Business organizations outline
Here's my midterm bus. orgs outline modified from Prof. Ron Wargo's outline
Agency indicates the relation that exists where one person acts for another. Where one undertakes to transact some business AGENCY
What is agency?
or manage some affair for another, the relationship of agency arises.
What is an agent and a principal?
An agent is one who acts on behalf of and under the control of the principal. A principal is a person or entity who authorizes the agent to act on their behalf, and subject to their authority such that the principal may be held liable for the acts of the agent.
Manifestation of consent by principal that agent can act on Principals' behalf.
Control of agent by principal:
A creditor who assumes control of his debtors' business may be held liable as principal for the acts of the debtor in connection with the business.
Agent's consent to act as agent
Effect of agency (K or tort)
1. Principal is liable for the obligations of the agent within the scope of the agent
2. The agent has a duty of loyalty to the principal, that is, a fiduciary duty to act with the utmost good faith and fair dealing and the agent cannot take a secret profit.
Contract action scope of authority;
Actual authority: Authority to do an act can be created by written or spoken words or any other conduct of the principal which, reasonably interpreted, causes the agent to believe that the principal desires him to act on the principal's account.
given by principal to agent, this can be either express or implied
Implied authority is actual authority circumstantially proven which the principal actually intended the agent to possess, and includes such powers as are pratically necessary to carry out duties actually delegated.
apparent authority: Is there a communication by principal to the third party?
Did it directly violate the principals' instructions to the agent?
(This is unclear here: Did the communication by the principal to the third party violate the principal's instructions to the agent? If they did, does that mean liability?)
inherent agency: Was the action by the agent reasonably related to the agent's actual authority? Did it directly violate the instructions to the agent? (again unclear: what exactly does this mean?)
Distinguishing apparent vs. inherent authority
exam approach
1. determine the agent, principal, and third party? Who are they?
2. What is the agent's authority, according to the principal?
3. How did the agent deviate from the authority?
4. Did the principal communicate with the third party? If yes, then perhaps you have apparent authority.
5. Is the principal undisclosed, but the agent acted within the reasonable scope of his agency? If yes, perhaps you have inherent agency?
ratification: Ratification is the affirmance by the principal of a prior act supposedly done on his behalf by an agent, but which was not authorized. Ratification causes the agent's act to be treated as if it had been authorized by the principal at the outset.
ratification can be proven in four ways:
1.Express affirmation by the principal,
2.when a principal accepts the benefits,
3.by the silence or inaction by the principal,
4. by a lawsuit to enforce the contract by the principal.
Estoppel
(aka deterimental reliance) . Estoppel generally requires the reliance by a third party. If the principal intentionally or recklessly caused third party to believe that there was agency, and the principal had knowledge of that belief but took no steps to rectify it, you may have estoppel. This is an equitable theory.
Tort action scope of authority
Independent contractor
There are two types of independent contractors: agent and non-agent:
agent-type; Who agrees to act on behalf of another but not subject to control over how the result is accomplished
Non-agent: operates independently and simply enters into arm's length transactions with others.
Humble oil: a party may be liable for a contractors' torts if he exercises substantial control over the contractor's operations.
Hoover: A franchisee is considered an independent contractor of the franchisor if the franchise contains control of the inventory and operations. The question is, "How much did the principal tie his profits to those of the defendant?"
Murphy: If a franchise contract so regulates the activities of the franchisee as to vest the franchisor with control within the definition of agency, a principal-agent relationship arises even if the parties expressly deny it.
Look at
1. contract analysis
2. control by principal
3. incompetent independent contractor
4. inherently dangerous activity
5. Perhaps scope of services. (expand on this section, poor understanding here, unclear)
Servant
Servant vs. Independent contractor
A master-servant relationship exists where the servant has
1. agreed to work on behalf of the master
2. be subject to the master's control or right to control the "physical conduct" of the servant
Look at;
1. Scope of employment
2. Foreseeable harm
3. Respondeat superior (automatic agent)
Partnerships
A partnership is a voluntary agreement entered into by two or more parties to engage in business and to share any profits and losses.
Types of partnerships:
General partnerships
A general partnership is a legal entity consisting of two or more owners who carry on a business for profit.
No state filing is required with a general partnership, but one problem is that there is unlimited liability for all partners. Each owns a partnership interest, and cannot sell it without the permission of other partners. (but there could be an assignment). The duration may be perpetual, but probably not. Most General Partnerships are at will or for a specified term. All partners have equal rights in the management of a general partnership, and all partners are agents of that partnership.
Limited partnership
An LP is also a legal entity which has two or more owners. There is one general partner and one limited partner. An LP must file with the state. There is unlimited liability for General partners and limited liability for limited partners. Only general partners have the right to manage the partnership.
Limited liability partnership
Also a legal entity with two or more owners, all limited (must file with the state). It gives limited liability to ALL partners, all partners have the right to participate in the management, but there are a limited number of professions that can form an LLP. Lawyers and other types of professionals, for example.
Who is a partner?
The general rule is that someone is partner if it can be shown that there is an intent to share profits, share losses, share mutual right of control, and share the community interest in the venture.
In investor is a partner.
An employee might not be; it depends on the participation in profit, and control of the entity.
A Lender might not be; same as employee. Do they share profit and control?
Partnership by estoppel: Someone may be considered a partner if they share in the profit, share in control of the entity, and there have been representations to third parties. Although a true partnership relation depends on a contract, parties who are not partners may be bound as if they were partners in dealings with third persons.
Fiduciary obligations of partners
There is unlimited personal liability on partnership debts. (This doesn't make sense. Is liability limited or not?)
Partners have a duty of loyalty to disclose partnership opportunities, to get the consent for the remaining partners, and to not obtain any secret profits. (what about good faith and fair dealing, duty to not self-deal? What the fuck?)
Grabbing and leaving
Partners leaving cannot take customer lists, they cannot solicit employees, they cannot steal business opportunities, they must complete all executory contracts for the benefit of the partnership as of the date of dissolution.
Partnership property
Partnership property is owned by the partnership and partners don't have the exclusive right of control.
Management of partnership property
The partnership agreement governs here. By default, all general partners have management rights.
Dissolution and dissociation
UPA- "The dissolution of a partnership is the change in the relation of the partners caused by any partner ceasing to be associated in the carrying on, as distinguished from the winding up, of the business." Dissolution does not terminate the partnership, it is merely a change in the legal relationship of the partners. The partnership continues until the winding up of the partnership affairs is complete.
Old rule: the default rule is that a partnership is at will. If it is for a definite term, then it is by agreement.
causes of dissolution?
By act of partners:
Per partnership agreement, by will of partner, by mutual assent, by expulsion of partner.
by operation of law: illegality, death or bankruptcy
By decree of court: court ordered dissolution. On application of a partner, a court can decree a dissolution of the partnership. Grounds for judicial dissolution include a partner's incompetence, incapacity, or improper conduct. Judicial dissolution is also available when the business can be carried on only at a loss or where there are other circumstances rendering a dissolution equitable. The judicial action is generally for dissolution and accounting.
Dissociation-modern rule; Because it is now common for a partner to leave the partnership and the partnership to continue, the RUPA has substituted the term "dissociation" for many of the UPA concepts of dissolution. Dissociation does not necessarily cause a dissolution and winding up of the partnership. Dissolution still exists under the RUPA, but the circumstances under which a partnership is dissolved and must be wound up differ from those of the UPA.
Winding up- Winding up is the process of settling partnerships affairs after dissolution. During the process, actual authority exists to carry out necessary acts to wind up the business. Generally, only transactions designed to terminate, rather than carry on the business are within the scope of a partners' actual authority; for example "old business" can be wrapped up; if "new business" is entered into, the partner who continues to carry on the business assumes sole liability for her actions and is liable for losses.
Buying out departing partner- When the partnership continues, the partnership must buy out the dissociated partner's interest in the partnership based on the greater of the amount distributable to the partner if the partnership assets were sold at liquidation value or their value if the partnership were sold as a going concern without the dissociated partner ( minus any damages if the partner wrongfully dissociated). interest must be paid on the buyout price from the date of dissociation to the date of payment. The partnership must indemnify the dissociated partner against all partnership liabilities except for those incurred by him after dissociation that bind the partnership.
Distribution upon dissolution- People are paid in the following order;
1. creditors'
2. partner creditors
3.partners equal to capital accounts (?)
4.partners according to partnership percentages
Limited Liability Company
An LLC is a relatively new hybrid business organization designed primarily to be taxed like a partnership but offer the owners the limited personal liability that shareholders of a corporation enjoy. LLC's are creatures of statute. SO basically there are two parts;
1. the limited liability that shareholders of a corporation enjoy and
2. the tax advantages that partners enjoy.
Though LLC's are governed by statute, LLC statutes generally provide that LLC members can adopt an operating agreement with provisions different from the LLC statute, and generally the operating agreement will control.
Section 103 of the ULLCA says that
may enter into agreement, not necessarily in writing, act is default;
operating agreement cannot;
unreasonably restrict information rights
eliminate duty of loyalty
unreasonably reduce duty of care
eliminate the obligation of good faith and fair dealing
vary the right to expel a member for horrible conduct
vary the requirement to wind up business upon dissolution
restrict the rights of third parties. (for example, not members, managers, or transferees)
FORMATION
1. There must be articles of organization filed with the state
2. There must be an operating agreement, but it can be oral or written
piercing the LLC veil
1. same as the piercing the corporate veil;
The corporate veil will be pierced when there is
1. a unity of interest and ownership between the corporation and the individual shareholder and
2.an inequitable result would occur if the acts were treated as those of the corporation alone.
However, observation of LLC formalities is less stringent than observation of corporate formalities. (HOW?)
Fiduciary obligations
1. managers have similiar fiduciary obligations as general partners of a partnership or directors/officers of a corporation.
2. Non-manager members have similiar obligations to limited partners of a partnership (for example, probably none, unless capital calls). (What is a capital call? What does this mean?)
Dissolution
Must be completed properly (filing with the state)
No dissolution upon withdrawal of member or manager
an LLC must file articles of organization with the state, and it must have an oral or written operating agreement.
One or more persons must file the articles of organization
The articles require:
name of company
address of initial office
name and address of agent of service
name and address of organizer
term of company
name and address of managers, if any
if any member is liable for debts and obligations
section 204 says articles may be amended or restated
section 209 liability for false statement
section 211 annual report
name of company and state in which organized
address and agent (with address) of offices in state in which doing business
address of principal office
names and addresses of managers
Corporations
A corporation is a type of legal institution or concept that defines relationships among people.
Types of corporations
C corporation- A corporation that elects to be taxed as a corporation. The C corporation pays federal and state income taxes on earnings. When the earnings are distributed to the shareholders as dividends, this income is subject to another round of taxation (shareholder's income). Essentially, the C corporations' earnings are taxed twice. In contrast, the S corporation's earnings are taxed only once.
A legal entity (must file with the state) with limited liability for all shareholders, stock ownership, a centralized management and control (board and officers) that exists perpetually and is taxed on it's own income.
S corporation- (differences and additions to c)
A corporation that elects not to be taxed as a corporation. That is, the corporation does not directly pay federal income tax on its earnings. Similar to a partnership, it passes its income or losses and other tax items on to its shareholders.
1. Must make affirmative election with IRS (What does that mean?)
2. Income and losses pass through to shareholders
3. Limitations on the number (100)and types of shareholders (generally must be individuals)
Close corporation
1. Must indicate close corporation status in Articles, on stock certificates
2. Can elect either C or S status for tax purposes
3. Can elect either C or S status for tax purposes
4. May not have to follow corporate formalities
5. limitations on number of shareholders, types
Southern Gulf Marine-where a party has contracted with what he acknowledges to be a corporation, he is estopped from denying the existence or the legal validity of such a corporation.
Walkovsky-Whenever anyone uses control of the corporation to further his own rather than the corporation's business, he will be liable for the corporation's acts. Upon the principle of respondeat superior, the liability extends to negligent acts as well as commercial dealings. However, where a corporation is a fragment of a larger corporate combine which actually conducts the business, a court will not "pierce the corporate veil" to hold individual shareholders liable.
Sea-Land-The corporate veil will be pierced when there is a unity of interest and ownership between the corporation and an individual and where adherence to the fiction of a separate corporate existence would sanction a fraud or promote injustice.
Kinney-The corporate veil will be pierced where there is unity of interest and ownership between the corporation and the individual shareholder and an inequitable result would occur if the acts were treated as those of the corporation alone.
Frigidaire-Limited partners do not incur general liability for the LP's obligations simply because they are officers, directors, or shareholders of the corporate general partner.
Promoters
1. Liable for pre-incorporation contracts
2. corporation can ratify
3. de facto corporation
a. tried to incorporate in good faith
b. had legal right to incorporate
c. acted as a corporation
d. actually failed legal formalities of incorporation
4. Corporation by estoppel
a. third party thought it was a corporation
b. third party would earn a windfall if no corporation
Piercing the corporate veil
1. Procedure- third party creditor sues shareholders or affiliated corporations
2. factors
a. commingling of assets
b. failure to follow corporate formalities
c. lack of adequate capitalization
d. domination and control by shareholder
e. fraud, wrong, dishonesty, or injustice
3. result: shareholders personally liable
Shareholder derivative actions
Definition: A shareholder's derivative action is an action asserted by a shareholder in order to enforce a cause of action on behalf of the corporation.
Business Judgment Rule- a doctrine relieving corporate directors and or officers from liability for decisions honestly and rationally made in the corporations best interests.
1. Direct suits
a. injury to the shareholder that is not derivative of a prior injury to the corporation.
b. Breach of contractual duty owed to the shareholder independent of any right of the corporation.
c. can be class actions
2. Derivative suits
Demand- If a shareholder demands that the board of directors take action and that demand is rejected, the board rejecting the demand is entitled to the presumption that the rejection was made in good faith unless that stockholder can allege sufficient facts to overcome the presumption.
a. demand on the directors unless futile
1)majority of the board has a material interest in the transaction or
2)board failed to fully inform themselves about the transaction (duty of care) or
3)challenged transaction not the product of valid business judgment
b. demand on shareholders unless futile
Lewis-Where the directors of a corporation are engaged in a transaction with an entity in which the directors have an interest, the burden of proof rests on the interested directors to show that the transaction was fair and reasonable to the corporation.
Grimes-If a shareholder demands that the board of directors take action and that demand is rejected, the board rejecting the demand is entitled to the presumption that the rejection was made in good faith unless the stockholder can allege sufficient facts to overcome the presumption.
c. qualified plaintiff
1)adequate number of shares
2)adequate share value
3)adequate security for expenses
Cohen-An unsuccessful P can be held liable for reasonable expenses of a corporation in defending a derivative action and entitling the corp. to require security for such payment is okay.
Eisenberg-A cause of action that is determined to be personal, rather than derivative, cannot be dismissed because the P fails to post security for the Corp. costs.
d. corporation recovers
1)P gets attorneys' fees
2)nothing directly to the P
e. dismissal by special committee (What is the role of a special committee?)
1) committee made up of disinterested board of directors dismissed in good faith and with reasonable investigation.
2)independent court inquiry into dismissal of suit
Auerbach-A court may properly inquire as to the adequacy and appropriateness of a special litigation committee's investigative procedures and methodologies, but may not consider factors under the domain of business judgment.
Zapata-When assessing a special litigation committee's motion to dismiss a derivative action, a court must 1) determine whether the committee acted independently, in good faith, and made a reasonable investigation and 2)apply the court's own independent business judgment. (!!!)
The role and purpose of corporations
1. Ultra vires acts practically eliminated by statute. (ultra vires: "unauthorized, beyond the scope of authority allowed by corporate charter or by law) (What does this mean?)
2. Charitable contributions must be reasonable
Business judgment rule
1. Directors are protected from the legal consequences of their decisions unless there is clear and gross negligence.
2. must be no presence of fraud, illegality, breach of duty of care (negligence), breach of duty of loyalty (conflict of interest)
3. This rule only protects decisions of the board.
Duty of care
1. Care of ordinary prudent and diligent person in like positions under similar circumstances
2. Board must inform themselves (use proper procedures)
3. Board must act in good faith
4. Defense-reliance on reports of officers or experts
5. Articles of Incorporation may limit or eliminate duty of care liability absent bad faith, intentional misconduct, or knowing violation of the law
Kamin-Whether or not a dividend is to be declared or a distribution be made is exclusively a matter of business judgment for the board of directors, and the courts will not interfere as long as the decision is made in good faith. (see Business Judgment Rule)
Van Gorkom-the business judgment rule shields directors or officers of a corporation from liability only if, in reaching a business decision, the directors or officers acted on an informed basis, availing themselves of all material information reasonably available.
Francis-Liability of a corporations' directors to its' clients requires a demonstration that 1. a duty existed, and 2. the directors breached that duty and 3. the breach was the proximate cause of the client's losses.
Duty of loyalty
1. Promote the interests of the corporation without regard for personal gain (directors, officers)
2. business dealings with corporation (self-dealing)
a. not automatically voidable
b. interested director counted for quorum
c. make full disclosure to independent board or get shareholders ratification
d. if not, director must prove transaction fair to corporation
e. If properly ratified, plaintiff must show waste
3. Usurpation of Corporate Opportunity
a. corporation must be financially able to undertake the transaction
b. corporation must have an interest or an expectancy in the opportunity
c. opportunity must be in corporation's line of business
4. Dominant shareholders
a. also can be liable for breach of duty of loyalty
b. must act with good faith and inherent fairness to minority shareholders
c. If properly ratified, P must show transaction fails test of inherent fairness.
Zahn- Majority shareholders owe a duty to minority shareholders that is similiar to the duty owed by a director, and when a controlling stockholder is voting, he violates the duty if he votes for his own personal benefit at the expense of the stockholders.
Sinclair-The intrinsic fairness test should not be applied to business transactions where a fiduciary duty exists but is unaccompanied by self-dealing.
Bayer-Policies of business management are left solely to the discretion of the board of directors and may not be questioned absent a showing of fraud, improper motive, or self-interest.
Broz-The corporate opportunity doctrine is implicated only in cases where the fiduciary's seizure of an opportunity results in a conflict between the fiduciary's duties to the corp. and the self-interest of the director as actualized by the exploitation of the opportunity
Fliegler- Ratification of an "interested transaction" by a majority of independent, fully informed shareholders shifts the burden of proof to the objecting shareholder to demonstrate that the terms of the transaction are so unequal as to amount to a gift or a waste of corporate assets.
ALI 5.05 (see page 383)
A director or senior executive may not take advantage of a corporate opportunity unless
1. that person offers the opportunity to the corporation first and discloses the conflict of interest
2. The opportunity is rejected by the corp.
3.The opportunity is rejected in advance following disclosure by disinterested directors
4. the rejection is authorized in advance or ratified following disclosure by disinterested shareholders
Definition of corporate opportunity
1. An opportunity to engage in a business activity of which a director or senior executive becomes aware in connection with the performance of functions as director or senior executive or through the use of corp. information or property if that director or senior executive reasonably believes would be of interest to the corporation.
Agency indicates the relation that exists where one person acts for another. Where one undertakes to transact some business AGENCY
What is agency?
or manage some affair for another, the relationship of agency arises.
What is an agent and a principal?
An agent is one who acts on behalf of and under the control of the principal. A principal is a person or entity who authorizes the agent to act on their behalf, and subject to their authority such that the principal may be held liable for the acts of the agent.
Manifestation of consent by principal that agent can act on Principals' behalf.
Control of agent by principal:
A creditor who assumes control of his debtors' business may be held liable as principal for the acts of the debtor in connection with the business.
Agent's consent to act as agent
Effect of agency (K or tort)
1. Principal is liable for the obligations of the agent within the scope of the agent
2. The agent has a duty of loyalty to the principal, that is, a fiduciary duty to act with the utmost good faith and fair dealing and the agent cannot take a secret profit.
Contract action scope of authority;
Actual authority: Authority to do an act can be created by written or spoken words or any other conduct of the principal which, reasonably interpreted, causes the agent to believe that the principal desires him to act on the principal's account.
given by principal to agent, this can be either express or implied
Implied authority is actual authority circumstantially proven which the principal actually intended the agent to possess, and includes such powers as are pratically necessary to carry out duties actually delegated.
apparent authority: Is there a communication by principal to the third party?
Did it directly violate the principals' instructions to the agent?
(This is unclear here: Did the communication by the principal to the third party violate the principal's instructions to the agent? If they did, does that mean liability?)
inherent agency: Was the action by the agent reasonably related to the agent's actual authority? Did it directly violate the instructions to the agent? (again unclear: what exactly does this mean?)
Distinguishing apparent vs. inherent authority
exam approach
1. determine the agent, principal, and third party? Who are they?
2. What is the agent's authority, according to the principal?
3. How did the agent deviate from the authority?
4. Did the principal communicate with the third party? If yes, then perhaps you have apparent authority.
5. Is the principal undisclosed, but the agent acted within the reasonable scope of his agency? If yes, perhaps you have inherent agency?
ratification: Ratification is the affirmance by the principal of a prior act supposedly done on his behalf by an agent, but which was not authorized. Ratification causes the agent's act to be treated as if it had been authorized by the principal at the outset.
ratification can be proven in four ways:
1.Express affirmation by the principal,
2.when a principal accepts the benefits,
3.by the silence or inaction by the principal,
4. by a lawsuit to enforce the contract by the principal.
Estoppel
(aka deterimental reliance) . Estoppel generally requires the reliance by a third party. If the principal intentionally or recklessly caused third party to believe that there was agency, and the principal had knowledge of that belief but took no steps to rectify it, you may have estoppel. This is an equitable theory.
Tort action scope of authority
Independent contractor
There are two types of independent contractors: agent and non-agent:
agent-type; Who agrees to act on behalf of another but not subject to control over how the result is accomplished
Non-agent: operates independently and simply enters into arm's length transactions with others.
Humble oil: a party may be liable for a contractors' torts if he exercises substantial control over the contractor's operations.
Hoover: A franchisee is considered an independent contractor of the franchisor if the franchise contains control of the inventory and operations. The question is, "How much did the principal tie his profits to those of the defendant?"
Murphy: If a franchise contract so regulates the activities of the franchisee as to vest the franchisor with control within the definition of agency, a principal-agent relationship arises even if the parties expressly deny it.
Look at
1. contract analysis
2. control by principal
3. incompetent independent contractor
4. inherently dangerous activity
5. Perhaps scope of services. (expand on this section, poor understanding here, unclear)
Servant
Servant vs. Independent contractor
A master-servant relationship exists where the servant has
1. agreed to work on behalf of the master
2. be subject to the master's control or right to control the "physical conduct" of the servant
Look at;
1. Scope of employment
2. Foreseeable harm
3. Respondeat superior (automatic agent)
Partnerships
A partnership is a voluntary agreement entered into by two or more parties to engage in business and to share any profits and losses.
Types of partnerships:
General partnerships
A general partnership is a legal entity consisting of two or more owners who carry on a business for profit.
No state filing is required with a general partnership, but one problem is that there is unlimited liability for all partners. Each owns a partnership interest, and cannot sell it without the permission of other partners. (but there could be an assignment). The duration may be perpetual, but probably not. Most General Partnerships are at will or for a specified term. All partners have equal rights in the management of a general partnership, and all partners are agents of that partnership.
Limited partnership
An LP is also a legal entity which has two or more owners. There is one general partner and one limited partner. An LP must file with the state. There is unlimited liability for General partners and limited liability for limited partners. Only general partners have the right to manage the partnership.
Limited liability partnership
Also a legal entity with two or more owners, all limited (must file with the state). It gives limited liability to ALL partners, all partners have the right to participate in the management, but there are a limited number of professions that can form an LLP. Lawyers and other types of professionals, for example.
Who is a partner?
The general rule is that someone is partner if it can be shown that there is an intent to share profits, share losses, share mutual right of control, and share the community interest in the venture.
In investor is a partner.
An employee might not be; it depends on the participation in profit, and control of the entity.
A Lender might not be; same as employee. Do they share profit and control?
Partnership by estoppel: Someone may be considered a partner if they share in the profit, share in control of the entity, and there have been representations to third parties. Although a true partnership relation depends on a contract, parties who are not partners may be bound as if they were partners in dealings with third persons.
Fiduciary obligations of partners
There is unlimited personal liability on partnership debts. (This doesn't make sense. Is liability limited or not?)
Partners have a duty of loyalty to disclose partnership opportunities, to get the consent for the remaining partners, and to not obtain any secret profits. (what about good faith and fair dealing, duty to not self-deal? What the fuck?)
Grabbing and leaving
Partners leaving cannot take customer lists, they cannot solicit employees, they cannot steal business opportunities, they must complete all executory contracts for the benefit of the partnership as of the date of dissolution.
Partnership property
Partnership property is owned by the partnership and partners don't have the exclusive right of control.
Management of partnership property
The partnership agreement governs here. By default, all general partners have management rights.
Dissolution and dissociation
UPA- "The dissolution of a partnership is the change in the relation of the partners caused by any partner ceasing to be associated in the carrying on, as distinguished from the winding up, of the business." Dissolution does not terminate the partnership, it is merely a change in the legal relationship of the partners. The partnership continues until the winding up of the partnership affairs is complete.
Old rule: the default rule is that a partnership is at will. If it is for a definite term, then it is by agreement.
causes of dissolution?
By act of partners:
Per partnership agreement, by will of partner, by mutual assent, by expulsion of partner.
by operation of law: illegality, death or bankruptcy
By decree of court: court ordered dissolution. On application of a partner, a court can decree a dissolution of the partnership. Grounds for judicial dissolution include a partner's incompetence, incapacity, or improper conduct. Judicial dissolution is also available when the business can be carried on only at a loss or where there are other circumstances rendering a dissolution equitable. The judicial action is generally for dissolution and accounting.
Dissociation-modern rule; Because it is now common for a partner to leave the partnership and the partnership to continue, the RUPA has substituted the term "dissociation" for many of the UPA concepts of dissolution. Dissociation does not necessarily cause a dissolution and winding up of the partnership. Dissolution still exists under the RUPA, but the circumstances under which a partnership is dissolved and must be wound up differ from those of the UPA.
Winding up- Winding up is the process of settling partnerships affairs after dissolution. During the process, actual authority exists to carry out necessary acts to wind up the business. Generally, only transactions designed to terminate, rather than carry on the business are within the scope of a partners' actual authority; for example "old business" can be wrapped up; if "new business" is entered into, the partner who continues to carry on the business assumes sole liability for her actions and is liable for losses.
Buying out departing partner- When the partnership continues, the partnership must buy out the dissociated partner's interest in the partnership based on the greater of the amount distributable to the partner if the partnership assets were sold at liquidation value or their value if the partnership were sold as a going concern without the dissociated partner ( minus any damages if the partner wrongfully dissociated). interest must be paid on the buyout price from the date of dissociation to the date of payment. The partnership must indemnify the dissociated partner against all partnership liabilities except for those incurred by him after dissociation that bind the partnership.
Distribution upon dissolution- People are paid in the following order;
1. creditors'
2. partner creditors
3.partners equal to capital accounts (?)
4.partners according to partnership percentages
Limited Liability Company
An LLC is a relatively new hybrid business organization designed primarily to be taxed like a partnership but offer the owners the limited personal liability that shareholders of a corporation enjoy. LLC's are creatures of statute. SO basically there are two parts;
1. the limited liability that shareholders of a corporation enjoy and
2. the tax advantages that partners enjoy.
Though LLC's are governed by statute, LLC statutes generally provide that LLC members can adopt an operating agreement with provisions different from the LLC statute, and generally the operating agreement will control.
Section 103 of the ULLCA says that
may enter into agreement, not necessarily in writing, act is default;
operating agreement cannot;
unreasonably restrict information rights
eliminate duty of loyalty
unreasonably reduce duty of care
eliminate the obligation of good faith and fair dealing
vary the right to expel a member for horrible conduct
vary the requirement to wind up business upon dissolution
restrict the rights of third parties. (for example, not members, managers, or transferees)
FORMATION
1. There must be articles of organization filed with the state
2. There must be an operating agreement, but it can be oral or written
piercing the LLC veil
1. same as the piercing the corporate veil;
The corporate veil will be pierced when there is
1. a unity of interest and ownership between the corporation and the individual shareholder and
2.an inequitable result would occur if the acts were treated as those of the corporation alone.
However, observation of LLC formalities is less stringent than observation of corporate formalities. (HOW?)
Fiduciary obligations
1. managers have similiar fiduciary obligations as general partners of a partnership or directors/officers of a corporation.
2. Non-manager members have similiar obligations to limited partners of a partnership (for example, probably none, unless capital calls). (What is a capital call? What does this mean?)
Dissolution
Must be completed properly (filing with the state)
No dissolution upon withdrawal of member or manager
an LLC must file articles of organization with the state, and it must have an oral or written operating agreement.
One or more persons must file the articles of organization
The articles require:
name of company
address of initial office
name and address of agent of service
name and address of organizer
term of company
name and address of managers, if any
if any member is liable for debts and obligations
section 204 says articles may be amended or restated
section 209 liability for false statement
section 211 annual report
name of company and state in which organized
address and agent (with address) of offices in state in which doing business
address of principal office
names and addresses of managers
Corporations
A corporation is a type of legal institution or concept that defines relationships among people.
Types of corporations
C corporation- A corporation that elects to be taxed as a corporation. The C corporation pays federal and state income taxes on earnings. When the earnings are distributed to the shareholders as dividends, this income is subject to another round of taxation (shareholder's income). Essentially, the C corporations' earnings are taxed twice. In contrast, the S corporation's earnings are taxed only once.
A legal entity (must file with the state) with limited liability for all shareholders, stock ownership, a centralized management and control (board and officers) that exists perpetually and is taxed on it's own income.
S corporation- (differences and additions to c)
A corporation that elects not to be taxed as a corporation. That is, the corporation does not directly pay federal income tax on its earnings. Similar to a partnership, it passes its income or losses and other tax items on to its shareholders.
1. Must make affirmative election with IRS (What does that mean?)
2. Income and losses pass through to shareholders
3. Limitations on the number (100)and types of shareholders (generally must be individuals)
Close corporation
1. Must indicate close corporation status in Articles, on stock certificates
2. Can elect either C or S status for tax purposes
3. Can elect either C or S status for tax purposes
4. May not have to follow corporate formalities
5. limitations on number of shareholders, types
Southern Gulf Marine-where a party has contracted with what he acknowledges to be a corporation, he is estopped from denying the existence or the legal validity of such a corporation.
Walkovsky-Whenever anyone uses control of the corporation to further his own rather than the corporation's business, he will be liable for the corporation's acts. Upon the principle of respondeat superior, the liability extends to negligent acts as well as commercial dealings. However, where a corporation is a fragment of a larger corporate combine which actually conducts the business, a court will not "pierce the corporate veil" to hold individual shareholders liable.
Sea-Land-The corporate veil will be pierced when there is a unity of interest and ownership between the corporation and an individual and where adherence to the fiction of a separate corporate existence would sanction a fraud or promote injustice.
Kinney-The corporate veil will be pierced where there is unity of interest and ownership between the corporation and the individual shareholder and an inequitable result would occur if the acts were treated as those of the corporation alone.
Frigidaire-Limited partners do not incur general liability for the LP's obligations simply because they are officers, directors, or shareholders of the corporate general partner.
Promoters
1. Liable for pre-incorporation contracts
2. corporation can ratify
3. de facto corporation
a. tried to incorporate in good faith
b. had legal right to incorporate
c. acted as a corporation
d. actually failed legal formalities of incorporation
4. Corporation by estoppel
a. third party thought it was a corporation
b. third party would earn a windfall if no corporation
Piercing the corporate veil
1. Procedure- third party creditor sues shareholders or affiliated corporations
2. factors
a. commingling of assets
b. failure to follow corporate formalities
c. lack of adequate capitalization
d. domination and control by shareholder
e. fraud, wrong, dishonesty, or injustice
3. result: shareholders personally liable
Shareholder derivative actions
Definition: A shareholder's derivative action is an action asserted by a shareholder in order to enforce a cause of action on behalf of the corporation.
Business Judgment Rule- a doctrine relieving corporate directors and or officers from liability for decisions honestly and rationally made in the corporations best interests.
1. Direct suits
a. injury to the shareholder that is not derivative of a prior injury to the corporation.
b. Breach of contractual duty owed to the shareholder independent of any right of the corporation.
c. can be class actions
2. Derivative suits
Demand- If a shareholder demands that the board of directors take action and that demand is rejected, the board rejecting the demand is entitled to the presumption that the rejection was made in good faith unless that stockholder can allege sufficient facts to overcome the presumption.
a. demand on the directors unless futile
1)majority of the board has a material interest in the transaction or
2)board failed to fully inform themselves about the transaction (duty of care) or
3)challenged transaction not the product of valid business judgment
b. demand on shareholders unless futile
Lewis-Where the directors of a corporation are engaged in a transaction with an entity in which the directors have an interest, the burden of proof rests on the interested directors to show that the transaction was fair and reasonable to the corporation.
Grimes-If a shareholder demands that the board of directors take action and that demand is rejected, the board rejecting the demand is entitled to the presumption that the rejection was made in good faith unless the stockholder can allege sufficient facts to overcome the presumption.
c. qualified plaintiff
1)adequate number of shares
2)adequate share value
3)adequate security for expenses
Cohen-An unsuccessful P can be held liable for reasonable expenses of a corporation in defending a derivative action and entitling the corp. to require security for such payment is okay.
Eisenberg-A cause of action that is determined to be personal, rather than derivative, cannot be dismissed because the P fails to post security for the Corp. costs.
d. corporation recovers
1)P gets attorneys' fees
2)nothing directly to the P
e. dismissal by special committee (What is the role of a special committee?)
1) committee made up of disinterested board of directors dismissed in good faith and with reasonable investigation.
2)independent court inquiry into dismissal of suit
Auerbach-A court may properly inquire as to the adequacy and appropriateness of a special litigation committee's investigative procedures and methodologies, but may not consider factors under the domain of business judgment.
Zapata-When assessing a special litigation committee's motion to dismiss a derivative action, a court must 1) determine whether the committee acted independently, in good faith, and made a reasonable investigation and 2)apply the court's own independent business judgment. (!!!)
The role and purpose of corporations
1. Ultra vires acts practically eliminated by statute. (ultra vires: "unauthorized, beyond the scope of authority allowed by corporate charter or by law) (What does this mean?)
2. Charitable contributions must be reasonable
Business judgment rule
1. Directors are protected from the legal consequences of their decisions unless there is clear and gross negligence.
2. must be no presence of fraud, illegality, breach of duty of care (negligence), breach of duty of loyalty (conflict of interest)
3. This rule only protects decisions of the board.
Duty of care
1. Care of ordinary prudent and diligent person in like positions under similar circumstances
2. Board must inform themselves (use proper procedures)
3. Board must act in good faith
4. Defense-reliance on reports of officers or experts
5. Articles of Incorporation may limit or eliminate duty of care liability absent bad faith, intentional misconduct, or knowing violation of the law
Kamin-Whether or not a dividend is to be declared or a distribution be made is exclusively a matter of business judgment for the board of directors, and the courts will not interfere as long as the decision is made in good faith. (see Business Judgment Rule)
Van Gorkom-the business judgment rule shields directors or officers of a corporation from liability only if, in reaching a business decision, the directors or officers acted on an informed basis, availing themselves of all material information reasonably available.
Francis-Liability of a corporations' directors to its' clients requires a demonstration that 1. a duty existed, and 2. the directors breached that duty and 3. the breach was the proximate cause of the client's losses.
Duty of loyalty
1. Promote the interests of the corporation without regard for personal gain (directors, officers)
2. business dealings with corporation (self-dealing)
a. not automatically voidable
b. interested director counted for quorum
c. make full disclosure to independent board or get shareholders ratification
d. if not, director must prove transaction fair to corporation
e. If properly ratified, plaintiff must show waste
3. Usurpation of Corporate Opportunity
a. corporation must be financially able to undertake the transaction
b. corporation must have an interest or an expectancy in the opportunity
c. opportunity must be in corporation's line of business
4. Dominant shareholders
a. also can be liable for breach of duty of loyalty
b. must act with good faith and inherent fairness to minority shareholders
c. If properly ratified, P must show transaction fails test of inherent fairness.
Zahn- Majority shareholders owe a duty to minority shareholders that is similiar to the duty owed by a director, and when a controlling stockholder is voting, he violates the duty if he votes for his own personal benefit at the expense of the stockholders.
Sinclair-The intrinsic fairness test should not be applied to business transactions where a fiduciary duty exists but is unaccompanied by self-dealing.
Bayer-Policies of business management are left solely to the discretion of the board of directors and may not be questioned absent a showing of fraud, improper motive, or self-interest.
Broz-The corporate opportunity doctrine is implicated only in cases where the fiduciary's seizure of an opportunity results in a conflict between the fiduciary's duties to the corp. and the self-interest of the director as actualized by the exploitation of the opportunity
Fliegler- Ratification of an "interested transaction" by a majority of independent, fully informed shareholders shifts the burden of proof to the objecting shareholder to demonstrate that the terms of the transaction are so unequal as to amount to a gift or a waste of corporate assets.
ALI 5.05 (see page 383)
A director or senior executive may not take advantage of a corporate opportunity unless
1. that person offers the opportunity to the corporation first and discloses the conflict of interest
2. The opportunity is rejected by the corp.
3.The opportunity is rejected in advance following disclosure by disinterested directors
4. the rejection is authorized in advance or ratified following disclosure by disinterested shareholders
Definition of corporate opportunity
1. An opportunity to engage in a business activity of which a director or senior executive becomes aware in connection with the performance of functions as director or senior executive or through the use of corp. information or property if that director or senior executive reasonably believes would be of interest to the corporation.
posted by Robert Smith at 9:57 AM
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