. Board's Allowance of Outright Criminal Enterprise Violates Duty to Monitor - Teamsters v. Chou (AmerisourceBergen) (2020) (pharmacy used the overfill from filling syringes to fill additional syringes and contaminated the drugs in the process): Directors essentially operated a criminal enterprise in allowing overfill to be used to fill new syringes and permitted a woefully inadequate reporting system with respect to the business line in which the Pharmacy operated. Requirement of demand is excused because of likelihood of liability under Caremark Individual Director Could be Liable for Oversight Liability - Francis v. Jersey Bank: Although this was a dereliction of duty case, the principle that directors on notice of issues cannot ignore them, applies to caremark situations. Specifically, in the case of Ms. Pritchard it was relevant that a cursory reading of the financial statements would have revealed the misconduct.

All Bylaws Dealing with Corporation Internal Matters Are Valid (Must address rights of stockholders as stockholders)

Boilermakers v. Chevron (Chevron adopted forum selection bylaws requiring litigation relating to corporation's internal affairs to be brought in Delaware; wanted to avoid the cost of multi-forum litigation): Claims brought by stockholders relating to their rights as stockholders are internal. However, bylaws cannot regulate external matters (i.e. claim by a stockholder affected like any other non-stockholder)

BOD Bylaws Can Establish Forum Selection Clause for Suits Against Corporation Under DGCL §109 (Also applies to people who are not yet stockholders)

Boilermakers v. Chevron (Chevron adopted forum selection bylaws requiring litigation relating to corporation's internal affairs to be brought in Delaware; wanted to avoid the cost of multi-forum litigation): Court found forum selection bylaw valid under DGCL §109 which allows bylaws relating to rights and powers of shareholders as long as they are not inconsistent with the law or the certificate of incorporation. If shareholders object to a bylaw they can sell their shares or vote out the directors responsible for it. Policy: Freedom of K; shareholders were put on notice when they bought shares.

Liability by Inherently Dangerous Business Plan

Business Plan Can Create Franchisor (Principal) Liability If Creates Inherent Danger Risks (e.g. Dominoes 30 minute guarantee)

Duty of Good Faith (Breach displaces BJR)

Categories of Bad Faith (not exhaustive); Gross negligence not sufficient · Subjective Bad Faith: Intentionally acting in a way the director knows is harmful to the corporation · Maximizing profits in way that breaks law · Dereliction of Duty · Acts with purpose other than advancing the best interests of the corporation (Stone v. Ritter)

No Oversight Liability Found

Compliance System in Place and Delegated Monitoring Duties - Stone v. Ritter (DL 2006) (AmSouth failed to file suspicious activity reports required by anti-money-laundering regulations even though it had a reporting system in place; shareholders brought derivative claim that directors had breached duty of oversight): Here oversight duties complied with despite failure to file report because they had in place an adequate suspicious activity reporting system and sufficiently delegated monitoring duties to the employees. - Qualcomm (BOD had allegedly been ignoring Me Too and racial discrimination type cases and settling with nondisclosure agreements; board also did not have underrepresented minorities on the board; board did have a chief diversity officer): Has not been decided yet but not clear Caremark case is met because they did have a system in place (diversity officer) and not clear they did not monitor because not obvious that a board position is included in the definition of employment requiring minority representation.

Waste: Directors May be Liable for Waste if They Give Away Corporate Funds for No Corporate Benefit (claim almost never succeeds)

Corporate Waste Through Acquiring Insolvent Firm In Re Tesla Motors Stockholder Litigation (2020) (Tesla acquired SolarCity company which had been setup by Elon Musk and his cousins; shareholders sued board for breach of fiduciary duties in approving the transaction; Musk claimed BJR applied under Corwin): If Solarcity was insolvent when Tesla acquired it that might be enough to establish a waste claim (paying money for something that is worthless). Public Benefit/Social Benefit Corporations Florida has Social Purpose Corporations and Benefit Corporations. Allow for-profit company to also have public/social benefit goals. Avoids risk that there will be challenges to the director's decisions that may not appear to maximize profit

LLC Veil Piercing

Corporation Veil Piercing Rules Apply to LLCs But are Less Strict - Netjets Aviation v. LHC Communications LLC (2008) (NetJets made a deal with LHC LLC to lease an airplane in return for rental and management fees; LHC terminated the contract when it owed $340k and then went out of business; NetJets went after LHC's single owner Zimmerman who had often used LHC money for personal expenses, used the plane for family vacations, and characterized capital contributions to LHC as loans): Court found LLC veil could be pierced because: 1. Unity/Mingling of Interest/Ownership: Treated LLC bank account as one of his own pockets. Used LHC funds for personal expenses such as apartment; used plane for vacations; claimed they were perks of being chairman but he decided what perks were and was using LLC to his own benefit 2. Fraud or Injustice: No need to prove actual fraud; sufficient to show element of injustice or unfairness. Failed to properly characterize "loans" as capital contributions. ULLC ACT: No Veil Piercing Except When Illegal Distributions (JSX Split) § 304 (2013): Failure of an LLC to observe formalities relating to the exercise of its powers or management of its activities and affairs is not a ground for imposing liability on a member or manager for a debt, obligation or other liability of the company. § 405 Constraint on Distributions (cannot if leads to insolvency): Personal liability incurred where a member or manager consents to a distribution or receives it knowing of the violation. Note: In NetJets a clawback for illegal distributions would be difficult because no good accounting meant hard to determine which distributions were prohibited.

No Breach When Partners Did Not Receive Personal Benefit from Action

Day v. Sidley & Austin (1975) (Attorney Day claimed approval of merger was wrong b/c based on misrepresentation that no partner would be worse off and he thought he would be chairman): No breach of fiduciary duties because partnership duties are mostly related to secrets (e.g. partner has advantaged himself at expense of firm); D did not make any financial gain; remaining partners did not acquire more power.

Partnership Management Rights

Default Management Rules (FL 620.8401) (Can be contracted around; e.g. Sidley & Austin) · All partners have equal rights in management by default (just like profits, losses, liability) · Differences regarding matter in ordinary course of business of partnership may be decided by majority of partners (regardless of partner share) · Act (1) outside ordinary course of business, (RUPA 401(6)) (2) amendment to partnership agreement (e.g. Stroud), and (3) admission of new partner requires consent of all partners (RUPA 401(9)) · Argue This on Exam: There is a grey area between things which are clearly extraordinary and things which are ordinary course or business. Partnership Agreement May Contract Around Default Rules - Day v. Sidley & Austin (1975) (Attorney Day claimed approval of merger was wrong b/c based on misrepresentation that no partner would be worse off and he thought he would be chairman): Partnership agreement had established that majority of voting percentage was sufficient instead of majority of partners.

Demand Excusal Test (NY)

Demand futility if complaint alleges with particularity that (Akers): 1. Majority of board is interested in transaction or not independent because they are controlled by an interested director OR 2. Directors did not fully inform themselves about the challenged transaction 3. Transaction is so egregious on its face it could not have been the product of sound business judgment - Marx v. Akers (1996) (IBM board voted to compensate directors who were members of the board and some who were not; the outside directors were 15 members of an 18 person board; P filed a derivative suit without making a demand): NY does not use DL reasonable doubt. Here, could not prove majority of board was interested in compensation for internal because only 3 directors allegedly benefited from the compensation scheme. Demand required. For outside directors demand excused but P did not prove compensation was not product of valid business judgment.

BJR Protection Applies to Director Decisions

Dodge v. Ford (1919) (President of Ford decided to stop paying out special dividends and to use the money to lower the price of cars and create a new smelting plant; dodge brothers wanted to sell their interests but Ford would not buy them; they were only shareholders so they lost most benefits by Ford's decision): Court found director's decision to make smelting plant protected by BJR.

Decisions Must be for the Benefit of the Corporation (Breach of Duty of Loyalty)

Dodge v. Ford (1919) (President of Ford decided to stop paying out special dividends and to use the money to lower the price of cars and create a new smelting plant; dodge brothers wanted to sell their interests but Ford would not buy them; they were only shareholders so they lost most benefits by Ford's decision): Court found that BJR was displaced and Ford must pay the special dividends because Ford's withholding was for the benefit of mankind as opposed to considering the corporation's benefit. Constituency Statute: Broad Description of Corporate Benefit "In discharging duties, director may consider factors including the long-term prospects and interests of the corporation and its shareholders, and the social, economic, legal, or other effects of any action on parties, the communities and society in which the corporation or its subsidiaries operate, and the economy of the state and the nation." FL Stat 607.0830(6) Note: Corps can support elections (Citizens United) and participate in exercise 1A (Hobby Lobby)

Oppression Displacing BJR (Dividends Distribution Not Motivated by Goals of Business and Oppressing Minority Shareholders); might be a direct claim, not derivative

Dodge v. Ford (1919) (President of Ford decided to stop paying out special dividends and to use the money to lower the price of cars and create a new smelting plant; dodge brothers wanted to sell their interests but Ford would not buy them; they were only shareholders so they lost most benefits by Ford's decision): Ford's withholding of dividends may have been to compete with Dodge brothers car business (wanted to build smelting plant to not depend on Dodge brothers plant), and minority stockholders needed to be protected (only money dodge brothers were getting was from these dividends and could not sell shares since Ford would not buy; locked into investment and Ford was changing rules of game) Note: Could argue that it was for corporate benefit because it was allowing him to compete with Dodge Brothers. Usually a court will not interfere with a director's management of dividends.

Has Demand Already been Made?

Elements of Demand Communication (Yaw) 1. Identity of Alleged Wrongdoers 2. Wrongdoing they Allegedly Perpetrated and Resultant Injury to Corporation 3. Legal action Shareholder wants board to take on corporation's behalf Statement to Board May be Demand Even if Shareholder Expressly States it is Not a Demand - Solak v. Welch (Letter from a shareholder asking the board to take action to address excessive director compensation contained a footnote stating that it was not a demand; board treated it as a demand and rejected it): Court found was a demand even though the letter stated it was not and when the shareholder commenced a derivative suit, because did not give reason that refusal was invalid, suit could not be brought.

Intentional Torts

Employee Acts Are W/n Scope of Employment when Interfere with Employee Doing Job - Manning v. Grimsley (1981) (Person in crowd was hit by a ball thrown by pitcher at him; this happened after they had heckled him continuously while he was warming up): The intentional tort was in connection with his employment because P's conduct resulting in it was interfering with the employee's ability to do his job. Legal Risk: Intentional torts are a very small source of risk but are still a source which businesses must consider when managing. Intentional Torts Are W/n Scope of Employment As Long as W/n Context of Performing Job - Arguello v. Conoco (2000) (Racial slurs were yelled at Smith as she tried to buy gas at a Conoco branded gas station; Conoco had control with respect to customer service and could terminate franchise for breach of it): Although Conoco did not exercise sufficient control over franchisees to establish employment relationship, the stores owned by Conoco were liable for the acts of its employee because they were within the scope of employment. See factors. COMPARE: The purpose of the interaction with P was to sell gas, it was similar to acts he was required to perform, act of being a clerk was commonly performed by employees, although it was a departure, he was still performing a employer oriented task.

Liability by Control

Employee Relationship Found - Sufficient Control by Principal - Humble Oil v. Martin (An unoccupied car rolled out of Humble's gas station and hit the Martins; Martin's sued Humble gas station but Humble claimed the gas station was operated by Schneider): Humble liable as principal because Schneider was an employee since Humble exercised significant control: Contract established Schneider as employee, Humble payed 75% of the utility bills (a huge operational expense), Humble furnished station equipment, Humble controlled hours of operation. - Miller v. McDonalds (Miller was hurt when she bit into a heart shaped sapphire in her Big Mac; restaurant was owned and operated by 3K restaurants a franchisee of McDonalds): McDonalds is vicariously liable because it exercised control over the franchise by requiring use of precise methods in food preparation, building design, etc.; sending inspectors, and the power to cancel the agreement. Because the sapphire was found in the burger McDonalds had control over the precise circumstances which produced harm. Only IC Relationship Found - Insufficient Control by Principal - Hoover v. Sun Oil Company (Hoovers were injured in a fire at a gas station owned by Sun and run by Baron; Sun allowed in addition to its products Baron to sell competing products but not under the Sun label; store had large signs advertising sun products but Baron's name was posted as owner): Baron was not an employee of Sun (just an IC) since Sun did not exercise sufficient control: Baron set his own hours of operations, had no obligation to follow Sun's advice (despite frequent Sun rep. visits), Baron took full responsibility for risk of profit/loss, Baron's name was posted as owner. Therefore, not an employee because Baron controlled the day to day operation of the business. - Arguello v. Conoco (2000) (Racial slurs were yelled at Smith as she tried to buy gas at a Conoco branded gas station; Conoco had control with respect to customer service and could terminate franchise for breach of it): Court found Conoco was not involved in the control or decision making of the activity causing liability or daily operations. Conoco did not make personnel decisions. Agreement states that Conoco and Marketer are not in an agency relationship. Contract Language Can Determine Whether Employee/IC Relationship (See Humble, Hoover) - E.g. Humble contract established Schneider as employee. Also, the Sun Oil termination right was bi-lateral under the contract, so the franchisor had less control. In both Humble and Sun Oil the company had the right to terminate the relationship so although Barone had more control it is only while he is acting in a way to maximize benefit to oil company. Although courts usually look to substance over form, form can affect how substance is perceived. - Arguello v. Conoco (2000) (Racial slurs were yelled at Smith as she tried to buy gas at a Conoco branded gas station; Conoco had control with respect to customer service and could terminate franchise for breach of it): Agreement states that Conoco and Marketer are separate. Principal More Likely to be Liable When It Controls Circumstances Which Produced the Harm - Murphy v. Holiday Inns (Murphy slipped on a walkway where water from AC had been allowed to accumulate and sued the hotel Holiday Inns which was run by Betsy-Len Motor Hotels): Principal not liable because it did not sufficient exercise control. Although Holiday Inns regulated Betsy-Len it was only to standardize the business entity/business plan. Betsy-Len owned the sales outlet and the regulatory provisions did not give D control over the day to day operation of the motel or power to control the daily maintenance of the premises or to command a portion of the profits. Besty-Len was thus not an employee. Policy: Least cost risk avoider. Betsy-Len is in the best position to avoid the risk at issue. - Miller v. McDonalds (Miller was hurt when she bit into a heart shaped sapphire in her Big Mac; restaurant was owned and operated by 3K restaurants a franchisee of McDonalds): Because the sapphire was found in the burger McDonalds had control over the precise circumstances which produced harm. Principal More Likely to be Liable When it Controls Hiring of Personnel - Humble Oil v. Martin (An unoccupied car rolled out of Humble's gas station and hit the Martins; Martin's sued Humble gas station but Humble claimed the gas station was operated by Schneider): Humble liable as principal because among other things contract established Schneider as employee.

Entrenchment

Entrenchment is Violation of Duty of Loyalty (transaction with purpose of diluting voting control) - Benihana of Tokyo v. Benihana (2006) (Benihana restaurants needed financing to give its facilities a facelift; board member Abdo of Benihana who was also director of BFC told board that BFC was interested in buying some stock that would help them finance): Court found purpose of transaction was not to dilute voting control of BOT because primary purpose was the best financing vehicle to meet Benihana's needs.

R3 2.06 Alternative: Undisclosed

Expands Apparent Authority to Include Inherent Agency Principal is liable to third party who is justifiably induced to make a detrimental change in position by an agent acting on the principal's behalf, having notice of the agent's conduct and that it might induce others to change their positions, did not take reasonable steps to notify them of the facts. Hypo: Would the beerhouse in Watteau have been liable under this standard? No because the principal had no notice of the agent's actions.

"Grabbing and Leaving" Fiduciary Duty of Confidentiality

Extends even after agency ends - Reading v. Regem (1948) (Sergeant took money to ride along with trucks so they could cross inspection points without stopping; no one stopped him because of his uniform): It is a breach of fiduciary duty to secretly accept bribes to use his position to smuggle goods. "Grabbing and Leaving" Fiduciary Duty of Confidentiality Extends even after agency ends - Town and Country House and Home Service v. Newbery (1958) (Employees from Town and Country, a house cleaning business, made their own competing business and used their former employer's list of customers which had taken extensive work and time to create): List constituted trade secret (secret information that if other people obtained they could profit from). Using list was breach of duty of confidentiality. Employees Do Have Right to make Preparations for a Future Competing Business (Town and Country House)

Controlling Litigation Against Corporation (Corporate law is enabling, contract based)

External vs Internal Claims · External matter: Claims brought by shareholders which can affect anyone (including the general public). e.g. Tort Claims; Contract Claims (commercial contract with corporation) · Internal matter: Claims brought by stockholders affecting them as stockholders o e.g. right to vote, securities fraud o Disputes relating to internal matters should be governed by the law of the state of incorporation regardless of where the litigation occurs (since most corps. are incorporated in DL the state will thus be applying DL law; each state will apply it differently) o Federal Forum Provisions allow a corporation to require the litigation be brought in DL courts, even if DL law would apply regardless. This is useful because it prevents the problem of having another state's possibly disfavorable interpretation of DL law.

Partner Authority

FL 620.8303 Apparent Authority: Each partner is an agent of the partnership for the purpose of its business (default rule) A partner has apparent authority with respect to matters in the ordinary course of the partnership business (RUPA §301) 1. Act of partner apparently carrying on in ordinary course (e.g. Stroud) of partnership business 2. In geographic area in which partnership operates 3. Unless partner (1) had no authority to act and (2) 3rd party knew or had received notification that partner lacked authority - Notice by Statement of Partnership Authority (only sufficient for notice for transaction of real property) Alternative Means of Authorization (otherwise partnership is not bound by act) 1. If act becomes authorized by all partners 2. Authorized by terms of written partnership agreement Two Partner Equal Management (Unanimity and majority both require both partners) - National Biscuit Company v. Stroud (1959) (Stroud and Freeman entered into partnership to sell groceries; Stroud later tried to stop Freeman from purchasing bread): Stroud had no power to limit authority of the other partner to buy bread because it was within the ordinary course of business of a grocery store and one cannot limit another partner's authority and thus stopping the purchase of the bread would be a change to a partner's authority that can only be accomplished by a joint partnership decision. - Summers v. Dooley (1971) (Summers and Dooley were partners in a trash collection business; Summers wanted to hire an additional employee but Dooley refused; Summers used partnership money to do it anyway): Court found even if hiring was within the ordinary course of business, one partner is not the majority in 2 person partnership so one partner cannot make the change when there is disagreement. Note: Two person partnership ought to address this risk of deadlock in the partnership agreement by assigning control to 1 partner or creating a tie-breaker mechanism.

Employee? Was it W/n Scope of Employment

FL Standard: Motivated by Serving the Employer's Interest (R3 7.07) · An employee acts within the scope of employment when performing work assigned by the employer or engaging in a course of conduct subject to the employer's control. · Employees act is not within the scope of employment if occurs both (1) in independent course of conduct AND (2) not intended by the employee to serve any purpose of the employer. CA Standard: Foreseeability of the Employees Actions (more likely that employer is liable) - Ira S. Bushney and Sons. v. US (Drunken sailor turned valves on Bushney's drydock and destroyed naval ship; Bushney sued the US): Sailor was clearly not acting to serve the employer's interest by turning the valves but his acts of passing through the area were characteristic of his employer's activities so the employer is liable. Similar to CA foreseeability approach. Hypo: Would McD be liable for acts of employees under this standard? Could be liable because food preparation is characteristic of the activities of McDonalds. Factors to Consider (Conoco) · Time, place, and purpose of act · Similarity to acts employee is authorized to perform · Whether employees commonly perform act · Extent of departure from normal methods (torts can be w/n scope sometimes) · Whether employer would reasonably expect act to be performed

Capital Calls

FL Stat 605.0403 · Promises to contribute to LLC are not enforceable unless in writing and signed by promisor · LLC Agreement can impose penalties for failure to obey capital call including reducing or eliminating the member's interest in the LLC (Dilution), requiring lending by other members of amount necessary to meet defaulting member's commitment, or other penalty or consequence. Note: Dilution could be abused by manager who makes capital call for no reason but to get rid of partner who is unable to make it (would be a breach of fiduciary duty; if LLC had contracted around all others still may be possible to sue under breach of good faith and fair dealing) Capital Call Provisions Cannot be Used as Debt Collection Provision - Racing Investment Fund 2000 LLC v Clay Ward Agency (2010) (Racing Investment purchased insurance from Clay Ward but fell behind on payments; Clay Ward attempted to use the LLC's additional capital call provision to satisfy the judgment): Court found capital contributions are not a debt collection mechanism. The additional capital call provision concerns the rights and obligations between members of the LLC (internal) and not between LLC and creditors (external). Provision had required members to contribute amounts as may be reasonably be deemed advisable by manager for business purposes.

Exception from Registration: Private Offerings (exempt for '33 act; not 1934 §10(b)5)

Factors to Determine if Offering was Private (Doran) 1. Number of Offerees (not dispositive) and their relationship to each other and issuer*** 2. Number of Units Offered (how many shares and what % of total) 3. Size of Offering ($$ raised) 4. Manner of Offering (announced to the public vs privately) Relationship to Issuer Factor***: All Offerees Must Have Had Disclosed Or Have Effective Access to Information Equivalent to What Would Have Been Provided by Registration Statement - Doran v Petroleum Management Corp (1977) (Duran was a sophisticated investor with an engineering degree; PMC had formed a limited partnership for drilling and had offered interests to 8 investors privately; Duran was only one that ended up investing; PMC did not register the securities; Duran claimed securities must be rescinded for failure to register; PMC claimed did not need to register because private offering): Not a private offering and should have been registered. Duran's sophistication is not enough, has to have relevant info to apply his sophistication to. Exemption depends on the knowledge of all the offerees which must be equivalent to the info provided by a registration document. Even though other factors all weighed in favor of private offering finding, first factor is most important and not met. Application of Exemption Based on Whether Person Affected Needs Protection of Statute (Doran) - Policy: Unlike rich businessman in Robinson v. Glynn, here sophisticated investor did not have relevant information and court found him to be in need of protection by the statute.

Implied Covenant of Good Faith and Fair Dealing Violation Only Applies When Parties Would Have Agreed to That Term Had They Negotiated the Matter (Cannot be Used to Abuse Contract)

Fisk Ventures v Segal (2009) (LLC was setup between an inventor Segal with Class A membership; an investor Fisk Ventures with Class B membership; board managed operations and required 75% approval; there were 2 members in each class and thus one was required from the other class to reach 75%; Segal wanted Class B members to suspend their put right in order to facilitating raising finance from other investors; they refused and Segal sued claiming breach of fiduciary duties and implied duty of good faith and fair dealing; Segal filed to dissolve LLC): Court cannot use the implied covenant of good faith and fair dealing to fill a gap in a contract with an implied term unless it is clear from the contract that the parties would have agreed to that term had they thought to negotiate the matter. It protects the spirit of what was actually bargained and negotiated for in the contract.

Dereliction of Duty

Francis v United Jersey Bank (1981) (Mrs. Pritchard and her two sons were directors of a reinsurance broker; sons were siphoning large sums of money as loans; mother Pritchard did not even come to corporate office, read financial statements; husband had warned her to watch out for sons; creditors sued her for breach of duties to monitor): Even a cursory view of the finances would have revealed the sons' actions and she should have objected, resigned, or threatened legal action. Mrs. Pritchard was not involved at all even though she was a director. Pritchard's actions were also a dereliction of duty as director to monitor actions of her sons. Stone v. Ritter (DL 2006) (AmSouth failed to file suspicious activity reports required by anti-money-laundering regulations even though it had a reporting system in place): Although not found here, failure to file the report could be seen as a dereliction of duty.

Agency Relationship of Lender/Borrower Requires De Facto Control (More than limited veto power; must manage business) R2 § 140

Gay Jenson Farms v. Cargill (1981) (Cargill extended increasing credit to Warren company to keep getting their grain even though they knew Warren was deep in debt; farmers sued Cargill claiming it was principal): Cargill was an active participant in Warren's operations rather than simply a financier with veto rights. Cargill aggressively financed Warren. Case illustrates legal risk: how business is managed can lead to liability. 1. By directing Warren to implement its suggestions, Cargill manifested consent that Warren be its agent 2. Warren acted on Cargill's behalf in procuring grain for Cargill (not just interest on loan) by means of Cargill's financing 3. De facto control by Cargill by interference with Warren's internal affairs (based on totality of factors): - Note: Cargill's control was actually mostly normal for a lender/borrower relationship but court found that combined together they showed an unusual relationship. It was often ineffectual in its attempt to control as well. Control included constant recommendations to Warren by phone, right of first refusal to grain, inability to enter mortgages w/o approval, power to discontinue financing, drafts and forms to Warren with Cargill's name on it, etc. - Policy: Cargill is in the best position to pay and it has taken on a relationship where it monitors the financial position of Warren and could limit the damage to the farmers (makes sense from policy perspective even though doctrinally weak).

Applies to Compensation Agreements

Grimes v. Donald (1996) (Board had granted CEO Donald generous compensation package including lifetime salary even if let go, lifetime medical insurance, etc.; Grimes made a demand but the board rejected): Independent and informed board is allowed to decide that services of renowned Donald as CEO warrants a large salary or severance and it is protected by BJR unless proof of waste (amount compared to services rendered) or other proof of invalid exercise of business judgment. Walt Disney: The generous compensation was to compensate Ovitz for risk in moving and that it might not turn out. Court looked to substance here (reason for compensation) although courts normally look to form to determine whether BJR applies.

Decreasing Value of Shareholder Shares as Result of Injury to Corporation Is Not a Direct Claim

Hypo: If there is a breach of duties and the corporation is harmed and the value of shares goes down, shareholders are suffering an injury but it is because of harm to the corporation and any remedy would go to the corporation. Alternative Test: Consider Nature of Wrong and Relief Claimed (how remedy is characterized affects derivative/direct) - Grimes v. Donald (1996) (Board had granted CEO Donald generous compensation package including lifetime salary even if let go, lifetime medical insurance, etc.; Grimes made a demand but the board rejected): Court found duty of due care, waste, and excessive compensation claims are derivative. Abdication of duty claim was direct because it asked for a declarative remedy which did not result in monetary recovery to corporation.

Is it a Conflict of Interest?

If Yes, Can the Transaction be Approved (Proper Process OR Fair) DGCL § 144 and FL Stat 607.0832

Officers Do not Benefit From 102b7 Exculpation

In Re Mindbody Stockholders Litigation (2020) (Vista had acquired Mindbody for $36.50 a share; Mindbody shareholders claimed breach of fiduciary duties and that the sale was titled in favor of Vista due to conflicts of interest; CEO Stollmeyer was motivated by need of liquidity and new job with Vista; CFO and COO motivated by future employment with Vista; Liaw wanted to exit his Mindbody investment): White as an officer did not benefit from exculpation and he acted in gross negligence by giving advantages to Vista by using his role as CFO to make deal look better than it was. Would be exculpated except that he was an officer.

If SLC Finds Litigation Should Proceed by P, All Documents it Finds Should be Given to P

In Re Oracle Corporation Derivative Litigation (DL 2019) (Shareholder derivative suit claimed that Ellison, the founder of Oracle and CEO for a while, had arranged for Oracle to acquire Netsuite at too high a cost; Netsuite was a company he had founded; demand was excused; SLC decided litigation should proceed and that original shareholder should bring it): Ellison was a dominant figure like Musk was in Tesla. Demand was excused because of Ellison's domination. SLC was set up with 3 members, 2 of which had not previously been on the board. The other was a named defendant. SLC decided that litigation should proceed and that the original shareholder plaintiff should be able to bring the litigation (litigation asset transferred back to shareholder). Oracle had acquired info from board meetings and elsewhere in conducting its investigation. The SLC had added value to the litigation asset which did not make sense to strip when giving to P. Because SLC found it appropriate for P to pursue the litigation, P should not be hampered in doing so. Court required all info even privileged which SLC reviewed to be given to P since Oracle had not given any reason why not to.

Tippees

Insider Trading Duty if: 1. Fiduciary passes on information in breach of duty (by deriving personal benefit from disclosure) AND 2. Recipient of the information knows the insider is breaching their duty Types of Tippee Liability (if duty above found) 1. Trade on the info? Liable as tippee 2. Pass on the info? Liable as misappropriator if breaching duty of confidentiality to immediate source Dirks v. SEC (1983) (Former officer of Equity Funding Secrist told Dirks that assets were exaggerated due to fraud; Dirks investigated and told some investors who sold stock after talking with Dirks): Secrist not liable as a tipper because he did not personally benefit from telling Dirks so that Dirks could investigate. Because Secrist ("tipper") did not personally benefit and thus not a tipper, first prong not met and Dirks is not liable as a tippee. Hypo: Pass on info to attorney/spouse to see if would be liable? Confidential relationship so not a breach of duty. Spouse or attorney not a tippee either because fiduciary was not breaching his duty. But, attorney or spouse who obtains information in the context of a confidential relationship has a duty to the source of the information and is liable as a misappropriator for using the information to trade or for passing it on to another person who would become a tippee if they had knowledge of the breach of duty. Hypo: Pass on info in elevator? Not a tipper because not receiving personal benefit.

Controlling Stockholders and Transactions

Is There a Controlling Stockholder? Don't Need Majority Share to Be Controlling Stockholder - In Re Tesla Motors Stockholder Litigation (2020) (Tesla acquired SolarCity company which had been setup by Elon Musk and his cousins; shareholders sued board for breach of fiduciary duties in approving the transaction; Musk claimed BJR applied under Corwin): Court found Musk was a controlling stockholder because even though he only held 22.1% share, he might be able to rally other stockholders to bridge the gap given his fundamental involvement with the company and he had been willing in the past to oust senior management. Entire fairness standard applies. Ability to Control is Sufficient Even If Don't Exercise (Inherent Coercion) - In Re Tesla Motors Stockholder Litigation (2020) (Tesla acquired SolarCity company which had been setup by Elon Musk and his cousins; shareholders sued board for breach of fiduciary duties in approving the transaction; Musk claimed BJR applied under Corwin): Even if Musk did not actively try to control, his ability to control was inherently coercive because minority stockholders might fear retaliation. No Controlling Stockholder: BJ Applies If Decision Approved by Disinterested, Uncoerced, and Fully Informed Majority of Stockholders (focuses on vote) (Corwin) - Corwin: Provided there is no conflicted controlling stockholder, and a board's transaction decision is approved by a majority of disinterested, fully informed and uncoerced stockholders the BJR will apply. Board Must be Disinterested - In Re Tesla Motors Stockholder Litigation (2020) (Tesla acquired SolarCity company which had been setup by Elon Musk and his cousins; shareholders sued board for breach of fiduciary duties in approving the transaction; Musk claimed BJR applied under Corwin): Some of board members were dual fiduciaries of both corporations

Applies to Decisions Regarding Distribution of Dividends (c.f. Dodge v. Ford; also discuss waste claim)

Kamin v. American Express (1976) (American Express directors issued dividends to stockholders; P sued claiming corporate waste because the money could have been used in a sale which would have saved the company 8M in taxes): Derivative claim on behalf of corporation; not enforcing personal rights. Court found under the BJR that distribution of dividends is up to the directors and merely alleging a different course of action would be more advantageous (sale saving company $8M in taxes) is not enough. Bad decisions are not breaches of director's duties because business decisions inherently involve risk; must be a dereliction of duty for court to step in. but WASTE? Note: Slightly different facts would allow a court to intervene. Appears to be maximizing apparent profits rather than the actual profits of shareholders. If the BOD had misstated material information intentionally that would be securities fraud and thus illegality allowing courts to ignore BJR.

Agency Via Lender Relationship (not all loans form agency relationships and v.v.)

Lending Car with Precondition/Designation of Driver Sufficient for Agency Relationship - Gorton v. Doty (1937) (Ms. Doty lent her car to football coach Garst on condition that he drive and he hit P): Doty consented to Garty acting on her behalf by designating that he drive as a pre-condition to lending the car (dangerous instrumentality). Doty exercised control of Garst by requiring him to be the driver. Ownership of car considered prima-facie case against owner. NOT a strong case for agency elements (doesn't make sense doctrinally, policy decision). Dissent: Pre-condition was a mere pre-caution to make sure teens didn't drive. Not enough to prove control. Policy: Case illustrates agency as a method of reaching into deep pockets. Coach could never pay claim, but Doty had insurance and was in the best position to avoid the risk. Hypo: Loan textbook to Garst? Likely no agency relationship would be found because books are not accident prone whereas cars are. Policy motivated decision; creating incentive for Doty to be more careful with lending. Dangerous Instrumentality (FL Approach) Ownership of one (e.g. car, airplane, etc.) makes owner principal by matter of law to anyone he lends it to Hypo: Lending bike to Garst on condition he ride it? Likely not a dangerous mentality. However, under Gorton v. Doty rule the owner would be liable because she conditioned use on him riding.

Liablity by Estoppel (Tort Liability under Apparent Agency)

Liability by Estoppel: Principal Held 3rd Party Out as Agent and P justifiably relied on that Holding Out - Miller v. McDonalds (Miller was hurt when she bit into a heart shaped sapphire in her Big Mac; restaurant was owned and operated by 3K restaurants a franchisee of McDonalds): McDonalds is vicariously liable by estoppel as well as by control. Principal held 3rd party out as agent because the only thing suggesting it was not a McD was one sign but it is not clear that it was visible or that it would have been enough. Reliance proved because Miller relied on McDonalds quality in eating her burger (did not need to prove she believed McD ran the restaurant; just that relied on the appearance) which was reasonable because McDonalds has ingredient requirements and focuses on quality. Hypo: If you go get a Bagel from Einstein's because it was the closest food source was there reliance on its quality? Could argue you were not relying on the quality but simply going there becaue it was the closest food source. Policy: Risk Management: Have to be careful as franchisor how one appears to third parties to avoid liability

LLCs

Liability of LLC Pre-Formation · Exception to SL: De Facto LLC/Corporation · Exception: Corporation by Estoppel Terms of LLC Agreement · Substance of Agreement Honored Even Though LLC Did Not Sign (substance over form) · Clear Terms of Agreement Honored Because of Freedom of Contract (Form over Substance) · LLC Member Cannot Sue LLC Without Consulting the Board if LLC Agreement Requires Fiduciary Duties (Can contract around everything except implied covenant of good faith/fair dealing) · May Contract Around Fiduciary Duty to Not Compete · Determination of Whether Duties Were Actually Contracted Around in Agreement Varies Based on Court and Circumstances (McConnell) · Implied Covenant of Good Faith and Fair Dealing Violation Only Applies When Parties Would Have Agreed to That Term Had They Negotiated the Matter (Cannot be Used to Abuse Contract) LLC Veil Piercing · Corporation Veil Piercing Rules Apply to LLCs But are Less Strict · ULLC ACT: No Veil Piercing Except When Illegal Distributions (JSX Split) Capital Calls · FL Stat 605.0403 · Capital Call Provisions Cannot be Used as Debt Collection Provision LLC Dissolution · Dissolution by Court (FL Stat 605.0702) · Rights of Dissociated Members (FL Stat 605.0603) · Clawbacks From Members Allowed If Do Not Address Creditor Interests First When Dissolving LLC

Due Diligence (For anyone besides issuer): Must Make Reasonable Investigation And Have Reasonable Grounds to Believe No Material Misstatements or Omissions (Escott)

Material Misrepresentation/Omission = Matters which Average Prudent Investor Ought Reasonably to Be Informed Before Purchasing Security (Escott) Expert Based Opinion Does not Shield From Liability Unless Reasonable Ground to Believe Information is True - e.g. If hire a "dodgy" accountant and there is no basis to believe his work is reliable then you cannot avoid liability from the work they did What is Required for Due Diligence Varies Based on Characteristics of Defendant - Escott v Bar-Chris (1968) (BarChris constructed bowling alleys and sold debentures to investors to fund; issuer had gone into bankruptcy shortly after securities offering took place; registration statement had several minor and major inaccuracies such as the assets to liabilities ratio being 1.9 to 1 when it was actually 1.6 to 1): Liable for misrepresentations about assets to liability ratio in registration requirement because did not conduct due diligence. Birnbaum as an attorney held to a higher standard and failed to meet it because as a lawyer he should have known his obligations under the statute. Auslander as an outside director had a duty of due diligence no matter how new of a director he was. Although Grant believed prospectus was accurate, he did not make a reasonable investigation and therefore did not meet standard of due diligence. Causation: Plaintiff Must Be Affected by Materially False Statements (Escott) - e.g. If plaintiff knew of truth or omission, he is not entitled to remedy under §11

May Contract Around Fiduciary Duty to Not Compete

McConnell v Hunt Sport Enterprises (1999) (hockey franchise LLC setup with provision that members could not be constrained in owning any other business including business that might be competitive; LLC member made agreement with Nationwide Insurance to build an arena independent of LLC): The operating agreement of hockey franchise LLC granted freedom to compete, limiting scope of fiduciary duties. Members allowed to compete with franchise by building its own arena under the agreement. Note: In a RUPA jsx, the provision allowing this in the LLC agreement would likely be considered "manifestly unreasonable."

Breach of Fiduciary Duty Can Happen Even Without Conscious Purpose to Defraud

Meinhard v. Salmon (1928) (Meinhard and Salmon entered into a 20 year lease for building that Salmon would develop and manage; Gary later approached Salmon and they agreed to enter a subsequent 20 year lease on a property which included the current one; Meinhard claimed breach of fiduciary duties of joint venture): Even though Salmon may have assumed Meinhard would not care he still had a duty to disclose the opportunity because he put himself in a position where thought of self ought to be renounced.

Partnership Expulsion

Must be in good faith and not for predatory purpose; requires unanimous vote Expulsion Allowed When In Partnership Agreement Made by Sophisticated Parties at Arms Length - Lawlis v. Kightlinger & Gray (1990) (Lawlis became alcoholic, firm he worked for gave him another chance but later decided to kick him out): Expulsion was by the partnership vote as allowed in the agreement (even though his stuff was removed from the office before then) so expulsion was lawful. Expulsion only violates duty of good faith if done in bad faith or for predatory purpose. Here the firm went out of its way to get Lawlis recovered from his addiction and gave him time to find other employment so not applicable. Not a breach of fiduciary duty because contracted to have no cause expulsion and did not deprive of any money legally due him.

Determination of Whether Duties Were Actually Contracted Around in Agreement Varies Based on Court and Circumstances (McConnell)

Not actually clear the provision in McConnell was so unambiguous in regard to allowing competing against the very core of the LLC's business. Court found it so because Hunt had been difficult to deal with. If facts had been different the court likely would have found it ambiguous.

SLC Decision Only Valid if SLC Composed of Independent Directors

Oracle (2003) (Oracle SLC decided litigation over claims 4 directors traded securities on inside information and sold securities before earnings information was fully disclosed; Court found SLC decision invalid): SLC was not independent because there were ties between the two members of the SLC who were Stanford professors and the trading defendants. Note: Director independence is important for conflicting interest transactions, controlling stockholder transactions, demand requirement, and SLCs.

No "Investment Contract" Security

Ordinary LLC Commercial Venture Cannot Be Included as Security (c.f. Leonard) - Robinson v. Glynn (Robinson was not a phone expert but was a wealthy businessman and he agreed to invest in Geophone LLC based on promises that a particular technology had worked in field tests; tech did not work and Robinson discovered they had never tested it in the field; he brought fraud claim under Securities Exchange Act and Rule 10(b)(5)): Court found interest was not a security and therefore not protected by securities fraud law. Not an investment contract: treating ordinary commercial venture as investment contract would be unwarranted expansion of securities law. Not Security if Capable of Exercising Meaningful Control Over Investment - Robinson v. Glynn (Robinson was not a phone expert but was a wealthy businessman and he agreed to invest in Geophone LLC based on promises that a particular technology had worked in field tests; tech did not work and Robinson discovered they had never tested it in the field; he brought fraud claim under Securities Exchange Act and Rule 10(b)(5)): Under Howey test element 3 Robinson was not a passive investor. He was an executive capable of exercising meaningful control over his investment. Policy: Court interpreting Howey test narrowly finding rich Robinson to not be the type of person designed to be protected by the securities law even though he was scammed. C.f. Duran's more liberal interpretation of Howey. Court has recently (Santa Fe) gone back to restrictive interpretation of securities protection.

Demand Excusal/Futility Test (Delaware)

Particularized facts creating reasonable doubt board is capable of making independent decision about litigation (Grimes v. Donald) 1. That the majority of the board has a material financial or familial interest 2. That the majority of the board is not independent, or board is dominated by individual who is not independent* (consider if substantial risk of liability) OR 3. Underlying transaction is not the product of valid business judgment (does not benefit from BJR) Board Domination Leading to Excusal of Demand Requirement - In Re Oracle Corporation Derivative Litigation (DL 2019) (Shareholder derivative suit claimed that Ellison, the founder of Oracle and CEO for a while, had arranged for Oracle to acquire Netsuite at too high a cost; Netsuite was a company he had founded): Ellison was a dominant figure like Musk was in Tesla. Demand was excused because there were sufficient social relationships to prove lack of independence and Ellison dominated such that Oracle was considered a cult; his domination was evident from his massive overcompensation despite persistent shareholder objection.

Partnership: Types of Natural Dissolution

Partners must decide partnership type · Specified Term (at end of term specified in agreement partnership will dissolve) · Partnership at Will (express will of partner can dissolve; can never be dissolved wrongfully) (Sheffel) · Partnership to Accomplish Objective (once objective is reached partnership dissolves) · Expulsion of Partner in Good Faith Court May Imply Partnership Category Even If It was Not Explicitly Agreed On - Page v. Page (1961) (Partner advanced money to partnership with understanding that the amount would be repaid with profits as soon as possible): Court found partnership was implicitly agreed on as partnership for a term long enough to repay the loan. RUPA: Does Not Allow Court to Imply (Partnership structure based strictly on the contract)

Partnership: Fiduciary Duties

Partners owe duties to other partners and partnership RUPA; FL Stat. § 620.8404 · Unlike hierarchical agency duties, partnership duties are mutual and flow between partners. · Duties under RUPA include (and are limited to under FL Stat. §620.8404): o Duty of Loyalty (JSX Split: Very Strict (Cardozo in Meinhard) or Can Consider Own Welfare Too (Meehan)) § Opportunities: To account to partnership for any benefit resulting from position in partnership including the appropriation of partnership opportunity (Meinhard) § Conflict of Interest: To refrain from conduct as or on behalf of another party with an adverse interest in partnership § Competition: To refrain from competing with the partnership § Partners may ratify act which would otherwise be breach of this duty (RUPA §409) o Duty of Care - Must not engage in gross negligence; reckless conduct; intentional misconduct o Duty of good faith and fair dealing o Under FL Stat. §620.8404, Partner does not violate duty just because it furthers partners own interest (c.f. Cardozo in Meinhard: "renounce all thought of self")

LLP Reinstatement (FL Stat 620.900(5))

Partnership whose statement of qualification has been administratively revoked may apply to the Secretary of State for reinstatement within 2 years after the effective date of the revocation. A reinstatement relates back to and takes effect as of the effective date of the revocation, and the partnership's status as a limited liability partnership continues as if the revocation had never occurred. Hypo: Partners set up LLP. Forget to file annual report and State notified them they were no longer an LLP as of September. They did not get around to successfully filing a restatement until January. Plaintiff sued them in December for products bought from them in November while not an LLP? Under the Florida Statute it relates back to when the LLP was terminated such that it is treated as if it never terminated. However, there might be constitutional issues with this because at the time the claim was filed they had a right to sue the partners of the firm.

Partnership Property

Partnerships are entities separate from partners; capital may belong to it Ownership Determined Based on Intentions of Parties at Time Property Acquired - In Re Fulton (1984) (Carrol and Fulton operated a trucking business as partners; Carroll bought a trailer in the partnership's name and it was used for the trucking business): Trailer constituted partnership property (as opposed to owned by partner and allowed to be borrowed) because sales invoice and title had partnership as owner and trailer was bought for the purpose and was used for partnership business. Distribution of Property on Dissolution (UPA 40; FL 620.8807) 1. Debts to creditors other than partners (Note: Under RUPA 1 and 2 are not distinguished) 2. Debts owed to partners except those relating to capital and profits 3. Debts relating to capital contributions 4. Profits owed to partners - In Re Fulton (1984) (Carrol and Fulton operated a trucking business as partners; Carroll bought a trailer in the partnership's name and it was used for the trucking business): Fulton had gone bankrupt which dissolves the partnership. The trailer was a capital contribution paid for by loan from grandmother. Under UPA 40, if the loan was made to the partnership it would be a debt to a non-partner which would be payed first before remaining capital contributions repaid to partners. Hypo: Trailer sold for $4k, partnership has no other assets, and a creditor has a claim for $1000? Creditor would be paid his $1k first. Assuming Carroll's claim for capital contribution is $4600 for the trailer he receives the remaining $3000 and there is nothing left for Fulton. Hypo: Same as above but total of 13k in assets? Creditor gets $1k and Carroll receives his $4600 capital contribution. Remaining amount would be divided equally according to respective shares. If they had equal shares they would each get half for a total of $8300 to Carroll and $3700 to Fulton.

Partnership: Buyouts (RUPA; no buyout under UPA)

Price of Buyout RUPA 701(2) (Favorable to Disassociated Partner) Buyout Price = Partner's share of the greater of the liquidation value of the assets (price if all assets sold) or the value of the assets based upon a sale of the entire business as a going concern (sell business) on the date of dissociation. - Wrongful Disassociation? (RUPA 701(3)): Must Compensate for Damages Set Off Against Buyout Amount) Buyout Mechanism - RUPA 701(5) & (9): If partners are unable to agree on buyout price then they can go to court - Custom Buyout Mechanism It makes sense for partners to have a mechanism setup within the partnership agreement (e.g. 1. formula or 2. procedure for independent evaluation); if too far from fair market value, may end up in court anyway - G&S Investments v. Belman (Partnership was formed to operate a building and agreement had buyout formula allowing other partners to continue the business and calculating disassociating partner's share based on partner's capital account; Partner was not satisfied with buyout formula): Court found custom buyout mechanism was unambiguous and declined to rewrite agreement.

Independent Contractor?

Principal Can be Liable for acts of IC Agent When Activity is Inherently Dangerous or Hires Incompetent People - Majestic Reality v. Toti Contracting (1959) (Parking Authority hired Toti to demolish a building; in the process a large part of P's property was damaged by mistake; P sued Parking Authority): Although Toti was an independent contractor, Parking Authority is liable because razing buildings in a crowded area is an inherently dangerous activity.

Agency By Estoppel

Principal Liable when appearances would lead a person of ordinary prudence to believe the imposter was the owner's agent (i.e. relied on) + there is detrimental reliance - Hoddeson v. Koos Bros (Hoddeson went to furniture store and bought 168.5 worth of furniture from man dressed in a suit; furniture never arrived and store claimed it was an imposter acting as a salesman): Owners have a duty of reasonable care and vigilance to protect customers from apparent salespeople. Owner is liable as principal when appearances would lead a person of ordinary prudence to believe imposter was the owner's agent. Note: When no manifestations are made by principal one cannot find agency by apparent authority, but might still be able to find it through estoppel. See apparent authority for comparison. Policy: Risk Management: To avoid agency by estoppel, businesses use uniforms, business cards, control receipt of payment, etc.

Apparent Authority

Principal is bound to transactions outside Agent's authority limits if 3rd party is not made aware of limits on agent - Three-Seventy Leasing Corp v. Ampex (1976) (Kays acting as agent of Ampex with no actual authority accepted an offer for computer memories even though Ampex never signed the document): Kays had apparent authority because it is reasonable for the third party to presume that as a salesman, he had the authority to bind his employer to sell. Company Designated Position of Agent Can be Manifestation of Type of Authority Agent Has (Three-Seventy Leasing) - e.g. Kays was a salesman, so principal was manifesting he had the power to make sales. Apparent Authority vs. Estoppel · Apparent: Agency existed but outside of authority. Creates binding contract enforceable by both parties · Estoppel: No agency existed. D deprived of defense of lack of agency. Only P can enforce.

Contracting Around Partnership Default Rules (RUPA 103 (1997) & RUPA 105 (2013))

RUPA 103: Cannot eliminate duty of loyalty or good faith and fair dealing fiduciary duties, but can contract around specific duties as long as not manifestly unreasonable (vague standard) Possible to Come Close to Eliminating All Fiduciary Duties and Still be Reasonable - Hypo: In the JVIC case, suppose Rash agreed to enter a partnership but only if he could carry out his businesses separately, not be liable for secret profits, conflicts of interest, or duties not to compete. Could partners agree to this? Although very close to an elimination of fiduciary duties, because the specific ones contracted around give warning to the partners it might not be unreasonable. FL Stat 620.8103 · Partnership agreement cannot eliminate duty of loyalty but can identify specific types or categories of activities that do not violate, if not manifestly unreasonable · All partners or number specified in agreement can ratify act which otherwise violates duty · Cannot unreasonably reduce duty of care · Eliminate the obligation of good faith and fair dealing RUPA 105 (2013) Same as RUPA 103 but "manifestly unreasonable" = decided as matter of law; determined as of time that term became part of the agreement. Not in effect in FL. Delaware: Grants Partnership Great Leeway To Contract Around All Fiduciary Duties; Contractual Duties (limited to language of contract) - El Paso Pipeline LP (2014) (El Paso general corporation wanted to sell assets to El Paso Master Limited Partnership investment vehicle; MLP sued general corporation board of directors claiming they were offloading assets on MLP at higher prices than market value and there was conflict of interest since 4 of 7 MLP directors had investment in general corporation; MLP had conflicts committee composed of other 3 directors and two outsiders): Delaware court found transaction was not a violation of fiduciary duty because the mechanism for approval in the agreement (approval by majority of conflicts committee acting in good faith; subjective belief standard) was satisfied. Approval in good faith stands despite General El Paso partner's withholding of relevant information because agreement had removed all fiduciary duties. If there had been gap in agreement coverage then implied covenant of fair dealing would govern but all fiduciary duties were expressly waived.

Partnership Losses

RUPA: Losses Are Shared Equally Among Partners Exception: Partner Contributing Only Services Does Not Have To Share in Capital Losses (JSX Split) - Kovacik v. Reed (Kovacik and Reed became partners in a modeling business agreeing to split profits evenly; never discussed share of losses; Kovacik contributed all financing and Reed only contributed remodeling services): In contrast to the RUPA default rule, Court decided to protect less wealthy drafter finding that partner who only contributed services does not have to share in capital losses.

Fiduciary Duty of Honesty and Good Faith

Reading v. Regem (1948) (Sergeant took money to ride along with trucks so they could cross inspection points without stopping; no one stopped him because of his uniform): It is a breach of fiduciary duty to secretly accept bribes to use his position to smuggle goods.

Partnership by Estoppel

Representations + Reliance giving credit to those representations - Young v. Jones (1992) (P deposited money in bank which sent it to SAFIG; Price Waterhouse Bahamas had issued an audit letter relating to SAFIG but then the money disappeared; P sued PW US claiming it was a partner with PW Bahamas based on representations including brochure that they were one big business): Court found no partnership because no evidence of reliance. Even if brochure was a representation that PW BA and US were partners, plaintiff did not rely on it. Also, plaintiff did not invest in a PW entity. Note: Represents legal risk. Beneficial to attract customers by representing business as large but also can become vulnerable to liability if you subect yourself to partnership by estoppel.

Revlon Duties

Revlon Duty: Directors Must Maximize Sale Price of Corporation (can be based on actions of single fiduciary) - Mindbody: Revlon duties allegedly not met. It is reasonably conceivable that Stollmeyer tilted the sale process in Vista's favor: that he provided lower guidance on revenue "for reasons unrelated to business expectations" and "strategically tanked" the stock price not maximizing price and gave informational and strategic advantages to Vista over other potential bidders.

Corporate Opportunities

SAY: A director must not only disclose but also offer the opportunity to the corporation (risk averse directors will offer all opportunities even if not sure whether they are opportunities). The corporation does not have to show loss. Meinhard. Per Guth v. Loft the test for corporate opportunities is (some jsx require all factors (Broz) but others don't): 1. If there is presented a business opportunity which the corporation is financially able to take 2. Is in the line of the corporation's business 3. Of advantage to it 4. Which it has in interest in or expectancy In Line with Business Interest/Expectancy (not a corporation case but applicable) - Meinhard v. Salmon (Meinhard, a wool merchant, and Salmon who wanted to be a real estate developer, entered into a joint venture with respect to a 20 year lease of the Hotel Bristol; Gerry, the owner of the reversion approached Salmon and their negotiations resulted in Salmon (alone) taking a new 20 year lease): The opportunity for the new lease (the pre-emptive privilege or opportunity) is an "incident of the enterprise" which "Salmon appropriated to himself in secrecy and silence."

Oversight Liability

SAY: Although the board of directors can delegate some decisions they have overall responsibility (DGCL 141(a)). Generally, oversight does not require directors to ferret out wrongdoing but they will be liable if they knew or should have known and did nothing. Graham v. Allis Chalmers. This is a duty of loyalty violation per Stone v. Ritter. · Breach of Duty of Care and Duty of Loyalty (per Ritter) because not acting in best interests of the corporation (conscious disregard of duties) · Must Consider Harm to Corporation Not Victims (Glasscock): Judges must be careful not to evaluate whether victims were harmed and should receive a remedy for misconduct. Instead, the issue is whether the corporation, should itself recover damages that benefit its stockholders. · Oversight can relate to things such as privacy, food safety, product safety, etc. · Spectrum of cases from no liability on one end (Ritter, Caremark), to liability (Barnhill, Oncology), to clear liability for outright criminal enterprise (Teamsters) BJR Only Displaced If Sustained and Systemic Failure (Caremark) (Strict Standard): a: 1. Utterly fail to implement any reporting or information system or controls OR 2. Having a system, consciously failed to monitor or oversee its operations Books and Records: Information Found and Not Found Can Prove Oversight Breach - In Re China Agritech (China Agritech had accessed US securities market incorrectly and was delisted eventually; oversight case; D tried to dismiss claims because of exculpation but P alleged breaches of duty of loyalty and good faith): Breach of oversight duty found because members of the audit committee acted in bad faith by consciously disregarding their duties. Sufficiently alleged audit committee's breach of oversight with references to books and records. Conclusions can be drawn both from what was present and what was absent from the records. Records May Not be Trustworthy - In Re China Agritech (China Agritech had accessed US securities market incorrectly and was delisted eventually; oversight case; D tried to dismiss claims because of exculpation but P alleged breaches of duty of loyalty and good faith): McGee report was made by someone who sold stock short and thus would profit if stock declines so report may not be trustworthy.

Formation of Agency Relationship

SAY: An agency relationship can be found in fact or by estoppel Joint Ownership Does Not Automatically Make One Owner Agent of Other (Botticello) Marriage Does Not Make Each Spouse Automatic Agent of Other (Botticello) - Botticello v. Stefanovicz (1979) (Walter who owns a farm jointly with wife Mary agrees to lease farm with option to purchase; did not disclose that he only had a half interest in land; Mary did not agree): The fact that one spouse does business activity is not a delegation of power to that person as an agent necessarily. Formal Contract and Compensation is Not Required to Form Agency Relationship - Gorton v. Doty (1937) (Ms. Doty lent her car to football coach Garst on condition that he drive and he hit P): Agency created when Ms. Doty lent her car for free by informal verbal agreement. Substance as Opposed to Naming of Relationship Counts in Determining Agency - Gay Jenson Farms v. Cargill (1981) (Cargill extended increasing credit to Warren company to keep getting their grain even though they knew Warren was deep in debt; farmers sued Cargill claiming it was principal): An agreement can result in an agency relationship even though the parties did not call it an agency or intend the legal consequences. Corporation Can be Agent of Individual (Walkovsky v. Carlton) - Walkovsky v. Carlton (Taxi-cab service with Carlton as shareholder who P tried to sue directly): P tried unsuccessfully to argue respondent superior: corporation as an agent of Carlton, so Carlton should be liable for what the corporation does. However, unable to show Carlton controlled on a day to day basis.

"Investment Contract" Security: Howey Test

SAY: Flexible test with the goal of being capable of adapting to the countless schemes available to use money of other on the promise of profits. Requires: 1. Investment of Money 2. Common Enterprise (pooling; either horizontally among investors or vertically from investor to firm) 3. Investor expects profits solely from* effort of promoter/third party *Later cases relaxed standard to determination of whose efforts were predominately responsible for making profits (investor could participate in an activity that contributes to profit while still being considered a security). See Glynn.

Insider Trading

SAY: Generally, there is no duty owed by directors to shareholders. (Goodwin) In the context of selling/buying shares mere silence is usually not a breach of duties. Insider trading is about breaches of fiduciary duty and not about ensuring a level playing field. (Dirks). Who is an Insider? Insider Trading Duty (Texas Gulf Sulphur) 1. Material: Access to material inside information AND Concrete Info Materiality Test: Whether a reasonable man would attach importance to the info Speculative Info Materiality Test: Balance probability of info against magnitude (e.g. geo result) Note: Selling/buying stock as result of hearing info is suggestive that the info was material 2. Non-Public: Intended only to be available for a corporate purpose Requirements of Duty: 1. Disclose to Investing Public OR 2. Abstain from Trading/passing on - SEC v. Texas Gulf Sulphur (1968) (TGS discovered a promising mineral site and did not disclose because they wanted to buy the land for cheap; TGS employees bought a ton of stock in TGS while keeping quiet; TGS denied to the newspaper that there had been a big find but later confirmed and the stock price went through the roof): Case was decided after 10b and 10b5 came into effect. Here geologist information even if unlikely is huge in magnitude and therefore material. Fiduciary duties breached even when selling because it involves a breach of the duty of loyalty by benefiting oneself. Any transaction in TGS stock made by someone who knew about the material drilling results was made in violation of Rule 10b-5 because he did not disclose or abstain. Duty Applies to All That Have Access to Inside Information (Not Just Directors/Officers) (Texas Gulf) SEC v. Texas Gulf Sulphur (1968): Employee of corporation qualified as inside trader in violation of 10b5.

Liability for Contents of Registration/Prospectus with Respect to Securities (§11 of 1933 Act)

SAY: Liability for the content of prospectus (registration statement) is strict for issuer; others involved are liable unless they prove they exercised due diligence by making a reasonable investigation and having reasonable grounds to believe there were no material misstatements or omissions. Escott. · Easier for P to prove than 10b5 but only applies to registration/prospectus · Unlike director duties which are protected by BJR, there is no presumption that directors are acting properly Less protection when raising money from the public. §11 Securities Act of 1933: In producing a prospectus there is a duty to use reasonable care to investigate the facts a reasonable man would use in the management of his property (due diligence). · Liable for untrue statements of material facts or omissions of material facts.

Duty of Care (FL Stat 607.0830)

SAY: Must discharge duties with the care that an ordinary prudent person (objective) in a like position would reasonably believe appropriate under similar circumstances (subjective; less experience = held to lower standard). · Failure to exercise due care (gross negligence) is less than non-exculpable bad faith · No damages per 102(b)7 but can claim injunctive relief · BJR applies unless displaced but exculpated regardless under 102(b)7 · If BJR displaced, each director's liability is evaluated individually · Focus on process: Directors must ask the right questions and get the information needed to answer those questions · In corporate context, fiduciary duties focus only on whether the corporation was harmed (not aspirational) · Duties with respect to decisions and duty to monitor often go hand in hand Policy: Encouraging leadership where otherwise people would be afraid to act because of liability

Conflicts of Interest

SAY: Under the old rule conflict of interest transactions were voidable by corporation. Now statutes focus on process by which transaction was approved. If proper procedure is proven by the defendant, the burden of proof is on shareholder to establish unfairness. If there no proper procedure, the defendant has the burden of proof to show it was nonetheless fair. Under DGCL § 144: No bright line rules. Family member definition not a narrowly defined class. Under FL Stat 607.0832 (Modeled after Revised Model Business Act) Indirectly a party if material (more specific than DL) financial interest in OR is a director, officer, member, manager, or partner of a person, other than the corporation, who is a party to the transaction. A director has an "indirect material financial interest" if a family member has a material financial interest in the transaction, other than as shareholder, or if the transaction is with an entity, other than the corporation, which has a material financial interest in the transaction and controls, or is controlled by, the director. "Family member" = Strictly limited to a child, stepchild, parent, stepparent, grandparent, sibling, step sibling, or half sibling of the director or the director's spouse. Liquidity Interest or Prospective Employment May be Conflict of Interest Not Enough In Re Mindbody Stockholders Litigation (2020) (Vista had acquired Mindbody for $36.50 a share; Mindbody shareholders claimed breach of fiduciary duties and that the sale was titled in favor of Vista due to conflicts of interest; CEO Stollmeyer was motivated by need of liquidity and new job with Vista; CFO and COO motivated by future employment with Vista; Liaw wanted to exit his Mindbody investment): Liaw's interest in liquidity of wanting to exit not strong enough to constitute conflict of interest Enough Interest in Liquidity and Prospective Employment - In Re Mindbody Stockholders Litigation (2020) (Vista had acquired Mindbody for $36.50 a share; Mindbody shareholders claimed breach of fiduciary duties and that the sale was titled in favor of Vista due to conflicts of interest; CEO Stollmeyer was motivated by need of liquidity and new job with Vista; CFO and COO motivated by future employment with Vista; Liaw wanted to exit his Mindbody investment): Stollmeyer had committed himself to various financial obligations requiring him to get money to meet those obligations (liquidity), had made comments on a number of occasions about how important liquidation would be for him and that currently is was like "sucking out of a small straw". Also hoped for a new position of employment at Vista instead of considering best interests of the company.

Yes "Investment Contract" Security

SEC v WJ Howey (1946) (Howey sold units in a citrus grove development to investors who also entered into service agreements where another company would possess and manage the land and pay profits to investors; investors were completely passive; Howey did not register the sales as securities): Units sold constituted "investment contract" security requiring registration because there was 1. investment of money through the service agreements, 2. investors' money was pooled together for the common enterprise, and 3. the investors were not skilled farmers but simply invested in the hope of profits. LLC Interest Constituted Investment Contract Security (c.f. Glynn) US v. Leonard (2008) (Sale of interests in 2 LLCs was conducted to finance the production and distribution of movies; interests in LLCs were called investment units and priced at $10k each; sales generated a 45% commission but documents used to sell interest reflected a rate of no more than 20%): LLC interest qualified as security because investors were completely passive (unlike Robinson v. Glynn). Also, they had been severely misled (told no more than 20 when in fact double) which made them good candidates for protect of security laws (misleading alone not sufficient).

AGENCY (R3 §1.01)

STEPS: Agency? Within Authority? Agent/Principal Liable 1.) Under K? 2.) Liable in Tort? SAY: Agency is a question of fact, the BOP is on P, and it must be proven by POE. Agency is often used as a means of satisfying claims where the immediate Defendant is insolvent. Agency requires: 1. Mutual consent to the relationship 2. Agent is subject to principal's control 3. Agent acts on principal's behalf Exam: Compare facts to Cargill and Doty

Articles of Incorporation Can Establish Federal Forum Selection Clause for Suits Brought Under Federal Securities Act

Salzberg v. Sciabacucchi (2020) (Roku included provisions in certificates of incorporation requiring claims brought under the Federal Securities Act of 1933 to be brought in federal court; Sciabacucchi claimed the federal forum selection provision was invalid): Court held that the federal forum provision in articles of incorporation was valid and there was a good reason to eliminate the otherwise multiple suits. (internal matters could include statements in a prospectus as well as proxy disclosures).

Scienter Requirement: No Remedy Under 10b5 If No Manipulation or Deception (dividing line between simple corporate mismanagement and security claim)

Santa Fe v. Green (1977) (Santa Fe controlled 95% of Kirby's stock and applied for a short form (automatic) merger; sole purpose was to eliminate minority shareholders; P sued claiming appraisal was fraudulent under 10b5): Pleadings must create a strong inference of scienter. Here no evidence of intentional or extreme recklessness regarding disclosure. Although there might be a breach of fiduciary duties (corporate mismanagement section) there is not enough for a securities claim. Manipulation means wash sales, matched orders, rigged prices, etc. intended to mislead investors. Note: If info had been deceptive that would be different. Because short-form mergers are automatic there is no voting by shareholders. Thus, loss causation would also be difficult to prove. Might be able to show that shareholders lulled into not getting fair appraisal.

Partnership: Lending Relationship

Share of Profits b/c Lending to Risky Business May Not be Partnership - Martin v. Peyton (1927) (Wealthy people lent money to KN&K which had gotten into financial trouble; lenders negotiated 40% of profits from firm in exchange to avoid usery laws; creditors of KN&K sued lenders claiming they were liable for KN&K's debts as partners): Court found no partnership because it was simply a loan relationship since lenders did not have management powers consistent with partnership. The management power was only enough to ensure profitability so they could be paid back as lenders. No power to initiate transactions or bind firm. All of the following were consistent with lender relationship: Lenders were referred to in agreement as trustees and were to be informed of what was happening at all times, management was to be in Lender's hands until securities were returned, and trustees may inspect firms books. There was also an option to become partners which was unusual but not sufficient to establish partnership. Note: No partnership was found with lenders in this case. In Cargill an agency relationship was found between lenders and business. However, it is equally likely that a partnership or agency could be found in a lending relationship and lenders have to be aware of both risks. Hypo: If KNK had been organized as a corporation? Lenders would be considered as investors and could not be liable for debts of corporation.

Joint Ventures

Similar to partnership but limited in scope and duration (e.g. Sandvick) 1. Contribution of money property time or skill in a common undertaking 2. A proprietary interest and right of mutual control over the property 3. Express/implied agreement for sharing profits and usually losses 4. Express/implied K showing a joint venture was formed · Co-ownership not required · Amount of opportunities from joint venture are much more limited than those of a partnership

When Parent Corporation Is Self-Dealing With Respect to Subsidiary the BJR Does not Apply and D Must Prove that Intrinsically Fair

Sinclair Oil v. Levien (1971) (Minority shareholder in Sinven, a subsidiary of Sinclair Oil, sued the latter for damages; Sinclair owned 97% of the stock in Sinven and made Sinven pay out dividends; they sued claiming Sinclair only did it because it needed cash): Parent corporations that dominate their subsidiaries owe a fiduciary duty to their subsidiaries. When domination and parent is on both sides of transaction, receiving a benefit to the exclusion of and at the expense of the subsidiary (self-dealing) the court will apply test of intrinsic fairness. - Not Found: Distribution of dividends was not self-dealing because minority shareholders also received proportionate share so business judgment rule applies. - Found: Contract between Sinven and Sinclair for the sale of crude oil was self-dealing because when contract was breached, Sinclair reaped benefit of crude oil out of detriment to minority shareholders at Sinven, and therefore intrinsic fairness rule applies (determine if has characteristics of arms-length bargain). Involvement was not objectively fair because International breached the contract and Sinclair reaped benefits without fully paying for them.

Uninformed Decision Making Is a Breach of the Duty of Care

Smith v. VanGorkom (1985) (CEO Gorkom who was about to retire engaged in negotiations with TransUnion for a merger and determined the value to be $55 a share based on nothing but the market price which was $38; Board of directors agreed to merger based on a single 2 hour oral presentation without investigating the price; shareholders sued claiming BOD was uninformed and price was too cheap): Shareholders suing to enforce their own rights. Not about how board should manage the corporation's business but about price to be bought out. Directors have duty to act in informed and deliberate matter in deciding whether to approve a merger. Here there was gross negligence b/c they failed to inform themselves. BOD should have focuses on the intrinsic value of the company and the highest price they could obtain. Gorkom's presentation and a statement about a preliminary study were not able to be relied on as experts to be shielded from liability. Shareholder approval cannot be relied on because decision not based on The board did not even read the agreement and it was signed by CEO while at opera. Approved based on 2 hour presentation by CEO. All directors found collectively liable. Board had two options that would have been sufficient to avoid breach of duty: 1. Expert Fairness Opinion (determine value of shares) 2. Determine true Market Share Rate Note: This case was based on gross negligence. After 102(b)(7) that is no longer sufficient to displace BJR. However, likely would have been liable under dereliction of duty theory. If board didn't do its job at all not just gross negligence but dereliction of duty.

Profit Sharing May Not Constitute Partnership Based on Totality of Circumstances Even if Relationship Called Partnership (Substance over Form)

Southex v. RIBA (2002) (Southex organized shows for RIBA under contract originally between RIBA and SEM and agreement referred to them as partners; parties shared profits 55/45%; SEM sued claiming it was actually a partner with RIBA entitled to ownership rights): Court finds no partnership because more similar to franchisee/licensee using RIBA's name to put on show and remunerated for work with share in profits. Also, agreement was for fixed term, operating costs were not shared, SEM conducted business with 3rd parties in his own name, management decisions were not shared equally, no share of ownership in business capital.

Examples of Scienter, Price Impact, Materiality Securities Claims

Spanier v. BMW (2020) (BMW had disclosed inaccurate info about sales volume by maintaining a bank of unreported vehicle sales used to meet monthly sales targets regardless of when sales actually occurred; SEC sued and BMW settled; shareholders filed a securities claim): Complaint alleged senior officers knew the disclosures made were false (scienter: deception), price impact from when disclosures were made in Wall Street Journal, and the fraud on the market presumption applied. Mehta v. JP Morgan Chase (JP Morgan spoofed orders by submitting orders that were intended to be cancelled in precious metals)another shareholder case that followed an enforcement action made by SEC; the case was settled; securities claim was brought by shareholders who bought shares while spoofing was going on): There was market manipulation (scienter) through the spoofing of precious metal market orders. Statements made were material omissions because they did not disclose the spoofing and when it was disclosed in a Bloomberg article the stock price fell (price impact). Halman v. Teva Pharmaceuticals (Teva had used charities as conduits to subsize Medicare co-pays while raising the price of the drug): Materiality in that failed to disclose illegal kickback payments to cover Medicare copayments such that the revenues were the product of illegal conduct and unsustainable. When the filing of the complaint was announced the price of Teva securities fell (price impact as evidence of reliance, materiality and loss causation). Franchi v. Turquoise Hill (Purchasers of securities in Turquoise Hill, sued alleging misleading disclosures about the Oyu Tolgoi copper-gold mine in Southern Mongolia): Allegations that failed to disclose progress was not proceeding as planned and publicly disclosed statements regarding dates of production were not achievable and when the company disclosed the stock price fell 12%. Basic v. Levenson: Failed to disclose info before plaintiffs sold shares about how the company was worth more than it appeared.

Old Law

Special Circumstances Doctrine: Where Director Seeks Out Shareholder to Buy Shares Without Disclosing Material Facts (Goodwin) Information Doesn't Have to Be Disclosed to Shareholders Buying From if Doesn't Pass Nebulous Stage (Old law; after Texas Gulf speculative info can be material) Goodwin v. Agassiz (1933) (Agassiz learned of a geologists theory as to the presence of precious copper deposits in another part of Goodwin's property and they thought it might also be present in Goodwins who sold his stock in Cliff Mining and they bought it knowing about the rare copper deposits; Goodwin sued claiming Agassiz should have disclosed): Directors of Agassiz were insiders who had information that the Cliff Mining shareholder did not. However, the existence of a theory formulated in a thesis (not concrete) by a geologist as to the possible existence of copper deposits in areas like property of the Cliff Mining Company is not actual information that must be disclosed to shareholders. Note: Special Circumstances Doctrine only applies when buying stock from existing shareholders (because fiduciary duty to existing shareholders but not new). This was before 10b5/Texas Gulf Sulphur Before Misappropriation Theory Not An Insider if No Fiduciary Duty of Trust Between Trader and Target Corporation Chiarella v US (1980) (Chiarella worked for a financial printer and had access to confidential info including about impending take overs; he then traded in securities of the target company): The Texas Gulf duty to disclose or abstain arises if there is a relationship of trust and confidence between parties to the transaction. Chiarella had no such duty and was not an insider. No relationship with the target company: was not their agent, no trust in him, no prior dealings with him. BUT: Rule 14e-3: Imposes liability in this situation regardless of lack of fiduciary duty.

Terms of LLC Agreement

Substance of Agreement Honored Even Though LLC Did Not Sign (substance over form) - Elf Atochem North America Inc. v. Jaffari (1998) (Elf and Jaffari created a joint venture LLC and agreed that all disputes would be resolved either by arbitration or in CA court; Elf brought a suit in DL individually and on behalf of the corporation claiming breach of fiduciary duty; LLC did not sign the agreement so Elf claimed agreement did not apply to it): Derivative and personal claims. Court found that Elf and LLC were bound by the arbitration agreement even though the LLC had not signed. It looked to substance instead of form to determine this. LLC does not need to be a party to the agreement to be bound because the members are the real parties in the interest. In theory argument was correct that suing on behalf of LLC should not be subject to arbitration agreement but court found Elf was attempting to manipulate the form. Note: FL has provision explicitly stating that LLC entity is bound by the provisions of the LLC agreement. Clear Terms of Agreement Honored Because of Freedom of Contract (Form over Substance) - Fisk Ventures v Segal (2009) (LLC was setup between an inventor Segal with Class A membership; an investor Fisk Ventures with Class B membership; board managed operations and required 75% approval; there were 2 members in each class and thus one was required from the other class to reach 75%; Segal wanted Class B members to suspend their put right in order to facilitating raising finance from other investors; they refused and Segal sued claiming breach of fiduciary duties and implied duty of good faith and fair dealing; Segal filed to dissolve LLC): Before the 2013 default fiduciary rules law; Court found agreement gave rights and protections to Class A and B members and did not require one group to agree to the wishes of the other. Court honored freedom of contract and found under the LLC agreement Class B investors thus did not breach duties. Note: Contrast Elf where court emphasized substance of the relationship between the parties and was willing to adjust LLC rules. LLC Member Cannot Sue LLC Without Consulting the Board if LLC Agreement Requires - McConnell v Hunt Sport Enterprises (1999) (hockey franchise LLC setup with provision that members could not be constrained in owning any other business including business that might be competitive; LLC member made agreement with Nationwide Insurance to build an arena independent of LLC): Hunt's filing of the lawsuit individually without consulting the board against member who competed against LLC. Not within his authority to file because agreement required approval of lawsuit actions by LLC.

Other Types of Securities (Most Likely Not on Exam)

Tangible Goods Purchased By Investors and Leased Back to Seller and Promised Rate of Return SEC v. Edwards (2004) (payphones were sold to the public and then leased back to the seller who promised purchasers a fixed rate of return of 14% per year; the money to pay this return came from new investors): Is governed by security law because: 1. Investment of money (purchase of phones); 2. Pooling of money (new investors money aggregated to pay new investors); and 3. Investors did not participate in generation of profits. Multi-Level Marketing Schemes Profits are made predominately by the efforts of the individuals who drafted the script as opposed to those who read it so the investors are passive. Could constitute investment contract security. Tangible Goods Where Seller Guarantees Can Resell or Sell Offspring for Profit E.g. painting, ostrich, worms, gold coin, etc. Guarantee may constitute investment contract. Pooling of money between seller and purchaser. Sellers guarantee the profit and investors are passive. Initial Coin Offerings (possible if characterized as commodity which will increase in value) SEC v. Kik Interactive (2020) (Digital tokens were sold without registration; SEC sued claiming they were security requiring registration): Court found sale of digital token in initial coin offering to be a security. Should have been registered because not exempt.

Types of Insiders

Temporary Insiders Also Have Duty Dirks v. SEC (1983) (Former officer of Equity Funding Secrist told Dirks that assets were exaggerated due to fraud; Dirks investigated and told some investors who sold stock after talking with Dirks): Dirks was an investigator but was still an insider. A range of people provide professional services to corporations who are within this category (lawyers, accountants, underwriters, consultants, etc.). These people have special confidential relationship with the corporation and have access to information by virtue of that relationship. Tippers (Type of Misappropriator) (only the first person; everyone else is a tippee/misappropriator) 1. Insider that misappropriates by passing on Material and Non-Public info to others 2. In Breach of Duty (fiduciary/confidentiality): Directly/Indirectly Personally Benefited (financially, getting something in return, benefiting family, etc.) Not met if given in confidentiality Dirks v. SEC (1983) (Former officer of Equity Funding Secrist told Dirks that assets were exaggerated due to fraud; Dirks investigated and told some investors who sold stock after talking with Dirks): Secrist not liable as a tipper because he did not personally benefit from telling Dirks so that Dirks could investigate. E.g. Fiduciary passes on info to friend knowing and expecting to receive similar tips from friend at a later time. Personal Benefit Standard: Intent to Benefit Tippee or Relationship Suggesting Quid Pro Quo Counts Salman v. US (2016) (Maher was investment banker who gave inside info to his brother Michael knowing he would trade on the information; Michael then gave the information to his friend Salman who also traded on the inside information. Knowing the info was coming from Maher): A personal benefit can be inferred from even the mere existence of a relationship between the insider and the tippee that suggests a quid pro quo arrangement or an intention to benefit the tippee. Maher intended to benefit tippee. Misappropriator

Direct vs Derivative Claim

Types of Clear Direct Claims · Shareholder Personal Claims (right to vote; contractual rights) are Automatically Direct (Citigroup) · Where directors owe duties to shareholders as opposed to the corporation, the shareholder's claims are direct (e.g. Smith v. VanGorkum, Mindbody where director had duty to obtain highest price for shareholders) · Capital Gains Burden (unlikely to succeed in litigation though because directors typically do not have a duty to think about the implications of their actions for individual shareholders) · Dilution (reduction in ability to control what is done in the corporation)(e.g. Medtronic P alleged injury based on loss of rightful incidents of his ownership interest) · Shareholder claims provided under a statute may be brought directly Direct/Derivative (Tooley Test) 1. Who suffered the injury? (must be shareholder for direct claim) 2. Who gets the benefit of any remedy? (must be only shareholders for direct claim) 3. If derivative, to bring the claim shareholders must have held shares at the time of alleged misconduct and continue to hold shares through the litigation.

Fiduciary Duties of Agents to Principals

Types of Duties (R3) · General duty of loyalty · Duty not to derive a personal benefit from the agency · Duty not to act on behalf of an adverse party · Duty not to compete with the principal · Duty not to use property or confidential information of the principal for the benefit of the agent or a 3rd party. · Duty of care · Duty to disclose information which Principal would want to know 1. Consent Principal Consent to Agent's Acts Avoids Liability (§8.06) (Disclosure by Agent is Important) Agent is protected from liability where the principal consents to the agent's acts provided that the agent acts in good faith in obtaining consent and discloses all material facts and the agent otherwise deals fairly and the consent either relates to a specific act or transaction or type of transaction that could reasonably be expected to arise in the course of the agency relationship. 2. Types of Duties: - Secret Profits: Agent Has Fiduciary Duty not to Receive Personal Profit by Means of Principal Granted Position, Assets, or Facilities - Fiduciary Duty of Honesty and Good Faith - "Grabbing and Leaving" Fiduciary Duty of Confidentiality

Mis-Appropriator: Breaching Fiduciary Duty to (immediate) Source of Inside Information (By Trading (O'Hagan) or Tipping (Rocklage))

Types of Misappropriator Liability (if has duty of confidentiality/fiduciary duty) 1. Pass on info (tipping) in breach of duty to the (immediate) source (e.g. Rocklage) BUT: Passing on info in confidentiality (e.g. attorney-client; family member)? Then no breach of duty so not a misappropriator. 2. Trading on info in breach of duty to source (O'Hagan) US v O'Hagan (1997) (A law firm was retained as counsel by Grand Met for an offer of Pillsbury stock; O'Hagan was a partner at the firm unassigned to the case who bought tons of Pillsbury stock and after the announcement of the tender offer sold it for a huge profit): As an attorney O'Hagan owed fiduciary duties to the firm and the firm owed fiduciary duties to the client. Liable if you misappropriate confidential information for securities trading purposes in breach of a duty to the source of the information. Here, misappropriation theory applies because O'Hagan violated a fiduciary duty to his law firm & client Grand Met (i.e. the sources of the information), not Pillsbury, the trading party in which he bought the stock. Deceptive misuse of confidential information to purchase stocks constitutes a violation of Rule 10b5. Hypo: Two people living together are in the house and one overhears their partner talking on phone and understands there is something big and good happening with partner's employer. Person overhearing tells friend of theirs who buys the stock. Phone caller not liable because relationship of confidentiality but overhearer liable because he knows there is an expectation of confidentiality so if he passes on info he would be a misappropriator. Disclosing Intention to Trade Forecloses Liability Under 10b5 but May Still Be Liable for Duty of Loyalty (O'Hagan) Disclosing Not Sufficient to Foreclose Liability as Mis-Appropriator If Receipt of Info Was By Deception SEC v. Rocklage (2006) (Chairman told his wife that the company's drug had failed a clinical trial; wife had a pre-existing agreement with her brother to pass on information she received; she told her husband she planned to give the info to her brother and then claimed no liability as misappropriator because she disclosed her intention): Wife's overall scheme was deceptive even if she disclosed because husband was unaware of her pact and intention to give info to her brother. Who is a Fiduciary? (Rule 10b5-2) 1. agreement to maintain information in confidence 2. people with a pattern or practice of sharing confidences such that the recipient knows the speaker expects the information to be kept confidential 3. receipt of information from a spouse, parent, child or sibling. Combining Dirks and O'Hagan - An insider communicating information to another person in the context of a relationship which is confidential (communications to an attorney, or a spouse), and where there is no personal benefit, would not be a tipper under Dirks because there is no breach of duty. And the recipient of the information would not be a tippee, because a breach of duty by the insider is necessary for a person to become a tippee. - However, the attorney or spouse who obtains information in the context of a confidential relationship has a duty to the source of the information and is liable as a misappropriator for using the information to trade or for passing it on to another person who would become a tippee if they had knowledge of the breach of duty.

Partnership: Dissolution by Court

UPA Standard (UPA 32) Allowed when (very broad to allow courts discretion to weigh relative blameworthiness): · Partner declared insane · Incapable of performing his part of partnership · Partner's conduct affects the carrying on of the business · Partner willfully breaches partnership agreement · Business is operating at a loss · Other circumstances render a dissolution equitable Note: Dissolution by court means not considered wrongful for partner to dissolve partnership Dissolved If All Confidence/Cooperation B/t Parties Destroyed/Party Misbehavior Materially Hinders Partnership Business - Owen v. Cohen (1941) (Two people agreed to be partners running a bowling alley; business ran fine until D stated disagreeing with P on every decision necessary to run business and claimed he should not work himself since he never worked a day in his life): Court dissolved partnership against D's will because D had acted in a way that prevented continuing the business. P received loan back and then remaining profits distributed. Cohen made Owen's life impossible. More than just quarrels, they were so bad as to work to the detriment of the partnership. Not Dissolved When Partner Requesting It Had Failed to Carry Out His End of Partnership Agreement and Other Partner Was Behaving - Collins v. Lewis (1955) (Partnership was formed to build and operate cafeteria where Collins would front the money to open the location and Lewis would repay him in profits; costs were greater than anticipated and Collins refused to keep contributing; Collins tried to dissolve partnership): Court declined to dissolve partnership. Collins had not met his obligation to front the costs he promised he would. Lewis had been keeping his end of the agreement. Collins cannot ask for dissolution when he is the one causing the problems. Collins can still leave but he will be in breach of K. RUPA Standard (RUPA 602): Dissociation is wrongful only if it breaches an express provision of the partnership agreement, or terminated before reaching specified term or undertaking. Court limited in ability to award remedies unlike discretion granted in UPA.

Liability of LLC Pre-Formation

Unless contract around, anyone who acts on behalf of corporation yet to be formed, will be liable individually. (Revised Model Business Act; Incl. FL; JSX Split) Exception: De Facto LLC/Corporation - Duray Development LLC v. Perrin (2010) (Duray entered into a contract with Perrin to excavate property and had him go ahead even though they intended to contract with Outlaw LLC; second K reflected this but Perrin signed on behalf of Outlaw and Outlaw company did not sign; Outlaw did not perform and Duray sued Perrin since LCC was found initially to not have been formed): Here the LLC subsequently existed but it did not exist when entered into. Court found the LLC existed de facto. No evidence that not acting in good faith so Outlaw is liable as a de facto LLC at the time of the contract. Requires (MI): 1. Incorporators proceeded in good faith 2. Under a valid statute 3. For an authorized purpose 4. Have executed articles of association Corporation by Estoppel - Duray Development LLC v. Perrin (2010) (Duray entered into a contract with Perrin to excavate property and had him go ahead even though they intended to contract with Outlaw LLC; second K reflected this but Perrin signed on behalf of Outlaw and Outlaw company did not sign; Outlaw did not perform and Duray sued Perrin since LCC was found initially to not have been formed): A firm contracting with what it thinks to be a valid business entity is only allowed to look to that entity for satisfaction of its claims and not to the owner who had not completed all formalities at the time of contracting. Note: Made sense when LLCs were difficult to set up. Now simple process means this makes less sense.

Partnership: Grabbing and Leaving

Violation of Fiduciary Duty - Meehan v. Shaughnessy (1989) (Law firm partners became dissatisfied and left their firm taking clients with them, requesting permission from clients secretly on old firm letterhead, lying about rumors of them leaving): Partners obligated to consider partners welfare and not merely their own. Partners breached fiduciary duty through the secrecy, lying, and unfairly acquiring clients using old firm letterhead to request permission and not notifying them they had the option to choose whether to stay or go. Proper actions could have included looking for + buying office space; setting up merger w/ another firm; negotiating w/ partners; and reminding clients they have a right to choose Note: Not a problem to be a part of conflict of interest but most disclose it so they know what they are agreeing to. Not a Violation of Fiduciary Duty - Lampert v. Gallant (2005) (Law partners put client solicitation letters in the mail before formal notice of resignations): Court found no breach of fiduciary duty because letters were not one-sided and gave the clients three options

Corporate Opportunity Waiver DGCL §122(17) (2000) (Allows corporations to identify categories of business opportunities that Director's will not be liable for taking for themselves)

Waiver Will not be Valid if Too General in Renouncing Opportunities - Alarm.com Holdings v ABS (wavier provision generally renounced corporate opportunities): If waiver is too general/broad it might be treated as invalid. (Similar to RUPA and waiving fiduciary duties).

Intentional Undercapitalization When Setting Up Business May Lead to Veil Piercing

Walkovsky v. Carlton (1966) (Taxi cab business run by Carlton was setup so that cabs were owned by separate corporations; tort victim attempted to pierce veil): Not found in this case but if a shareholder intentionally made sure there was not enough capital when setting up a business then that might give rise to veil piercing. Normally undercapitalization by itself will not though. It is acceptable as general rule to structure corporation so creditors cannot access money but not always.

Materially False Statements Made Privately Cannot Create Basic Reliance Presumption

West v Prudential Securities (2002) (Hoffman was a broker who lied to his clients personally that Jefferson Savings was about to be acquired; not disputed that there was a material representation; Hoffman argued public trading did not count because could not have been incorporate into the market): Public information is incorporated into the market through professional investors who monitor securities. No basis to conclude Hoffman's statements to his clients privately affected the price of securities. There are two situations where the presumption may apply despite the professionals not having incorporated the information: 1. Identity of High-Profile Trader (e.g. CEO buys lots of shares) 2. Significant Trading Volume (lots of people buying/selling). Even this is not dispositive because supply and demand have limited effect on stock where there is a multitude of different substitutes since the item being bought is simply risk at a price.

Ratification

When act of agent not within his actual authority but Principal becomes liable by ratifying Ratification is the affirmance by a person of a prior act which did not bind him but which was done or professedly (1) done on his behalf. There must be evidence of (2) intent to ratify and (3) full knowledge of all material circumstances. (R2) · Principal can no longer claim agent acted outside scope of authority · Principal can ratify acts of person that was not an agent but he must have been acting or purporting to act on behalf of the ratifier · Can be express or implied - Botticello v. Stefanovicz (1979) (Walter who owns a farm jointly with wife Mary agrees to lease farm with option to purchase; did not disclose that he only had a half interest in land; Mary did not agree but did receive proceeds from Walter's sale and saw Botticello on the land): Not enough to establish ratification because: · Walter did not act on Mary's behalf: Walter was not acting as Mary's authorized agent since she did not agree to selling and she in the past had signed all legal documents. · No full knowledge of all material circumstances: There is no evidence that Mary knew Boticello's presence and payments were anything more than a lease which Walter was allowed to issue. Had some knowledge but not the type needed to constitute full knowledge of material circumstances. · No indication of intent to ratify: The sharing of the proceeds could mean nothing more than it was used for family purposes. Hypo: If Bill had acted outside of the scope of his authority in Mill Street, was his action ratified? Could argue yes because the church payed for his brother's services.

Federal Forum Provision May Not Apply to All Claims Brought Against Corporation

Wong v. Restoration Robotics (2020): Claims under the Federal Securities Act against the issuer were dismissed based on federal forum provision in issuer's certificate of incorporation. Claims against underwriters were allowed as the FFP did not apply to these claims.

Partnership: Dissociation

Wrongful Dissociation: If partner does not have the right to leave the partnership, may be liable to the partnership for damages. Dissociating Partner Payment (regardless of if wrongful dissociation): entitled to receive funds that represent his or her share of the partnership: - Under RUPA dissociated partners usually entitled to greater of their share of the: (unless K around) - "going concern" value of the partnership, OR The value of the partnership as an operating entity (without the dissociated partner) - the liquidation value of the partnership. Value one could get for selling all of the assets of the business. - Minus share of any liabilities and damages for dissociating if wrongful Dissociation Allowed When Partner's Actions Break Down Partnership Relationship - Giles v. Giles Land Company (2012) (Kelly was sibling partner of farm who demanded access to partnership books; family asked court for his disassociation because he had threatened them and broken the relationship beyond repair): Court allowed dissociation because Kelly had behaved badly such that relationship had broken down beyond repair since partnership was among family members and there was no mutual trust anymore. Although threats were not related directly to the business, it was related because his family was partners and also there was a resulting lack of trust.

Majority Stockholders Have Right To Control But Have Fiduciary Duty to Minority Stockholders

Zahn v. Transamerica (1977) (Axton-Fisher issued different types of stock: preferred, class A common stock; and class B common stock; Class B had voting rights and A had voting rights if there had been 4 dividend defaults; Transamerica bought 4/5 of shares in Class B stock and called Class A stock then liquidating the company to take advantage of increase in price of tobacco asset, benefiting Class B stockholders): Two classes of shareholders with opposite views. Court found that here the directors were acting in their own self interest to help their true principal Transamerica. Calling Class A stock could have been a valid decision if made by a disinterested board but that did not happen here. Should have informed Class A stock members of what was going on. Shareholders can vote in their own interest but directors cannot. Note: Not possible to have disinterested decision maker in this context so next best alternative is notification to the Class A members.

LLP Requirements

formalities necessary for LLP shield · Errors do not affect LLP status · Must file statement of qualification, initial fee · Must file annual report and pay annual fees · Effective until cancelled (620.8105(7) decision by firm) or revoked for failure to meet requirements (620.9003)

Veil Piercing Requirements (Sealand)

o Unity/Mingling of Interest/Ownership (lack of regard for formalities of corporation)* o Keeping corporate form would facilitate fraud or injustice e.g. corporate form was just to avoid liability but no true business purpose Veil Pierced - Sealand v. Pepper Source (1991) (Marchese owned 6 separate businesses but ran them all from the same office; all businesses shared accounts and lent money to each other; one of the businesses, Pepper Source, contracted with Sealand for some peppers and failed to pay; Sealand sued attempting to pierce veil and hold Marchese liable): Veil pierced because lack of formalities (shared accounts, undercapitalized, Marchese often withdrew money from Pepper Source, did not treat companies as separate) and tax fraud was sufficient to satisfy fraud or injustice element (not best example of second element). Veil Not Pierced - Walkovsky v. Carlton (1966) (Taxi cab business run by Carlton was setup so that cabs were owned by separate corporations; tort victim attempted to pierce veil): Court found veil could not be pierced because Carlton was 1. not carrying on the business in his individual capacity and there was 2. no fraud/injustice. P claimed 3 theories: Enterprise liability (looks to assets of entire enterprise to satisfy claims); Respondent Superior (acting within personal capacity as opposed to for corporation); Veil piercing (1. acting in personal capacity (like agency above) such that 2. facilitating fraud/injustice).

PARTNERSHIP

two or more ppl carrying on business as co-owners for profit · Partnership entities are regulated by statutes: Revised Uniform Partnership Act (RUPA) · Constitutes an entity distinct from its partners (RUPA §201) (and can therefore be the agent of a principal) · Partnership is default business formation regardless of whether persons intend to form a partnership (RUPA §202) · Substance matters not form (substance > form) · Receipt of share of profits creates presumption of partnership with exceptions including: 1. Payment of debt 2. Services 3. Rent 4. Annuity 5. Interest/goodwill of business · Co-ownership of property does not itself constitute partnership even if co-owners share profits from use of property · Partnership and Legal Risk (RUPA §306) o All partners are limitlessly liable jointly and severally for all debts of partnership unless otherwise agreed upon in the contract. · Default Partnership Rules (RUPA §401) o Each partner entitled to equal share of partnership profits and chargeable with share of losses in proportion to his partner's share o A partnership shall reimburse a partner for payments made and indemnify a partner for liabilities incurred by the partner in the ordinary course of the business of the partnership or for the preservation of its business or property. o A partnership shall reimburse a partner for an advance to the partnership beyond the amount of capital the partner agreed to contribute. o Each partner has equal rights in the management and conduct of the partnership business. o A partner may use or possess partnership property only on behalf of the partnership. o A partner is not entitled to remuneration for services performed for the partnership, except for reasonable compensation for services rendered in winding up the business of the partnership · Business owners forming partnership must consider: share of profits/losses, financial/non-financial contributions, how management decisions are made, termination of business relationship, and rights of parties on termination.

Does Individual Have Duty of Confidentiality/Fiduciary duty?

· Actual Agreement to maintain information in confidence (e.g. employee subject to fiduciary duties) · Pattern or practice of sharing confidences such that recipient knows speaker expects the information to be kept confidential (no actual agreement) · Receipt of information from a spouse, parent, child or sibling

Agent Authority (Acts of the Agent within the scope of the agent's authority bind the principal)

· Actual Authority o Express: Authority the principal actually gives the agent o Implied Actual Authority: Authority within the agent's reasonable interpretation of the principal's express instructions (e.g. pay for ads to carry out requested selling truck) o Incidental Authority: Authority to do things which usually accompany or are reasonably necessary to accomplish a transaction for which the agent is authorized · Apparent Authority: Based on the principal's manifestations of authority to a 3rd party with whom the Agent contracts which leads the 3rd party reasonably to believe the agent has authority. (Authority exists but agent will be in breach of his duties to principal unless ratified) · Inherent Agency Power: Based on agent's manifestations of authority to a 3rd party which leads the 3rd party to reasonably believe the agent is the owner.

Agent/Principal Tort Liability

· Agents who commit torts are always personally liable (unless they get indemnity) · Tort victim will look for deep pockets o Principal is directly liable when: § Torts of agent acting within scope of agent's authority - e.g. Gorton v. Doty (Doty instructed coach to drive car which resulted in accident) § Where principal ratifies agent's acts § If Principal instructs agent to commit tort or knows that what agent does will involve tort o Principal is vicariously liable for: § Torts committed by agents who are employees acting within the scope of their employment or acting with apparent authority. § Independent Contractor: Limited liability of Principal for actions of these agents (distinction based on level and type of control; more details controlled = more likely employee relationship) Policy: Conflicting incentives: franchisor exercising more control allows them to protect brand but tort liability encourages less control to remove risk of liability.

Rule §10(b) and Rule 10b-5 (harder than §11 to prove b/c of scienter but applies to more than registration)

· Applies to omissions as well as untrue statements of material fact. (unlike common law fraud where must be affirmative) · Not just public companies (Can apply to companies with small # of owners). Not just transactions on public markets. (Can be a transaction between 2 ppl) · These provisions regulate insider trading · The SEC/ Department of Justice can take action against people who violate the statute and the rule (civil/criminal enforcement respectively). · There is an implied private right of action under the statute and the rule. Because it is implied the statute does not provide for conditions for liability in damages. · Remedy is damages for the difference between what the investor paid and what the securities were worth at the time. Also, a recessionary remedy under §12 (you can get your money back) · Securities v. Derivative Suit P Requirements: Securities claim can be brought even if sold shares (unlike derivative litigation where must own shares at the time it happened, when claim filed, and throughout entire litigation) · Examples: against BMW, JP Morgan Chase, Teva Pharmaceuticals, and Turquoise Hill SAY: Unlike derivative lawsuit claims, security claims can be brought even if those suing already sold their shares. There must be a change in position, however. The remedy is damages for the loss the investor suffered as a result of the fraud. Requirements: 1. Materially misleading statements and omissions (identify w/ particularity) with respect to manipulative and deceptive devices/contrivances in connection with purchase or sale of securities 2. Scienter (intent; more than negligence) Materiality (if substantial likelihood that a reasonable shareholder would consider it important" in making an investment decision; small misstatement will not create liability) Note: Statements must be more than puffery. E.g. Qualcomm statements about diversity may not be enough but statement made by investment manager of Yale that diversity is important might be. 3. Loss Causation (loss of investor must be causally connected to material false statements) Note: Price impact can be used as evidence 4. Reliance/Transaction Causation (on material lies/omissions in making decision to buy OR sell security) (Basic rebuttal presumption of reliance; d.n.a. if market not efficient) Note: Reliance is easier to prove with face to face transactions or in IPO where can point to statements in prospectus but harder to prove for market transactions. Not everyone researches before buying. May simply buy because it is part of an indices.

Business Judgment Rule (BJR)

· BJR Protection Applies to Director Decisions · Applies Even if Appears Director Does Not Appear to Be Maximizing Profits · Applies Even If Other Directors Have Acted Differently · Applies to Decisions Regarding Distribution of Dividends · Applies to Compensation Agreements SAY: Normally decisions made by board are protected by business judgment rule and not interfered with by courts. Policy: Judges are not business experts and business plans must be made while mindful of future expected competition (Dodge v. Ford).

Demand Required for all Derivative Claims Unless Excused

· Board must either have rejected a demand or P must prove that making a demand would be futile (FL 607.0742) · In Delaware a demand is never filed because that would be admitting board was disinterested

Veil Piercing

· Claims brought by creditors against shareholders in their position as shareholders for corporate debts (When shareholders do not treat corporation as separate entity) · By default incorporation protects shareholders from liabilities incurred by the corporation. Shareholders are liable for the amount they invested in the corporation and no more. Encourages capital formation. · Veil piercing usually occurs when the shareholder removes the formalities distinguishing itself and the corporation and when the shareholder's management of the corporation resulted in some fraud or injustice. o More likely to happen when there is a single shareholder or one shareholder has 90% share o Allows creditor to go after all assets owned by shareholder · To avoid risk need to preserve formalities by keeping track of debts/liabilities and assets, not using corporate account for private purchases, having meetings and keeping minutes; adequately capitalizing, etc. · Veil piercing often comes up in 3 contexts: 1. Statutory scheme and question about how to apply it (e.g. employment and whether it makes sense to treat owner as separate from corp); 2. Constructive Fraud (leading creditor to believe liability is personal rather than the liability of the firm; e.g. Sealand where owner promised to pay money to creditors) 3. Bankruptcy values (preventing shareholders from transferring assets to themselves or favored creditors ahead of bankruptcy proceedings)

Corporations: Role and Purposes

· Corporations have Express, Implied, and Incidental Powers Like Agents (Barlow) · Decisions Must be for the Benefit of the Corporation - Constituency Statute: Broad Description of Corporate Benefit · Donations: Made in Reasonable Belief that Will Advance Interest of Corporation and Community in Which It Exists are Within Corporation's Power and Director's Power · Waste: Directors May be Liable for Waste if They Give Away Corporate Funds for No Corporate Benefit (Claim almost never succeeds) · Corporate Social Responsibility (CSR) and Environmental Social and Governance (ESG) · Public Benefit/Social Benefit Corporations SAY: Purpose: The corporation's duty/purpose is to maximize wealth/value for shareholders. Corporations have the purpose of engaging in any lawful business unless a more limited purpose is set forth in the articles of incorporation. FL Stat. 607.0301(1)

Derivative Litigation

· Derivative claims normally require a demand made to board, unlike direct claims · The board's decision on demand is protected by the BJR unless the board is not sufficiently independent. · For derivative litigation, shareholders must own shares at the time the event occurred, at filing, and throughout the entire litigation.

Stock as Security

· Does not have to be called stock to qualify as stock (substance over form) · Shares in corporation normally considered to qualify Attributes of Stock (Glynn) · Right to receive dividends on apportionment of profits · Negotiability · Pledgeability · Voting rights in proportion to the number of shares · Capacity to appreciate in value Interest Denominated "Stock" May Not Qualify as Security - United Housing v Forman (1975) (Individuals buying flats in a building bought stock in a corporation but they were not doing it for investment purposes): An instrument denominated stock may not be treated as stock for the purposes of the definition of a security if the economic purposes of the transaction are not for investment. Court found substance of transaction (buying stock as requirement of buying flat in building) proved it was not a security. LLC Investment Did Not Constitute "Stock" Security - Robinson v. Glynn (Robinson was not a phone expert but was a wealthy businessman and he agreed to invest in Geophone LLC based on promises that a particular technology had worked in field tests; tech did not work and Robinson discovered they had never tested it in the field; he brought fraud claim under Securities Exchange Act and Rule 10(b)(5)): Court found interest was not a security and therefore not protected by securities fraud law. Not a stock because: Dividends on Apportionment of Profits: No, Robinson got all net profits up to a certain amount and then remainder was shared in proportion to relative shares Negotiability: Robinson's interest in the LLC could not be negotiated Pledgeability: Would affect only distribution but not control rights Voting Rights in Proportion to Number of Shares: Possible (disputed issue) but other characteristics prove that regardless it is not a stock

Duty of Care

· Duty of Care Not Violated Simply Because Different Course of Action Was More Advantageous · Directors Have Duty of Care to Corporation and Creditors to Monitor Other Directors' Actions and Respond When Wrong Conduct · Uninformed Decision Making Is a Breach of the Duty of Care

Partnership

· Formation o Description of Agreement is Not Conclusive of Whether Partnership Formed o Agreement Differing from Too Many Default Rules of Partnership is Likely Not Partnership o Share of Profits as Compensation for Services/Employment Does Not Constitute Partnership o Share of Profits for Lending to Risky Business May Not Constitute Partnership o Profit Sharing May Not Constitute Partnership Based on Totality of Circumstances o Partnership by Estoppel · Joint Ventures · Fiduciary Duties o Duty to Disclose Opportunities Connected to Business to Joint Venturer/Partner § Partner Does Not Have to Demonstrate Harm From Lack of Knowledge of Opportunity · JSX Split: Lack of Harm to Partnership as Valid Defense · Remedy: Opportunity Must be Shared § Exception: Partnership at Will can be Terminated Anytime Allowing Former Partner to Pursue Undisclosed Opportunity § Breach of Fiduciary Duty Can Happen Even Without Conscious Purpose to Defraud § No Breach When Partners Did Not Receive Personal Benefit from Action § Grabbing and Leaving · Expulsion o Expulsion Allowed When In Partnership Agreement Made by Sophisticated Parties at Arms Length · Partnership Property o Ownership Determined Based on Intentions of Parties at Time Property Acquired o Order of Distribution of Property · Partnership Management Rights o Partner Authority § Apparent Authority § Alternative Means of Authorization § 2 Partner Equal Management o Partnership Liability (Liable for All of Partner's Acts/omissions which were in ordinary course of business/with authority of the partnership) § Agreement Formed by Sophisticated Parties Authoritative in Partnership Disputes o Partnership Losses o RUPA: Losses Are Shared Equally Among Partners; Exception: Partner Contributing Only Services Does Not Have to Share in Capital Losses · Dissolution and Dissociation o Types of Dissolution o Partner Always has Power to End Partnership but Not Always the Right o Types of Natural Dissolution (Specified Term, Partnership at Will, Partnership to Accomplish Objective, Expulsion of Partner in Good Faith) o Dissolution by Court § Dissolved If All Confidence/Cooperation B/t Parties Destroyed/Party Misbehavior Materially Hinders Partnership Business § Not Dissolved When Partner Requesting Failed to Carry Out End of Partnership Agreement o Dissociation · Buyouts · Contracting Around Partnership Default Rules

Controlling Stockholders

· Generally, shareholders do not owe fiduciary duties to the corporation in which they own shares · Shareholders who are also officers and/or directors owe fiduciary duties in their capacity as officers or directors. · Controlling shareholders are subject to fiduciary duties to the corporation and minority shareholders. Ownership of 50% is sufficient for control but less can also be treated as controlling · DGCL §253 allows a 90% owner to buy out minority shareholders in a short-form merger transaction (way to handle difficult minority shareholders). · A director who has fiduciary duties to the corporation but approves a transaction which benefits them rather than the corporation is self-dealing.

Special Litigation Committees

· If demand is excused, it is still possible for the corporation to take back control of the litigation by setting up a special litigation committee that then determines that the litigation is not in the best interests of the corporation · Focus is on the process (whether independent and had a proper decision-making process). DL also looks at substance of committee's decision. Board has Right to Establish SLC To Make Decision about Litigation (Bennett)

Business Formations and Likelihood of Constituting Security

· LLC Interest as Security: Compare Glynn (no) and Leonard (yes) · Partnership: Under default rules, all partners are equally involved in management so not a passive security investment. · Corporation: Under default rules, shareholders do not manage, votes are in proportion to ownership interest, transferable, etc. so more likely a security investment (But See Forman)

LLCs cont.

· LLC rules differ across states and heavily controlled by contract · Allows limited liability for owners but more non-corporate characteristics so can enjoy pass through tax benefits, unlike corporation where taxed as corporation and as shareholder. · Default Rules o Can be managed by members or managers (DL and FL default is managed by members) o Members have management rights proportionate to financial interest in LLC (unlike partnership where equal rights regardless of interest) o Members cannot veil pierce other members · Uniform LLC Act governs

Partnership: Dissolution Process (UPA 38)

· Natural Dissolution: Partnership property sold and used to pay liabilities; surplus distributed to partners · Wrongful Dissolution: Parties not in wrong have claim for damages, and right to continue partnership business (e.g. Pav-Saver) during the agreed term of the partnership (can use partnership property to do so); wrongful partners get share of business but no goodwill (c.f. RUPA*) RUPA*: Dissociating partner receives higher of liquidation value or valued based on sale of entire business without the person. Anyone Including Partners Can Bid on Assets of Business at Dissolution - Prentiss v. Sheffel (1973) (Prentiss was excluded from management duties of partnership thus dissolving the partnership at will; the remaining partners bid on the partnership assets): Prentiss was not excluded for the wrongful purpose of obtaining partnership assets. Partners can bid on assets of the business at its dissolution. Custom Dissolution Agreement Will Not Apply If Not Clear It Displaces All Default Rules - Pav-Saver v. Vasso (1986) (Detailed partnership agreement formed to sell paving machines; Pav-saver contributed intellectual property; agreed partnership would be permanent unless both agreed to terminate; agreed on unlawful termination Pav-Saver would take back his IP and party in the right would receive damages): Although detailed dissolution agreement had been formed, Court found unclear and that it did not seem to displace UPA §38. Found agreement had established a permanent partnership and in the event of wrongful termination UPA §38 applied. Thus, partner was entitled to continue the business using the IP since it was partnership property. Court Found Custom Dissolution Agreement Did Apply b/c Clear that Overturned §38 - Congel v Malfitano (Agreement specified that partnership would dissolve if both agreed or they could no longer carry on business): Court found partners had clearly intended the methods in the agreement as the only ways to dissolve the partnership.

Employee vs. Independent Contractor

· Often in the context of franchisor/franchisee. Franchises are highly regulated by statutes and regs. Franchisor has to protect value of franchise to maximize franchise operations but this interest in standardization of identity/control also benefits franchisees. · Legal Risk: Franchise agreements that give too much control to the franchisor can create liability for the franchisor (especially if franchisor has control over aspects of business that give rise to liability)

Partnership Dissolution and Dissociation

· Old Rule: Traditionally partnerships are contingent: when new partners join a new partnership was formed; required contracts between old partners to be renewed under new partnership · New Rule (RUPA): Partnership is an entity with a continuing existence and partners can be dissociated (RUPA Art. 6) or there can be dissolution of the partnership (RUPA Art. 8) Types of Dissolution (UPA 31) (Old Rules) · Without violation of partnership agreement: o Termination of definite term/particular undertaking in agreement o Express will of any partner when no definite term or undertaking o Express will of all partners even before termination of term or undertaking o Expulsion of partner from business bona fide as allowed within the agreement o Bankruptcy · In violation of partnership agreement (e.g. Collins v. Lewis): o By express will of any partner at any time Partner Always has Power to End Partnership but Not Always the Legal Right (Will be a breach) - Collins v. Lewis (1955) (Partnership was formed to build and operate cafeteria where Collins would front the money to open the location and Lewis would repay him in profits; costs were greater than anticipated and Collins refused to keep contributing): Court found partnership could be dissolved if desired but it would be considered a wrongful dissolution.

Operating Agreements

· Operating agreements can limit duties an LLC or Corporation member might otherwise have · Examples: o Insider Trading as Missappropriator: May not be a breach of fiduciary duties to the source if the operating agreement excludes the duty of confidentiality. o Conflict of Interest: If corporations allow you to compete with their business (e.g. McConnell) · Is the Provision Manifestly Unreasonable? (FL Stat 605.0105) SAY: If Arcadia has a statute similar to FL Statute 605.0105, "an LLC operating agreement may not eliminate the duty of loyalty although it may alter or eliminate aspects of the duty of loyalty if this is not manifestly unreasonable."

LLP: Personal Liability

· Partners are liable for their own torts · Indemnity for torts committed in ordinary course of business where partnership has assets or there is an insurance policy · Bankruptcy could lead to creditors clawing back profit shares from partners (if can prove not actually profits but attempting to hide money)

Partnership Liability

· Partnership is liable for all of partner's acts/omissions which were in ordinary course of business/with authority of the partnership (FL 620.8305) · Partner is directly liable for torts he commits as well Partnership Indemnity (FL 620.8401) (Default Rule): Partnership shall reimburse a partner for payments made and indemnify a partner for liabilities incurred by the partner in the ordinary course of the business of the partnership or for the preservation of its business or property Note: Indemnity so only useful when partnership has assets or insurance, does not remove liability Partnership Agreement Formed by Sophisticated Parties Is Authoritative in Partnership Disputes (Partners are free to make own agreements but must lay in bed you made) - Day v. Sidley & Austin (1975) (Attorney Day claimed approval of merger was wrong b/c based on misrepresentation that no partner would be worse off and he thought he would be chairman; agreement stated firm policy decisions would be made by executive committee of which Day was not a part): Court found partnership was created by sophisticated parties and included no right of Day to be chairman so no breach of partnership duties. Case shows that any rights you want protected should be included in agreement. Note: Sidley Agreement Structure: All questions of firm policy decided by executive committee except for some matters which require approval of partners with majority of voting percentages. Deviated from default rules because majority of voting percentage used instead of majority of partners. Also no action required unanimity under this agreement.

Corporation Structure

· Perpetual Existence: by default, exist indefinitely unlike partnerships which are often only until term or undertaking · Transferability of Interest: Partnership interests are not transferable by default and all partners have to agree to admission of a new partner; corporations may have restrictions on transferring interest · Controlling documents: (1) LAW (2) Articles in Incorporation (Can allow directors to amend bylaws) (3) Bylaws (easier to amend) & (4) Board Resolutions

Promoters

· Promoters are fiduciaries of the corporations they establish; duty to disclose information about all assets they sell to the corporation. Selling worthless stock might also get promoter in trouble with securities regulation. · Law may treat transactions differently depending on how they were structured/performed (form over substance) · FL Stat 204: All persons purporting to act as or on behalf of a corporation, knowing that there was no incorporation under this chapter, are jointly and severally liable for all liabilities created while so acting" Promoter's Fiduciary Duties Can Arise Before Corporation Formed Access Cardio Systems (2006) (promoter applied for patents in his own name while setting up corporation to use patents): Promoter required by court to assign patent rights to corporation. Court held that activities carried out by promoter before incorporation to make business viable could also breach fiduciary duties. Here, promoter took advantage of a corporate opportunity.

Corporate Disclosures and Fairness

· Securities law is a frequent source of litigation · Application of the relevant law is very fact specific · Risk Management: Issues relating to securities law can arise even where those involved do not realize that it would be considered a security · Fraud Liability: Easier to establish then under common law: can be liable for intentional misstatement of fact as well as omissions. · Registration Requirements: Securities with some exceptions must be registered.

LLC Dissolution

· Unlike partnerships where there is unlimited liability for debts of the firm, LLCs do not have that so less serious to be locked into an LLC. · Buyout: LLC can provide for buyout of members that want to leave; makes sense to try to negotiate a buyout even if there is no explicit provision before dissociating. Can threaten dissociation as leverage. · Only members or managers have standing to ask for dissolution; ex-members or dissociated members cannot and could find their investment wrapped up in the LLC with no way to get it out Dissolution by Court (FL Stat 605.0702) · Not reasonably practicable to carry on business · Those in control are or are reasonably expected to act illegally or fraudulently · Assets are being misappropriated or wasted · Managers are deadlocked Rights of Dissociated Members (FL Stat 605.0603) · The person's right to participate as a member in the management and conduct of the company's activities and affairs terminates; · If the company is member-managed, the person's duties and obligations as a member end with regard to matters arising and events occurring after the person's dissociation; and · A person's dissociation as a member does not, of itself, discharge the person from a debt, obligation, or other liability to the company or the other members which the person incurred while a member. · No right to seek dissolution once dissociated Clawbacks From Members Allowed If Do Not Address Creditor Interests First When Dissolving LLC - New Horizons Supply Cooperative v Haack (1999) (Haack's LLC ordered a gas card from New Horizons and agreed LLC would pay for any gas he purchased; later told New Horizons LLC had dissolved but never filed or dissolution or notified creditors before): Creditor allowed to clawback money from Haack LLC member because creditors interests must be considered first at dissolution. The formalities for dissolution, which require payments to creditors before distribution to members, had been complied with.