Académique Documents
Professionnel Documents
Culture Documents
1. Page numbers
a. 3 8
2. Code Sections
a. UPA 2; UPA 6; UPA 7; UPA 15; UPA 18, RUPA 201; RUPA 202; RUPA
306; RUPA 401
3. General Agency Principles
a. Deals with principals being responsible for the actions of agents
i. Big exception is when agent is not acting in the course of duty (frolic or detour)
4. Forming Agency Relationship
a. Agency Restatement 1.01 Agency defined
i. Elements
1. Fiduciary relationship that
2. Arises when one person (principal)
3. Manifests assent to another person (agent)
4. That the agent
a. shall act on the principals behalf, and
b. subject to the principals control
5. and the agent
a. manifests assent OR
b. otherwise consents to act
ii. Doesnt seem to require consideration, once there is reliance will usually be
enforceable
b. Agency Restatement 1.03-Manifestation-person manifests intent through
i. Written or
ii. Oral or
iii. Other conduct
c. Class Hypo: X tells Y, Y, Give this $100 to Z. Y takes the bill
i. Has an agency relationship been formed? Has Y consented to act as an agent?
1. Yes, by taking the bill, Y manifested consent even though he didnt say
anything.
2. 1.03 of agency says manifestation of assent may be written, oral, or other
conduct
ii. Because an agency relationship exists, Y is a fiduciary (so Y is supposed to look out
for Xs interests above his own). Now, Y must carry out the order (subject to
exceptionsit must be a legal instruction).
5. Identifying Agents in BA
a. Sole Proprietorship: Employer = Principal; Employee = Agent
b. Partnership: all partners are both agents and principals
c. Corporations: corporation (entity) = principal; employees = agents
d. Lawyer client: lawyer=agent, client =principal
i. Special because have 2 master fiduciary relationship to client and law
6. Importance of agency Law
a. Corporations can only act through agents
7. Major Issue arising in agency:
a. Who Owes fiduciary duties?
i. Agents principals
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b.
c.
d.
e.
Outline
1. A person who has not made a manifestation that an actor has authority as an
agent and who is not otherwise liable as a party to a transaction purportedly
done by the actor on that persons account is liable to a third party who
justifiably is induced to make a detrimental change in position because the
transaction is believed to be on the persons account if
a. person intentionally or carelessly caused such a belief OR
b. having notice of such belief and that it might induce others to
change their positions, the person did not take reasonable steps to
notify them of the facts.
ii. Agency Restatement 3.10 Manifestation Terminating Actual Authority-An
agents actual authority terminates if
1. The agent renounces it by a manifestation to the principal OR
2. The principal revokes the agent actual authority by manifestation to the
agent.
3. Revocation is effective when the other party has notice of it
iii. Agency Restatement 3.11 Termination of Apparent Authority
1. Termination of actual authority does not by itself end any apparent authority
held by the agent
2. Apparent authority ends when
a. it is no longer reasonable for the 3rd party with whom the agent deals
to believe that the agent continues to act with actual authority
OVERVIEW OF VARIOUS BUSINESS ASSOCIATIONS
1. Page numbers
a. pg. 8 16
2. Code sections
a. UPA 15; UPA 31;
b. RUPA 201; RUPA 306; RUPA 307; RUPA 1001;
c. ULLCA 112; ULLCA 202; ULLCA 203; ULLCA 301; ULLCA 404;
d. RMBCA 2.01; RMBCA 2.02; RMBCA 2.03; RMBCA 2.0
3. Intro
a. UPA governs partnerships (including LLPs)
b. RUPA isnt our law. We only read this to understand modernization
i. We will add a few sections from the RUPA to the UPA. EX: Georgia is governed by
the UPA (almost word for word), along with a couple of the RUPA replacing some
of the UPA provisions.
c. ULLCA governs limited liability companies
d. RMBCA governs corporations, regardless of close or public
4. 3 questions to Ask yourself:
i. Formation: How do you create each of these business entities? How does it come
into being? Does it require formality or can it happen accidentally?
ii. Management; Liability: Once the entity is formed, how is it organized? Consider
liability issues. How are the agents of the organization potentially liable?
iii. How do you end (dissolve) these business entities?
iv. Limited Liability
b. Whenever you want to create any kind of limited liability association, you have to file
something
5. All of the business organizations are governed by state law.
a. With the exception of some federal law that controls for publicly held corporations
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i. Ex. SEC
6. Business Forms
a. Sole Proprietorship-informal business
i. Owned by single individual
ii. Owner remains fully and personally liable for all business obligations
iii. Along with GP, the only business associations that do NOT require some formal
filing or decision or intent to form
iv. Standard problem here are agency issues
b. Joint Venture-similar to partnership
i. Business undertaking for profit owned by 2 or more individuals
ii. Usually limited to purpose and period of time
iii. Joint venturers are partners for that activity, UPA rules apply w/in that scope
iv. Ex. Chevron and Exxon joint venture to build oil rigs, but joint venture only in that
scope
c. General Partnership (GP)-informal business
i. Default form for business owned by 2 or more persons
ii. Partners are fully and personally liable for all business obligations of the
partnership
iii. Can be dissolved anytime by a partner
iv. Along with GP, the only business associations that do NOT require some formal
filing or decision or intent to form
v. An oral agreement to share profits in some agreed upon ratio may be sufficient,
even if financial contributions are unequal
vi. GP LLP
d. Limited Liability Partnership (LLP)
i. Modern Modification of the general partnership
ii. General partnership in all respects except that the statute provides that partners
have no personal liability for firm obligations that exceed the assets of the general
partnership
1. Exception: Partners still have responsibility for personal misconduct
iii. Tax benefits for being a partnership
iv. Have to draft partnership agreement and file RUPA 1001-1003
e. Traditional Limited Partnership (LP)
i. Two different kinds of partners-one partner contributes capital (Limited partner)
and the other party (general partner) assumes daily responsibility of operating
business
ii. Creature of statute
iii. Formed by filing certificate in public office; failure to file renders partnership a GP
iv. Limited partners have no liability for firms debts
v. Limited partner could lose shield of limited liability if he takes part in the control
of the business
1. only applies to persons who transacted business w/ limited partner believing
that the limited partner is a general partner
vi. If general partner departs, partnership is dissolved. If ltd. partner departs,
partnership is NOT dissolved RUPA 801
f. Limited Partnership with Corporate General Partner
i. General partners in a limited partnership may form a corporation to provide
themselves with limited liability.
ii. Quite common solution prior to the invention of limited liability laws
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iii. LP LLLP
g. Limited Liability Limited Partnership (LLLP)
i. Has both limited and general partners
ii. General partners have the protection of LLP partners
h. Limited Liability Companies (LLC)
i. Provides limited liability for all participants
ii. Permits flexibility in internal management
i. Corporations
i. Publicly Held: means that the corporation has shares that are traded on public
securities markets subject to federal regulation
ii. Closely Held: do not have publicly traded shares; shares are usually held by a few
private individuals (family, friends, etc.)
iii. Provides limited liability for all investors and participants whether active or
passive, to assets of the corporation
1. EXCEPTION: Piercing the Corporate veil (below)
iv. Piercing the corporate veil-permits creditors of closely held corporations in limited
circumstances to recover directly from directors, officers, and shareholders
The General Partnership
1. Pages
a. 25-34, 49-52
2. Code sections
a. UPA 13; UPA 14; UPA 15; UPA 18;
b. RUPA 105; RUPA 301; RUPA 303
3. Definition of Partnership
a. UPA 6-A partnership is an association of two or more persons to carry on as co-owners of
a business for profit
b. RUPA 201-a partnership is an entity distinct from its partners
i. A limited liability partnership continues to be the same entity that existed before the
filing of a statement of qualification under 1001 (must be approved by vote
necessary to amend partnership agreement)
4. Partnership Formation
i. Very minimal requirements:
1. No writing necessary
2. May be express or implied
b. Default is that Unanimous Consent is Required
i. UPA 18(g)- No person can become a member of the partnership without the
consent of all other partners
c. UPA 7-In determining the existence of a partnership:
i. Receipt (or an agreement to receive) by a person of a share of the profits of a
business is prima facie evidence that he is a partner in the business.
ii. HOWEVER, no such inference shall be drawn if such profits were received in
payment:
1. as a debt by installments or otherwise
2. as wages of an employee or rent to a landlord,
3. as an annuity to a widow or representative of a deceased partner,
4. as interest on a loan though the amount of payment varies w/ profits of
business
5. as consideration for sale of goodwill business or other property by
installment or otherwise
iii. Other UPA 7 Points
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1. persons who are not partners as to each other are not partners as to 3rd
persons
2. Joint tenancy, tenancy in common, tenancy by the entireties, joint property,
common property, or part ownership does NOT of itself establish a
partnership, whether such co-owners do or do not share profits made by use
of property
3. Sharing of gross returns does not itself establish a partnership, whether or
not persons sharing them have a joint or common right in any property
d. RUPA 202i. Except as provided in (b) (formed under a different statute), the association of two
or more persons to carry on as co-owners a business for profit forms a partnership
ii. In determining whether a partnership is formed, the following rules apply
1. Joint tenancy, etc. does not by itself establish partnership, even w/ shared
profit
2. Sharing of gross returns does not by itself establish partnership
3. Person who receives share of the profit of a business is presumed to be a
partner in the business, unless profits were received in payment
a. Of a debt or otherwise
b. For services as an independent contractor or of compensation to
empee
c. Of rent
d. Of an annuity or other retiree or health benefit to a beneficiary,
representative, or designee of a deceased or retired partner
e. Of interest or other charge on a loan, even if payment varies w/
profits of business OR
f. For the sale of the goodwill of a business or other property by
installment or otherwise.
e. Key points to Ask?
i. Share of profits? (UPA 7)
ii. Equal rights in management? (UPA 18(e))
5. Adding Someone to the Partnership
a. Requires Unanimous Consent
i. UPA 18(g)- No person can become a member of the partnership without the
consent of all other partners
b. Be on the look out for inadvertent addition to the partnership
6. General Partnership Liability
i. NOTE: While UPA 18 says subject to any agreement between them, UPA 13-15
do not say that
b. Partnership Liability
i. UPA 13- Partnership Bound by Partners Wrongful Act
1. Elements:
a. When a partner commits a wrongful act/omission
b. While acting in the ordinary course of the business OR with
authority from his co-partners
c. And loss/ injury/penalty is incurred
ii. UPA 14: Partnership Bound by Partners Breach of Trust:
1. the partnership must make good the loss:
a. (a) where a partner with apparent authority receives money or
property of a third person and misapplies it; AND
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c. (3) partner has agreed that the creditor need not exhaust partnership
assets;
d. (4) court grants permission to the judgment creditor to levy
execution against the assets of a partner because the assets subject to
execution are clearly insufficient to satisfy the judgment;
e. (5) liability is imposed on the partner by law independent from
partnership
7. The Partnership Agreement
a. Contents of Written partnership Agreements
i. ype of Partnership (GP, LP, LLP, LLLP)
ii. Who the parties are
iii. How profits and losses will be shared
iv. What property (if any) is being contributed to the partnership and what is to remain
personal property on loan
v. Happenings upon dissolution of partnership the most common provision is that
upon withdrawal of any partner the business of the partnership is not to be wound
up and terminated, but is to be continued by the remaining partners with the interest
of the withdrawing partner begin paid off on some case basis.
1. UPA 38: can be a big pitfall if no agreement In absence of written
agreement, partner withdrawing has the right to compel a winding up and
termination
b. Written Agreement is NOT required
i. Advantages of Having:
1. May avoid future disagreements over what the agreement was
2. Readily provable in court, while an oral agreement may involve substantial
factual controversy
3. Statute of Frauds:
a. May be necessary where real estate is to be contributed as
partnership property or the agreement includes a term of more than
one year
4. May focus attention on potential trouble spots in the relationship which may
be unnoticed if partnerships proceed on a handshake deal
5. Allows partners to allocate tax burdens among themselves
6. Allows partners to agree to what will happen if one partner dies or retires
a. UPA & RUPA default = dissolution/disassociation
b. Having agreements in writing helps surviving spouses, executors,
etc. understand rights as intended by parties
7. Allows partners to specify which property is contributed and which
property is loaned to the partnership
8. Advantageous to the partnerships attorney
a. justifies higher fee; places suggestions and advice in concrete form
so there is no misunderstanding (& no malpractice)
9. Serves a cautionary function: lets the signer know hes entering a serious,
legally binding relationship
ii. Disadvantages of not having a written agreement
1. If there is no written agreement, partnership is governed by statute
a. It is unlikely that the provisions of the statute will reflect all of the
expectations and understandings among the partners
2. Default Partnership Agreement: The UPA
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vii. (h) partner is NOT entitled to remuneration for services performed for the
partnership, EXCEPT for reasonable compensation for services rendered in
winding up the business of the partnership
viii. (i) person may become partner with the consent of ALL partners
ix. (j) Difference arising at to matters w/in ordinary course of business may be decided
by majority. An act outside the ordinary course of business and an amendment to
the partnership agreement may be undertaken only w/consent of ALL partners
10. Fictitious Business Statement: if you start a business under a name that is not yours, you must file
this statement (does not apply to corporations)
Limited liability Partnership
11. Limited Liability Partnerships Formation(LLP)
a. Overview of Formation (For Exam)
i. Must be approved by a vote of the partnership necessary to amend partnership
agreement. 1001(b)
ii. File a Certificate of Qualification under RUPA 1001
1. Detail below
iii. Include LLP in name to give public notice according to RUPA 1002
iv. After it is formed must file annual Reports under RUPA 1003
b. RUPA 1001-Statement of Qualification
i. (b) Terms & conditions on which partnership becomes LLP must be approved by a
vote necessary to amend the partnership agreement except, in the case of a
partnership agreement that expressly considers obligations to contribute, the vote
necessary to amend those provisions.
ii. (c) after approval, partnership becomes LLP by filing statement of qualification
containing:
1. name of partnership
2. street address of partnerships CEO & street address of an office in the state
3. If the no office in this state, name & address of agent for service of process
4. statement that partnership elected to become LLP and
5. deferred effective date, if any.
iii. (d) agent of LLP for service must be resident of state or authorized to do business
in state
iv. (e) status of partnership as LLP is effective on LATER of
1. filing of the statement OR
2. date specified in the statement
-Statement remains effective, regardless of changes in membership, until cancelled
v. (f) Status of partnership as LLP and liability of partners is not affected by errors or
later changes in information contained in statement of qualification
vi. (g) filing of statement establishes that partnership has satisfied all conditions
precedent to qualify as LLP
vii. (h) an amendment or cancellation of statement of qualification is effective when
filed or on a deferred effective date, if specified.
c. RUPA 1002-name of an LLP must end w/ LLP, RLLP, etc.
12. LLP Liability
a. RUPA 306(C)
i. Shields all its members from personal liability so none would be personally liable
Partnership Management
1. Pages
a. 52-64
2. Codes Sections
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a. UPA 9; 15; 18
b. RUPA 105; 301; 303
3. Partnership Management
a. Decision Making
i. UPA 18(e)-If there is no agreement about management and decision making, all
partners have equal votes and power, regardless of how profits are split
ii. RUPA 401(f)-identical to UPA 18(e)
b. Partners as Agents (Agency Principles under Partnership Law)
i. UPA 9-Partners as agents of Partnership
1. (1) every partner is an agent of the partnership for business purposes. The
act of every partner, including execution of partnership name on any
instrument for carrying on the usual business of the partnership binds the
partnership UNLESS
a. The partner had no authority to act for the partnership AND
b. The person w/ whom he is dealing has knowledge of that fact
2. (2) An act of a partner which is NOT apparently for carrying on the usual
business does not bind the partnership UNLESS authorized by the other
partners
3. (3) Unless authorized by the other partners or unless they have abandoned
the business, one or more but less than all the partners have NO
AUTHORITY to
a. (a)Assign the partnership in trust
b. (b) dispose of the good-will of the business
c. (c) Do any act which would make it impossible to carry on the
ordinary business of a partnership
d. (d) Confess a judgment
e. (e) submit a partnership claim or liability to arbitration or reference.
4. (4) No act of a partner in contravention of a restriction on authority shall
bind the partnership to persons having knowledge of the restriction
ii. RUPA 301-Partner Agent of Partnership
1. (1) Each partner is an agent of the partnership for the purpose of its
business.
a. An act of a partner for apparently carrying on ordinary course of
business binds the partnership
b. UNLESS 1) the partner had no authority to act for the partnership in
the particular matter AND 2) the person w/ whom the partner was
dealing knew or had received notification that the partner lacked
authority.
c. Acts include the execution of an instrument in the partnerships
name
2. (2) An act not in the ordinary course of business binds only if the act was
authorized by the other partners
c. General Rules
i. All partners are agents of the partnership UPA 9
d. 2 types of Authority (partner acting with actual or apparent authority may bind the
partnership)
i. Actual Authority- Express or implied, when a partner really has authority to make
decisions for a business, and this authority cannot be taken away absent some sort
of partnership agreement
1. Methods of conferring actual authority (Nabisco)
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a. Articles of Partnership
b. Verbal Agreement between parties
c. Partners have full authority to bind their partnership when acting
w/in the ordinary scope of the partnerships business
2. Revoking actual authority
a. Absent agreement, a partners actual authority can only be
eliminated by a majority of the partnership. (Nabisco)
3. Ex.
a. Nabisco v. Stroud: 2 general partners in grocery store. Disagreement
over buying bread and one partner told Nabisco they would no
longer purchase while the other made orders. Grocery Partnership
was liable for bread order because partner had actual authority to
order bread b/c was w/in scope of grocery business and no majority
vote denying authority.
i. Hypothetically: if there were 3 partners and 2 voted to not
buy bread there would be no actual authority, and no
apparent authority since Nabisco had notice
b. Roach v. Mead: 2 partners in Law GP. 1 partner took loans from
client without providing sound legal advice. Court held that the
client reasonably believed he was getting legal advice and was
therefore in the ordinary scope of the business. Partnership therefore
liable when partner defaulted.
ii. Apparent Authority- reasonable belief, based on some manifestation of the
partnership, that the partner has authority.
1. Apparent authority can be created only by the partnership, not by the
partner
a. title and past dealing are examples of manifestations by the
partnership which might create apparent authority
2. Apparent Authority is defeated if the third party was aware the partner
lacked actual authority (Nabisco)
a.
3. Ex
a. Smith v. Dixon: Family farming partnership. Agreed to sell parcel
for 225K, but partner contracted to sell for 200K. NO actual
authority was present because not in ordinary business and majority
vote denied right to sell for 200K. However, there was apparent
authority because Partnership had authorized him in the past to be
the point man for selling land.
b. Rouse v. Pollard: GP law partnership w/ 7 members. 1 partner
secretly embezzled funds from clients by telling them he would act
as an investment agent for them. Court held general investing was
NOT the ordinary scope of the business so no authority and belief of
the client was not reasonable because of no manifestation of
authority by the firm.
iii. Authority standoff in 2 person partnerships
1. UPA 18 (e) and (f) state that each partner has equal rights in the
management and that business decisions are decided by majority rule.
2. (e) and (f) together mean that if there are 2 partners, there can never be a
majority and neither can outvote the other or tell the other what to do as
long as they are acting within ordinary matters of the business; but if there
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are 3 partners, 2/3s can outvote 1/3 even if the 2/3s combine to have less
than a majority stake in the partnership
iv. Two ways to consider authority problems
1. Contract Approach: In the K world, did this agent have authority actual
or apparent to enter into this K? It is a scope of authority issue. The
partnership is also relieved of liability if the business transacted was NOT
in the ordinary scope of the partnerships business. Thus, if no reasonable
person could have believed that the transaction was in the normal course of
business, then the partnership will not be liable. See Rouse v. Pollard
above (must condense and combine)
2. Tort approach: in a tort world, use master/servant terms, and think about
the scope of employment. (It is not an issue of authority because the
partnership would not give an agent authority to commit a tort!) The
relevant question becomes what the employee was supposed to be doing
when the tort was committed. A partnership is liable if the client reasonably
believed that the services requested of a partner were undertaken as part of
the partnerships business, even if others in the industry would regard the
services as outside the scope of the partnerships business. Reasonableness
is determined by facts of each case. See Roach v. Mead above
e. RUPA 303-Statement of Partnership Authority
i. (a) Partnership may file a statement of partnership authority, which may state the
authority or limitations on the authority of some or all the partners to enter into
transactions on behalf of partnership
1. (e) Third parties are deemed to know of the limitation on a partners
authority transfer the partnerships real property if a certified copy is on file
2. (g) a statement of partnership authority is valid for 5 years from the latest
amendment
Duties of Partners to Each Other (Loyalty & Care)
a. Pages
a. 64-75
b. Statutes
a. UPA 9; 13; 14; 15; 17; 20; 21; 22; 26
b. RUPA 306(b); 404
c. Overview of Fiduciary Duties
a. Partners owe fiduciary duties to Partnership (Meinhard v. Salmon & UPA 21)
b. Employees owe fiduciary duty as agents (Agency Restatement 1.01)
d. Case
ii. Meinhard v. Salmon
1. Salmon leased NY hotel with Meihard as financial backing partner. Make
big success and lease lasts 20 years. Salmon learned of business
opportunity to renew the lease, but didnt tell Meihard b/c wanted to do it
alone. Court articulated an extremely high level of fiduciary duty which
they described as the duty of finest Loyalty and the punctilio of an honor
the most sensitive. Salmon was Legally required to take affirmative steps
to inform Meinhard of the new lease opportunity, even if he wanted to do it
alone. After informed, could have tried to obtain the lease on his own.
Business info is very valuable, and must be shared just like profits.
a. Extremely high standard, but seems to have relaxed
b. Courts cite this case (still good law) when the D will probably loose,
and really want to hammer home fiduciary duty
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xviii. (e) partner does NOT violate duty merely because the partners conduct furthers his
own interest
xix. (f) partner may lend money to and transact other business w/ partnership and as to
each loan or transaction, the rights and obligations of the partner are the same as
those of a person not a partner
xx. (g) section applies to a person winding up the business if the person is a
representative of the last surviving partner
Partnership Property
1. Pages
a. 72-75
2. Code overview
a. UPA 24, 25, 26
3. Transferring Interest in Partnership allowed?
a. UPA 26- Partners interest in the Partnership
i. A partners interest in the partnership is his share of the profits and surplus,
ii. This is personal property.
1. This right to profits may be transferred , but not management or specific
property interests(UPA 27)
b. UPA 25- Partners Rights in Specific Partnership Property (ex. truck or land)
i. (1) a partner is co-owner of specific partnership property
ii. (2)co-ownership means that:
1. (a) a partner only has the right to use partnership property for partnership
purposes, unless he is given consent by other partners
2. (b) partners right in specific partnership property is NOT separately
assignable.
3. (e) a partners right in specific partnership property is NOT subject to
dower, courtesy, or allowances to widows, heirs, or next of kin.
4. Statutes
a. UPA 24 Extent of Property rights of a partner
i. 3 rights
1. Rights as co-owner in specific partnership property
2. Interest in partnership
3. Right to participate in management
b. RUPA 204-When Property is partnership property
i. Is partnership property
1. If acquired in the name of the partnership (a)(1)
2. If acquired in the name of one or more partners with an indication on the
instrument of the persons capacity as a partner but w/out indication of the
partnership name (a)(2)
3. By a transfer to the partnership in its name (b)(1)
4. By a transfer to one or more partners in their capacity as partners if the
name of the partnership is indicated in the transferring instrument (b)(2)
5. Presumption that property purchased w/ partnership assets even if not in the
name of the partnership (c)
ii. Not Partnerhsip property
1. Property NOT acquired in the name of the partnership is presumed NOT to
be partnership property even if the property will be used for partnership
purposes (d)
c. UPA 28 Charging Order
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i. Charging order= When a partners creditor comes into court and sues for debt, if
creditor wins the partnership may be forced to give that partners stream of profits
to the creditor. (similar to lien)
Partnership Accounting
1. Pages
a. 75-81
2. Code
a. None
3. 3 basic instruments
a. Balance Sheet
i. Fundamental Equation
1. Equity = Assets Liabilities ( or also Assets = Liabilities + Equity)
a. Equity is also known as ownership or net worth
ii. Double Entry Bookkeeping
1. When you make an entry on one side of a balance sheet, an equal but
opposite entry must be made on the other side so that the two sides are
equal
iii. static snapshot of a businesss financial condition at a certain instant.
iv. Bottom line is often not meaningful figure
1. transactions that do not affect the real worth of the business to the owners
may increase or decrease the bottom line. Taking out loan increases assets
bottom line but the company is not in any better position.
v. Every transaction potentially creates a different or new balance sheet when the
transaction is recorded
vi. Numbers cannot be completely accurate b/c hard to quantify good will, reputation,
prospects, etc. as assets
vii. Aspects of Balance sheet
1. Assets
a. Cash- includes cash and cash equivalent like stocks
i. fairly accurate on balance sheet
b. Accounts Receivable- money people owe company
i. Slightly inaccurate on balance sheet because some people
just dont pay, but there is formula to adjust
c. Inventory-goods you have to sell (based on how much business paid
for inventory)
i. Inaccurate because under valued because usually sell above
cost
d. Real Property
i. Inaccurate because hard to sell sometimes, and may not get
full value
e. Fixtures-improvement to real properry(carpet, lighting, sheliving)
i. Inaccurate because hard to sell sometimes, and may not get
full value
f. Equipmenti. Will likely depreciate, so must be reflected in double entry
2. Liabilities
a. Accounts Payable money that the company owes to others; not
yet paid
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1. Pages
a. 81-90
2. Code Overview
a. UPA 17; 29; 30; 31; 32; 35(1)(b); 36; 38; 41; 42
3. Three stages to ending a partnership:
a. Dissolutioni. UPA 29 Dissolution Definition-the change in the legal relation of the partners
caused by any partner ceasing to be associated in the carrying on
1. This should be distinguished from the winding up of the business.
2. Dissolution may be intentional or accidental
ii. UPA 30 Partnership Not Terminated by Dissolution
1. Dissolution does not terminate, continues unitl completion of winding up
affairs
iii. Not the end of business, business still continues
iv. Not taking on new business, but finishing up old business
b. Winding Upi. closing things down, selling property, settling affairs, etc.
ii. UPA 37 Right to wind up
1. As long as partner did not wrongfully dissolve, there is a right to wind up
partnership affairs if you can show cause to the court.
2. This allows the partner to be very demanding
3. Most good partnership agreements change this because, this provision would
essentially require the business to sell off substantial assets to wind up and as a
result kill the business
iii. UPA 42 Rights of Retiring or estate of deceased partner when business continues
1. If the business continues after a partner leaves, the retiring partner or legal
representative has 2 options:
a. May have the legal value of the interest as of dissolution plus interest
b. May have the legal value of the interest as of dissolution plus half the
profits attributable to partnership property
2. This gives incentive to go ahead and settle business shortly after dissolution.
c. Terminationi. when all partnership affairs are wound up
ii. duty to business finally ends
4. Causes of Dissolution: (UPA 31 and 32)
i. MAY and SHOULD be modified by agreement, this is just default
b. UPA 31 Causes of Dissolution (Occurs Automatically)
i. Dissolution is caused by:
1. (1) If there is no violation of the partnership agreement, dissolution occurs
automatically when:
a. by termination of the definite term or particular undertaking in the
partnership
b. by the express will of ANY partner when there is no definite term or
particular undertaking 31(1)(B)
c. by the express will of ALL partners who have not assigned their
interests or suffered them to be charged for their separate debts,
d. By the expulsion of any partner in accordance with partnership
agreement
2. Even if violating the agreement, any partner at any time may dissolve by
express will
Business Associations 2009 20
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Outline
i. If any, but not all, of the partners are insolvent or refuse to contribute, partners shall
contribute their share of the liabilities, and the additional amount necessary to pay
liabilities in the proportion in which they share profits
ii. (e) An assignee for the benefit of the creditors has the right to enforce these
contributions
iii. (f) Any partner shall have the right to enforce these contributions to the extent he
has paid in excess of his share
iv. (g) individual property of a deceased partner shall be liable for contributions
e. (h) when partnership property and individual properties are in possession of a court for
distribution, partnership creditors have priority on partnership property and separate
creditors on individual priority, saving the rights of lien and secured parties
f. (i) where a partner has become bankrupt or his estate insolvent, claims against his separate
property rank in following order
i. those owing to separate creditors
ii. those owing to partnership creditors
iii. those owing to partners by way of contribution
11. Continuing Business after Dissolution
a. If the partnership's business continues (with the remaining partners), after dissolution, then
the new partnership is liable for all of the debts of the previous partnership. The creditors
of the dissolved partnership become the creditors of the new partnership. UPA 41
12. Effects of dissolution on Partner liability
a. UPA 36- Effect of dissolution on Partners Existing Liability
i. dissolution does not discharge the existing liability of any partner
ii. partner is discharged from existing liability upon dissolution when there is a
agreement between
a. Himself
b. the partnership creditor
c. the person or partnership continuing the business
2. such agreement may be inferred from course of dealing between creditor
having knowledge of the dissolution and those continuing the business.
iii. Where someone agrees to assume the existing obligations of a dissolved partnership,
the partners whose obligations have been assumed shall be discharged from liability to
any creditor who consents to a material alteration in the nature or time of payment of
such obligations
iv. The individual property of a deceased partner SHALL be liable for all obligations of
the partnership incurred while he was a partner but subject to the prior payment of his
separate debts.
b. UPA 41-Liability of Persons Continuing the Business in Certain Cases:
i. When persons continue the business after dissolution, creditors of the former
partnership become creditors of the continuing business
c. Case Law
i. Sheehan:
1. Large partnership where all the partners signed a long term lease. Sheehan
withdrew from partnership before moved in. Several new parters joined but
they also left before moving in. The partnership ultimately defaulted on the
loss. All pre-existing partners sued based on 2 theories, contractual privity and
use of the property. Shehan was liable because he signed the lease. Other
partners who joined after lease signed, not liable personally because UPA 17.
The incoming partners would be liable for all rents & covenants running w/
property while incoming partner is in possession of the property
Business Associations 2009 23
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2. According to UPA 36, Sheehan should have gotten an agreement to release him
from liability
13. Competition between departing partner and partnership after dissolution
a. Non-compete agreements are generally allowed in almost every industry, except for law
i. There is a delicate line because of fiduciary duty to partnership
ii. Ethical obligation to allow clients pick their attorney so this is exception
iii. There is an important distinction in law firms between taking clients and staff/attorneys
iv. Gallant
b. Duties owed by departing partner to the partnership
i. Before withdrawl/ informing the partnership a partner owes a fiduciary duty to
partnership, but modern practice has made more lenient
ii. Need to tell firm you are witdrawing so they can fairly compete to keep staff
iii. After informing the partnership of intent to withdraw, but prior to witdrawl given more
flexibility
1. may then recruit other staff and employees to come
2. still cannot reveal privileged info to competitors even after announcing you are
leaving
a. can only reveal information that is publicily available
b. Not client lists, billable hours and rates, and staff reviews
c. A partnership has an obligation to render on demand true and full
information of all things affecting the partnership of any partner. UPA
20
iv. Gibbs
1. Breach of fiduciary duty by turning over confidential partnership info to
potential new employers while still working at old firm. Not a breach for
recruiting other people to go with them in this case
Duties owed by partnership to partners
v. The relationship between partners is fiduciary in character, and imposes upon all the
participants the obligation of loyalty to the joint concern and of the utmost faith,
fairness, and honesty in their dealings with each other with respect to matters
pertaining to the enterprise. Bohatch v. Butler & Binion
vi. A partnership can expel partner w/out breaching any duty in order to resolve a
fundamental schism Bohatch
vii. Bohatch v. Butler & Binion-Lawyer fired when she accused partner of overbilling.
There is no fiduciary duty to remain partners with someone you do not wish to be
partners with.
14. UPA v. RUPA dissolution
a. 2 theories of partnership: (1) "The Aggregate" (UPA) (standard approach) vs. (2)
"Entity" (RUPA)
i. Aggregate/UPA
1. This is the method we care about
2. Steps: Dissolution "Winding Up (40) Termination
3. How to avoid: Avoid issues by partnership agreement OR postdissolution agreement
ii. Entity/RUPA
1. The entity usually isn't affected by the departure of a partner.
2. A partner "dissassocates" when he leaves ("a partner has left, but it isn't
necessarily a dissolution event). All that's required is to pay off the
departing partner or the estate of the partner (must buy the person out)
Business Associations 2009 24
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(book value vs. market value) (question: how do you know if it is book
value or market value?
3. How to handle: Should have an agreement saying that you want an
orderly buyout
4. How statute works
a. RUPA 601 defines what is disassociation
i. Includes things such as:
1. (1) Partner withdrawing, (2) other agreed event
in partnership agreement, (3) Partner expulsion
according to partnership agreement, (4)
partners expulsion by unanimous vote of other
partners, (5) Partner expulsion by judicial
determination, (6) Partner becoming bankrupt,
(7) Partners death or incompotency, etc.
b. After disassociation code gives 2 options
i. RUPA 701: Just buy out the old partner and
partnership keeps going
1. General Rule
ii. RUPA 801: similar to old UPA, which requires
liquidation
Inadvertent Partnerships
1. Pages
a. 117-122
2. Code Overview
a. UPA 16
3. Language not binding
a. Even if say not partnership is intended, that is not binding
i. Even though not binding is always helpful, so clearly specify intent in writing
b. Issue is whether they actually agreed to carry on a business for profit, as co-owners
4. 3 Main ways that an inadvertent partnership are created
a. Agreeing to share profits (creates a rebuttable presumption of partnership)
i. Rebuttable in specific circumstances listed in UPA 7 such as sharing profits to pay
debts, wages, interest or other loans.
1. See partnership- formation for more
2. Small percentage of profits is less likely to create partnership because it
looks more like incentive bonuses to employees
ii. Under RUPA 203(c), person who shares profits is presumed a partner
iii. Martin v. Peyton: sharing of profits is prima facie evidence of a partnership, but is
not determinative and can be rebutted. See 7(4)(a) (payments on a debt by sharing
profits does NOT constitute a partnership)
1. Merely giving some control in partnership to person who loaned money
does not create partnership necessarily, it is common for creditors to have
some control to protect their investment.
2. If sharing of profits and veto power are only to protect the lenders as
creditors, there was no intent to make the lender a partner. Martin v.
Peyton
3. Contributing capital alone does not make a partnership
b. HELD out to be a partner to third parties
i. EXAMPLE: Listed person as a partner on tax returns, listed in name of firm
ii. Worst case scenario for associate
Business Associations 2009 25
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1. Get paid like an assoicatie with no claims to profit because you cant force
someone to be partners, but then get the liability of a partner
iii. UPA 16 Partner by Estoppel
1. When represent yourself or consent to another person representing you as a
partner then you are liable like a partner people to whom the representation
was made.
2. If representation made in public manner, liable whether or not victim was
aware of representation or not
3. Person represented as partner cant use this to claim partnership rights
though (worst of both worlds)
a. Smith V. Kelly
i. partners in accounting business hired to work for them,
provided salary and small bonus out of profits. Firm held
out as partner in public and public documents listed as
partner. Where a partnership is not intended to be created,
and the partners did not agree that would be entitled to
share in the profits, a partnership is not created.
1. NO partnership unless they intentionally create a
partnership, can be partnership by estoppel as to
THIRD PARTIES, but not as to other partners.
2. There is no definitive test which courts apply to
determine whether a partnership exists. Courts
examine the facts and circumstances, including the
existence of the following: the sharing of profit; the
sharing of losses; an individual's right to
manage/control the business; the intent of the parties
(express and implied); and contribution of capital
(cash/property) to the business. If some of these
factors exist, but not others, then it is a case-by-case
determination. Profit-sharing, however, is prima-facie
evidence of partnership. If the parties don't share
profits, then there probably isn't a partnership.
b. Kaplan v. Gibson
i. (Georgia Case, bad decision and never followed)
professional corporation of 2 doctors. Both were suergons
and one doctor paralyzed patient. Sued both the doctors and
corporation. Justified suing the other doctor because he had
referred to him as his partner. Court said this was enough
under UPA 16 to create partnership by estoppel because
patient relied on this representation.
1. Very shaky logic here. Wells says UPA 16 only
applies to contract liability, not tort. Also hard to
believe there was actual reliance on statements.
2. Practice tip: just to be safe never refer to business
associate as partner if not really partner.
iv. How do you try to convince the courts that this person was not a partner?
1. Talk about how the person never made a capital contribution
2. Talk about how he wasnt responsible for the debts of the partnership
3. Talk about how that person had NO say in management
v. Smith v. Kelly (below)
Business Associations 2009 26
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3 recent years; (3) copies of partnership agreements for the 3 recent years; and (4) various
information that RULPA 105(a)(5) requires that the partnership agreement contain
6. Modern development for Limited Partnerships
a. 3 critical problems limited partnerships under UPLA (1916)
i. Problem 1:Need to Significantly restricting the potential liability of limited partners
for taking part in control of business. 7 of UPLA stated that limited partners were
not liable unless he takes part in the control of the business and this was very
unclear.
ii. Problem 2: Need to Make clear limited partners could not withdraw from the
limited partnership during the term of agreement
iii. Problem 3: Need for Corporation or other limited liability entities to be capable as
serving as the sole general partners
b. 3 solutions to the above problems
i. Solution 1:
1. RUPLA 303(a) states a limited partner was not responsible for partnership
debts unless he:
a. Is also a General partner OR
b. Participates in the control of the business, BUT only then liable to
those who transact with the partnership and reasonably believe the
LP is aGP.
2. 303(b) spells out what constitutes participates in control to clear up any
confusion (ONLY USE LIST BELOW IF NEEDED FOR PROBLEM)
a. (1) Being a contractor for or an agent or employee of the limited
partnership or of a general partner or being an officer, director, or
shareholder of a general partner that is a corporation;
b. (2) consulting with and advising a general partner with respect to the
business of the limited partnership
c. (3) acting as surety for the limited partnership or guaranteeing or
assuming one or more specific obligations of the limited partnership
d. (4) taking any action required or permitted by law to bring or pursue
a derivative action in the right of the limited partnership;
e. (5) requesting or attending a meeting or partners
f. (6) proposing, approving, or disapproving, by voting or otherwise,
one or more of the following matters:
i. (i) the dissolution and winding up of the limited partnership
ii. (ii) the sale, exchange, lease, mortage, pleadge, or other
transfer for all or substantially all of the assets of the limited
partnership;
iii. (iii) the incurrence of indebtedness by the limited partnership
other than in the ordinary course of its business
iv. (iv) a change in the nature of the business
v. (v) the admission or removal of a general partner
vi. (vi) the admission or removal of a limited partner
vii. (vii) a transaction involving an actual or potential conflict of
interest between a general partner and the limited partnership
or the limited partners;
viii. (viii) an amendment to the partnership agreement or
certificate of limited partnership; OR
ix. (ix) matters related to the business of the limited partnership
not otherwise enumerate din this subject (b), which the
Business Associations 2009 28
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1. Default is partnership
iii. Entity that has only one member may elect to be taxed as a corporation or it can be
classified as nothing (i.e. as thought it has no separate existence from its owner).
iv. Once entity changes its classification, it may not change its classification back w/in
five years w/out permission of commissioner. The conversation of an entity that is
currently taxable as a corporation to a partnership is itself a taxable event, treated as
though the corporation dissolved and reconstituted itself as a partnership. The
conversion in the opposite direction, from a partnership to a corporation, will usually
(though not always) be tax free.
5. Basic Tax Principles
a. Marginal v. Average Tax rate
i. Marginal Tax Rates-tax rate on the last dollar made
1. Progressive-generally the more money the higher the tax
2. Regressive tax rate- In the middle of the corporate tax bracket, there is an area
where it is regressive.
ii. Average Tax Rate- if you average the rate that all your money is being taxed at, that is
the average total tax. Will be less than marginal tax rate because first dollar is taxed at
lower rate than last dollar
b. Taxation of Long term Capital Gains and Losses
i. Gains or losses of assets held more than one year
ii. Taxed at preferential rate, because congress wants to encourage investment
c. Sole Proprietorships
i. NOT treated as separate taxable entity
ii. Income or loss is reported directly on proprietors personal income return
d. Individual Tax Rate: (page 125 of book)
i. There are 4 different individual income tax rate schedules based primarily on marital
status, plus elaborate sets of tax tables based on the rate schedules and used mostly by
persons with relatively small incomes. In addition, there is a special tax schedule for
the income of trusts and estates.
e. Unincorporated Businesses (General and Limited Partnerships, LLC)
i. Partnership and LLC are NOT taxable entities
ii. Partnerships and LLCs are treated as conduits subject to pass through taxation, which
requires the business association to file an informational return (Form 1065) showing
income and expenses and allows the partnership to allocate such income or loss to the
individual partners in accordance with the partnership agreement.
iii. Partners then include their income or loss in their personal tax return.
iv. Amount allocated are based on the income calculations of the proprietorship or
unincorporated business form and not the amounts actually distributed in cash or
property to the proprietor, partner or member
f. Corporate Taxation
i. Corporate entities are separate taxable entities
ii. Rates applicable to traditional corporations are in Subchapter C of the IRC and such
corporations are referred to as C Corporations
iii. MAIN POINT: Corporate Taxation as a C Corporation results in more taxes being
taken out because taxed on corporations earning and on dividends distributed to
shareholders
2.Example using following tax table
Taxable Income >
But NOT >
Tax + Marginal Tax
Of the amount >
$0
$50,000
$0 + 15%
$0
Business Associations 2009 32
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$50,000
$75,000
$100,000
$335,000
$10,000,000
$15,000,000
$18,333,333
$75,000
$100,000
$335,000
$10,000,000
$15,000,000
$18,333,333
$7,500 + 25%
$13,750 + 34%
$22,250 + 39%
$113,900 + 34%
$3,400,000 +35%
$5,150,000 +38%
$6,416,667 +35%
$50,000
$75,000
$100,000
$335,000
$10,000,000
$15,000,000
$18,333,333
Outline
a. 404(c)(7) of ULLCA states that addition of new member requires unanimous consent of all
LLC members
9. 2 documents to really need to draft when forming LLC
a. Articles of Organization (required by 202 ULLCA)
b. Operating Agreement (allowed under S103 ULLCA, but strongly encouraged)
10. Formation of an LLC
a. Creation:
i. To form must deliver articles of organization to Sec. of State .( 202 ULLCA)
ii. Articles of Organization (203)
1. Name, address of designated office, address of agent for service of process,
name and address of organizers, whether term company (if so specified), how
managed.
2. More important stuff is actually in the operating agreement
3. This is a brief and formal document
b. Name
i. must have LLC or similar in it and name must be distinguishable from other LLCs.
(105)
ii. May reserve a name under 106. Gives you 120 days to formally file after reserved
iii. If name already in use in another jurisdiction, May register name even if not currently
planning on doing business in state. 107
c. Agent for Service of Process
i. Must maintain an office and registered agent for service of process in the state. ULLCA
108
d. Powers:
i. Can be organized for any lawful purpose and has same powers of any natural person
person. 112
ii. Myer: LLC wanted beverage license in state that denied them to corporations but
allowed partnerships to have. Denied liquor license to LLC.
e. Contribution of Assets
i. 401- May consist of tangible property, intangible property, or any other benefit to the
company
1. Very broad- Would even include things such as promise to serve as Manager of
LLC or as a CPA (or Etc.)
ii. Most common contribution if there was a prior business form that was transitioned into
an LLC is the ownership interests from the prior entity
11. Things to do after formation of LLC
a. Draft Operating Agreement-103
i. Key agreement among members
ii. May be oral, but should be written
iii. Similar to partnership agreement or shareholder agreement
iv. If things are left out, UCCLA fills in gaps
v. Does not have to formally filed
vi. Great deal of freedom, but are a couple of Un-waivable provisions
1. Good faith fair dealing
2. Fiduciary duty
vii. Agent acting for the LLC does not have to sign, in order for the operating agreement to
be binding on the LLC. (Elf Atochem North America)
12. Fiduciary Duties 409 a-d
a. Duty of Loyalty-duty of heart, faithfulness 409(b) & 603(b)(3)
i. Supposed to act in good faith with the best interest of the company in mind
Business Associations 2009 35
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Outline
Trait or
Characteristic
GOVERNANCE
TAXATION
LIABILITY
LIFE SPAN
INVESTMENT
LIQUIDITY
MEMBER POWER
CAPITAL
FORMATION
COSTS
CORPORATION
Republican, representative
government; more likely to hire
managers so owners can sit back
and let the returns roll in
Entity taxation; either C
corporation or S corporation
depending on which box the
company checks for income
taxation
Limited liability (same is true for
limited partnership); s/h are not
liable for debts of corporation b/c
they are not the corporation
Perpetual; corporation continues
along; to get out of the business,
s/h sells stock; corporation
unaffected by comings & goings
of s/h
Stock in large, publicly traded
corporation is very liquid, but
stock in closely held corporation is
illiquid because s/h must find
buyers (Why would a nonfamily
member want to buy into a familyowned business?)
Shareholder in a publicly traded
corporation generally has no
power or authority; this is not
necessarily true in a closely held
corporation
Corporations must sell more stock,
which if done publicly requires
complying with substantial SEC
filing rules
GENERAL PARTNERSHIP
Democratic, direct
government; more likely for
owners to play an integral role
in the management
Passthrough taxation:
partnership prepares tax return
but does not pay actual tax;
passes tax liability on to
partners
Personal liability
Fixed or limited term; a
general partnership dissolves
upon any number of
circumstances death,
departure could be
devastating to business
Partners can liquidate assets
by forcing a dissolution of the
partnership
REGISTRATION
FEES
NUMBER OF
PEOPLE
a. 193-211
2. History of distrust against corporations
a. First idea developed by church because needed something with perpetual life
b. People were very suspicious of early on
c. Were originally authorized by the crown and charter was similar to monopoly
d. Special charter or legislative approval was required, led to corruption
i. (solution was later general incorporation statutes)
3. State control
a. Each state controls incorporation in that state
b. State law governs corporate law
4. International affairs rule
a. foreign courts should apply the law of the state of incorporation to issues relating to the
internal affairs of a foreign corporation
i. Exceptions
1. Largest corporations may also have to deal with federal law
2. Some states have rejected this rule. California is an example. When companies
come to CA, must use CA law, not internal affairs rule.
5. Sarbanes-Oxley Act (federal Law)
a. overrides some traditional state laws
b. Executive Compensation
i. SEC has power to seek a freeze of extraordinary payments made to corporate officers
and directors during the course of an SEC investigation
ii. Requires CEOs & CFOs to reimburse the company for any bonus or equity-based
compensation or profits received from the sale of securities during the 12-month period
after the first publication of a financial statement that later turned out to be erroneous
and had to be restated
c. Increases SECs power to bar people from serving as officers or directors of public companies.
i. SEC need only show that person is unfit to bar people from serving as officers and
directors for misconduct that falls far short of egregious or recidivist behavior.
d. Requires the SEC to develop rules of professional conduct for s of public companies.
6. Why state competition?
a. Race of the lax
b. All the states want to compete for the filing revenues that incorporation brings
c. States compete to offer most innovative and business friendly laws
d. Deleware has long been the winner (of fortune 500 over incorporated in DE)
7. Changing state of incorporation
a. Example is provided by Dole Food Company, Inc., Proxy statement
i. Usually incorporate a subsidiary in the state where you want to re-incorporate
ii. Then have shareholders elect to merger into that corporation
iii. Reasons Dole incorporated
1. Quorum voting
a. HI- requires above 50% for quorum
b. DE- Can set lower quorum percentage (1/3)
2. Distributions
a. HI (MERCER LAW) only pay dividends if:
i. Wont be bankrupt after pay out
ii. Will be able to pay bills as come due
b. DE- No matter state of books, only if made profit that year
3. Takovers
Business Associations 2009 39
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a. DE- prevents taker overs, may have staggered board of directors elects,
limited liability for directors
1. Proper Formation of a Corporation
a. If Corp. is not adequately formed, existing entity is probably a partnership. Where a
corporation is adequately formed, shareholders have no personal liability for that entitys
obligations. Their loses are limited to the consideration paid for their shares.
2. Classic Characteristics of a Corporation
a. Continuity of Life-existence of the corporation is not dependent on who the owners or
shareholders are at any one time. If shareholders die, sell out, etc., the corporation continues
as a separate entity
b. Perpetual Existence-corporation continues indefinitely until the owners decide to dissolve it
or merge it into another business
c. Centralized Management-management of a corporation is vested in an independent body, the
board, but not in the shareholders themselves
d. Free Transferability of Interest-ownership interests of the shareholders may be sold or
transferred to third persons w/out approval or consent of the corporation or other shareholders
e. Limited Liability-shareholders enjoy limited liability b/c corporation is an entity in its own
right
3. 3 Major Documents in a Corporation
a. Articles of Incorporation
1. The must set forth is the plain vanilla articles
2. The may set forth is the more complete set
1. Purpose Clause: generally not in the articles now, and if not, the default = for
all lawful purposes, but could use a more restrictive purpose clause when you
dont want to expand the scope of the business
2. Wells 3 Is (what the directors would appreciate made available)
a. Immunity
b. Indemnification
c. Insurance Policy so the corporation does not have to foot the bill but
the insurance will handle the cost of good faith decisions gone wrong
b. By-Laws: tend to be longer and have more useful information
c. Shareholder Agreement essential for a close corporation
4. Wells: Forming a Corporation, Generally
a. First: file the Articles of Incorporation
b. Second: sit down with a lawyer and decide the business layout
c. Third: By-laws these lay out the details of the corporation
d. Fourth: Shareholder agreement
The Formation of a Closely Held Corporation
1. Pages
a. 212-227
2. Code Sections
a. RMBCA 1.20, 1.25, 1.40(2),(21),(22), 2.01, 2.02, 2.03, 2.04, 2.05, 2.06, 3.01, 3.02, 3.04, 4.01,
4.02, 4.03, 5.01, 5.04, 6.01; 6.03, 6.20, 6.21, 7.32
3. Definition-Corporations with few shareholders, whose shares are NOT publicly traded. Shareholders
are likely to be active in the management of the business and are members of the board of director.
Thus, the functional role of the board of directors is likely to be minimal and purely formalistic
4. Where to Incorporate
a. Can essentially incorporate anywhere in the world, but realistically there are 2 choices
i. Delaware
ii. Home state
Business Associations 2009 40
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Outline
2. One or more classs or series (may be same as voting shares) entitled to receive
assets of corporation upon distribution
b. Act Definitions: 1.40
i. (2) Authorized shares means the shares of all classes a domestic or foreign
corporation is authorized to issue
ii. (21) Shareholder means the person in whose name shares are registered in the
records of a corporation or the beneficial owner of shares to the extent of the rights
granted by a nominee certificate on file with a corporation.
iii. (22) Shares mean the units into which the proprietary interests in a corporation are
divided.
c. Authorized Shares: 6.01
i. Articles of incorporation must set forth all classes of shares and series within class
ii. Articles must authorize: (2 main requirements)
1. One or more classes or series with unlimited voting rigts
2. One or more classs or series (may be same as voting shares) entitled to receive
assets of corporation upon distribution
iii. Articles may authorize:
1. Special voting rights
2. Calculate dividiends or priority to dividends in any manner
3. Etc
d. 6.03 Issued and Outstanding Shares
i. May issues the number of shares authorized
ii. Shares that are issued are outstanding shares until they are reacquired, redeemed,
converted, or cancelled.
e. 6.20 Subscription for Shares before Incorporation
i. Subscription agreement to buy shares before incorporation is binding for 6 months
after incorporation unless otherwise stated
f. 6.21 Issuance of Shares
i. Directors power to issue shares may be reserved by shareholders in articles of
incorporation
ii. The board of directors may authorize shares to be issued for consideration consisting of
any tangible or intangible property or benefit to the corporation, including cash,
promissory notes, services performed, contracts for services to be performed, or other
securities of the corporation.
1. Cannot give shares away for nothing
iii. Hanewald case:
1. If dont pay for stock and company goes under, creditors can sue and force you
to pay full value for stock so they have something to take from the company.
iv. Occurs at the Organizational Meeting under RMBCA 2.05 (see above from class
notes)
g. Issuing new classes or series of Shares
i. Required to amend the articles of Incorporation to authorize the new type of shares.
RMBCA 6.02(c)
Premature Commencement of Corporate Business
1. Page
a. 236-253
2. Code
a. RMBCA 2.04
3. Promoters
Business Associations 2009 44
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a. Definition= Persons directly or indirectly taking initiative in founding and organizing the
business or enterprise of an issuer
b. Promoters must obtain the necessary capital, assets, and personnel so that corporation may
function.
c. Can be non-natural persons
4. Promoters Duties to others
a. Owe significant fiduciary duties to other participants in the venture
i. To other promoters (treated as if having a general partnership) AND
ii. to the corporation as a separate legal entity AND
iii. the members, including those who it was anticipated would make application to invest
in the venture
b. general creditors of the corporation or their representatives, including trustees in bankruptcy,
may stand in the shoes of the corporation and bring claim against promoters who violated their
legal duty.
c. Self Dealing prohibited
i. Class Hypo- What if A acting as promoter buys land for 100K before incorporation.
Then incporporates with B, and sells the land to the company at 200K.
1. Breach of fiduciary duty
ii. Modified Hypo- Even if the 200K was it actual value
1. Still breach of duty
iii. Even if given 200K worth of stock
1. Still breach of duty
5. Liabilities of Promoters
a. General rule
i. RMBCA 2.04 Liability for Pre-incorporation Transactions
1. All persons purporting to act as or on behalf of a corporation, knowing there
was no incorporation under this Act, are jointly and severally liable for all
liabilities created while so acting.
a. What is Knowing
i. Actual
ii. Constructive (adopted as mercer law)
1. should have known because it is so easy to find out.
(even though is inconsistent with equitable doctrines)
b. Even if later becomes a corporation, is still liable unless adoption or
novation
ii. Under 2.04 a promoter is liable on Pre-incorporation agreement, and even after the
corporation is formed the mere formation does not change the promoters liability.
iii. EXAM TIPS: Hypos from Tests
a. Generally test answers have been 2.04 as answer
2. If unknown for a couple of weeks the articles were delayed in the mail, and
Martha the manager of LLC executed contracts as President of Scandles, Inc.
a. Correct answer: could be enforceable against Martha under 2.04 or
Scandles LLC (not corp.)since she was acting on behalf of them
3. AOI mailed in on april 17, but not filed until april 21. Shemp (manager of LLC)
executed contract on 17 as NYUCK Inc., by Shemp, as president believing in
good faith that would be corp before goods arrived.
a. Correct answer: Schemp would be obligor of contact under 2.04
i. Schemp had constructive knowledge of no inc. adoption doesnt
fix because still surety
Business Associations 2009 45
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iv. EXAM NOTE FOR SUCCESSOR LIABILITY: Do not confuse this with
corporation- Successor Liability where corporation IS liable promoters and
predecessor business because of the continuing nature of the business
b. ways Relieving Promoter of Pre-incorporation liabilities
i. Pre-incorporation agreement to not hold promoter liable
1. K where the third party agrees not to hold the promoter liable, but to only look
to the corporation for relief.
ii. Ratification1. DOESNT WORK, can only work of corp. was in existence at time K formed,
so doesnt apply to pre-incorporation issues
iii. Novation1. Works if all the parties (promoter, corporation, and 3rd party) agree to make the
corporation liable for the contract rather than the promoter. Essentially is a new
contract. Parties agree to give up rights under first K in exchange for rights
under second K.
iv. Adoption
1. After the corporation is formed, the company adopts the contract and agrees to
become liable for the contract. Promoter is still liable as surety unless released
from contract
c. Equitable and legal defenses
1. ***No equitable without good faith belief***
ii. RMBCA 2.04
1. Argue you didnt know there was no incorporation. Will always loose because
Mercer adopts constructive notice and could have discovered whether you were
incorporated through checking with the secretary of state
iii. Defacto incorporation
1. See below
iv. Corporation by estoppel
1. See below
6. Rest. 2d Agency 326 (defines what type of contract promoter might have signed)
a. Alternatives that may represent the intent of the parties when a promoter makes an agreement
with another on behalf of the corporation to be formed
i. Other party is making a revocable offer to the nonexistent corporation with will result
in a contract if the corporation is formed and accepts the offer prior to withdrawal
ii. May understand that the other party is making an irrevocable offer for a limited time
iii. May agree to a present contract by which the promoter is bound, but with an agreement
that his liability terminates if the corporation is formed and manifests its willingness to
become a party
iv. May agree to a present contract on which, even though the corporation becomes a
party, the promoter remains liable either primarily or as a surety.
7. Defective Corporation
a. De-jure Corporations = corporations which are legally created because they are properly filed
in accordance with the law.
b. When De-jure incorporation is not accomplished, The strict requirements of 2.04 may hold a
promoter liable when the promoter believed they had a corporation, but failed to meet the
formal requirements. In response to this, some courts adopt 2 equitable forms of incorporation.
(this will be in conflict with 2.04, cant reconcile)
c. These 2 doctrines serve as promoters defenses to personal liability
i. De Facto Corporations
Business Associations 2009 46
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Whos debt is this? Wells (it doesnt indicate that he is signing in some capacity
for the company)
2. AB Farms Co (typed)
By DC Wells, President (signed)
DC Wells, President (signed)
Who is liable? Both Wells and the Corporation. The by indicates that the
corporation assumes liability, and the 2nd usage of the name indicates that wells is
taking responsibility
3. AB Farms Co (typed)
By DC Wells, President (typed)
By Joe Doakes, President (typed)
Who is liable? company (2nd by in front of Joe Doakes name trumps the
personal which then indicates that the company is liable)
4. AB Farms Co (typed)
(Signed name)
Authorized signature
(court held that Wells was liable for it, because it missed the magic word by
Disregard of the Corporate Entity
1. Pages
a. 258-288, 300-313
2. Code
a. RMBCA 6.22
3. General Shareholder Liability -MBCA 6.22(a)
a. A shareholder is not liable to the corporation except to pay the consideration for which the
shares were authorized to be issued or specified in the subscription agreement
b. Unless otherwise provided in the articles of incorporation, a shareholder of a corporation is not
personally liable for the acts or debts of the corporation except that he may become personally
liable by reason of his own acts or conduct.
c. Generally assumed shareholders and corporation are separate and distinct
4. Piercing the Corporate Veil Generally
a. Purpose:
i. General purpose is to prevent fraud or achieve equity
ii. The common feature in all piercing cases is that courts agree that piercing is
appropriate only when recognition of separate corporate existence will lead to injustice
or an unfair or inequitable result ( Baatz v. Arrow Bar.)
b. When it arises:
i. Usually arises in context of creditor who cannot collect from corporation
ii. Occurs in the context when a wholly owned subsidiary has no real assets, so try pierce
the veil and reach the parent company
iii. Almost exclusively arises in CLOSELY HELD CORPORATIONS
c. Mercer law allows piercing for any limited liability company
5. Factors considered when Piercing the Corporate Veil
a. Fraud
i. Promoting fraud or something illegal
ii. Misrepresentation, a scheme whereby the corporation cannot possibly make profits or
merely nominal profits (Bartle) (the worm case)
b. Inadequate Capitalization
i. look at what corp. was designed to do, then look at what it needs to do to carry on in a
responsible way
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b. Dewitt Truck Brothers v. W Ray Flemming Fruit Co. 4th Cir. 1976. owed trucking co.
money for deliveries. had personally guaranteed the notes. Mere fact that all of the
corporate stock was owned by one person is insufficient grounds for disregarding corp.
c. Radaszewski v. Telecom Corp.-8th Cir. 1992. Person injured by truck driver employed by
subsidiary co. Where there is no fraud, the corporate veil cannot be pierced, even if subsidiary
goes under.
d. Baatz v. Arrow Bar-s were injured when patron from s bar drove drunk. When the court
deems it appropriate to pierce the corporate veil, the corporation and its shareholders will be
treated identically. Not sufficient facts in this case.
e. Fletcher v. Atex, Inc. 2d Cir. 1995. sued for keyboard injury seeking to hold parent co.
liable. and Kodak did not operate as a single economic entity, therefore piercing was not
permissible in this case.
10. Reverse Piercing
a. Definition
i. Corporation and organizers themselves (rather than creditors) claim that the corporate
form should be ignored to gain some type of benefit in the name of equity.
ii. Only basis is in equity
b. Acceptance
i. Accepted as mercer law
ii. Not universally accepted, because makes no sense since the party denying
incorporation is the one who filed it.
c. Cargill
i. Family farm in MN incorporated and run by owner couple
ii. Corporation in debt to Cargill for farm equipment, and bankrupt
iii. If couple were merely individuals farm would have homestead exemption, as
corporation there is no homestead exemption b/c corp. doesnt live anywhere
iv. Court agreed to ignore corporate form and allow exemption out of equity
d. Texas workers compensation law
i. Less likely to work when big corporation tries to argue reverse incorporation
ii. Example would be parent company who would be liable for personal injury suit if a
separate corporation, but would not be under workers compensation laws if the
subsidiary was actually just a division
11. Deep Rock Principlea. Definition
i. bankruptcy court may subordinate (move to the back of the line) claims presented by
controlling shareholder to claims of other creditors or preferred shareholders if the
shareholder acted inequitably or unfairly.
b. Pepper v. Litton
i. Sole owner knows corp. is about to go bankrupt
ii. She hadnt paid herself in years
iii. Sues her own corporation, allows default to occur so she can take all assets before other
creditors
iv. Court prevented this
c. This is not really piercing, but similar ideas
12. Successor Liability
a. General Rule:
i. Corporation acquiring all or a portion of the assets of another corporation does NOT
acquire that corporations liabilities and debt
b. 4 EXCEPTIONS to general Rule:
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e. (e) corporation may place in escrow shares issued for a contract for
future services
4. 6.22: Liability of Shareholders
a. Shareholders are not liable to the corporation in any respect other than
to pay for the shares
b. Not personally liable for acts of company
iii. How many shares to authorize in Articles of Incorporation
1. More than you need right now so you can sell later
b. Debt capital
i. Loan
1. Creditors get right to be repaid debt but no say in management
2. Shareholders can lend to company as well benefits include
a. Tax deduction
b. Promise to repay
c. Helpful if trying to organize so all owners have equal voting power, but
provide unequal asset contribution
ii. Sell Preferred Shares
1. Preferred shares= usually do not have right to vote, but have preference as to
distributions before other stock (can be changed)
2. Prevents S-Corp election for tax purposes
3. Preferred shares provides a form of leverage because you are getting money to
use, hopefully paying a low dividend, and earning a higher return than you have
to pay. Therefore this is a form of leverage
iii. Bonds or Debentures
1. Both are Negotiable debt instrument that is easily transferred
2. Both are Essentially long term loan agreements, guaranteed interest and paid off
in certain period of time.
3. No voting rights in either
4. Bond= have identified some other piece f property the that can be foreclosed
upon (secured)
5. Debenture= no identified collateral, so unsecured obligaton
6. variations
a. Zero Coupon Bondsi. pay no interest at all, sell at a substantial discount from face
value and upon maturity the holder receives face value-ex.
Treasury notes
b. Junk Bondsi. widely used in takeovers, are simply below investment grade
debt instruments
iv. Tax Advantages of Debt
1. interest payments on debt are deductible by the corporation while dividend
payments on equity securities are not
2. further repayment of debt may be non-taxable return of capital while a purchase
or redemption of equity securities from shareholder by corporation is taxable
event.
c. Considerations in Balancing Capital Ratio
i. Debt/Equity Ratio v. Undercapitalization-Possible Deep Rock problem, Danger of
being held too thinly capitalized and subject to piercing and personal liability
ii. Liquidation v. Stability
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iii. Maintaining control of corporation v. need to sell stock to raise Capital outside-balance
the need for outside money v. losing majority control by selling too many shares
5. Leverage: Balancing Debt v. Equity
a. Basic Concept of leverage
i. Using other peoples money to make your own money. So in many ways debt can be a
good thing for companies because it can be used to make more money.
ii. Making a higher rate of return on your investment than you have to pay in interest on
the debt
iii. Highly leveraged can rapidly increase profits, but will rapidly increase losses if fail
iv. Therefore incentive to borrow if you can receive a low interest rate and think you will
succeed.
b. Leverage hypo
i. No leverage
1. Have 100,000 and Borrow no money
2. Buy one house for 100,000. Sell 5 years later for 200,0000.
3. 100,000 profit
ii. Leverage
1. Have 100,000 and borrow 400,000 from bank
2. Buy 4 houses for 100,000. Sell each in 5 years for 200,000
3. 500,000 profit
c. Fully leveraged
i. Corporation has borrowed as much money as it can because:
1. Limits by law
2. Limitation by the articles of incorporation
3. Nobody is willing to lend anymore
ii. Rule of thumb: have 1$ of equity for every dollar of debt
d. Disadvantages of leverage
i. The rate of return on investment may not be as high as you thought, and company may
be unable to pay depts.
ii. More quickly increases losses if you fail
e. Advantages of leverage
i. Owners dont have to risk as much of their money
ii. Highly leveraged corporation can rapidly increase profits
iii. Use other peoples money to make money.
iv. Tax benefits on paying interest, but none on paying dividends
f. Example of Leverage on earnings per share
i. Shares cost $100 per share, and corp. needs 500,000.
ii. Chart demonstrates that at low profits then high leverage can be bad, but the more
earnings made the higher the earnings per share when leveraged
Un-leveraged approach (raise 500,000 entirely by selling shares)
Assumed Net Earnings
25,000
100,000
150,000
200,000
Number of Shares
50,000
50,000
50,000
50,000
Earnings Per Share
.50
2.00
3.00
4.00
Leveraged Approach (raise 250,000 by selling shares & 250,000 by debt)
Assumed net earnings
25,000
100,000
150,000
200,000
Interest on bonds (8%
20,000
20,000
20,000
20,000
on 250,000)
Earnings allocable to
5,000
80,000
130,000
180,000
common
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Number of Shares
Earnings per share
25,000
.20
25,000
3.20
25,000
5.20
25,000
7.20
6. Issuance of Shares:
a. 1.40(21)
i. Shareholder means the person in whose name shares are registered in the records of a
corporation or the beneficial owner of shares to the extent of the rights granted by a
nominee certificate on file with a corporation.
b. 1.40(22)
i. Shares units into which the proprietary interests in corporation are divided.
c. Pre-Incorporation Subscription
i. 6.20
1. Subscription for shares entered before incorporation is IRREVOCABLE for 6
months, unless agreement provides other duration
2. Subscription agreement after incorporation is merely treated as regular issuance
of shares under 6.21
ii. Potential investors are approached individually to determine whether they would be
willing to purchase a specified number of shares 6.20(a)
iii. Once company is formed the condition will be satisfied for acceptance and investor
MUST purchase the stocks
d. Par Value
i. No real reason to have par value
ii. Simply sets an arbitrary value at which stock cannot be sold below that price
1. Only applies to original issuance. Can be resold at any price by shareholders
(Torres v. Speiser)
iii. Used for psychological benefit that shares have certain value
iv. MBCA has eliminated requirement and made par value optional.
e. Watered Stock
i. Watered stock is stock issued for less than par value.
1. If no par value then there will not be watered stock.
ii. In most states an investor who purchases watered stock is automatically liable to the
corporation for the difference between par value and what he actually paid.
1. Discount Stock-shares issued for cash less than par value (True Watered stock)
2. Bonus Stock-shares which the company gave away and nothing is actually paid
iii. Failure to pay for shares in a corporation makes the directors corporately liable to
corporate creditors. Hanewald v. Bryans.
f. Payment for Stock
i. Cant issue stock for free, must have some form of consideration for stock. 6.21(b)
ii. If dont pay for stock and company goes under, creditors can sue and force you to pay
full value for stock so they have something to take from the company. (Hanewald)
g. 6.25 Issuing Shares with Certificates
i. (a) Physical stock certificates are not required
ii. (b) If you have a certificate, it must at least have:
1. (1) the name of the issuing corporation and that it is organized under the law of
this state;
2. (2) the name of the person to whom issued; and
3. (3) the number and class of shares and the designation of the series, if any, the
certificate represents.
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iii. (c) the designation of class, series, and associated rights must be summarized
somewhere on the certificate, or state the corp. will furnish such info on request.
iv. Certificate must be signed by 2 of officers or directors and must bear corporate seal
h. 6.26 Issuing Shares Without Certificates
i. Unless otherwise prohibited, board can authorize shares without certificates
ii. Within a reasonable time after the issue or transfer of shares without certificates, the
corporation shall send the shareholder a written statement of the information required
on certificates by section 6.25(b) and (c), and, if applicable, section 6.27.
7. Types of Shares
a. Common Stocki. Two fundamental Characteristics of Common Stock
1. Right to Vote for the election of directors and on other matters
a. Unlimited voting rights
2. Right to receive dividends when distribution is made
ii. Other rights
1. Inspect books and records 16.02
2. Sue on behalf of corporation to right wrong committed against it 7.40-7.47
3. Right to financial information 16.20
4. Value of common stock will increase if earnings are not distributed
iii. Classes of Common Shares
1. different classes of common shares are permissible, as long as there are
appropriate provisions in the Art. Of Incorp. 6.01
2. Corp. can establish a scheme of consummate generality designed to
accommodate the most innovative and ingenious creator of new classes or types
of shares.
3. Most states prohibit converting from common to preferred stock upstream
conversion
4. If the articles of incorporation do not specify what type of stock, it will be
common stock
b. Preferred Shares
1. Can be used to create leverage
ii. Preferential to those assigned common shares, but limited in some ways
iii. Preferred shares are usually non-voting
iv. holders of preferred shares are typically are entitled to a specified distribution before
anything can be paid on common shares
1. Dividend agreements Typically have specific amount dividends or percentage
dividends
a. Specific amount might pay $10 every year per share
b. Percent dividend might pay $6 for 6% on $100 share
2. If cant pay dividend, two types
a. Cumulative Preferred stock- If could pay dividend last year, then must
pay last years and this years dividend before paying anyone with
common stock
b. Non-cumulative Preferred Stock- doesnt carry over if couldnt pay
dividend last year
v. Rights of Preferred shares (like other shares) can be customized in almost any way
vi. Common features of publicly traded preferred shares
1. Cumulative dividend right
2. Usually Non-voting
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3.
4.
5.
6.
8. Authority
a. Torres v. Speiser-NY 2000. filed MSJ that sale of his minority interest in corporation was
valid. While NY law prohibits an initial issuance of stock in a new corporation for less than
par value, this law has no bearing on re-sale of issued shares among shareholders.
b. Hanewald v. Bryans-ND 1988. Art. Of Inc. authorized corporation to issue 100 shares.
issued 50 shares but never paid for them. Shareholder is liable to the extent of the difference
between the par value and the amount actually paid, and to such an extent only as may be
necessary for the satisfaction of the creditors claim.
Securities Regulation
1. Pages
a. 347-356, 365-369
2. Code
a. RMBCA 7.22
3. History
a. Prior to depression there was no securities regulation
b. When created first securities Regulations there were 2 pillars
i. Sunshine Theory- Make everything out in the open with full disclosure, this would
force honesty
ii. Efficient Market theory- Anyone who wants to sell stock can if they provide full
disclosure and the market will set the value for the stock
1. Ex. of efficient Market theory
a. Govt. allowed NV brothel to incorporate but required them to make
full disclosure and the market made the stocks worthless
c. Two key Acts
i. Securities act of 1933
1. Designed to inusre that when people offer/sell securities to the public it is
an honest process
2. Registration of securities
3. Only Concerned more with the initial sale of securities
4. System of full disclosure, NOT a permit approach
5. Contains a number of private remedies for investors who are injured due to
violations of the Act
6. There are general anti-fraud provisions which bar material omissions and
misrepresentations in connection with the sale of securities
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Outline
c. Even if not within 506 is still may be private placement, but this
simply guarantees it is private
ii. Small Offering: 3(b) of the 1933 act
1. Any offering less than 5 million dollars qualifies for an exemption
2. These small offerings can be split into 2 groups
a. Rule 504 (offerings less than 1 million)
i. See below for more
b. Rule 505 (offerings less than 5 million)
i. See below for More
iii. Intrastate Offering: 3(a)(11)
1. If every part of the offering and corporation is in one state then the offering
may qualify for an exemption
2. Requirements
a. Offering made to residents on 1 state
b. Corporation incorporated in that state
c. Corporation primarily located in that state
d. Revenues spent in that state
3. If 1 person out of 100 investors is from out of state, then the entire
exception is blown
a. Can become issue of some investors have multiple homes
4. Rule 147 as Safe Harbor
a. If 80% of everything to do with money and business activity is
conducted within a state, then SEC guarantees it will meet the
exemption
b. 80% is measured at the time the exemption is sought, business is
allowed to expand at a later point beyond state lines
c. Regulation D- Exemptions
i. These are the exemptions defined by the SEC.
ii. These apply to the private placement and small offering exemptions discussed
above
Rule 504
Rule 505
Rule 506
Aggregate
1 Million (12 mos.)
5 million (12 mos.)
Unlimited
Offering price
Limitation
Number of
Unlimited
35 + unlimited accredited
35 + unlimited accredited
Investors
investors
investors
35=ordinary
35=ordinary
citizens. Must be
citizens. Must be
able to fend for
able to fend for
themselves which
themselves which
usually requires
usually requires
professional
professional
representative
representative
Unlimited = wealthy
Unlimited =
people, institutional
wealthy people,
investors, insiders of co.
institutional
investors, insiders
of co.
Investor
none
none
Purchaser must be
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Qualification
Sophisticated (alone or
with help of
representation).
Accredited is presumed
qualified.
Permitted
no general solicitation
permitted
Outline
ii. Only have rights if expressly included in articles of incorporation (must opt in)
iii. Current shareholders have Right to purchase proportional amounts of
corporations unissued shares, when board decides to issue, in order to prevent
dilution. Not required to though
f. No preemptive right to the following
i. Shares issued as compensation to officers, directors, employees6.30(b)(3)
ii. Shares issued to satisfy conversion or opt in rights of officers, directors, or
employees. 6.30(b)(3)
iii. Shares issued w/in 1st 6 months of corporation6.30(b)(3)
iv. Shares sold other than for money. 6.30(b)(3)
v. Preferred stock (b/c no voting rights) 6.30(b)(4)
e. Publicly Held Companies and Pre-emptive rights
i. Publicly held corporations can have preemptive rights but they NEVER do. dont
elect pre-emptive rights because it would be so complex if every shareholder had
pre-emptive right to buy proportional share
ii. Only used by closely held corporations, but probably a good idea for close
corporations to have.
f. Required to sell at fair price to prevent dilution
i. Even if shareholder chooses not to elect his preemptive right, he has right to
demand that the new issue of shares be sold at a fair price.
ii. Selling shares at below fair value significantly dilutes the value of all shares and
violates shareholder rights.
iii. Katzowitz v. Sidler
1. 3 shareholders. 1 shareholder decided he was done and didnt want to invest
any more. Rejected his preemptive right to new shares. Other shareholders
sold themselves shares well below fair value. Resulted in unfair dilution
g. In recapitalization there is fiduciary duty
i. Lacos
1. Created a new super voting stock, but entitled to less dividend. Who ever
owns this stock elects 75% of the board. Essentially owner of this stock
runs the company. Manager who was also main stockholder said he wanted
to do it to prevent takeovers. This super stock could not be freely transferred
so it protects manangement. The deleware court that this type of antitakeover provision is allowed
2. Problem was that the main owner said that if he didnt get this new type of
stock he wanted, that if he didnt get his way he would harm the company
and only protect his interests. Court decided he had made illegal threats to
breach fiduciary duty. So it was only the approval that was flawed, not the
structure.
h. 6.31: Corporations acquisition of its own shares
i. Corporation may acquire its own shares
Distributions by a Closely Held Corporation
1. Pages
a. 383-390, 394-415
2. Code
a. 6.40(a), 8.33, 6.40(c)
3. Ways to get return on investment in closely held company
i. Dividend
ii. Stock appreciate in value
1. Probably cant sell
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iii. Job
1. Director, officer, employee
iv. Benefit package
a. (All can be risky because none of these are guaranteed to occur. This is why shareholder
agreement is so essential to guarantee some of these benefits to potential minority
shareholders)
4. Distribution by a Closely Held Corporation
a. Correctly identify closely held company
a. Key features
i. Few shareholders (no bright line #)
ii. Involved in management or operation
iii. No ready market with which to sell shares
b. 6.40(a)
a. A board of directors may authorize distributions to shareholders. Subject to
restrictions of articles and limitation of 6.40(c)
c. Distributions definition-1.40(6):
vi. Elements
1. Distribution of cash or property
a. Microsoft could have software dividend
b. Could have stock dividend but is stupid because everyone will still
have same percentage
2. Paid to shareholders
3. On account of their share of ownership
vii. May come in the following forms:
1. Dividend
a. most common to simply give cash
2. Purchase, redemption, or other acquisition of shares
a. Corporate re-purchase of shares is distribution
b. See below for more
3. Distribution of indebtedness OR otherwise.
g. Repurchase of Shares as a distribution
i. Reason Re-purchase of shares is distribution
1. Shareholders get money in exchange for returning shares to company
2. Its not a sale because company didnt really get anything of value in return,
the company cant list their own stock as an asset
3. If company bought shareholders stocks in another company then this would
NOT be a distribution. Company can list this as an asset.
4. Therefore all three requirements of distribution are met.
ii. If company re-purchases shares from some, is everyone entitled to repurchase?
1. General Rule
a. If :
i. majority shareholders, (1) acting as directors, (2) cause the
corporation to buy the stock (3) of a majority shareholder,
b. Then:
i. they must offer each shareholder the equal opportunity to (1)
sell a ratable number of his shares (2) at an identical price, or
else the majority shareholders have breached their fiduciary
duty to the minority shareholder.
c. Analysis
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MORE than enough money for those things. Lost suit where
minority shareholders sued for dividends
b. Basic Jist: Better pay dividend unless you have a good reason for
keeping excess money.
iii. Maximum Dividend?
1. 6.40(c)- A distribution may not be made UNLESS Neither of the following
tests are met:
a. (i) Equity Insolvency Test-corporation would be unable to pay its
debts as they become due in the usual course of business
i. monthly payment debt, power bill, operating expenses
ii. KEY NUMBER here is to look at cash available in assets.
Need to have enough cash to be able to pay
b. (ii) Bankruptcy or Balance Sheet Testi. Total assets < total liabilities + sum needed to satisfy
preferential shareholders if corporation was dissolved
2. 8.33(a)- Director Liability for Unlawful distribution
a. If the board of director pays more than is allowed under 6.40(c)
then the directors are personally liable for the excess beyond what
was allowed.
b. Only directors that vote for or assent to are personally Liable
i. Determining ceiling (likely exam question, will probably focus on C2, but must meet C1
as well)
i. How much dividend can be paid on AB Inc.?
1. Assets
a. 100,000 cash
b. 900,000 property
2. Liabilities
a. 500,000
3. Equity
a. 500,000
i. Common stock 50,000
ii. Preferred stock 100,000
iii. Accumulated earnings 350,000
ii. Solution under 6.40(c)(2)
1. Essentially allowed to pay out all amounts owned in common stock and
accumulated earnings.
a. 400,000 here
b. New total assets would be 600,000
c. Total liabilities + preferred stock= 600,000
2. Problem is you will have to sell some assets to get 350,000 in cash. If you
sell the assets will the corporation be able to stay in business and pay bills
as they come do without needed equipment?
10. Freeze-Out
a. A tactic where majority shareholders oppress/disadvantage a minority shareholder into
selling his shares (preferably at a low price)
i. Possibilities
1. squeezers may refuse to declare dividends
2. drain of corporations earnings in the form of
a. exorbitant salaries and bonuses to majority shareholders OR
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a. To calculate from the balance sheet, divide total net worth(equity) of the
company by the number of outstanding shares to get a rough estimate of
value of corporation. (Book value is not a very good estimation of actual
value because does not consider future earning potential or chance of
appreciation.)
i. If you sell stock for more than the book value, then the current
shareholders value will rise and the purchasing shareholders
value will fall so that they meet in the middle. This tells us that
book value is just a place to begin.
2. Example of calculating Book value
ASSETS
LIABILITIES
Cash
$4,000
Acct. Payable
$2,000
Acc. Reciev. $3,000
Bank Loan
$5,000
Inventory
$7,000
Loan from A
$2,000
fixture
$5,000
EQUITY
Equip
$1,000
Common A (20
$2,000
shares)
BMW
$600
Common B (20
$2000
shares)
Patent
$6,000
Common C (1
$1
share)
Retained
$12,599
Earnings
$25,600
$25,600
a. Networth/outsanding shares= book value
b. 16,600/ 41= $404.88 per share
i. Note: the book value will be equal to maximum distribution that
may be made per share under 6.40(c) for the balance sheet test.
3. If there is a market for that stock, look to the Fair Market Value of the stock
(i.e., listed on the exchange). How do you determine an FMV for nonlisted
stock?
i. How is fair value to be determined for a nonlisted stock? Under
MBCA 14.34? official comment: the two proceedings (14.34
and 13.30) are not wholly analogous and the court should
consider all relevant facts and circumstances of the particular
case in determining fair value.
4. Could use calculation based on future dividends
5. Hire professional business appraiser
a. Can cost a lot, and the issue of who will pay for it
b. If this is choice, best to settle who must pay for in shareholders
agreement
6. Pre-determined formula to determine value of the stock decided in shareholder
agreement
a.
Voting Agreements and Trusts
1. Pages
a. 446-465, 472-484, 487-488
2. Code
a. RMBCA 7.01, 7.02, 7.04, 7.22, 7.28, 7.31
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3. Voting Process
a. Establishing Right to vote
i. Shareholder Record
1. Corporations need to keep a record list of all shareholders so they know who is
entitled to vote.
a. Close corporations often have a notebook with all the shares, and when
they sell and tear out a carbon copy record is left.
b. Public corporations often outsource their shareholder record keeping
and they are maintained electronically
2. The problem is that even though they keep these detailed records, they still do
no really know who owns all the stock because of the record owner v. equitable
owner distinction.
ii. Record Owner
1. The party whose name is on the corporations shareholder record. Often
stockbroker firms.
iii. Beneficial Owner
1. Person who has beneficial or equitable title to the value of the stock, even
though it is held in the stock brokers name. also know as street name. Can ask
to become the record owner, but might cost a fee. This is the owner with the
right to vote
iv. Record Date
1. Since ownership of stocks and shareholder record is always changing the
company has to take a freeze frame of ownership at a certain time, and these
will be the people entitled to vote in any upcoming election. This is called the
record date and who ever has ownership at this time is entitled to vote, even if
they sell their stock prior to the election.
2. 7.07: Record date
a. May not be more than 70 days before meeting
v. Change in ownership after Record Date
1. The previous owner would be able to vote the stock, while the current owner
would be unable
2. Solution is that purchaser after notice was given would demand an irrevocable
proxy right
b. Types of Boards
i. Regular Board
1. Everyone on the board is up for re-election every year at the annual stock
holders meeting
ii. Staggered Board(classified Board)
1. Board is staggered similar to U.S. senate so only certain group is up for reelection each year and terms are longer than a year.
a. Ex. board of 9, may elect 3 each year.
2. 8.06
a. Staggered terms are allowed
b. May be split into 2 or 3 groups.
3. Staggering weakens the power of the minority in cumulative voting because the
fewer the number of directors being voted on, the more votes it takes to elect
one.
c. Voting at regular Shareholder Meeting
i. 7.01: Annual Meeting
1. Corporation shall hold an annual meeting to elect directors
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Outline
1. (a) unless otherwise stated in AOI, directors are elected by a plurality of votes,
when quorum is present
2. (b) NO RIGHT to cumulate, unless AOI opts in
3. (c) Total votes= # of shares owned x # of directors being elected
a. This total number of votes can be combined and cast for any person they
like
b. Ex. 200 shares x 5 directors= 1000 votes to be split among any
combination of directors he chooses, or all for 1 candidate
4. (d) must give advance notice before meeting of intent to vote cumulative
ii. Effect of Cumulative voting
1. effect is to increase minority participation in board of directors
2. Can become very math intensive and a type of strategy game when voting
3. Only applies to voting involving directors
iii. Rule of Thumb
1. The fewer number of directors being elected, the more shares you need to elect
one
iv. Formula ensuring the election of 1 director
1. [S/(D+1)] + 1 = SHARES necessary to elect 1 director
a. S=total number of shares voting
b. D=number of directors to be elected
2. Multiply the # of shares needed to elect 1 director by the # of directors being
elected to determine how many actual CUMULATIVE VOTES are needed
v. Formula hypo
1. Problem
a. 1120 total shares
b. Electing 3 directors
2. Formula
a. Shares
i. [1120/(3+1)] +1
ii. (1120/4)+1
iii. 280+1
iv. 281 SHARES needed to elect 1 director
b. Votes
i. 281 x 3
ii. 843 CUMULATIVE VOTES to elect 1 director
vi. Formula for electing certain # of directors (e.g. a majority)
1. [(N*S)/(D+1)] + 1
a. N=number of directors you want to be able to elect
b. S=number of outstanding shares
c. D=number of directors to be elected.
i. When directors have staggered terms, ONLY count # of directors
to be elected at a particular meeting
vii. Minority Shareholders can pool together leftover votes and perhaps elect another
director together. Ringling Bros.
5. Shareholder Voting Agreements
a. Definition
i. Parties maintain control of their stock and ownership rights, but they contractually
agree to vote together, but often doesnt have an enforcement mechanism other than
breach of contract
b. 7.31: Voting Agreements
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e. Should Attoreny ever agree to nominal classified share for tie breaker?
i. NO, never because you will eventually have to break a tie and you will piss off one of
the faction. Bad idea. See Lehrman v. Cohen below
f. Example Lehrman v. Cohen
i. 2 families owned a company . had classified stock and each could elect 2 of 4 directors.
To prevent deadlock they created a third class of stock with no other rights but voting
and gave it to attorney who voted himself on the board. This was held to NOT be a
voting trust. Attorney was stupid to agree to be tiebreaker, NEVER DO THIS
g. May be alternative to voting trust or voting agreement
Deadlocks
a. Pages
a. 491-506
b. Code
a. 14.30, 14.34
c. Definition
a. Opposing factions of a board that have an equal number of directors, and neither
faction has enough shares to change this result. As a result the board is unable to
function because neither side can gain a majority in order to make any meaningful
decisions. Result in company paralyzed
d. Overview of Board of Directors
a. number of directors
i. 0 directors are actually required, because this require may be eliminated under
7.32
ii. May have an even number of directors
b. Vacancies
i. Can be created by:
1. Death
2. Resignation
a. Can be effective immediately or some time in the future
b. Best to make resignation effective only after electing
replacement, because resignation may lead to deadlock
afterwards if no other director is in place.
c. Gearing v. Kelley
i. 4 person board split into 2 family factions. 1 person
resigns prior to electing a replacement. This leaves the
board with only 3 directors and the other faction is then
in a position to take control with a 2 to 1 majority to elect
the new director. The lone director refused to attend
meetings to prevent quorum, because she knew if she
showed up she would loose vote to replace vacant spot.
She cannot sue because doctrine of unclean hands.
Refusal to attend board meetings was a breach of
fiduciary duty, because put personal interest over
company. Could have been solved by selecting a
replacement before retirement. Even better solution
would be create 2 classes of stock to elect 2 directors.
3. Incapacity
4. Etc.
ii. Cannot refuse to attend meetings to prevent quorum, (Gearing v. Kelley)
iii. Who fills vacancies?
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1. MBCA 8.10
a. hold shareholder meeting and vote to fill vacancy OR
b. Board of directors may fill vacancy by majority vote of the
remaining shareholders
i. whoever acts first (the shareholders or the board) gets to
fill the vacancy (usually the board acts first)
c. Length of service
i. 8.05(e)
1. despite expiration of term, director continues to serve until new
directors are lawfully elected.
2. If there is deadlock and no new directors can be elected, the same board
can continue to serve
e. Preventing deadlock (Close corporations)
i. Dont structure corporation w/ equal numbers of shares owned by equal parties
ii. Directors elected by that stock get to replace directors who resign
iii. Build into corporation a dissolution provision so that unhappy shareholders will have a
way out despite lack of market for shares
iv. Build a buy out provision including the rate and time frame for payment of the shares
being bought.
f. Remedies of Deadlock
v. 14.02 Voluntary dissolution
1. Occurs when:
a. The Board of Directors directors recommend the plan of dissolution to
the shareholders
b. The shareholders approve of the plan.
c. More shares must vote in favor of the dissolution than against the
dissolution.
d. A majority of the shares entitled to vote on dissolution must be at the
meeting at which the dissolution is voted on.
2. Board of directors may propose dissolution to shareholders
3. The shareholders must adopt the proposal to dissolve
vi. 14.30 Judicial Dissolution
1. Court MAY dissolve, this is completely in the discretion of the court
2. Applies only to closely held companies
3. In order to cause dissolution, shareholder must show
a. (a) Deadlock that cannot be broken by s/h vote AND must not be able to
continue to conduct business profitably OR
b. (b) Directors or those in control have acted, are acting, or will act in a
manner that is illegal, oppressive, or fraudulent OR
i. Not all jurisdictions include oppression (like Ga)
c. (c) Deadlock has existed for at least 2 consecutive annual meetings in
electing successors to directors whose term has expired OR
d. (d) Corporate assets are being misapplied or wasted.
4. Courts are often reluctant todissolve corporations and often refuse to dissolve
healthy corporations In re Radom & Neidorff, Inc.
vii. 14.34 Election to Purchase in Lieu of Dissolution
1. majority shareholders may be given an alternative to buy out the minority
shareholders rather than dissolve the corp.
2. May purchase at fair value
3. May make this election within 90 days after filing 14.30 with the court
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4. Davis v. Sherrin
a. Court has equitable power to order a buyout in a case where less harsh
remedies inadequate to protect the parties
g. Duty of Minority Shareholders in Close Corporation
viii. Owe duty of loyalty
ix. Duties to majority and breach of those duties may be viewed as oppressive in some
instances
x. Duty may go past alleged misconduct by majority
h. See also MBCA 14.01 Dissolution by incorporators or board; 14.02 dissolution by
board/ s/h
Action by Directors and Officers
a. Pages
i. 511-519
b. Code
ii. 8.20, 8.21, 8.24, 8.25, 8.40, 8.41
c. Agency Law
a. Corporations are not real people so they can only act through agents
d. How may Board conduct business
iii. Meet together all in one location
1. Collegiality principle is that they must come together to exist
2. Generally board cant act if they dont convene
iv. Action w/o meeting
1. 8.21
a. May act without a meeting when all directors agree
v. Electronic meeting
1. 8.20
a. Requirements are that everyone must be able to hear everyone else
b. Has to be something like teleconference, e-mail doesnt count
e. Having Board Meeting Required?
a. Cannot simply cease having board meetings, this could result in director liability
i. Can act without meetings occasionally under 8.21 but this requires unanimous
consent and is impractical for long range practice
b. May dissolve the board of directors entirely under 7.32 but only if Closely held
company
i. Need to recall stock certificates and issue new ones with the agreement with the
agreement noted on the certificate
c. Should NOT hire outside directors just because you dont want to meet because you
will loose control of the company
f. Binding the company and board to by Resolution
a. General Guaranty of Authority
i. Third parties usually require a resolution from the board. Will be signed by the
secretary and have the corporate seal put on it. Demonstrates the boards
authority
b. How do you know a resolution is legit
i. Best way is for third party to send their lawyer to the meeting where resolution
adopted, but at some point this isnt a complete guarantee because you dont
know if those were the actual directors
ii. So, law is that third parties are allowed to rely on resolution that has secretarys
signature as being legitimate, even if it is not board still liable because the fraud
is the companys fault. In the Matter of Drive In Development Corp.
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iii. Corp. Will be estopped from denying the validity of the document
g. Authority of Officers
a. Old Law
i. Officers no matter what rank have no authority at all, unless there is a clear
source of it from the board, bylaws, AOI, etc.
ii. We are talking about Actual authority, may still have had apparent authority
b. Modern Law
i. Most people believe officers have actual authority, so law changed to meet this
belief and give inherent actual authority to certain offers
ii. Inherent authority only applies to high ranking officers, still shaky concept so
dont rely on.
iii. Inherent authority only applies to actions within the regular course of business.
iv. Does not apply actions of extraordinary nature
1. Lee v. Jenkins Brothers
a. President recruited an employee to come work for the company.
Offered him a lifetime employement contract because would pay
pension at age 60 regardless of what happened. Corporation
fired before 60 and didnt want to pay pension. Corp. not bound
because even though CEO typically has inherent authority, it
only applies to things arising under usual and regular course of
business, not extraordinary in nature. Lifetime employment
contract was deemed extraordinary in nature
h. More Code Sections
a. RMBCA 8.22-Notice of Meeting
i. No need for notice unless AOI or bylaws say otherwise
ii. Special meetings must have at least 2 days of notice, unless otherwise specified
in bylaws or AOI
b. RMBCA 8.23-Wiaver of Notice
i. Director may waive any notice requirement
1. Must be in writing, signed, and filed with corporate minutes
ii. Directors attendance or participation in a meeting waives any objection to
notice
c. RMBCA 8.24 Quorum and Voting
i. (a) Unless AOI or bylaws require otherwise, a quorum of a board of directors
consists of:
1. (1) a majority of the fixed number of directors if the corporation has a
fixed board size; or
2. (2) a majority of the number of directors prescribed, or if no number is
prescribed the number in office immediately before the meeting begins,
if the corporation has a variable-range size board.
ii. (b) Cannot make quorum be any less than 1/3
d. RMBCA 8.25 Committees
i. (a) Board may create committees, and have directors serve on them
ii. (b) Creation of committee and appointments must be confirmed by majority of
quorum
iii. See supplement for more
e. RMBCA 8.40 Officers
i. (c) The bylaws or the board of directors shall assign to one of the officers
responsibility for preparing the minutes of the directors and shareholders
Business Associations 2009 77
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meetings and for maintaining and authenticating the records of the corporation
required to be kept under sections 16.01(a) and 16.01(e). (secretary)
ii. (d) The same individual may simultaneously hold more than one office in a
corporation.
f. RMBCA 8.41 Duties of Officers
i. Each officer has the authority and shall perform the duties set forth in the
bylaws or, to the extent consistent with the bylaws, the duties prescribed by the
board of directors or by direction of an officer authorized by the board of
directors to prescribe the duties of other officers.
Duty of Controlling Shareholders
i. Pages
a. 519-527
j. General Rule
a. The controlling majority shareholder must exercise good faith and fairness on
behalf of the corporation and those interested therein (including minority
shareholders) when he enters into any transaction where the control of the
corporation is material.
i. Duties-reasonable investigation and due care
i. The duty includes an obligation of the controlling shareholder in possession of facts
such as to awaken suspicion and put a prudent man on his guard to conduct a
reasonable adequate investigation of the buyer.
j. Debaun v. First Bank CA 1975.
i. bank owned controlling stock in company, sold to bad businessman who had reputation
of looting companies and running them into ground. They relied on the fact that he
seemed wealthy and had good reviews from members of an elite social club. Needed to
do further research before they can sell majority stock. Bank even had actual
knowledge that he had tons of debt and judgements against him.
ii. Damages should be measured by the sum necessary to restore the negative worth, plus
the value of its tangible assets, plus its going business value determined w/ reference to
its future profits reasonably estimated.
k. Principles of Corporate Governance 5.16
i. Controlling shareholder has the same right to dispose of voting equity as any other
shareholder for a price that is not made proportionally available to other shareholders,
but the controlling shareholder does not satisfy the duty of fair dealing to other
shareholders if
1. does not make disclosures concerning the transaction to other shareholders OR
2. it is apparent from the circumstances that the purchaser is likely to violate the
duty of fair dealing in such a way as to obtain significant financial benefit for
the purchaser or an associate
ii. Affirmative investigation by controlling shareholder is not required in the absence of
facts that would alert a reasonable person to the need for further inquiry in the context
of the transaction
iii. If facts are sufficient to put the controlling shareholder on notice that it would be
imprudent to proceed with the transaction without making further inquiry
Introduction to Publicly Held Corporations
1. Pages
a. 538-546, 548-551, 554, 558-560, 564-566, 571-588
2. Who to Board of directors owe allegiance
a. Owe duty solely to shareholders as agents of capital
b. Agents of society
Business Associations 2009 78
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a. Shareholders
i. Most shares are not owned by individual directors. Even if individuals do own them
they are not the record owners
ii. Collective action problem, they have almost no voice because they have such small
shares. Really only choice is to sell shares if dissastisfied
iii. Shows that shareholders really have NO control in companies
b. Institutional investors
i. Mutual funds, Pension funds, endowment funds, etc.
ii. These investors have much more power because they own massive chunks of stock
iii. They actually have enough power to change ownership or pressure company because
of their size.
4. Who controls the company
a. Individual Shareholders
i. Really have no control
b. Institutional shareholders
i. Have much more control but not a ton
c. Officers and directors
i. Make all the decisions
ii. Solicits the proxy of shareholders which they give in to b/c collective action problem
iii. Nominate the board
1. Can have a proxy contest but rare, and even less likely to win
iv. Directors and officers keep re-nominating themselves
5. Who monitors the control of the company
a. Shareholders
i. Really CANNOT do it because collective action problem
b. Market discipline
i. When shareholders are dissatisfied they sell their shares
ii. This depresses the value of stock below its potential value and makes a company prone
to a hostile takeover.
iii. Managers know if they do a bad job, the market will force them out
6. Lack of Social Responsibility and monitoring
a. Large series of corporate failures recently including Enron, worldcom, etc.
b. Led to the belief more regulation was needed to regulate corporate failures
c. Corporate Governance in 2007Business Failures and Corporate Scandals
i. Collapse of dot-coms-loss to individuals who failed in investing was substantial
ii. Collapse of Telecoms-telecom industry did not grow as fast as predicted, thousands lost
jobs
iii. Collapse of Enron-restated earnings to the tune of $567 million
iv. Collapse of Arthur Andersen
v. Collapse of WorldCom, Inc.
vi. Crisis at Adelphia Communications
vii. Qwest Crisis
viii. Collapse of Global Crossing, Ltd.
ix. Tyco International
d. Response to Substantial Misconduct
i. Resulted in sharp decline in securities prices
ii. Was a clear failure of corporate responsibility
e. Enactment of Sarbanes Oxley (SOX)
i. Result of media frenzy over Worldcom collapse
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2. When anyone sells securities you must register the OFFERING, but this
requires registering SECURITIES not for the purpose of the offering
3. OTHERS involved in disclosure process can be held liable if found they
were aware of FALSE statements in disclosure statements. (Enron & 10b5)
a. See Corporation- Disclosure Material liability in index
4. Intended to prevent fraud, omission of material statement, and misleading
information when soliciting proxies
5. Required to send out 4 documents:
a. Notice of Meeting (consistent with state law)
b. Proxy Statement
i. Includes all info shareholders should need to vote
ii. Can cost a lot of money to draft and send out, probably
$100,000 every year.
c. Annual Report to Shareholders
i. Documents to inform shareholders about company and make
them feel good about company
ii. Used as type of advertising, some make into glossy
magazine
iii. Can cost millions to produce
d. Actual Proxy Ballot
6. Studebaker Corp. v. Gittlin
a. Gittlin was unhappy with Studebaker management (12 public
company) because they refused to change practices. He contacted 42
people he knew personally which comrpsied more than 5% of
company. Using that 5% demanded shareholder list to contact other
and get proxy from other S/H so he could make changes. Studebaker
refused to give up the list. Court held that contacting the first 42
shareholders was communication as part of a continuous plan to
solicit proxies and was subject to 14 proxy regulation. He failed to
comply when contacting those 42 because didnt provide how own
version of proxy statement.
7. Rules provisions
a. 14(a)(3)- requires proxy solicitation be accompanies by a proxy
statement with information. Must include annual report
b. 14(a)(4)- specific reglulation to form of proxy regulation
c. 14(a)(5)- info in proxy statement must be clearly presented
d. 14(a)(6)- proxy statements must be submitted for preliminary review
with SEC
e. 14(a)(7)- Obligation of company to provide a list of all security
holders and estimated costs or making own S/Hs own solicitation.
This is the rule you use to begin a proxy solicitation.
f. 14(a)(8)- Shareholder proposal- see below
g. 14(a)(9)- Prevents lying, cheating, and deceiving people in process
or Proxies
8. Shareholder Proposals- 14(a)(8) (book pg 638)
a. Does NOT currently allow nominating directors
b. Created to help promote shareholder democracy because after the
depression thought it was problem that people running public
companies were not constrained by anything
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Outline
a.
b.
c.
d.
Circumstances of case
Size of decision
Financial resources involved in decision
Immediacy of problem presented
b. Litwin v. Allen
i. PREFACE: Probably didnt violate duty of care here, even though case held they did.
Likely product of banks being held to stricter standards because investing other
peoples money and supposed to be cautious
ii. CASE: Company needed to borrow money, but company had already maxed out its self
imposed borrowing limit. Company agree s to sell bonds it owns along with their 5%
interest to bank, but Company reserves right to buy back at orginal price any time in
next 6 months. Disguised type of loan essentially. Problem was that court held it was a
loose loose situation for bank because they couldnt sell stock for 6 months and if it
appreciated in value company would buy back, but if decreased in value bank would be
stuck with it. Court viewed this as negligent and violation of duty of care. (wrong
decision, court using hindsight but no reasonable person could have expected 2nd stock
crash)
5. Protection from violating Duty of care
a. Business Judgment Rule
i. Makes duty of breach case almost impossible to win because courts refuse to question
decision of boards in business decisions as long as there is a rational basis for decision.
Boards not responsible for error in judgement
1. Even if bad decision thats part of business and not breach of duty of care
2. Plaintiff must rebut presumption that directors act 1) on an informed basis, 2) in
good faith, and 3) in an honest belief that their actions are for the good of the
company.
3. 8.30(f)- Board is entitled to rely officers, employees, lawyers, accountant,
experts, special committees when they merit confidence
ii. Common example where BJR protects director
1. Shlensky v. Wrigley
a. At the time Wrigley was the only field without lights and couldnt play
night games. Wigley owned vast majority of company and prevented
adding lights. Minority upset and sued as violation of duty of care.
Accused Wrigley of refusing lights just because he only liked day
games. If that were all the facts may have been problem, but Wrigley
had a reasonable business justification. Thought lights would cause
deterioration of neighborhood and nobody would come to games if in
bad neighborhood.. Wrigley won.
iii. Rare example where Duty of Car breached in spite of BJR
1. Smith v. Van Gorkem
a. Breach involved insufficient process and standards, was shock to the
legal wold to see directors held liable in Deleware
b. Some directors thought it was good idea to sell company for tax reasons.
Had all-star caliber board. Van Gorkem was chairmen of board and had
selfish interest because he wanted to retire and wanted to sell at higher
price. Van Gorkem went out on own and found buyer. Stocks had been
selling at 35$ per share and found buyer for $55. Problem was that van
Gorkem had conflict of interest as well as Board relied entirely on Van
Gorkem for all relevant facts. Board did not factual investigation on the
value of the company. Didnt even have merger agreement in fornt of
Business Associations 2009 84
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them. Didnt have any expert in the room to say $55 was fair price. Was
a rush decision without much deliberation.
b. Protection Directors by Articles of Incorporation
i. Under 202(b) of MBCA may include the three Is protective provisions which protect
for violation of duty of care, but not from duty of loyalty.
ii. Provisions may include:
1. 202(b)(4)- Immunity= immunity provision eliminating or limiting liability for
breach of duty of CARE. Doesnt limit breach if criminality or loyality
2. 202(b)(5)- Indemnification= corporation will indemnify any director held
liable for duty of CARE
3. 202(b)(6)-Insurance=director liability insurance
6. Duty of care- failure to Monitor and Inaction
a. Two ways to prove failure to monitor
i. Show that red flags were raised to the board and the board in bad faith failed to
effectively monitor and did nothing.
ii. Failure to create monitoring system at all
1. (might be borderline breach of loyalty because board just doesnt even care
enough to create system)
b. Requirement for failure to monitor: (8.31(a)(2)(iv) is something you can cite)
i. Requires board to exercice a good faith judgment that the corporations information
and reporting system is in concept and design adequate to assure the board will receive
adequate info in a timely manner
ii. 3 elements to show this was breached
1. Knowledge
a. directors knew of violations OR
b. directors should have known of violations
2. Directors took no step in good faith to remedy the violations
3. Such failure proximately resulted in the loss complained of
4. Failure to act in good faith (Stone v. ritter says this is an element of both duty of
care and loyatly, and not its own duty) (MBCA 8.30(a))
iii. Test is really high standard to meet
c. In Re Caremark Intern. Inc. Derivative Litigation
i. Caremark was a medical service provider, who received a lof of money from federal
medical programs
ii. There are federal laws and referrals and payments relationg to federal medical
programs
iii. Caremark had been advised they were within these rules, but they werent and were hit
hard with criminal violation.
iv. Cost about 250 million to settle
v. Now shareholders want to sue, to get that money back from directors
vi. This derivative suit was dismissed for a nominal settlement with shareholders that
involved no money, and just put some more procedures in place
1. Such weak settlement because shareholders didnt have a chance
vii. Held not to violate duty of care because directors had monitoring programs in place
and were seeking out information, but simply never were alerted of their agents who
were giving kickbacks
Shareholder Derivative Suits
a. Code
a. RMBCA 7.40-7.46
b. Types of directors
Business Associations 2009 85
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Second board was also sued for breach of duty of loyalty because of waste.
Found that that co. got something in return, getting rid of Ovitz and no lawsuit
from Ovitz. Board won.
iii. Intentional dereliction of Duty-conscious disregard for ones responsibilities Brehm II
1. deliberate indifference and inaction in the face of a duty to act
2. There are two categories for bad faith, one of which must be met before board
will be liable for waste or Intentional Dereliction of duty
a. Subjective bad faith-motivated by actual intent to do harm
b. Lack of due care-fiduciary action taken solely by reason of gross
negligence
g. Parent-Subsidiary-Self-dealing occurs when a parent is on both sides of the transaction with its
subsidiary AND causes the subsidiary to act in such a way that the parent receives something
from the subsidiary to the exclusion of or to the detriment to the minority stockholders.
Sinclair Oil
i. Parent forced subisidiary to pay out massive dividends. Not breach of loyalty because
minority shareholders got dividends to. Was breach of loyalty when allowed another
Sinclair company to breach contracts with Sinven.
h. Corporate Opportunity Doctrine
i. Doctrine prevents a fiduciary of a company from taking an opportunity away from the
company which they have a fiduciary duty to look out for. Must let the Principal have
the business opportunity or at least the right to reject.
1. Similar doctrine applies to partnerships. Thats what was going on in Meinhard
v. Sammons when the court laid down the strict rule of fiduciary duty.
ii. Several Tests for the Corporate Opportunity Doctrine (NOT MERCER LAW)
1. Line of Business Test
a. Intensely factual test
b. If corporation is financially able to undertake and is one which the
corporation has an interest or reasonable expectancy, and by embracing
the opportunity the self-interest of the officer is brought into conflict
with the corporation, the law will not permit him to seize the
opportunity for himself.
2. Fairness Test
a. Rests on the unfairness in the particular circumstances of a director
taking advantage of an opportunity when the interests of the corporation
justly call for protection.
b. Application of ethical standards of what is fair and Equitable in a
particular set of facts.
3. Minnesota Combined Test-Two step analysis
a. Determine whether a particular opportunity was within the corporations
line of business.
b. Scrutinize the equitable considerations existing prior to and at the time
of the officers acquisition.
iii. Mercer Law Test: ALI Approach-5.05-Principles of Corp. Governance
1. ALI 505(a): Director may not take advantage of corporate opportunity unless:
a. Director first offers opportunity to corporation, disclosing conflicts of
interests;AND
b. Corporate opportunity is rejected by the corporation AND
c. Either of the 8.61 requirements for cleansing corporate transaction
i. the rejection of the opportunity is fair to the corporation;OR
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1. Pages
a. 813-841
2. Actual wording of Rule 10b-5 makes it unlawful to:
a. Employ any device, scheme, or artifice to defraud
b. To make any untrue statement of a material fact or to omit to state a material fact necessary in
order to make the statement OR
c. To engage in any act that would operate as a fraud or deceit upon any person, in connection
with the purchase or sale of any security.
3. ***10(b)-5 applies to ALL companies***
a. This is crucial to remember,
4. Exam Hint: Look to Tipper and Tippee Liability potentially
5. History prompting creation of 10B-5
a. Hotchkins v. Fisher
i. At the time there was no rule about lying and misrepreresentation for buying stock,
only rules regulated selling stock. Company president lied and said company was not
doing well and said there would be no dividend. Agreed to buy others stock, and then
the company actually did awesome and paid big dividends. 10b5 created to solve this
tiny issue and then grew into something massive.
6. 10B-5 is a massive rule that can be used to address MANY different things
a. Insider trading (most famous use)
b. tipping (giving inside info to outside parties
c. Corporate disclosure problems
d. Corporate Mismanagement (early cases said violation of duty of care or loyalty was a 10 b-5
violation, but new cases have rejected this)
e. Broker/Dealer duties when providing info to clients
f. Manipulation of securities markets (intentionally putting false info into market to change
prices)
g. Simple fraud in securities (includes implied private right of action)
7. Advantages
a. Nationwide service of process
b. Generous discovery rules
c. Liberal venue provisions
d. can be the basis of a private suit to rescind a securities transaction.
e. Language of the rule is broad, flexible, and not hedged w/ qualifications or limiting doctrines
f. Does not matter if there is overlap between 10(b) & 14 violation.
g. Can hold both 10b-5 claim and state claim in one proceeding-pendent jurisdiction
8. History limiting 10b-5
a. Rule got so massive that threatened to take over all of business law and the supreme court
decided to prune its power in several key cases when the composition of the court changed.
i. Blue chips v. Manor drug Stores
1. Adopted Birnbaum doctrine- to have standing for 10B-5 you must be a
purchaser or seller.
ii. Ernst & Ernst v. Hochfelder
1. Nay was president and was committing a ponzi scheme. Had Rule no one else
could open his mail. Ernst & Ernst was accountant and was the only solvent one
left after company collapse, so they were sued for 10b-5 violation. Claimed
they were liable for not finding this mail rule in their audit. Court found them
negligent, BUT since 10B-5 speaks in terms of fraud and manipulation it is
implied that D have SCIENTER. Ernst and Ernst did not have scienter here.
9. Rule 10b-5 Requirements
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a. 1) Fraud or deceit, 2) Practiced upon any person, 3) occurring in connection with 4) the
purchase or sale 5) of any security
b. 1) Fraud or deceit
i. SCIENTER is a required element. Ernst & Ernst v. Hoschfelder.
1. Actions resulting from mere negligence or unfairness are not actionable
2. Action must be deceptive or manipulative. Santa Fe
a. Manipulative-practices that are intended to mislead investors by
artificially affecting the market
3. activities must be viewed in context to determine whether they are merely
ordinary and legitimate acts or contrivances and deceptive devices used to
fraud. Enron
4. Allegations must demonstrate that they knowingly or w/ reckless disregard
stepped outside the boundary of legitimate and professionally acceptable
activities in performing material acts to defraud public.
ii. Requires a DUTY, to be fraud or deceit. Chiarella
iii. Compare Misappropriation theory v. Classic theory
c. 2) Practiced upon any person
i. Usually talking about s/h, but can apply to corporations as well.
ii. See. Blue Chip Stamps
d. 3) occurring in connection with
i. Must be fairly direct in connection with and not attenuated.
e. 4) the purchase or sale
i. Exchange for value.
ii. Only people who have standing are those who actually purchased or sold securities.
Birchbaum Rule from Blue Chip Stamps
1. Doesnt apply to those that almost bought securities but didnt because of
misrepresentation
f. 5) of any security
i. Not limited to 12 securities.
10. Implied cause of Action
a. Judicially Created by Kardon v. slavin., but People had assumed cause of action was there for
past 30 years
11. Statute of Limitations
a. Historically, since no SoL in statute then would look to state law, so resulted in lots of forum
shopping
b. First modified so Suits must be brought w/in 1 year after the discovery of facts constituting the
action and w/in 3 years after such cause of action occurred. Lampf, Pleva, Lipkind v.
Gilbertson
c. SOX Extended SOL for private securities fraud claims to earlier of 2 years after discovery of
facts constituting violation or 5 years after violation. SOX 804(a)
12. Aiding and Abetting
a. Held that 10B-5 held that claims based on aiding and abetting were not authorized under that
rule.. Central Bank of Denver, NA v. First Interstate Bank of Denver, NA.
i. Aiding and abetting= knew ahead of time or after the fact that some time of wrong was
done, and provided assistance.
13. Right of contribution
a. Held that implied right among s, relative to their responsibility 1934 Act 21D(g).
14. In re Enron corporate securities Dervitive
a. Probably the most massive corporate fraud in history. Company was cooking the books.
Corporation and its officers were clearly liable for fraudulent transactions and misleading
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investors. Big issue is whether other people involved in the process such as lawyers,
accountants, and banks could be held liable for their compliance. Issue is whether these people
were potentially liable under 10b-5 since aiding and abetting is no longer covered. All three
groups were considered potentially liable as PRIMARY ACTORS, and therefore could be
liable if jury decided.
i. Law Firm- elkins
ii. Accounting firm Aurthur Anderson
iii. Banks
1. Assisted in ponzi scheme, because made large loans to generate the necessary
money.
b. Lawyers have a duty to 3rd parties not in privity not to knowingly or with severe recklessness
issue materially misleading statements on which they intend or have reason to expect that
those third parties will rely. Enron
c. Independent Accountants & Auditors-By certifying reports, the independent auditor assumes a
public responsibility transcending any employment relationship w/ the client. Enron
i. The ultimate duty owed is to the corporations creditors and stockholders as a public
watchdog.
d. A pattern of transactions that are not isolated and are part of a common scheme through which
all parties profit may give rise to liability. Enron
15. Disclosure Material Liability
a. Key Phrases included just for control F searching. Disclosure lawyer attorney accountant
fraud
b. Rule: under 10b-5 and Enron case people involved in the disclosure process such as lawyers,
accountants, and banks can be held liable as primary actors.
i. More info For attorney liability: see book page 351, note 2. Could also argue 14(a)-9
of the 1934 act which prohibits false or deceptive statements.
16. Outside Counsels Duty upon discovering Fraud
a. Up the Ladder Rule
i. Report it to appropriate in-house counsel, and if they refuse to act continue to go up the
ladder until you reach the Board of directors
b. If Directors refuse to act then you should resign
i. Sarbanes Oxley does NOT require you to notify SEC. This might even be a violation of
the model rule of professional conduct. So Dont Do this, just RESIGN.
Insider Trading
1. Pages
a. 841-854, 857-864,
2. ***Must meet the rule 10b5 Requirements above***
a. Fraud or Deciet (scienter) (Ernst and Ernst)
b. Upon any person (Blue chip stamps)
c. In connection with
d. Purchase or sale (Birnbaum doctrine)
e. Of any security (not limited to 12)
3. Most common type of rule 10B-5 violation
4. Insider
a. A special obligation has been required of corporate insiders (officers, directors, 10% s/h)
5. What holder of inside info must do?
a. Disclose information with adequate time for it to reach the public OR
b. abstain from buying or selling
6. Theories of Insider Trading
a. Equal Access doctrine- (no longer good law, modified by chiarella)
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i. Law
1. Existence of a relationship giving access, directly or indirectly, to information
intended to be available only for a corporate purpose AND
2. The inherent unfairness involved where a party takes advantage of such
information knowing it is unavailable to those with whom he is dealing
ii. Texas Gulf Sulfur1. Some lower executives and engineers discovered mother-load of mineral
deposits. Company wanted to keep discovery a secret until they could buy up
all the land around the find. Defendants started buying stock in the company
and calls (right to buy stock later at now price). Company also lied to public to
down play significance of find.
2. Defendants were held liable
3. Held that the purpose was to make markets fair and create equal access. Anyone
with unequal access is a cheater is liable for insider trading (Held wrong later
because didnt required a duty)
b. Classic Theory (GOOD LAW, modifies equal access doctrine by requiring duty)
i. Law
1. Existence of a relationship giving access, directly or indirectly, to information
intended to be available only for a corporate purpose AND
2. The inherent unfairness involved where a party takes advantage of such
information knowing it is unavailable to those with whom he is dealing
a. PLUS
3. Fiduciary DUTY to party buying or selling stocks from
ii. Chiarella v. US SCOTUS
1. Tender offer situation. Bidding company wanted to acquire a target company
hostilly. Bidding Company was getting ready to go to share holders and make
tender offer to buy stock. Required to meet publicity steps under 12. Bidding
company wants this to be very hush hush till the last minute
2. Have printing company print hard copy of document, but keep out identifiying
infor until last minute. Chiarella figured out and bought stock in target company
and made good profit when tender offer was made.
3. KEY
a. Even though Chiarella would have lost under Equal Access Doctrine,
court held that he did not violate 10B-5 because court said there is only
a duty to disclose info if you have a relationship to that party creating
afiduciary duty.
b. Chiarella had duty to printer bidding company bidding company
shareholders
c. Chiarella did NOT have a duty to target company or their
shareholders
4. Misapropriation theory was raised, but to late so not addressed
c. Misappropriation Theory (GOOD LAW)
i. Law
1. Existence of a relationship giving access, directly or indirectly, to information
intended to be available only for a corporate purpose AND
2. The inherent unfairness involved where a party takes advantage of such
information knowing it is unavailable to those with whom he is dealing
a. PLUS
Business Associations 2009 94
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3. Even though no duty to party buying or selling to, there is a duty to party which
Defendant misappropriated the information from and that is in connection with
purchase of sale of security.
ii. U.S. v. OHagan
1. Was an attorney and used inside info from client who was bidding company and
bought stock in target company. IDENTICAL FACTS TO CHIARELLA. This
time Misappropriation theory was raised in time.
2. Even though no Fiduciary duty to target, there was a fiduciary duty to the firm
and its client the bidder. Fraud and deceit of aginst own company is sufficiently
connected to purchase or sale to meet requirements of 10(b)-5.
iii. What is misappropriation?
1. Accidentally overhearing
a. No. Barry Switzer Case
2. Purposely Evesdropping
a. Yes. Class hypo
3. Breaking into office and taking info
a. Definitely yes. Class hypo
iv. For misappropriation theory to apply must be sufficient connection between fraud and
sale.
1. If sale is completed then fraud then not enough
7. defense of Materiality
a. When people act on inside information that is NOT material, there is no insider trading
violation
i. Ex. Rumor that CEO cheated on his wife.
b. Materiality=info that a reasonable investor would want to know when buying or selling stock
c. Two aspects
i. Magnitude (this will be the largest mineral deposit in history)
ii. Certainty (this is only a guess)
d. A lot of either magnitude or certainty will make something material
i. If largest mineral deposit in history is material, even if there is very little certainty.
ii. Even if smaller deposit, but was absolutely certain it was there that is material too
iii. Not material requires low amounts of both
8. Tippee/Tipper Liability
a. Law
i. Tippee is liable if he knew or should have known that the provision of information to
him was a violation of duty by the tipper. Dirks
1. TEST: If tippee paid for the info directly or indirectly then this indicates
knowledge of breach of duty.
a. Includes quid pro quo, sharing profits, giving money to family member
you support, or other financial arrangement
ii. Tippee will be liable only if tipper received an improper benefit from disclosure. Dirks
1. SEC appears to have little problem finding a benefit between tipper and
tippee to avoid Dirks wrinkle.
b. Dirks v. SEC SCOTUS
i. Equity funding was large successful company in LA that sold insurance. Former VP
Seacrest called dirks to tell him it was all a scam and encourage him to come
investigate. Dirks did, and confirmed they were fraudulently making up policies. Dirks
called CA insurance commissioner, SEC, and Wall street but no one believed him.
Using this info that was unkown to public, He later told his clients to sell because it
was a scam. SEC prosecuted him and said was a tipee. Held liable
Business Associations 2009 95
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iii. To engage in any act, practice, or course of business which operates or would operate
as a fraud or deceit upon any person, in connection with the purchase or sale of any
security.
10b-5 requirements...........................91
10b-5 uses........................................91
Actual Authority............................2, 12
Outline
Outline
Common Stock..................................57
Corporate Opportunity Doctrine........89
Corporate taxation............................30
Corporate Taxation............................32
corporation- 12- 5 restrictions.........80
Corporation- 12 public corp.............80
corporation- 14(a) proxy regultion...80
Corporation- 10b-5 requirements......91
Corporation- 10b-5 uses....................91
Corporation- 1933 Act.......................58
Corporation- 1934 Act.......................59
Corporation- 3 I's Protetion...............42
Corporation- Action by Directors and
Officers...........................................76
Corporation- actions req. S/H approval
.......................................................67
Corporation- Agency.........................76
Corporation- Agnecy- Resp. Superior. .2
Corporation- annual meeting............70
Corporation- Articles of Incorporation
elements........................................42
Corporation- Articles of Incorporation
filing...............................................41
Corporation- Attorney discovers fraud
.......................................................93
corporation- authority of officers.......77
Corporation- Authorized Shares........44
Corporation- Beneficial Owner.........70
Corporation- Board meeting req. ?....76
Corporation- Board of directors.........67
Corporation- Board vacancies...........74
Corporation- Boards- types...............70
Corporation- Bonds...........................54
Corporation- Book value....................68
Corporation- Business Judgment Rule
.......................................................84
Corporation by estoppel....................47
Corporation- Bylaws..........................43
Corporation- classic Characteristics. .40
Corporation- classified board............70
Corporation- Classified Shares..........73
Corporation- common Stock..............57
Corporation- conflicting transaction. .87
Corporation- Corp. by estoppel.........47
Corporation- Corporate finance.........53
Corporation- deadlock.......................74
Corporation- deadlock remedies.......75
Corporation- debentures...................54
Corporation- Debt Capital.................54
Outline
Outline
E
Enron.................................................92
Enterprise entity Theory...................50
Equal Access doctrine.......................93
Equity Insolvency..............................66
F
Federal Income Taxation...................33
Fictitious Business Statement...........11
Fiduciary duty- Who has them
overview..........................................1
Forming a Corporation Overview.......40
Freeze-Out.........................................66
G
General Partnerhsip............................5
General Partnership Liability...............6
General Standards of Partners
Conduct..........................................15
GP........................................................5
GP- Formation......................................5
GP- Liability.........................................6
GP- Liability and Suing partnership.....7
GP- Management...............................11
GP- Partnership agreement.................8
GP- Rights and Duties.......................10
GP- Sharing of Profits & Losses...........9
GP- Suing partnership.........................7
I
Inadedquate Capitalization...............48
Inadvertent Partnerships...................25
Income Statement.............................18
Income Statement- effects of change
.......................................................19
Income Statement Example..............19
Insider Trading...................................93
Insider trading- theories....................93
International Affairs Rule..................39
investment contract..........................59
Investment K.....................................59
K
Kitner rules........................................31
L
Leverage...........................................55
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Partnership Agreement.......................8
Partnership Agreement- advantages of
having..............................................8
Partnership Agreement- Disadvantages
of not having....................................8
Partnership Agreement- Written
Contnets...........................................8
Partnership- Apparent Authority........13
Partnership- Assignment of interest. .16
Partnership at will.............................21
Partnership Bound by Partners Breach
of Trust.............................................6
Partnership Bound by Partners
Wrongful Act.....................................6
Partnership- calling someone partner
.......................................................25
Partnership- decision making............12
partnership- definition.........................5
Partnership- Disolution-RUPA............24
Partnership Dissolution.....................19
Partnership Dissolution- 3 stages......20
partnership dissolution- Causes of
dissolution......................................20
Partnership dissolution- Common
modification by agreement............21
Partnership- Dissolution- continue after
.......................................................23
Partnership- dissolution- Duties
departing partner owes partnership
.......................................................24
Partnership Dissolution- Duties owed
by departing partner to the
partnership....................................24
Partnership Dissolution- Duties owed
by partnership to partners.............24
Partnership- dissolution- Duties owed
to partnership by partners.............24
Partnership- Dissolution- Effect of
dissolution on Partners Existing
Liability..........................................23
Partnership Dissolution- Effect on
liability...........................................23
Partnership Dissolution- effects.........23
Partnership- Dissolution- Liability of
Persons Continuing the Business in
Certain Cases.................................23
Partnership- dissolution- Non compete
agreement.....................................24
Partnership- Dissolution order...........22
Outline
Outline
Signature...........................................47
Silent Partners Liability......................7
SOX
Analysis of the Provisions of SOX...80
Enactment of SOX..........................79
staggered board................................70
Stock- Payment for Stock..................56
straight voting...................................71
S-X.....................................................80
T
Taxation.............................................30
Taxation- basic principles..................32
Taxation- Check the box rules...........31
Taxation- Corporate...........................30
Taxation- Corporate- Subchapter C. . .30
Taxation- Corporate- Subchapter S. . .30
Taxation- LLC.....................................31
Taxation- Partnership.........................31
Taxation- sole Proprietorship.............32
taxation-average tax rate.................33
taxation-marginal tax rate................33
Tender offer.......................................82
The Formation of a Closely Held
Corporation....................................40
Tippee liability...................................95
Tippee/Tipper Liability.......................95
Tipper liability...................................95
U
UCCLA 108- Registered agent for
service of Process..........................35
UCCLA 405- Sharing and right to
distribution.....................................37
UCCLA 407- Liability for unlawful
distributions...................................37
ULLCA 1002 Application for
Certificate of Authority...................37
ULLCA 503 Rights of Transferee...37
ULLCA 504(a) Rights of Creditor. .37
ULLCA 103- Operating Agreement...35
ULLCA 105- Name............................35
ULLCA 106- Reserved Name............35
ULLCA 112- Nature of Business and
Powers............................................35
ULLCA 202- Organiztion...................35
ULLCA 203- Articles of Organization 35
ULLCA 301- Agnecy of Members......36
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