Business Organization Flashcards

Terms Definitions
division of corporate profits.
Types of Businesses
corporation, general partnership, limited partnership, LLC, LLP, LLLP
separate legal entity than its owners
conducts business as if it were a real person
consciously formed, file with the state
shareholders have no right to participate in management, board of directors of 1 or more has the control
shareholder typically has no ability to compel a buyout or dissolution
ownership interests in a corporation may be freely and fully transferred without the consent of the other shareholders
income of the corporation is taxed twice- corporate and shareholder levels
provides its shareholders with limited liability for the obligations of the business
LLC: Introduction
LLC is a noncorporate business structure that provides its owners with a number of benefits
limited liability for the obligations of the venture, even if a member participates in the control of the business
pass-through tax treatment
tremendous freedom to contractually arrange the internal operations of the venture
this has emerged as the preferred business structure for closely held businesses
LLC was the product of innovative professionals creating solutions when the current legal system failed to meet client needs
after partnership taxation was given to the LLC, states rushed to develop LLC statutes and uniformity was a concern. but b/c of some legislation, it is less uniform than other business entities
Hamill, the LLC: A Catalyst Exposing the Corporate Integration Question
LLC became tax driven as pship taxation was given as well as limited liability
serious alternative to pship and corp
rise of LLC hasnt been greeted with uniformity. some think that it can be taken advantage of
in order to have a corp you have corp taxation, continuity of life, free transferrability of ownership, centralized management, and limited liability. LLC had pship taxation and possibility of centralized management. to sufficiently distinguish it, statutes restrict free transfer of ownership and usually provided for dissolution upon member’s withdrawal or other dissociation from business
Kitner regulations allowed LLC to chose whether to be taxed as a corp or pship. took the lid off the growth of LLC’s
LLC is the majority form for newly created small businesses in US
even without the LLC, limited liabliity and pass through taxation can be obtained through limited pship, s-corp, and LLP structures
b/c LLC have similarities with other business entities, courts often confront LLC issues by looking at other entities’ doctrines
What is a serparate legal entity formed by documents filed with your state?
sole proprietorship
owner operated business and simplest business form
Transactions in Shares, Insider Training: Background
inside information- nonpublic information intended solely for corporate purposes. if the information were known, it would materially affect the market price of the corporation
insider- person with a fiduciary relationship with corporation and has access to the information because of relationship
standard- must disclose information or abstain from engaging in the insider trading. insider can only trade once information has had sufficient time to disseminate the information
tipper- insider who gives information of the insider trading to someone else
tippee- people who buy stock as a result of being told by an insider
LLC: Notes from Class
partnership taxation is more advantageous than S Corp. taxation. if LLC has 1 owner than it is taxed as income. 2 or more, it is taxed as a pship
designed to make an LLC look like a pship, even though they have a corporate shield

Limited Liability Centralized Management Transferability of Interest Existence
Corporations yes yes yes (100% freely transferable) perpetual
Partnerships no- unlimited joint/several liability no- every P is an agent no- can freely sell economic rights, but not voting/managemnt. rights. consent of all Ps needed before someone can be replaced 100% b/c all Ps can bind no- dissociation may dissolution. dissociation loses agency authority but can have economic rights. have right to share in profits, losses, and distributions
LLC yes no (therefore members have authority to bind LLC in normal course of business. not freely transferrable- same as partnership dissociation can trigger dissolution, depending on how the agmt. is set up

check the box regulations- if you form a business enterprise that is not a corporation then the default is of 1 owner is ignored as a business, treated as a sole proprietorship for tax purposes. if you have 2 or more owners of an LLC, it will be treated as a pship
can have publicly traded LLC’s
if you have more than 500? SH or make more than $10 million/year, must be C-Corp. for tax purposes?

Maryland Title 4
4A-204: file articles of organization with state, creature of statute
4A-201: organize for any lawful purpose
can be a 1 person owned LLC, must used LLC in business name, must have business officer and resident agent
4A-301: members arent liable in contracts or torts merely b/c they are members, therefore can be personally liable if you give a guaranty, tort, or PCV situation
4A-301.1: LLC is liable for negligent acts/omissions for professional services in another state
some courts apply corporate promoter liability
4A-401: each member is an agent by statute, unless otherwise agreed to. this comes from the UPA. scope of authority in ordinary course of business
only fiduciary duties in pship are loyalty and care because members are agents. all agents have fiduciary duties b/c of common law, therefore not addressed in the MD statute. the LLC can limit statutory agency stating that solely being a member doesnt give agency and that it must be stated as such in the articles of organization then designate who are the ones with agency authority. in other states, must designate member (are agents) or manager (are agents) managed LLC. puts creditors with the burden to determine authority. (in pship, the standard is known or should have known that the particular agent didnt have authority, otherwise it is apparent authority)
DE allows people to contract away duty of loyalty/care. UPA states that you cant eliminate it entirely, but can designate what will or will not constitute duty of loyalty/care
default rule in pships- everything is shared per capita basis (equally). in corporation, based on number of shares owned. in MD, LLC is based on capital contribution to LLC at outset unless it is modified (4A-503). distributions are made based on capital contributions ratios. voting is based on how profits are shared (as default rule, can be modified). ordinary course matters require majority vote. extraordinary matters (sale of company, etc) requires unanimity. in corporation, super majority is required (2/3) vote.
in MD mergers require ⅔ votes
4A-603: transfers of interests in LLC, unless consent of all members, you can only transfer economic interests, not agency authority/voting power. this can be modified by agreement
4A-____: dissociation (similar to pship rule) can withdraw at any time retains economic rights, loses vote and agency authority. involuntary disassociation isnt as broad as pship. dissociation never caused dissolution of entity, with one exception. the company can allow the dissociating member to remain an economic member or buyout for fair value. exception- if there is 1 member and they disassociate or die, it causes dissolution b/c there is no one to pass the voting on to. fix- within 90 days of disassociation of last member, heirs can choose a new member or agree in operating agreement to deal with it. can be dissolved by vote of members or judicially dissolved if not longer practicable. the dissolution then causes wind up (creditors get paid first, then owners)
general Partnership
definition: an association of 2 or more persons to carry on as co-owners a business for profit
can be informally created, begins by conducting business
some states view a GP as a separate legal entity than its owners, while others do not
easily can exit from the partnership
structural flexibility, patron can only become a partner with unanimous consent
pass-through taxation
imposes unlimited liability on the partners
All owners have control
What are intermediaries?
Businesses involved in selling the goods and services of producers to consumers and other businesses.
insider trading
buying or selling stock using special information unobtainable to the average investor
when shareholders vote to elect a new CEO
Management & Control of Corporation: Deadlocks- In re Radom & Neidorff
proposed dissolution case. for many years had a successful business of lithography or printing musical compositions
for 30 years prior to feb 18, 1950, neidorff, radom (anna's brother) were the sole SH, each with 80 shares
since neidorff's death, his stock went to his wife. brother and sister were unfriendly before and after the husband's death
radome brought this action to try to get is dissolved under sect 103 of the general corp law- petition in case of deadlock
petition said corp is solvent and successful, but anna has refused to cooperate, refuses to sign his salary checks even though he has the sole burden of running the business
lead to election of directors being impossible
corp had more assets and minor liabilities, plus radom's salary
radome offered to pay anna for her stock for 75k, but she refused. so he threatened to dissolve, buy the business at a low price, or start a competing business if she bought it
anna alleges that she hasn't interfered with the conduct of the business and has signed the checks
radom has no other grievance other than the nonpayment of his salary, which is hardly a ground for dissolving a flourishing corporation
special term held that the papers showed a basic and irreconcilable conflict between 2 SH requiring dissolution. appellate court reversed pointing out that the profits have actually increased during this time and salary is redeemable in other ways than dissolution.
anna has offered to have the 3rd BOD to be appointed by the american arbitration assoc, any bar assoc, or any respected public body
the dismissal of the petition was well within the discretion of the appellate court
sect 103 provides that it can be dissolved if SH cant elect BOD- this is the precise situation before the court - the SH are deadlocked
debts haven't been paid, dividends haven't been distributed, sole manager hasn't been paid, etc
a corp with this deadlock cant continue to operate with such fundamental differences
if radom was to start a competing company, he would be in violation of his fiduciary duty. the legislature didn't intend to put someone in a situation like this
nothing in 103 suggests that the corp profits must be decreasing or operating at a loss- the legislature would have specified so if that was its intention
MBCA 14.30(2)- typical of many state involuntary dissolution statutes. grounds for judicial dissolution
MBCA 14.01- dissolution by incorporators or initial directors
MBCA 14.02- dissolution by BOD & SH. BOD must recommend it before SH
MBCA 14.20- grounds for administrative dissolution
Partnership/Fiduciary Duties/Statutory developments and the role of contract /Contractual Limitation- Singer v. Singer
Appeal from a judgment declaring that land purchased by D is to be held in constructive trust for a pship. All parties are related through families, pships, and trusts
Formed an oil production pship in the late 1930s. Shares have been passed down to family members over the years
Assignments resulted in Andrea and her brother becoming Ps
1977- redrafted pship agmt that allowed each P to enter into business for their own individual gain
In 1979. Meeting was held where several investment opportunities were raised but it was mainly held to discuss the business routine and the possible purchase of 95 acres of land, including 45 acres of minerals at the sale price of 1.5 million
After the mtg Stanley and Andrea formed a GP, Gemini Realty, purchasing the land without consultation of the Josaline Ps
It was then demanded that the pship be allowed to purchase 50% of the property. He was offered 16.66%, but withdrew before it was accepted
Josalines contention is a fiduciary aspects of pship is entitled to purchase
We would agree except for paragraph 8
Josaline contracted away it's right to expect a noncompetitive fiduciary relationship with any of its Ps
The wording promotes competition
Result under UPA 21
result under RUPA 103b
Limited Partnership
solely a creature of statute, that can be created simply by having the owners behaving in a certain manner as required by statute
Must file with state authority
comprised of at least one general partner and one limited partner: general partner has unlimited liability, while limited partner has none beyond the loss of investment
provides its owners with pass through taxation and structural flexibility
LP can only be formed by filing a certificate of LP with the sec. of state, that includes basic information about the company- RULPA 201
details on the rights and duties of partners on the operation of a LP is contained in the partnership agreement- non public document to govern their firm
GP manages day to day operations
LP have control over the fundamental/basic nature of the business (type of business, selling, GP, etc). Can lose LP status if participates as a GP in which he/she is only liable for the acts the 3rd party wants them to be liable for
central feature of LP is the limited liability provided to LP. can lose the limited libality protection if he participates in the control of the business
question arises as to what constitutes "control of the business"
a LP w/ a corporation as the sole GP creates a totally different kind of entity than the traditional LP. if the GP is only marginally capitalized, the LP becomes a LL entity not unlike a corporation- no indivdual is personally liable for the firm's debts
What is a franchise?
A written contract granting permission to operate a business to sell products and services in a prescribed way.
Enter your front text here.
Enter your back text here.
General Rule for Limited Liability
wherever there is limited liability, must file with the state
LLC: Disasociation and Dissolution
LLC statutes typically state that a member dissociates from a venture upon the occurrence of certain specified acts- withdrawal, resignation, death, or bankruptcy. ULLCA 601, RULLCA 602
until recently, member dissociation usually resulted in a buyout of the dissociating member’s interest or dissolution of the LLC . if dissolution didnt occur b/c the requisite % of remaining members voted to continue the venture, then a buyout was required. if dissolution occurred and dissociating member got their share, a buyout was no longer needed
with the check box regulations, there was no longer a tax drive need for member dissociation to trigger a dissolution of the LLC. as a result, many states curtailed the buyout and dissolution rights that had previously arisen upon the dissociation of a member
statutes continue to provide other triggers of dissolution- expiration of a venture’s term, consent of all or a specified percentage of the members, judicial decree based on specified grounds
Moll, Minority Oppression & The LLC: Learning (Or Not) from Close Corp. History
a publicly traded LLC is likely to be taxed as a corp, but are often rare b/c LLCs want to avoid double taxation
LLC used primarily for closely held businesses
lack of liquidity severely reduces the chance of sale
most LLC statutes provided liquidity to its members in 2 forms
majority of LLC statutes provided that members had the power to withdraw from the business in the absence of a contrary provision in the operating agmt and upon withdrawal the member was entitled to be paid the fair value of its ownership interest less any damages caused by wrongful withdrawal.
most of LLC statutes provided for dissolution of LLC upon the member’s withdrawal or other dissociation from venture. even if liquidation were averted, withdrawing member is entitled to buyout of his interest
provisions calling for dissolution upon member’s withdrawal were designed to resist a continuity of life finding for tax reasons to get to keep the pship taxation ability
minority member was still entitled to its buyout upon withdrawal
to minimize the tax value of an ownership interest in a closely held business, an investor will frequently claim that the value of its ownership position should be reduced to reflect 1) that the interest is difficult to liquidate, and 2) that purchasers will generally pay less for iliquid positions
this well accepted “marketability discount” is premised on empirical evidence indicating that investor will extract a high discount relative to actively traded securities for stocks or other investment interests that lack a high degree of liquidity
many jurisdictions amended their LLC statutes to restrict a member’s ability to liquidate its ownership position- done by estate planners
elimination of default withdrawal and dissolution rights leaves minority members vulnerable to oppressive majority actions since the minority can no longer easily exit the venture with the value of its investment
in some LLCs, the op agmt specifies how distributions are to be made in the event of dissolution. absence such a provision, the applicable statute provides a scheme. DLLCA 18-804; ULLCA 806; RULLCA 708
unless an op agmt provides otherwise, a member who dissociates by withdrawal in these states has no ability to liquidate his investment. section makes major change in the LLC law by providing that the company is not obligated to buy the interest of a withdrawing member unless the art of op or op agmt provide so
number of states do not expressly eliminate buyout-upon-withdrawal rights but they do restrict a member’s ability to withdraw before the dissolution of the LLC. these statutes therefore have the same locking-in a minority member for the duration of the venture. DLLCA 18-603-604. unless an LLC agmt provides otherwise, a member cannot resign prior to dissolution and winding up of the LLC
LLC statutes are the least uniform in the US. how and when buyouts occur vary
LLC: Piercing the Veil
should the courts allow piercing in the LLC context? if so, should any difference exist between in LLC v. corp context?
some LLC statues explicitly state that corp piercing the veil standards shall apply to LLCs
under some statutes, LLC’s piercing analysis cannot consider a firm’s failure to follow formalities where the articles of operation or operating agmt do not require it. failure to follow the normal formalities isnt sufficient to impose personal liability on its members or managers for liabilities of the company. RULLCA 304b
What is one who has no explicit or implicit contract for long-term employment?
contingent worker
What is a goal?
A specific statement of results the business expects to achieve.
What is needed for a fundamental corporate change?
A fundamental corporate change requires a majority of the board and 2/3 of the shares entitled to vote.
Partnership/Liability to 3rd Parties/Liability of the Partner
UPA provides that Ps have joint and several liability for all p-ship oblgiations under 13-14 and joint liability for all other p-ship obligations - UPA 15
joint and several- permits a P to sue one or more of the Ps without having to sue them all
joint- requires a P to join all Ps as defendants
joinder requirement may create serious issues for P in terms of serving all Ps
UPA makes it substantially easier to sue a P for the tort obligations of the firm
RUPA eliminates the reference to joint liability and provides for joint and sveeral liability for all obligations of the p-ship- RUPA 306a
RUPA 307b- judgment creditor is required to first exhaust ps-hip assets before pursuing a P individually- important change from UPA
Problem- make sure that RUPA 307 is inlcuded in the documents
Duty of Care & Business Judgment Rule- DE General Corp. Law
contents of certificate of incorporation- added a paragraph that eliminated the personal liability of BOD for monetary damages for breach of fiduciary duty
MBCA 2.02b4- nearly every state has adopted something similar to the del. gen. corp. law
law was necessary to allow BOD to carry out their jobs without being discouraged from the possible mistake of carrying out their duties fully. this led to increased costs and reduced BOD insurance
Financial Matters & the Corp- Accounting for Business Lawyers
prospective creditor who inspects the balance sheet of a corp and finds low par or stated capital and most of the net worth in capital surplus should know that corp law to some extent permit the distribution of capital surplus and earned surplus to SH, giving creditors no protections beyond the legal capital consisting of par or stated capital
so creditors rely on security interests or careful monitoring of their receivable while commercial lenders require disclosure of financial data, security interests, and contractual limitations on distributions
MBCA (1969) 58(d), (e), (h) to see if there are public relations value to high par stock. is it desirable to protect creditors? does high par tend to keep stock prices high?
importance to distinguish between states that have abolished the par value system and others who have it, but a corp is using no par shares since the issuance of no par shares affects the stated capital and may affect the distributions
states that have eliminated par value have eliminated concept of watered stock and mandatory capital accounts
optional par value can be issued by the contracting of the parties
Financial Matters & the Corp- Issuance of shares: herein of subscriptions, par value, and watered stock. Share subscriptions and agreements to purchase securities
Traditional method of raising capItal for a new corporation was by public subcripitons to which persons agreed to purchase a specified number of shares contingent upon a specified amount of capital being raised. Usually solicitied before corporation was formed. The subscription money was called in when the corporation was created
Created problems , including revocability of subscription before acceptance
Resolved by MBCA 6.20-
This declined in importance as modern investment industry developed
The Principal's Duties to the Agent
not fiduciary in nature
must perform his contractual commitments to the A, must not unreasonably interfere with A's work and must generally act fairly and in good faith towards the A; duty to indemnify the A
What is a proprietorship?
A business owned and controlled by one person.
How is a limited liability partnership formed?
The partners must register annually with the SOS and pay a $200/partner fee; Must include “Registered Limited Liability Partnership” or “LLP” in its name; and must care at least $100,000 in liability insurance or segregate $100,000.
What federal securities laws could show up on the exam?
10b5 – which prevents fraud or misrepresentation in connection with the sale or purchase of security. 16B – prohibits insiders from profiting from short swing trading (within 6 mos. before or after)
Financial Matters & the Corp- Classes of Common Shares
MBCA 6.01 authorized the creation of classes of common shares by appropriate provision in the AIC
such classes can vary in management, financial or voting rights, etc
Liability from the Agency Relationship (Tort)
The degree of control the principal has over the agent depends on the agency relationship
Most employment relationships are master/servant
Master- principal who employs an agent to perform services in his affairs and who controls or has the right to control the physical conduct of the other in the performance of the service
Servant- is the agent so employed by a master
Independent contractor- person who contracts with another to do something for him but who is not controlled by the other nor subject to the other's right to control with respect to his physical conduct in the performance of undertaking
The distinction between IC who is an agent and one who isn't depends on the degree and character of control exercised over the work being done by the IC
Differences between agent as a servant or IC is important b/c different rules apply for liability
Master is liable for torts committed by a servant within the scope of performance while a principal isn't generally liable for torts committed by an IC in connect with his work
Doctrine of respondent superior- vicarious liability is a rule of policy, deliberate allocation of risk. Employer is better suited to endure the costs and can distribute the costs in the prices, etc
Financial Matters & the Corp- Concept of Leverage
debt owed to 3rd person creates leverage
leverage is favorable to the borrower when the borrower is able to earn more on the borrowed capital than the cost of borrowing
entire excess is allocable to the equity accounts of the corporation, thereby increasing the rate of return on the equity invested in the corporation. example: corporation has a total invested capital of 500k. 2 alternative assumptions: A- all this capital is invested as equity capital- 50k shares sold at $10/share. B- half is borrowed on a long term basis and the other half is contributed capital- 25k shares sold at $10/share
when earnings are low, debt service takes up most of the earnings; in alt. B, the common SH are getting 500k to work for them even though they contributed only 250k at the cost of the fixed interest charge which they must meet out of their own capital if necessary. even this fixed charge is partially offset by the tax saving resulting from the deductibility of the interest- this is leverage
leverage can generally only be obtained by the use of other people's money. conflicts arise between the interest of fixed claimants (creditors) and the interest of residual claimants (SH)
most corporate lawyers try to draft docs/agmts/AIC that attempt to reconcile the conflicts between the interests of creditors and equity holders
lot of debt, little equity= highly leveraged
debt/equity = leverage
SH/ppl want to see higher proportion of debt, while creditors want to see higher in equity.
better to finance through outside debt b/c bond foots the bill and is fixed. SH get anything above fixed interest payment & can use more of their money for other investments. there is a tax advantage to paying interest, since it is deductible. if the court believes that the debt to equity ration is too high, they can re-characterize it was equity
look at notebook for leverage scenarios
What is a contingent worker?
One who has no explicit or implicit contract for long-term employment
What are the requirements for a shareholder to bring a derivative suit?
The shareholder must have owned stock when the claim arose. Must make a written demand that the corp. bring suit and then wait 90 days unless demand is rejected or irreparable harm will ensue. Corporation may move to dismiss based on a determination by a majority of disinterested directors that the suit is not in the company’s best interest. Decision is reviewed for good faith and disinterested persons. No dismissal or settlement without court approval, sometimes notice is necessary to shareholders.
How are agency principals applicable to partnerships?
Every partner is an agent for the partnership in carrying out its business in the usual way. Apparent authority may be created by a partner’s title, the way the partnership has conducted business in the past; or the way similar firms conduct their business. Partners have apparent authority to bind the partnership to any contract within the scope of the partnership business. A withdrawn partner may have the apparent authority to bind the partnership for 1 year. The partnership can protect itself by notifying creditors of partner’s withdrawal.
Financial Matters & the Corp- Debt & Equity Capital
capital- financing that the firm uses to conduct business. can be obtained from
credit cards
capital contributions from owners of the firm
capital contributions from outside investors
retaining earnings of the business rather than distributing to owners
debt is associated with idea of borrowing
must be repaid
interest on the amount borrowed must be paid periodically
repayment of principal and interest is not contingent on success of the business
equity is synonymous with ownership. the value of an owner's equity in a piece of property equals the market value of that property minus the market value of the debts that are liens against that property
equity capital is composed of contributions by the original entreprenuers, capital contributed by subsequent investors, and retained earnings of the enterprise
debt is sometimes referred to as fixed claims- equity as residual claims
topic is dealing with raising of equity capical by corporations through sale of securities, not debt financing
securities are highly regulated
Financial Matters & the Corp- Types of Equity Securities. Shares Generally
shares are defined in MBCA 1.40(22) as the units into which the proprietary interests in a corporation are divided
MBC 1.40(2), 6.01(a)- corporation may create and issue different classes of shares with different preferences, limitations, and relative rights
eahc class must have a distinguishing designation and all within a single class must have identical rights
if a corporation issues only one class of shares it can be referred to as- common, capital shares or stock or shares
MBCA 6.01- various designations and rights of shares of different classes must be in the articles of incorporation
MBC 6.01b- 2 fundamental rights of holders of common shares
entitled to vote for the election of directors and other matters
entitled to the net assets of the corporation, after debts, when distributions are made in the form of dividends or liquidating distributions
MBCA 6.03(c) adds that at least one share of each class with these basic attributes must always be outstanding (issued to someone)
Notes on Shares in General
precise line between preferred and common is marginal
in 70s and 80s, creative financing because of high interest rates was done, blurring the line
MBCA 6.01 avoids the dicotomy to allow for creative financing
when considering classes of debt or equity securities, much weight shouldnt be given to the name
Formation of a Closely Held Corporation: Premature Commencement of Business/Promoters. Stanley v. Boss
Action to recover on a K for performance of architectural services
P alleges it performed services and was only paid 14,500 of the 38,250. Seeks to get balance from boss, a promoter of the corporation
K was a standard form agmt designed by the American institute of architects, signed by boss himself for the compnsh
Company was to be formed for the project
Checks for partial payment were made in the name of the corporation
Project was abandoned after a substantial amount of arhictectural work
It isn't clear to what extent the Minneapolis-hunter hotel co came into being by the evidence as no documentation was submitted
If there is a corporation, there are no assets to pay the balance
Not much debate- a promoter, though he may assume to act on behalf of the projected corporation and not for himself, will be personally liable on his K unless the other partyy agreed to look to some other person to fund payment
Restatemnet 326 of agency- promoters
The signing indicates that boss co will be the obligor in the future, it doesn't say anything about who the obligor is right now
When K wording is ambiguous, look to circumstantial evidence, intent, etc
P testifies that he didn't intend the new Corp to be the sole obligor
D thinks that it is for the corporation entirely. P got the 2 checks from the corporation and not the individual
D was principal promoter acting on behalf of himself and as president of boss. He abandoned the purpose of forming the corporation, making the promoter liable unless it was construed to mean
P agreed to look solely to the new Corp for payment
Promoter didn't have any duty toward the P to form the corp and to give them a chance to pay the liability
P should recover against D
MBCA 50- corporation comes into existence only when certificate has been issued
MBCA 51- minimum capital is 1000
MBCA 2.03- corporate existence starts when articles of incorporation are filed
'MBCA 2.04- anyone purpoeying to act or on the behalf of a corporation knowing that there is no corporation are jointly and severally liable for all liabilities created while doing so
consider the restatement of agency: 329- agent who warrants authority, 330- liability for misrepresentation of authority, 331- agent making no warranty of authority
Duty of Loyalty & Conflict of Interest- Heller v. Boylan
derivative action 7 out of a totall of 62,000 SH, holding under 1000 out of a total of over 5 million shares of the american tobacco company, seek recovery for the corp from the company's directors for alleged improper payments to certain of the company's officers
suit derives from an incentive compensation by law of the co, known as article XII, adopted by SH almost unanimously in 1912. 10% of the annual profits over the earnings of the properties in 1910 are to be distributed, 2.5% to the president, 1.5% to each of the 5 VP in addition to their salaries
ended up that these directors recieved bonuses over 11.6 million, in addition to their 3.7 million salaries
P argues that the majority SH committed waste and spoilation and thus giving away corp property against the protest of the minority
validity of the by law isn't challenged. no issue of the company not having sufficient $ to pay such bonuses. very profitable
another SH, Rogers, attacked this issue as well- that the bonuses are no longer fair or equitable
P wants the compensation to be fixed for each of those years
analysis of Rogers:
whether these amounts are subject to exam and revision by the District Court
the percentages are not per se unreasonable. bonuses became enormous as profits grew
the bonuses are not fraud, but give rise to question the equity interest in the company. cannot have bonuses that rise to waste/spoliation of the company
facts alleged by P are sufficient to require that the District Court upon a consideration of all the relevant facts brought forward by the parties determine whether and to what extent payments to the individual D under the by laws constitute misuse and waste of the $ of the corp
the SH and corp negotiated the bonuses down
analysis- perplexities of the case
general reluctance of the courts to interfere with the internal management of a corp
only 7 of the 62k SH joined the suit. these 7 holding less than 1k shares of over 5 million shares
this is different in nature b/c this had been authorized by the by laws by the SH
by law has been in existence since 1912 (case was in 1941)
embarrasement of paying back the bonuses, especially since taxes have been paid
language of the finality of the by law
the Ps proferred no testimony w/e in support of their charge of waste, but the figures speak themselves so the D must justify them. the numbers are large, but it does not mean that the court should step in the place of the SH
assuming arguendo that the compensation should be revised, who/what should make the determination as to how it is to be revised? the court can, but the question is really can the court make the best determination in place of the SH? for the court to purport to know how they should go about revising the compensation would be a "farce"
reasonable compensation determinations for directors is up to the SH, but it doesn't mean that its directors can commit waste
court finds for the D b/c he cannot find any reliable standard find the payments to be waste or spoliation
TAKEAWAY: if self interested transaction is approved by fully informed disinterested directors under 144 or disinterested SH, it permits invocation of BJR (low threshold) and limits judicial review for issues of gift/waste. if SH/BOD have not approved, must look at fairness rule (much higher threshold)
Disregard for the Corporate Entity: Successor Liability
courts are split on what happens to liability for the successor company: may do it for several reasons- keeping the good name of the company, to impose it upon the party best able to bear it, to not harm the P, prevent fraud, etc
courts that decline argue that it fails to respect the corporate forms of the companies involved and that its not fair because it hold a corp liable for something that isn't its fault. it wont deter misbehavior. it will deter transferability of companies
this is difficult from a policy perspective- on both sides
How do you determine whether a partnership exists between parties; what factors support a finding of a partnership (5 things)?
Receipt of or the right to receive profits; intent to be partners; participation or right to participate in control of the business; sharing or agreeing to share losses; or contributing money or other property to the business.
How much are partners entitled to be paid for their service to the partnership?
Unless otherwise agreed, a partner is not paid for his service to the partnership.
What are the main characteristics of a limited liability company?
It can be structured like a corporation or a partnership, but managers run the company unless otherwise provided for in articles of organization. It allows pass-through tax treatment like a partnership if you check the box. Members get limited liability for all obligations except their own torts. LLC is liable itself on contracts and torts under agency principals.
What is the standard applied for a promoter to make a profit?
Under the secret profit rule, a promoter must fully disclose any profit that is being made on her dealings with the corporation. Profit is figured over fair market value. Approval is necessary by a majority of disinterested directors, or all subscribers/initial shareholders approve.
Liability of the principal to the 3rd party- Apparent authority & Estoppel
Arises from the manifestation of a principal to a 3rd party that another person is authorized to act as an agent for the principal. That other person has apparent authority and an act by him within the a cope of that apparent authority binds the principal, even though in actuality he doesn't have the authorized authority
Major difference between actual v. apparent- actual flows from principal to the agent, apparent flows from principal to 3rd party
In some circumstances an agent's apparent authority will be equivalent to the scope of the agent's actual authority
Viewed through the eyes of the 3rd party
Only principal, agent, and 3rd party are involved
P is bound by apparent authority if 3rd party reasonably believes that agent had authority
Reasonable belief is based on the manifestations of principal
If agent acts fradulently, P won't be liable- depends on facts
Estoppel is closely related to apparent authority- both focus on holding the principal responsible for a 3rd party's belief that a person is authorized to act on the principals behalf
Apparent authority holds the principal repsonible for 3rd partys belief b/c of the principals manifestations of authority to the 3rd party
Estopel applies when the principal has not made any manfiestations of authority to the 3rd party
Entity v. Aggregate Views for Partnership
is a GP a legal entity that is separate and distinct from the partners themselves or is a p-ship simply an aggregate of its partners with no separate legal status. This doesn't really matter because P is still liable whether it is an entity or not
can a p-ship be sued in its own name, hold property of its own- only if the p-ship is recognized
Financial Matters & the Corp- Debt as a planning device. Obre v. Alban Tractor
formed Annel corp to engage in the dirt moving and road bldg business. obre contributed equipment and cash worth 65kish and nelson agreed to 10k in cash and equipment. equipment value were based on independent appraisal
agreed that control would be equal
relied on the advice of a reputable CPA firm as follows: each put 10k in par value voting common stock. obre 20k par value non voting preferred stock, and 35kish in unsecured promissory note
venture was an economic failure, ending up in insolvency proceeding. obre successfully claimed the right to participate as an unsecured creditor to the extent of his 35kish unsecured note
unpaid trade creditors argued that a subordinate equity principle required that this note be treated as equity, a capital contribution, rather than as a valid debt.
Obre wants to be treated pari passu. 3rd party creditors werent happy.
court rejected this argument, stating that there was no showing of undercapitalization, fraud, misrepresentation, or estoppel. found the debt/equity to be acceptable
in deciding that anneal corp wasn't undercapitalized, the court treated obre's preferred stick as an equity investment so that the corporation had begun business with 40k of equity and only 35kish of debt
court found that obre's loan to the creditors or could have easily been discovered
subordinate equity is essentially the deep rock doctrine
why did the CPA recommend that a signficant portion of Obre's contribution be in the form of debt rather than simply having a preferred stock investment of 55kish?
What is the relationship between the agent and third party?
The third party is not liable to the agent unless the agent’s power is coupled with an interest. Agent is not liable to third party unless the principal is partially disclosed or undisclosed or agent breached her warranty of authority.
How much control is allowed for a limited partner?
A limited partner may work for the partnership as an employee but cannot run the day-to-day affairs of the partnership. A LP can also vote on extraordinary management matters without incurring personal liability.
What duties does a partner owe to a partnership?
A partner owes strict fiduciary duties to the partnership. A partnership agreement can’t eliminate these duties but it can set the applicable standards if not manifestly unreasonable. These fiduciary duties include the duty of care of an ordinary prudent person in similar circumstances, a duty of loyalty, a duty to exercise good faith, and a duty to render full information about the partnership upon a reasonable request.
What is the duty of loyalty and who has the burden to prove a breach?
A director owes the corporation a duty of loyalty. She must act in good faith and with a reasonable belief that her action is in the best interest of the corporation. Burden will be on the defendant. In an interested director transaction, the transaction will be set aside unless the director shows that the deal was fair to the corporation or her interest was disclosed and the deal was approved by a majority of disinterested directors. A director cannot usurp a corporate opportunity. He must let the board reject first.
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