Business Associations

Factors to determine if Company is giving excessive charity.

(1) Whether the gift was anonymous? (this would reduce the value to the firm if the goal of the gift was marketing or good public relations) (2) Whether the amount donated was significant when compared to the corporation's earnings? (3) Whether the gift was made to a "pet" charity? (A charity which does not have widespread appeal but is merely an interest of an officer or director of the corporation is more suspect in that it is less likely such a gift is truly for the benefit of the corporation.)

Rule for Failure to Act or Montior

(1) absent a suspicion of wrongdoing, there is no duty on the board to install and operate a corporate system to find wrongdoing that the board does not suspect or believe exists, (2) The Board must attempt in good faith to ensure that an adequate reporting system is in place so that the Board can obtain necessary information to make informed decisions. (Example: compliance programs, manuals, employee training, audits, provisions for self-reporting.)

Liability Exposure of Limited Liability Partnerships

306(c) provides: "An obligation of a partnership is a limited liability partnership, whether arising in contract, tort, or otherwise, is solely the obligation of the partnership. A partner is not personally liability, directly or indirectly, by way of contribution or otherwise, for such an obligation solely by reason of being or so acting as a partner."

Formation of Limited Liability Partnerships

A LLP is simply a partnership that has elected LLP status under the applicable provisions its partnership statute. 1001 requires the filing of "statement of qualification." 1002 requires business name to end in LLP.

Notes (including Promissory Notes)

A Note is evidence of a secured or unsecured loan. It involves a promise to repay money on specific terms. Usually banks will use a promissory note to reflect a loan obligation. Notes are usually not traded as bonds or debentures might be.

Sole Proprietorship

A business owned by a single person who has not filed the paperwork to operate the business in some other legal form.

Corporation

A business that has filed "articles of incorporation" with a state's secretary of state office. Key features include limited liability for all its owners and management authority vested in a board of directors elected by the shareholders.

Limited Liability Company

A business that has filed articles of organization with a state's secretary of state office. Provides its owners with full liability shield and pass-through taxation.

Credit Rating

A business that is borrowing money by issuing publicly traded debt such as bonds will have the debt rated by a credit rating agency. There are 3 major types of credit rating agencies in the U.S.: Standard & Poor's (S&P), Moddy;s Investment Services and Fitch Ratings. Credit rankings are forward looking option about credit risk. Each of the big 3 use similar rating scale to communicate the agency's opinion of the relative level of credit risk concerning a debt instrument. Here is S&P sample: Can go from AAA-Extremely strong capacity to meet financial commitments. Highest rating. D-payment default on financial commintments. Note ratings from AA to CCC may be modified by the addition of a plus (+) or minus (-) sign to show relative standing within the major credit categories. A credit rating agency monitors each company for whom has provided a rating and adjusts the rating as its opinion on a company's credit risk changes.

Opinion Letter

A letter from the attorney or law firm of one party to the transaction that addresses various legal issues with respect to the transaction.

Liquidation Preference

A right to be paid a certain amount upon liquidation of the corporation, before amounts are paid to other classes of stock. Another way to express this idea is to say that preferred stock will often have a liquidation that is "senior" to common stock.

Tag along provisions

A tag along (or "co-sale") provision provides that before a shareholder may sell his or her shares in the corporation, that shareholder must allow other shareholders to participate proportionately in the sale. This type of protection assures that one shareholder will not be able to "cash out" and leave the other shareholders in the company unless that is what they want. It is also a device which might prevent a controlling shareholder from selling his or her shares for a "control premium" without sharing that premium with the other shareholders.

Affirmative defenses to Duty of Care Violations

A violation may not result in liability if the Board can show that the transaction was beneficial to the corporation, that it was "fair" or that there were no damages. In order to use the BJR, there is a minimum level of care that must be met to show that an informed judgment was made. BUT, if the transaction is judged to have been fair even though good business judgment was not exercised, then there is no liability.

Investing in a client

Accepting stock or stock options in lieu of legal fees is acceptable by the ethical rules.

Sub-K

Allocation can be based on something other than the percentage of ownership.

Voting Rights

Sometimes preferred shareholders will have the right to vote along with common stock shareholders as though the preferred stock were common stock. In other preferred stock structures, the holders of preferred shares will often have different, additional is superior voting rights to common stock. For example, a class of preferred stock may be entitled to elect a certain number of directors to the Board or exercise a veto right over certain significant corporate actions, such as a sale of the corporation.

Put Option

Sometimes the holder of preferred stock may also possess the right to require the corporation to repurchase the holder's preferred stock for a certain price, meaning that the shareholder may "put" the stock to the corporation, forcing the corporation to purchase the stock at a set price. These options usually arise within or following the passage of some agreed upon period of time or the occurrence of some event.

Venture Capitalists

Specialize in investigating in emerging growth and other development-stage companies with great potential but high risk. Venture Capitalists only invest in business organized as corporations and taxed under Sub-C for the following reasons, among others: prefer preferred stock that only a C corp can issue, want to avoid extra taxing provided by pass through taxation, may get favorable tax treatment.

Choice of Form Considerations: Corporation

Sub-C Sub-S (if eligible)

Choice of Form Considerations: Limited Partnership

Sub-K Sub-S (if eligible)

The BJR Failure to Act or Montior

The BJR does not apply where the entire board is accused of failing to act. The BJR only protects "judgments." It does not apply when the board has not taken an action (unless the Board has made an affirmative informed decision not to act).

Sub-S & Sub-K

Both provide for pass-through taxation, meaning that the entity calculates its income/loss for the tax year and then allocates it to each owner.

Practicing the Law of Other States

Corporate lawyers routinely provide legal advice to clients concerning the laws of states in which they are not licensed to practice. All states prohibit a lawyer from practicing la in the state unless he or she is licensed in the state. MRPC 5.1. MRCP 5.5(c)(4) Can provide temporary legal services in another state when you are licensed to practice in a different state. California has not adopted this rule.

Pharmaceutical Sales and Consulting Corp. v. J.W.S. Delavau Co.

Corporation by estoppel may be summarized in general as one who contracts and deals with an entity as a corporation thereby admits that the entity is a corporation and is estopped to deny its incorporation in an action arising out of the contract or court dealing.

Obligation of Good Faith and Fair Dealing for Limited Liability Companies

DLLCA 18-1101(c) does not allow an LLC agreement to "eliminate the implied contractual covenant of good faith and fair dealing."

Debt of Corporation

Debt involves the lending of money to the corporation with the usual requirement that the money be repaid, with interest, according to the terms of the loan. There are three basic instruments which are used for loans: notes, bonds, debentures. All may be referred to as securities.

Corporate Debt

Debt is borrowed money that the business has to pay back with interests. The terms of debts are set through negotiations which can include the following.

Corporate Finance: Cash Flow Statements

Depicts a business's cash inflows and outflows over a specific period of time. It reflects all cash that flowed into or out of the business during the specified timeframe.

Corporate Finance: Income Statement

Depicts a business's financial performance over a specific period of time such as a quarter or a year. Gives you a better sense of the way you make money. Should give you a picture of how things progressed over time - money coming in (revenue); money going out (expenses).

Choice of Form Considerations: Single-Member LLC

Disregard Sub-C Sub-S (if eligible)

Conflict of Interest

Exists where the director knows that, at the time he is asked to take action with regard to a potential transaction, he or a person related to him (1) is a party to the transaction or (2) has a beneficial financial interest in the transaction; and then exercises his influence to the detriment of the corporation.

Governing Law of Limited Partnerships

Governed by the limited partnership statute of the state in which it filed its certificate of limited partnership.

Corporate Finance: Balance Sheet

Has two columns, assets in one column and liabilities in the other. Tells you about your current situation. It's a moment in time.

The BJR and Protection by Consulting an Expert

If the Board hired or consulted an expert, regarding certain matters, the Board's decisions and actions with regard to those matters will later be protected under the BJR as "informed" decisions (provided, of course, that the decision does not violate another requirement of the BJR).

Equity Investment

In general, shareholders have obtained their shares by making an equity investment in the corporation. An equity investment typically has certain features which distinguish it from debt. Equity investments: May be divided among different classes of stock; Receive dividends, when, as and if, declared (Dividends represent payments of money or property (typically representing some portion of the corporations profits) by the corporation to its shareholders; May have specific rights, privileges or preferences, relating to specific "class" of equity in the corporation; Are entitled to vote on shareholder matters; Do not usually have a right to repayment of the amount that was invested or to receive a return on their investment; Usually prosper as the firm prospers and flounder as the firm flounders; and Have a residual claim on the assets of the firm, once outside creditors' claims have been satisfied. (Note that there might be different rights or priorities to the residual among different classes of stock within the same firm.)

Articles of Incorporation/Charter

Included in the articles of incorporation: Distinguishable name with proper distinction making it clear that it is a limited corporation Authorized shares - must indicate the number of shares you are authorized to issue. Just because they are authorized doesn't mean you've actually issued them yet. Also, include the par value (minimum amount you could charge) of the shares. The general rule is that you only include in the charter required provisions and desired optional provisions that the statute requires to be set forth in the charter. Everything else you put in the bylaws because the charter is public and much harder to change.

Analysis for Duty of Loyalty

Is there a conflict of interest? (note that conflict can be direct or indirect) If there is no conflict of interest, then there is no duty of loyalty issue. If there is a conflict of interest, then one must determine if the transaction has been cleansed. If the transaction has been cleansed, then the transaction is protected and may proceed. If the transaction has not been cleansed then the transaction is voidable by the corporation and the directors who breached their duty of loyalty may be subject to damages.

Inside Liability

Is where insiders are personally liable for the business' obligation. LLC and Corporations provide full liability shield. LLP has different rules in different states, look to state statutes. LP problem is that you have full insider liability protection for the limited partner. General partners do not. Sole proprietors have no insider liability protection.

Partnership Agreement

It is through this agreement that partners alter or opt out of default partnership statutory rules do not meet the partners' needs or preferences.

Debentures

Loans which, like bonds, are held by creditors of the corporation. However, debentures are typically unsecured obligations, rather than secured bonds. This difference means that debenture holders are usually unsecured creditors, rather than secured creditors.

Residual Loss

Loss resulting from the divergence notwithstanding monitoring and bonding.

Organization of the Corporation

MBCA 8.21 - directors sign a written consent covering adopting bylaws, appointing officers, and approving stock issuances. First three things the board must do: Adopt the Bylaws Elect the Officers Issue the Stock Set date for first shareholder meeting ALWAYS keep minutes in board meetings. And make sure to pass the resolution (we voted on it and passed by a ___ to ___ vote.)

Incorporation Mechanics

Must file articles of incorporation with the secretary of the state in which the client wants the corporation incorporated. This document is usually called a charter.

Authorized Shares of Corporation

Must list this in charter. It's the max number of authorized shares the corporation has authority to issue.

Preferred Stock

Often has different features from or "preferential" to common stock.

Pepsi-Cola Bottling Co. of Salisbury, MD v. Handy

Piercing the Corporate Veil: Pepsi brought property from Handy that Handy had purchased with intentions of building on it. However, the land was filled with wetlands. Handy formed an LLC after negotiations with Pepsi. Pepsi sued for their money back because Handy never disclosed about the test or that the property had protected wetlands.

Right of Participation

Preferred stock holders will often have the right to participate is subsequent financing or investments in the corporation. These rights are sometimes called "preemptive rights" since the holder of these rights may "preempt" others who want to participate in the investments.

Redemption Rights

Preferred stock is sometimes subject to repurchase by the corporation for a certain price, meaning that the corporation may force the holder of the preferred stock to sell that stock to the corporation at a set price.

Convertability

Preferred stock may also be "convertible" into common stock or even bonds. Conversion is usually at the option of the shareholder, but may also be required upon the occurrence of certain specified events as an initial public offering.

Dividend Rights

Preferred stock will often have the right to receive a specific dividend before any dividend is paid to holders of common stock. The rights associated with a particular class of stock may sometimes provide that the payment of this dividend is mandatory. Other classes of stock may provide that payment is only required, "when, as and if declared."

When the Business Judgment Rule Does NOT Apply

Protections of the BJR will apply unless a plaintiff can show any of the following conditions: Fraud; Illegality or "wrongful" conduct; Conflict of Interest (duty of loyalty analysis applies); Bad Faith (duty of loyalty analysis applies (at least in DE)). Bad faith can include several different categories such as: subjective bad faith (conduct motivated by an actual intent to do harm), intentional dereliction of duty (a conscious disregard for one's responsibilities (Disney), or acts with a purpose other than that of advancing the best interests of the corporation (Stone); Egregious /Irrational Decision (a decision with no business justification); Waste (a transaction that lacks any business rationale to support it or one "that is so one sided that no business person of ordinary, sound judgment could conclude that the corporation has received adequate consideration")(Zapata); Uniformed decision (including lack of investigation) or; No decision (for example, no action was taken by the Board, but the plaintiff alleges that some action should have been taken.).

Business Judgment Rule

Provides protection for directors from lawsuits which might seek to challenge the business judgment of those directors. Provides a shield of liability, which limits a director's potential liability to acts of gross negligence. The directors are allowed to be wrong or to make mistakes and still have the protection. The directors do not have to pick the best approach to receive protection. They need to act in good faith, to consider their decision and to have a business reason for their action. The BJR does not protect directors, it protects the decisions.

Statement of Authority

RUPA 303 authorizes a partnership to file an optional statement of partnership authority with the secretary of state specifying the actual authority of its partners. Can involve a specific transaction with a specific third party.

Monitoring Costs

Refer to expenditures incurred by a principal to minimize divergent behavior by an agent.

Duty of Care

Requires that each member of the board of directors, when discharging the duties of a director, shall act: (1) in good faith and (2) in a manner the director reasonably believes to be in the best interests of the corporation.

Duty of Loyalty

Requires that fiduciaries (such as officers and directors) put the interests of the corporation ahead of their own interests. Implicated when a director is involved in a situation where there is a conflict of interest, meaning that there is some aspect of the situation that creates a personal benefit for the fiduciary.

Caremark Claims

Situations in which a Board is accused of failing to act, often involve instances of corporate wrongdoing which the Board is accused of failing to detect, prevent, or stop.

Who is the client

The client issue comes up when a new business has multiple founders who jointly meet with the same lawyer to discuss choice of form considerations and legal form of business.

Transfer of LLC Interests

The default rule under the DLLCA is that an LLC interest is freely transferable but, per DLLCA 18-702(a) "the assignee of a member's LLC interest shall have no right to participate in the management of the business and affairs of a LLC agreement, or unless otherwise provided in the LLC agreement, upon the affirmative vote or written consent of all of the members of the LLC."

Consequences of Qualifying to Do Business in Other States

The foreign corporation will have to pay the annual fee/franchise tax charged by the state. The foreign corporation will be subject to service of process in the state. The foreign corporation will have to file an annual report with the state.

Right of first refusal

The right of first refusal is a restriction on the transferability of a corporation's stock. It requires that, before a shareholder sells his or her shares in the corporation, that shareholder must first offer those shares either to the company, the other shareholders or both. This type of protection is relatively common in many closely held companies.

Credit Risk

There are firms that provide credit scores for business that a lender can use in assessing a business credit risk. Example: Dun and Bradstreet maintains PAYDEX. A paydex score is D&B's unique dollar weighted numerical indicator of how a firm paid its bills over the past year, based on trade experience reported by various lenders. A business that is borrowing money by issuing publicly traded debt such as bonds will have the debt rated by a credit rating agency.

Drag Along Rights

These rights provide that if a majority (or sometimes a suprer majority) of the shareholders vote for a sale of the corporation, then the other shareholders will agree to sell as well. These provisions eliminate "dissenters" and "hold-outs" and are used to facilitate an easier sale process for the corporation.

Dissolution of Partnerships

Triggered by various events requiring the company to be wound up. 801 governs. Dissolution may also be court ordered. The court ordered dissolution rules are mandatory rules and thus cannot be altered by a partnership agreement. 807 governs winding up process.

Dissolution of Partnership for Definite Term/Undertaking

Triggered when the definite term is over, or at the express will of partners to dissolute.

Dissolution of Partnership at Will

Triggered whenever a partner notifies the partnership of his or her express will to withdraw as a partner.

Management of Limited Partnerships

Under the default rule, it is managed by its general partner(s) and the limited partners have no rights to participate in the control of the business. 406(a).

Corporation by Estoppel

Under this doctrine, if a third party treats an organization as though it were a corporation, then that third party may be estopped from denying the organization's corporate existence, if the denial would result in unjust harm to the principals. In order for this doctrine to apply: (1) the parties need to have consistently treated the organization as though it were a corporation; and (2) if one party were allowed to deny the existence of the corporation, that party would obtain an unfair advantage or benefit.

Bonds

Usually involve a secured loan. The security for the loan may be real or personal property belonging to the corporation. The "holders" of a bond are usually secured creditors. Bonds may be registered on the corporation's books or bearer bonds. In case of registered bonds the corporation's obligations are owed to the owner who is registered in the corporation's books and records. In the case of bearer bonds, the corporation's obligations are owed to the holder (or "bearer") of the bonds.

LLC Agency Default Rule

Varies by state, but majority of state follow partnership rules: Partners have (1) actual authority, and (2) apparent authority for ordinary course transactions.

Defective Incorporation

When a dispute arises because of the foul-up and the opposing side says since there wasn't a corporation and the individual who signed is personally liable there can be a remedy under two doctrines: (1) de facto corporation, (2) corporation by estoppel.

Ultra Vires

Where a corporation had a more limited purpose, actions taken "outside of the corporate purpose" were considered void or voidable. Excessive charity is an example that professors use on example.

Anti dilution Protections

While these protections can take many forms, they generally protect the preferred shareholder from the company issuing stock at a price below the price at which the preferred shareholder possessing the protection purchased his or her shares in the company. These rights usually provide that the preferred shareholder will be protected from "dilution" by the issuance of a number of shares sufficient to make the preferred shareholder's price per share equal to the lower priced issuance that, but for the protection, would have been issued at a lower price. (Note that if the preferred stock is convertible, often anti dilution protection will merely increase the number of shares of common stock into which the preferred stock may convert, to accomplish the same result.)

Angel Investors

Wealthy individuals who directly invest in emerging growth companies (as opposed to investing through a venture capitalist fund), typically prior to a venture capitalist investment.

Self Dealing

Whenever you are on both sides of a business deal (the seller and buyer) you have a potential conflict of interest. Make sure that you have full disclosure: The test is fairness (the fairness test has to be applied). Entire fairness depends on 2 things: Fair dealing and fair price.

De Facto Corporation

Where a corporation was not properly formed, but the would-be shareholders believe that, and act as though, the corporation were properly formed. Sometimes given corporate protection under this equitable doctrine. Three requirements to assert this protection: (1) A good faith, substantial effort must have been made to comply with the state's incorporation statute; (2) the business must have had a legal right to incorporate; and (3) the parties must have had a good faith belief that, and acted as though, they had, in fact, formed a corporation.

Formation of Limited Partnerships

You form by filing a "certificate of limited partnership" with the secretary of state of the state in which the client wants the limited partnership organized. Name must end in LP.

Formation of Limited Liability Companies

You form by filing certificate of formation with the secretary of state in the state in which the client wants the LLC organized. Under Delaware statute, the list includes: name of the LLC, address of the LLC's office in Delaware, and the name and address of the LLC's agent in Delaware for service of process. Name must contain LLC or some variation thereof.

Jurisdiction of Incorporation

If a business operates in a single state, it usually makes sense for it to incorporate in that state unless the business will need venture capitalist funding or plans to go public. Delaware is appealing to businesses seeking venture capitalist funding, but requires additional costs for having to maintain a registered office and agent in Delaware.

Implied Adoption of Promoter Contracts

May occur when a corporation receives the benefits of the contract or accepts goods or services under the contract with knowledge of the contract.

Management of Limited Liability Companies

Member managed: means all members are involved in managing. Member management is similar to partnership or decentralized management - the statute vests the members with the authority to manage the LLC. Manager managed: means that some members are selected to manage the company. Manager management is similar to corporate or centralized management - the statute vests management authority in a board of managers elected by LLC members. Default Rule under LLC is what percentage of interest each one has will determine how much power they have to vote.

Operating Agreement of Limited Liability Companies

Needs to be in writing. The agreement usually addresses management structure, allocation of profits and losses among the members, member taxation, transfer of membership interests, and dissolution.

Reverse Piercing

Occurs when a claim against an individual shareholder is found to be enforceable directly against the corporation in which the individual is a shareholder. The test is the same. One difference is that it does not enable a creditor to collect on a claim which, otherwise would necessarily be unpaid by the party reached by the piercing. However, it is possible, even likely, that the creditor could foreclose on the individual shareholder's stock and become a shareholder of the corporation.

Bylaws

Opt in or out of default corporation law.

Partnership Agency Default Rule

Partners have (1) actual authority, and (2) apparent authority for ordinary course transactions.

Fiduciary Duties of Partnerships

Partners owe each other and the partnership fiduciary duties. RUPA 404 says they owe each other the duty of loyalty and the duty of care.

Allocation of Profits and Losses of Limited Liability Companies

Per DLLCA 18-503 allocation of LLC profits and losses is "on the basis of the agreed value (as stated in the records of the LLC) of the contributions made by each member to the extent they have been received by the LLC and have not been returned." Typically, an LLC agreement will tie ownership interests in an LLC to contributions. So, if you contribute to an LLC equal to 60 percent of total contributions received by the LLC, you will get 60% ownership.

Factors to determine 1st Prong of Piercing the Corporate Veil

((1) was there such unity of interest and ownership that the separate personalities of the corporation and its shareholders, officers or directors are indistinct or non-existent) Undercapitalization - not having enough money to pay bills means you have to reach into your own pocket to pay company bills. Failure to observe corporate formalities - corporation has the most; sole proprietorship has the least. Absence of corporate records - books, payment records, cash-flow statement, balance sheet, etc. Payment by the corporation of individual obligations - don't co-mingle funds.

Factors to determine 2nd prong of Piercing the Corporate Veil

((2) would adherence to the fiction of separate corporate existence sanction fraud, promise injustice or inequitable consequences or lead to an evasion or legal obligations) Fraudulent misrepresentation by corporation directors - example, lying about keeping books separate. Use of the corporation to promote fraud, injustice, or illegalities.

Limited Liability Limited Partnership

Provides full liability shield for partners. Must include LLLP at the end of name.

Obligations of Good Faith and Fair Dealing in Partnerships

RUPA 404(d) requires obligation of good faith and fair dealing. "Good faith" suggest a subjective element and "fair dealing" implies an objective element.

Limited Liability Partnership (LLP)

A for-profit business with two or more owners that has filed a statement of qualification with state's secretary of state office. Partners are not personally liable for the obligations of the partnership.

Bonding costs

Refer to expenditures incurred by an agent to bond itself to the principal that the agent will limit its divergent behavior.

Formation of Partnership

A partnership is formed when (1) two or more people associate to carry on as co-owners in a business for profit, and (2) they do not file the paperwork necessary to operate the business in some other form.

Limited Partnership

A partnership with one or more general partners and one or more limited partners that has filed a "certificate of partnership" with a state's secretary of state office. General partners have management rights, but no liability shield. Limited partners have no management rights, but do have a liability shield.

Promoter

A person who engages in pre-incorporation activities.

Corporate Agency Default Rule

Shareholders do not have authority. Individual directors do not have authority. Officer authority is specified in bylaws or board resolutions.

Name selection of Corporation

States typically require that the name be distinguishable from all existing names on record with the secretary of state. MBCA 4.01(a) provides that "A corporation name...must contain the word 'corporation,' 'incorporated,' 'company,' or 'limited' or the abbreviations: corp., inc., co., ltd..."

Choice of Form Considerations: Multi-owner unincorporated entity other than a limited partnership (general partnership, LLP, LLC)

Sub-K Sub-C Sub-S (if eligible)

Purpose of Corporation (Articles of Incorporation/Charter)

The MBCA allows, but does not require, articles of incorporation to include a purpose, so most corps in MBCA states do not include one.

Respondeat Superior

The concept that a principal is vicariously liable for a tort committed by an agent if (1) the agent is an employee of the principal, and (2) agent committed the tort while acting within the scope of employment.

Fiduciary Duties of Limited Liability Companies

The members owe fiduciary duties to the other members and to the LLC. The fiduciary duties under the DLLCA can be modified or even entirely eliminated in an LLC's limited liability company agreement. Check the state to see what the limits are regarding duty of loyalty and care.

Par Value

The minimum amount of consideration the corporation must receive when issuing a share. The MBCA (Alabama) does require shares to have par value. But Delaware does not require par value or par value to even be mentioned in a corporation's articles.

C.F. Trust, Inc. v. First Flight Limited Partnership

The shareholders sought to be held personally liable has controlled or used the corporation to evade personal obligation, to perpetrate fraud or crime, to commit injustice, or to gain an unfair advantage...piercing the corporate veil is justified when the unity of interest and ownership is such that the separate personalities of the corporation and the individual no longer exist and to adhere to that separateness would work an injustice.

Corporation Doing Business in Other States

The state you are incorporated in is your domestic state. Most states require any foreign corporation transacting business in the state to obtain a certificate of authority from the secretary of state. This is often referred to as "qualifying to do business" in a state. To obtain a certificate of authority, the corporation needs to fill out a form and pay a filing fee. The form requires the corporation to specify a registered agent in that state. Qualifying to do business in a state has several consequences.

Sub-S

Allocations must be based on percentage of ownership.

Liability Shield of Limited Liability Companies

An LLC affords its members a full liability shield. DLLCA 18-303(a).

Governing Law of Limited Liability Companies

An LLC is governed by the limited liability company statute of the state in which it filed its certificate of organization.

Ratification of Promoter Contracts

Can also bind a corporation to a promoter contract. Occurs when the principal, through word or deed, manifests his assent to ("affirm") the agreement and given the situation the law will give effect to that assent. Affirmation may be express or implied. For a ratification to be valid, the principal must know or have reason to know, at the time of the alleged ratification, the material facts relating to the transaction. A principal may not partially ratify a transaction, it is all or nothing. If the third party manifests an intention to withdraw from the transaction, prior to the ratification, the principal may not then ratify the agreement. Ratification will be denied when necessary to protect the rights of innocent third parties.

In re Albright

Chargin order's purpose is to protect the other members. Therefore, when there is only a single-member LLC then no protection for the other members is required.

Pre-Incorporation Activities

Corporation comes into the picture only after the founders have developed the idea into a business plan, decided there is enough potential to warrant moving forward, and that the best legal form for their startup business is a corporation.

Distributions of Limited Liability Companies

DLLCA 18-504 default rule for distributions: "Distributions shall be made on the basis of the agreed value (as stated in the records of the LLC) of the contributions made by each member to the extent they have been received by the LLC and have not been returned."

Dissolution of Limited Liability Companies

DLLCA subchapter VIII provides for both voluntary and judicial dissolution of an LLC. The default rule for voluntary dissolution is that an LLC is dissolved and must be wound up at the time specified in the agreement (if a time is specified), upon the happening of an event (if any) is specified in the LLC agreement as triggering dissolution, or upon an affirmative vote of members holding more than 2/3rd of the LLC's ownership interests.

Transfer of Partnership Interests in a Limited Partnership

Default Rule: A partnership interest is not freely transferable in its entirety. "A partner's right to distributions" are the only transferable interests. The default rule cannot be overridden.

Allocations of Profits and Losses of Partnership

Default Rule: Each partner is entitled to an equal share of the partnership profits and is chargeable with a share of the partnership losses in proportion to the partner's share of the profits. BUT this can be modified to pro rata based (based on your capital contributed). Partnership agreements typically include a provision to distribute enough to cover taxes.

Management of a Partnership

Default rule under RUPA 401(f) - "each partner has equal rights in the management and conduct of the partnership business." Under statutory default rule, an ordinary course of business matter put to a partnership vote is approved if a majority of partners are in favor of it. RUPA 401(j) The statutory default rule for approval of a matter outside the partnership's ordinary course of business requires unanimous partner approval. RUPA 401(j) Person with decision-making authority on day-to-day activities is the managing partner.

Transfer of Partnership Interests

Default rule: Partners can transfer his or her economic but not management rights. However, the agreement may modify this default rule to allow management rights to be transferred. Transferable interests: the partners share of the profits and losses plus their right to distribution.

Dissociation of Partnership

Default rule: a partner can dissociate at any time by notifying the partnership of his or her express will to withdraw. Automatic dissociation is triggered by expulsion from the partnership pursuant to the partnership agreement, bankruptcy, or death. Additionally, the rule allows the other partners to cause a partner's dissociation through a unanimous vote if, subject to limited exceptions, "there has been a transfer of all or substantially all of that partner's transferable interests in the partnership." A partner can notify the other partners at any time, but a penalty may be involved. 701 says a dissociation triggers a buyout situation. Damages for dissociation and any amounts due must come out of buyout amount.

Liability Exposure of Partnership

Each partner is personally liable for the obligations of the partnership. The liability is joint and several. A liability creditor generally must seek to recover against the partnership itself. The partner will be entitled to indemnification, or repayment by the partnership.

Sub-S Requirements

Entity is domestic, that is, it is incorporated or organized in one of the 50 states or the District of Columbia. Entity has 100 or fewer owners. All of its owners are individuals, estates, certain types of trusts, or tax-exempt organizations. None of its owners are nonresident aliens; and It has only one class of ownership interests outstanding (disregarding differences in voting rights).

Ethical Issues in Corporate Legal Practice

Ethical issues that arise: (1) who is the client; (2) investing in a client; and (3) practicing the law in other states

William Penn Partnership v. Saliba

Example of Self Dealing: Sale of Del Bay Lingos lied about what they sold didn't disclose to all owners. The Lingos also falsely stated that the sale was unanimously approved at a board meeting, but the board meeting never happened.

Fiduciary Duties of Limited Partnerships

General Partners: General partners owe the partnership and its limited partners the duty of loyalty and care. Cannot eliminate the duty of loyalty. 110(b). Cannot unreasonably limit the duty of care. 110(b). A general partner owes the partnership and its limited partners an obligation of good faith and fair dealing. 408(c). Limited Partners: The default rule is that a limited partner does not owe fiduciary duties to the limited partnership or any other partner solely by reason of being a limited partner. 305(a).

Piercing the Corporate Veil (Kansas Gas, In re Albright)

Two-prong test: (1) was there such unity of interest and ownership that the separate personalities of the corporation and its shareholders, officers, or directors are indistinct or non-existent; and (2) would adherence to the fiction of separate corporate existence sanction fraud, promise injustice or inequitable consequences or lead to an evasion of legal obligations.

Allocation of Profits and Losses of Limited Partnership

ULPA does not provide a default rule for allocation, but it does for distributions. 503 provides: "A distribution by a limited partnership must be shared among the partners on the basis of the value, as stated in the required records when the limited partnership decides to make the distribution, of the contributions the limited partnership has received from each partner."

No Default Buyout Right in Limited Partnership

ULPA-2001 says that the limited partnership interest of a limited partner who dissociates before termination of the limited partnership is essentially converted to a transferable interest owned by the dissociated limited partner. 602(a)(3).

Partnership Agreements may NOT:

(1) vary the rights and duties under Section 105 except to eliminate the duty to provide copies of statements to all of the partners; (2) unreasonably restrict the right of access to books and records; (3) eliminate the duty of loyalty, but: (i) the partnership agreement may identify specific types or categories of activities that do not violate the duty of loyalty, if not manifestly unreasonable; or (ii) all of the partners or a number or percentage specified in the partnership agreement may authorize or ratify, after full disclosure of all material facts, a specific act or transaction that otherwise would violate the duty of loyalty; (4) unreasonably reduce the duty of care; (5) eliminate the duty of good faith and fair dealing , but the partnership agreement may prescribe the standards by which the performance of the obligation is to be measured, if the standards are not manifestly unreasonable; (6) vary the power to dissociate as a partner under Section 602(a), except to require the notice under Section 601(1) to be in writing; (7) vary the right of a court to expel a partner in the events specified in Section 601(5); (8) vary the requirement to wind up the partnership business in cases specified in Section 801(4)(5)(6); (9) vary the law applicable to a limited liability partnership under Section 106(b); or (10) restrict rights of third parties under this Act.

Adopting a Promoter Contract

A corporation adopts a contract by manifesting assent to be bound by it. Adoption can only occur after the corporation is formed and is valid only if at the time of adoption the corporation has knowledge of all material facts concerning the contract. Adoption can either be express action and implied through conduct.

Secretary's certificate

A document signed by an entity's secretary certifying that certain actions were approved by the governing body of the entity. A secretary is the officer of the business entity responsible for maintaining the books and records of the entity.

Partnership

A for profit business with two or more owners who have not filed the paperwork to operate the business in some other legal form. No limited liability shield.

Novation

Adoption does not relieve a promoter from liability on a contract unless the other party agrees to substitute the corporation for the promoter on the contract.

Agency Costs

Agency costs are defined as monitoring costs, bonding costs, and residual loss.

Outside Liability Exposure

Idea that personal creditors can try to go after the business assets to satisfy personal debt. Stock is an asset so they can get it to satisfy your personal debts. Under LLC they can only get a charging order saying they will be paid out of distributions for the business before anyone else.

Promoter Liability on Contracts

General Rule: Promoter is personally liable on pre-incorporation contracts even after the corporation is formed. If a promoter signs his or her own name, the promoter is personally liable under basic principles of contract law. If the promoter signs the name of the yet-to-be-formed corporation, knowing that the corporation has yet to be formed, the promoter is liable under agency law rule that a person acting on behalf of a nonexistent principal is personally liable. 2.04 of the MBCA provides, "all persons purporting to act as or on behalf of a corporation, knowing there as no incorporation under this Act, are jointly and severally liable for all liabilities created while so acting." Exception: Courts have held that a promoter is not liable on a contract if he or she can prove that the other party agreed to look solely to the corporation on the contract.

Corporation Liability on Promoter Contracts

General Rule: is that corporation is not liable on a pre-incorporation contract unless the corporation adopts it.

Liability Exposure of Limited Partnerships

General partners are personally liable for the debts and obligations of the partnership. RULPA 403(b). Exception is the control rule...

Holmes v. Lerner (Urban Decay case)

Holmes and Lerner came up with the idea together, and Holmes was allowed to participate, but when she questioned her position in the company the locked her out. She sued claiming that she was a partner. Holmes participated in board meetings and also worked in the warehouse for years with authority to sign checks. The agreement was breached when she was frozen out of the company and a remedy was appropriate. Holmes received 1 million dollars.