Business Associations - Coyle
promoter magic words
"[Name] in the name and sole by the credit of [corporation]"
Apparent Authority can be broken down into 3 elements:
1) The "agent" acted in a way that would lead a reasonable person to conclude that he was an agent of the principal 2) Plaintiff actually believed that that the "agent" was an agent of the principal 3) Plaintiff relied to his detriment upon the care and skills of the allegedly negligent agent (generally a given if 1 and 2 can be met)
the Restatement defines agency as the fiduciary relationship that arises:
1) When one person (a Principal) 2) Manifests assent to another person (an agent) that the agent shall act on the principal's behalf and subject to the principles control, and 3) the agent manifests assent or otherwise consents so to act
a finding of a corporation de facto requires:
1) the state has a law authorizing corporations 2) there was a good faith effort to create the corporation legally 3) the purported corporation exercised corporate powers
Walkovsky v. Carlton Facts
Taxi company was organized in 10 different corporations, each owning only two cars. The cabs all operated as one company with regard to financing, supplies, repairs, employees, and garaging. One of the cabs hit struck someone who sued in tort
default rules
can be altered by the partnership agreement
Decisions in the ordinary course of business:
can be made by a majority of the partners
mandatory rules
cannot be altered by the partnership agreement
shareholders cannot
control directors by giving them instructions
the principal also owes limited fiduciary duties to the agent such as:
dealing with the agent fairly and in good faith; indemnify the agent when the agent acts on his (the principal's) behalf
the members and manager of an LLC all owe:
fiduciary duties to the LLC; some state statutes allow limiting or eliminating these fiduciary duties to the LLC
the partnership must reimburse the partners for:
for all regular costs and liabilities incurred by the partners in the ordinary course of business
A partner can always:
give notice he wants to leave and get the remaining partners to buy him out
convertible stock
is preferred stock that can be converted into common stock at the holder's option and is commonly used by venture capitalists
Agency relationships terminate only when:
it is longer reasonable for a third party to believe that the agent possesses apparent authority
Apparent Authority
it was reasonable for a third party to believe an agent acted with actual authority and the belief is traceable to the principal's manifestations
the agent owes the principal fiduciary duties of:
loyalty and care
Principals can be liable for their agents activities on their behalf through:
Actual or Inherent authority
Cranson v. Internal Business Machine Corp. Facts
After being advised by an attorney that a company had been properly incorporated, Cranson bought typewriters for his company. In fact, the articles were not properly filed for almost six months after they were signed. IBM sued for Cranson for an unpaid balance on the typewriters
RUPA §404(b) - Duty of Loyalty
Agent has to to be loyal to the principle and put the principles interests first at all times, cannot deal with adverse parties, and cannot compete with the agency
Horne v. Aune Facts
Couple bought a house together through a partnership agreement. The man moved out and the woman continued to pay for everything to keep the house up. The woman wanted the option to buy the property and sued to allow her to do so
Martin v. Peyton Holding
Court found that no partnership existed as a matter of law Demonstrates that careful drafting of an agreement can avoid a finding that a partnership exists, thus preventing individuals from being on the hook for massive liabilities
Limited Liability Partnerships
Exactly like limited partnerships with an additional key feature: when one partner acts he is personally liable for his actions and so is the partnership, but other partners are not personally liable for the "rogue" partner's actions
Organizing an LLC:
Fill out the filing with the Secretary of State in the state organization, and create an operating agreement spelling out arrangements between the members
O'Rorke v. Geary Facts
Geary was going to form a corporation to build a bridge, and was going to bind the corporation to the contract, not himself, so he signed the contract as "Geary, for a bridge company to be organized and incorporated." The company wasn't formed and O'Rorke sought payment on the contract
Peed v. Peed facts
Husband and wife owned a dairy together. Wife invested $3,000 into the business when she married husband. She and defendant agreed they would be partners in the dairy and registered the cows and land in both of their names. Wife was involved in the operation of the business and wrote checks off the business account (though husband did more day-to-day work)
Cranson v. Internal Business Machine Corp. Holding
IBM estopped from denying the existence of the corporation Cranson worked for because it dealt with him as if he were representing a corporation and everyone thought that a corporation existed
Piercing the corporate veil Instrumentality Test:
Is the corporation operated as a mere instrumentality or "alter ego" of a sole or dominant shareholder as a shield for his activities? Three elements: 1) "Complete domination, not of finances, but of policy and business practice in respect to the transaction attacked so that the corporate entity had at the time no separate mind, will, or existence of its own" 2) The control was used to commit a fraud, wrong, violation of statutory or other legal duty, on unjust act in contravention of the plaintiff's rights 3) The control proximately caused the injury to the plaintiff
Limited Partnerships
Limited partnerships are general partnerships with a few passive investors "along for the ride"
East Market Square, Inc. v. Tycorp Pizza IV, Inc. holding
Piercing the veil appropriate Bland exercised total control because he was the only player The control led to a breach of contract (legal wrong) which was the proximate cause of plaintiff's injury
Iceland Telecom, Ltd. v. Information Systems & Networks Corp. holding
Piercing the veil not appropriate because Maryland law makes it basically impossible (though case led to a revision of Maryland law)
Butler v. McDonald's Corp. Facts
Plaintiff was injured by shattering door at a McDonald's store was not directly operated by the corporation. The franchise agreement between the operator and McDonald's required the operator to adhere to certain standards
winding up a partnership
Shutting down the partnership and fully liquidating and distributing the remaining assets
National Biscuit Company, Inc. v. Stroud Facts
Stroud and Freeman were partners in a grocery business. NABISCO sold bread to the partnership, but the partnership did not pay for what it had purchased. There was nothing to suggest that the Freeman's authority as a general partner was limited, though Stroud did tell NABISCO at one point that he would not be responsible for any additional bread sold to the business. The purchase and sale of bread was part of the partnership's ordinary course of business
Summers v. Dooley Facts
Summers approached Dooley about hiring a new employee. Dooley refused his request, but Summers hired the employee anyway and paid him out of his own pocket. Dooley objected again after learning of this and refused to pay the new employee out of the partnership funds
Gateway Potato Sales v. G.B. Investment Co. Facts
Sunworth (general partner) entered into a limited partnership with G.B. Investment (limited partner) to farm potatoes in Arizona. Sunworth bought potato seed on credit, falsely giving the impression that it was in a general partnership with the respected/solvent G.B. The seed seller wanted to get money out of G.B.
O'Rorke v. Geary Holding
The contractual language was not sufficient to absolve Geary of liability. Since he didn't use any of the other "escape hatches" to liability he was responsible for paying out the contract
Horne v. Aune Holding
The majority approach is to read "liquidation of the partnership assets" in RUPA § 807 as giving a departing partner the right to receive the fair of the value of his property interest in cash upon the winding up and dissolution of the partnership The minority approach strictly construes the language and requires a forced sale
Red River Wings Facts
The majority limited partners in an operation owning a number of Hooters franchises became dissatisfied with the general partner, ousted him, and effectively controlled the business as general partner. They changed management companies several times and eventually sued the old general partner, all over the objection of the minority limited partners
Summers v. Dooley Holding
The majority requirement for settling disputes about the ordinary course of business in partnership means in effect that there must be unanimity for making these decisions in two-person partnerships
Piercing the corporate veil
allows a court to disregard the corporate entity and to hold shareholders personally liable for corporate debts when the court concludes that the corporate form is being misused
right of redemption
an investor has the right to force the company to buy back his shares at a future date at a fixed price
written agreements affirming or disclaiming the agency relationship:
are not dispositive of their existence
an agent's Duty of Care:
do a reasonably good job in carrying out the duties that the principal assigns
LP Fiduciary Duties
general partners owe the duties of loyalty, care, and good faith and fair dealing to the limited partners. The duties of general partners are generally more limited, (but see red river wings)
Giving someone a corporate title of significance (CFO, VP of sales) may:
give them the authority to act, though allowing them to use company letterhead or email is not enough on its own
IPO
going public raises a good deal of capital and also opens other financial doors, but comes with certain regulatory requirements
preferred stock
is created when companies set up different classes of stock
RUPA §404(c) - Duty of Care
limited to refraining from engaging in grossly negligent or reckless conduct, intentional misconduct, or a knowing violation of the law (has to do as good a job as is expected under the circumstances)
general partnerships are
not well suited to the modern environment, they can, and often are, formed inadvertently
Piercing the corporate veil:Weighing the various factors: look for total control and injustice to the plaintiff; if so then appropriate to pierce the veil
o Inadequate capitalization o Non-compliance with corporate formalities o Excessive fragmentation o Strong control by one or a few shareholders o Injury to plaintiff (tort should theoretically be a better a case for piercing, though contract often is in practice)
an agency argument for promoter liability does not work because:
one cannot be an agent for a principal that does not yet exist
though it happens infrequently, a court in every state except for Delaware may exercise its equitable authority to:
pierce the veil and hold individual LLC member liable when justice so requires
Private equity funds after making an initial investment:
play an active role in the company's management to add value to it, the selling the company for a profit
Partnerships can carry on as a new partnership by:
remaining partners buying out the departing partner
Novation
substituting the corporate name for the promoters name
the buyout price of a partner is determined by:
taking the value (both in liquidation of assets or as a going concern), subtracting the liabilities, and multiplying that number by the percentage ownership the partner has
Partners owe each other three fiduciary duties:
the Duty of care, duty of good faith and fair dealing, and duty of loyalty
the two main sources for law for the course are
the Model Business Corporation Act (MBCA) and the law of Delaware
when the principle is unidentified and the third party does not know that the agent is action for a principal:
the agent is liable
when the principle is unidentified and the third party knows that the agent is acting for a principle but doesn't know who the principal is:
the agent is liable unless the agent and the third party agree otherwise
When the principal is disclosed, and the third party knows who the principal is:
the agent is not liable unless the agent and the third party agree otherwise
call right
the company has the right to buy back the stock at a future date at a fixed rate
Whether the agent is personally liable for the contracts he signs on behalf of the principle depends on:
the identity of the principal in the contract
the veil is pierced only with respect to:
the individual who acted inequitably
LP newest rule:
the limited partner is never liable even if participates in the management of the partnership
common stock
the most basic form of stock, comes with right to vote (voting rights and receive dividends (economic rights), and is last in line behind lenders and preferred stockholders (in that order) in the case of company liquidation
by default, when one partner leaves a partnership:
the partnership is dissolved
Corporation by estoppel occurs when:
the plaintiff goes after an individual for the debts of the "corporation" and then: 1) the plaintiff is estopped from going after the defendant 2) the defendant must have acted in good faith, thinking that a corporation existed
agents remain liable for:
their own actions, however the principal usually has more money so thats who gets sued
though an agreement is required to form an agency relationship:
there doesn't have to be a contract or a formal recognition that such a relationship exists
it is important to follow the steps of incorporation validly because if they are not:
there is no corporation and the incorporator(s) would be personally liable for any of the non existent entity's liabilities
promoters will generally be held liable for Ks the enter into on behalf of the yet to be formed corporation unless:
they use the magic words, argue the offer has not yet been accepted, receive a novation, seek indemnification from the company, get the corp to adopt the K
factors a court could consider in deciding whether to pierce the veil include:
total control of the LLC by one member, fraud, following corporate formalities, commingling funds between a member and the business, inadequate capitalization
Decisions outside the ordinary course of business require:
unanimous consent of all the partners
the members of an LLC get:
voting rights, economic rights (a share of the profits), and a pro rata share of the LLC profits when the business is wound down
Defective Incorporation
where the parties honestly believe that a corporation existed at the time of K, but such a corporation does not exist for whatever reason, courts will equitably infer the existence of a corporation through a "corporation de facto" or "corporation by estoppel"
National Biscuit Company, Inc. v. Stroud Holding
· If one partner goes to a third party to contract for the partnership, the other partner cannot prevent it by writing to that third party and telling him not to contract · What either partner does with a third person is binding on the partnership · In two-person partnerships, one cannot control the other's actions in the ordinary course of business because he does not have more than a half-stake
Gateway Potato Sales v. G.B. Investment Co. Holding
Applied the "old rule" and held that it was jury question as to whether G.B. could be held liable
Gay Jenson Farms Co. v. Cargill, Inc. Facts
Cargill loaned Warren more than $3.6 million during the 1970s. Warren and Cargill had a separate agency agreement for other purposes. As Warren's debt increased, Cargill became involved in the daily management of Warren's business and had to sign off purchases of any consequence
Martin v. Peyton facts
Investment in a banking partnership looked a lot like a partnership, but specifically rejected that idea Investors received a share of the profits (a percentage), installed their friend as the director of the business, had veto power over all major decisions, and had option to formally enter the partnership/could exercise control over who became a member of it; loan funds were not co-mingled with other funds
Red River Wings Holding
Limited partners who take an active role in the business incur the same fiduciary duties as general partners When not in control, limited partners have limited fiduciary duties
Limited Liability Company
Has the limited liability advantages of a corporation, but like a partnership is taxed only once (whereas corporations are taxed twice—when income is earned and when dividends are paid out)
Corporate Promoter
Person acting on behalf of a yet to be formed corporation
Iceland Telecom, Ltd. v. Information Systems & Networks Corp. facts
Same man controlled two very similar entities, made contracts with one in a way that confused the other party as to which entity they were dealing with. Then dissolved one of the entities and other party sought enforcement of contract
Actual Authority
agent acting at the express or implied direction of the principle, usually under some delegation of authority
Ratification
a principal can ratify an agents unauthorized actions by affirming the conduct the principals assumes liability for the agents behavior
respondant superior
a principal may be vicariously liable for the actions (within scope of duty) of employees (who may or may not be agents)
an agent's Duty of Loyalty:
1) Avoid conflicts of interest with the principal 2) Avoid competition with the principal outright and from aiding the principal's competitors 3) Avoid stealing from the principle (defined broadly to include the stealing of opportunities from the principle)
Piercing the corporate veil Instrumentality Test Element 1 complete domination factors:
1) Inadequate capitalization 2) Non-compliance with corporate formalities 3) Complete domination or control of the corporation so it has no independent identity 4) Excessive fragmentation of a single enterprise into separate corporations (goes to enterprise liability)
there are three ways a company can acquire capital:
1) Issuing stock in the company in exchange for capital (selling equity) 2) Borrowing money from a lender (selling debt) 3) Reinvesting the profits the company makes in itself (retained earnings)
The process of forming a corporation:
1) Step one: check to make sure that the name has not already been taken 2) Step two: maintain an office in the state of incorporation (sometimes a service is used) 3) Step three: prepare and file the corporate charter/articles of incorporation with the secretary of state in the state of incorporation; generally, must decide on: o The number of shares to be issued o In Delaware, the purpose of the business (but can be listed as "any lawful activity" 4) Step four: hold an organizational meeting where the by-laws are adopted, the shares are officially issued, etc.
there are four factual scenarios that generally give rise to a corporation de facto or corporation by estoppel defense:
1) The incorporator honestly and reasonably believes that the articles have been filed by attorney when they haven't been 2) The articles of incorporation are mailed to the secretary of state but are delayed or returned by the secretary because of some error 3) A third party urges immediate execution of a contract in the corporate name in full knowledge that the company has not yet filed its charter with the secretary 4) A passive investor provides funds with the instruction not to engage in business until the articles are filed, but business is commenced anyway before incorporation
the formation of a partnership involves four elements:
1) two or more people 2) come together as co owners 3) to operate a business 4) for a profit
East Market Square, Inc. v. Tycorp Pizza IV, Inc. facts
Bland organized a network of corporations to run Pizza Huts in North Carolina and Virginia. One of his entities leased space in shopping plaza, failed to make the needed repairs on the building, and ultimately defaulted on the lease
Peed v. Peed Holding
Though a jury question, there was enough here for a jury to find that a partnership existed That one partner owns certain property in the business or provides the capital, while the other performs certain work, does not mean they are no co-owners of the business
Walkovsky v. Carlton Holding
Though the case was ultimately a close one, the court ruled that piercing the veil was not appropriate Coyle says because of excessive fragmentation, better case for enterprise liability
Gay Jenson Farms Co. v. Cargill, Inc. Holding
Though there was no specific agency agreement in this context, an agency relationship existed by implication (court looked at all the circumstances) There does not need to be an explicit agreement to form an agency relationship
Butler v. McDonald's Corp. Holding
To show reasonable belief of agency, a court could consider all means and methods a franchisor requires to maintain an image of uniformity among its franchisees, including national advertising, common signs and uniforms, common menus, common appearance, and common standards Court held enough for reasonable belief of agency (though a jury question)
Term Partnerships
Very rarely a partnership will have an expiration date on it (term partnership), meaning that a partner may not dissociate until the term is up or else be subject to suit for wrongful dissociation (Page v. Page)