BUSINESS ORGANIZATIONS OUTLINE

INTRO
I. Agency: one person working with another with certain powers
II. Partnership: when two equals come together
III. Forms of Business Organizations
a. Proprietorships
i. Single-person businesses
ii. Most businesses are these
b. Partnerships
i. General partnerships- account for about 50%
ii. Limited partnerships
iii. Limited liability partnerships- smallest group
iv. Limited liability companies- second largest group; hybrid that
offers benefits of partnerships without as much of the downsides
c. Corporations
i. Second largest group of businesses
ii. Account for over 75% of receipts
IV. Types of Authority/Agency
a. Actual- manifestation of consent
b. Apparent- viewed from 3rd party perspective
c. Implied- viewed from agent’s perspective
d. Inherent- catch all; undisclosed principal & agent exceeding authority
e. The legal consequences of an agent’s act do not depend on the type of
authority the agent possessed
V. On exam question, always ask how the court is trying to make things more
efficient- make whole economy more efficient
VI. Important to hire a transactional lawyer in order to get best deal for client and
to lower transactional costs for all, thereby making more money for all

CHAPTER 1: AGENCY
I. Who Is an Agent?
a. Gorton v. Doty
i. Facts: son injured in wreck on way to football game in car driven
by coach; car belonged to defendant
ii. Establishes PAT Triangle: principal, agent, third party
iii. Legal standard for agency: agency is a relationship that results
from
1. the manifestation of consent by P to A that A shall act
a. on P’s behalf
b. subject to P’s control
2. A’s consent to so act
iv. Doesn’t have to be a contract for there to be an agency relationship
b. A. Gay Jenson Farms v. Cargill
i. Facts: plaintiffs were farmers who sold their crops to Warren.
Warren was the local firm that operated the grain storage facility.

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 Cargill was a world-wide grain dealer. Warren bought grain from
farmers and sold to Cargill- was Warren an agent for Cargill?
Warren became insolvent and farmers sue Cargill.
ii. Principal is liable on contracts made by an agent on principal’s
behalf
iii. You can form an agency relationship without even knowing it-
may not realize that the elements for agency are present
iv. There must be an agreement, but not necessarily a contract; no
consideration needed
v. Creditor becomes a principal at the point at which it assumes
defacto control over the conduct of the debtor
vi. Restatement: one who contracts to acquire property from a third
person and convey it to another is the agent of the other only if it is
agreed that he is to act primarily for the benefit of the other and not
for himself
1. court says that under this approach it must be shown that
the supplier has an independent business before it can be
concluded that he is not an agent
vii. How could Cargill have avoided this?
1. reduce level of control
2. do nothing
3. take on additional control and become more like a franchise
viii. policy issues
1. Cargill got the benefit of controlling Warrant while evading
legal obligations that accompany control
2. holding Cargill liable is a way of forcing it to internalize
the social costs of how it turns its business
II. Liability of Principal to Third Parties in Contract
a. Restatement: principal is subject to liability upon contracts made by an
agent within his authority if made in proper form and with the
understanding that the principal is a party
b. Authority Intro
i. Authority is the key; agents acting with authority may bind
principals
ii. Authority is the starting point for analysis of contract actions
iii. Authority vs. Power
1. agent may bind the principal even when the agent lacks any
form of authority
2. an agent’s power to bind the principal is broader than an
agent’s authority to bind the principal
3. authority means that the agent has legitimate power to do
so; power is just doing it
c. Actual Authority
i. must be authority from the principal to the agent in order to act on
the principal’s behalf

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 ii. requires manifestation of consent- written or spoken words or other
conduct of the principal which reasonably interpreted causes the
agent to believe that the principal desires him to so act on the
principal’s account
iii. express actual authority- P to A: “do this”
iv. implied actual authority- authority that is inherent in the office; see
below
d. Implied Authority
i. Is actual authority circumstantially proven which the principal
actually intended the agent to possess and includes such powers as
are practically necessary to carry out the duties actually delegated
ii. Often highly contextual, often depending on prior practices or
industry customs
iii. includes authority to do those things that usually accompany or are
reasonably necessary to the actions authorized
iv. also called incidental authority
v. viewed from the agent’s perspective
vi. Mill Street Church v. Hogan
1. Facts: church hires Bill to paint. Bill normally gets Sam to
help and church knows this. Sam gets hurt on the job. Did
Bill have authority to hire Sam?
2. Bill (agent) had both implied and apparent authority
3. Bill had implied authority- had used Sam in the past, knew
needed 2 people to do job; reasonably necessary to hire
another person and to hire Sam; no instructions to the
contrary
vii. Can have implied actual authority and implied apparent authority
1. implied actual: act of putting an agent in such a position
leads agent to reasonably believe he has authority
2. implied apparent: act of putting agent in such a position
that leads third party to reasonably believe agent has
authority
e. Apparent Authority
i. Viewed from the third party’s perspective- manifestations by
principal to third party
ii. Lind v. Schenley Industries
1. must be a manifestation by the principal to the third party
2. this court got it wrong because it confused the forms of
authority
3. notice will defeat apparent authority
4. must prove agency relationship existed and then what
kind(s) of authority agent possessed
5. burden on principal to have good agents
iii. to avoid apparent authority, must take away third party’s
reasonable belief
iv. Three-seventy Leasing v. Ampex

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 1. apparent authority exists only when there is some
connection between the third party and the principal
2. you must always look at how the third party learned of the
agent’s alleged authority and ask whether the principal
reasonably can be said to have been the source of that
knowledge
f. Inherent Agency Power
i. Classic situations: undisclosed principals, agent exceeds authority
ii. Used to impose liability on the principal when there is neither
authority nor apparent authority
iii. Also imposes liability on agent, but usually agent has disappeared
iv. Is a catch-all category
v. Doesn’t derive from authority but solely from the agency
relationship and designed to protect third parties
vi. Watteau v. Fenwick
1. Facts: defendants got an agent to run a beerhouse for them
2. undisclosed principal- principal is liable for all acts which
are within the authority usually confided to an agent of that
character
3. inherent authority is usually a policy issue
vii. Kidd v. Thomas A Edison
1. Facts: singing tour case. Agent exceeded scope of authority
by promising third party Kidd the full tour when principal
only hired agent to travel around
2. not actual, implied, or apparent authority
a. not actual because principal expressly told agent he
did not have this power; not implied actual either
b. not apparent because no communication between
principal and third party
3. inherent authority existed- must establish that reasonable
for third party to believe agent had authority (industry
standard for agent to have this authority)
viii. Nogales Service Center v. Atlantic Richfield Co
1. 3 types of situations in which inherent agency exists
a. General agent does something similar to what he is
authorized to do, but in violation of orders
b. Agent acts purely for his own purposes in entering
into a transaction which would be authorized if he
were actuated by a proper motive
c. Agent authorized to dispose of goods and departs
from the authorized method of disposal
2. most commonly at issue: customary for agent conducting a
transaction to have authority to make incidental
arrangements, but principal has made contrary instructions
3. p. 35 problem 2- good exam question
g. Ratification

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 i. Agent acts without authority of any kind and there is no grounds
for estoppel
ii. Requirements:
1. a valid affirmation by principal
a. can be express or implied
b. principal must know or have reason to know all
materials/information
2. to which the law will give effect
iii. will be denied legal effect where necessary to protect the rights of
innocent third parties
iv. Botticello v. Stefanovicz
1. martial status is not enough to establish agency
v. Ratification is a means by which the principal can say, “my agent
didn’t have the right to enter into this contract, but I’m glad she did
so. Accordingly, I’ll affirm the transaction and agree to be bound
by the contract
vi. ratification cases involve 2 questions:
1. what types of acts constitute an affirmation by the
principal?
2. what effect should we give to that affirmation?
h. Estoppel
i. Hoddeson v. Koos Bros
1. Facts: guy pretended to be salesman and pocketed money
2. no actual authority
3. no implied authority
4. no apparent authority (no manifestation by principal to
third party; silence can be manifestation but no holding out
he was its agent here)
5. estoppel elements
a. acts or omissions by the principal, either intentional
or negligent, which create an appearance of
authority in the purported agent AND
b. the third party reasonably and in good faith acts in
reliance on such appearance of authority
6. estoppel only binds the principal, never the third party
a. the third party changed her position in reliance upon
the appearance of authority
i. Agent’s Liability on the Contract
i. Atlantic Salmon A/S v. Curran
1. if agent doesn’t disclose principal (inherent agency), agent
is treated as a contracting party
2. partially disclosed or undisclosed principal:
a. agent is treated as though a party to the contract
b. third party must elect who to sue- principal or agent
c. agent has usually disappeared, so third party is left
with suing principal

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 3. actual knowledge is the test
4. the duty rests upon the agent, if he would avoid personal
liability, to disclose his agency and not upon others to
discover it
III. Liability of Principal to Third Parties in Tort
a. Servant Versus Independent Contractor
i. A master-servant relationship exists where the servant has agreed
(a) to work on behalf of the master and (b) to be subject to the
master’s control or right to control the “physical conduct” of the
servant
1. Two types of independent contractors (differ in degrees of
control retained by principal)
2. agent-type IC
a. one who has agreed to act on behalf of another, the
principal, but not subject to the principal’s control
over how the result is accomplished
b. can hold principal liable here
3. non-agent IC:
a. one who operates independently and simply enters
into arm’s length transactions with others
b. usually cannot hold principal liable here
ii. generally, principal liable for conduct of his employee but not that
of IC
iii. IC usually paid by the job, not by the hour
iv. Gas Station Cases- Humble Oil v. Martin, Hoover v. Sun Oil
1. similar facts: gas station with repair shop is tied to an oil
co; somebody gets hurt and sues the oil company because
they have the deep pockets
2. 3 possibilities: gas station is
a. Completely independent station that buys from
many oil companies
b. Wholly owned by oil company
c. Franchise: intermediate between wholly owned and
independent
3. look at the level of control; the more control franchisor has
more likely will be liable
v. Murphy v. Holiday Inns
1. Facts: plaintiff slip and fell at a Holiday Inn
2. Court found there was not sufficient control by Holiday Inn
to amount to agency- didn’t give defendant right to control
the methods or details of doing the work
3. control is the essential element for agents and IC
relationships
4. key distinction between the servant and IC types of agents
is the differing natures and degrees of control exercised by
the principal

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b. Tort Liability and Apparent Agency
i. Miller v. McDonald’s
1. Facts: plaintiff bit into sapphire in Big Mac
2. court found both actual and apparent authority- apparent
because third party had no idea if this McD’s owned by
corporate McD’s or a franchisee
3. the RIGHT to control is key, not actual control
ii. problem p. 62- good exam question
c. Scope of Employment
i. Ira S. Bushey & Sons v. US
1. Facts: sailor on boat, drunk, plays with valves and ends up
damaging boat and dock; dock owner sues
2. Restatement: a master is subject to the liability for the torts
of his servant committed while acting in the scope of his
employment
3. this case discards the purpose test (whether the conduct was
motivated at least in part by a purpose to serve the master)
4. this court adopts foreseeability test: if some harm is
foreseeable, master liable even if the particular type of
harm was unforeseeable
a. virtually amounted to a rule of strict liability for the
torts of employees as long as any connection in time
and space could be made between the conduct and
the employment
b. not adopted by all courts
ii. General rules about scope of employment
1. Was the conduct of the same general nature is that which
the servant was employed to perform?
2. Was the conduct substantially removed from the authorized
time and space limits of the employment?
3. Purpose test (Restatement): whether the conduct was
motivated at least in part by a purpose to serve
iii. Manning v. Grimsley
1. Facts: baseball player heckled by fans and intentionally
threw ball at them in the stands
2. Are intentional torts within the scope of employment?
a. Not in early CL
b. Restatement: intentional torts involving the use of
force result in liability if the use of force is “not
unexpected by the master”
c. Restatement: consciously criminal or tortious acts
not per se excluded from scope of employment
3. here, court held principal liable for player’s intentional tort
because the cause of the tort was due to fans interfering
with the agent/player’s duty and scope of employment-
playing baseball

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 iv. Law and economics perspective (Lee likes this better)
1. occasionally employees will do bad things and if hold
principal liable will be able to pay person for injuries
2. deep pockets in the best position to do this because they
can spread the cost around – could prevent at lowest cost
and absorb cost better
d. Statutory Claims
i. Statutes can alter the requirements under CL suit- such as extend
the scope of employment
ii. Can usually sue both under CL (tort) and statute (if a statute exists
in your jurisdiction)
iii. Arguello v. Conoco
1. Facts: plaintiffs sue under §1981 alleging racial
discrimination while purchasing gas
2. 5 factors in considering whether an employee’s acts are
within the scope of employment (Restatement)
a. The time, place, and purpose of the act
b. Its similarity to acts which the servant is authorized
to perform
c. Whether the act is commonly performed by servants
d. The extent of departure from normal methods
e. Whether the master would reasonably expect such
act would be performed
e. Liability for Torts of Independent Contractors
i. Majestic Realty v. Toti Contracting
1. Facts: wrecking ball case
2. Generally principal is not liable for torts of IC
3. 3 exceptions
a. Where the landowner retains control of the manner
and means of the doing of the work which is the
subject of the contract
b. Incompetent contractor
c. Inherently dangerous activity
4. law and economic analysis: contractor in best position to
absorb and pass on the costs
IV. Fiduciary Obligations of Agents
a. 2 components: care and loyalty
i. care: use power granted with due care
ii. loyalty: with respect to power of principal granted to agent, agent
has a duty of loyalty to principal with exercise of his authority
1. no kickbacks
2. no secret profit
a. from transactions with principals
b. use of position (Reading)
3. no usurping business opportunities from principal (Singer)
4. no grabbing and leaving (Town & Country)

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 b. Duties During Agency
i. Reading v. Regem
1. Facts: soldier used his uniform to get truck through security
without having it searched
2. remedy for breach of loyalty: disgorgement of profits
3. think about it in terms of authority given-
a. in this case authority to wear uniform- wearing
uniform gives façade of government approval and
abusing it by converting it to own purpose
b. vs not using that authority for own advantage, not in
payment of authority
c. can’t do anything that would profit yourself; if do
so breach duty of loyalty and doesn’t matter if
company not actually hurt
ii. General Automotive Manufacturing v. Singer
1. Facts: agent/defendant learned of business opportunity
while working for plaintiff and didn’t tell company about it
and took it for himself
2. agent has a duty to exercise good faith by disclosing to
principal all the facts
3. here, agent took away opportunity from employer; if he had
told them about the deal probably wouldn’t have been a
problem
4. agent wasn’t the decision maker, but held himself out as the
decision maker
5. would have been harder for principal to bring breach of K
action because would have had to shown that agent
breached an express term of K (such as not working the
required time each week)
c. Duties During and After Termination of Agency: Grabbing and Leaving
i. Town & Country House & Home v. Newbery
1. Facts: couple of employees want to start own business and
take customer list with them; had access to customer list
from authority give by principal and used it for own
benefit- access to trade secret and took it
2. it’s how you get the trade secret information- if followed
trucks and wrote down addresses wouldn’t be using
authority to gain info
3. duty continues even after relationship ends

CHAPTER 2: PARTNERSHIPS
I. What is a Partnership? And Who Are the Partners?
a. Intro
i. 2 bodies of law
1. UPA 1914- NC still has this one
2. UPA 1997- most states have this one

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 ii. UPA partnership definition: partnership is an association of two or
more persons to carry on as co-owners a business for profit
1. co-owners is the key
iii. Is on on-going entity- can’t make it dormant like you can a
corporation
iv. Can dissolve when any partner wants to as long as it isn’t a
partnership for term or for a specific purpose
b. Partners Compared with Employees
i. Fenwick v. Unemployment Compensation Commission
1. Facts: Defendant had a beauty shop and “promoted”
employee to partner status
2. Partnership traits
a. Sharing of profits- this is prima facie evidence of
partnership but not determinative
b. Right to control
3. works in reverse to agency: for partnership to exist must
have some agreement, but doesn’t have to intend to be a
partnership agreement and doesn’t have to be written
c. Partners Compared with Lenders
i. Martin v. Peyton
1. rule of partnership makes each partner potentially liable for
all the debts of the partnership; question of who is a partner
is important
2. facts: defendants made investments in plaintiffs’ firm;
defendants claim were creditors, not partners
3. court says defendants didn’t have sufficient right to control,
but very close to it
ii. Southex Exhibitions v. RI Builders Association
1. dissolution case, diving up of assets
2. Facts: RIBA enter into agreement with SEM for future
productions of RIBA home shows
3. business for profit existed, but what about right to control?
4. court found no partnership, but Lee thinks court may have
been wrong- Southex made “lion’s share of decisions” but
RIBA had right to come in
d. Partnership by Estoppel
i. Young v. Jones
1. Facts: plaintiffs, group of investors, relied on an opinion
letter from PW-Bahamas, which was negligently prepared;
sue PW-NY because that’s where all the money is
2. court found no partnership because individual entities
licensing PW name
3. in order to have partnership by estoppel, must prove
plaintiffs relied- here, didn’t rely on it being a PWH firm;
reliance is an essential element
II. Fiduciary Obligations of Partners

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a. Introduction
i. Fiduciary duty between partners is extreme
ii. Meinhard v. Salmon
1. Facts: S formed partnership with M to manage hotel; as
lease on building expired S negotiated to take the reversion
and develop a new building without telling M- in effect S
trying to form new partnership
2. legal standard
a. duty of finest loyalty
b. “punctilio of an honor most sensitive”
c. “the though of self was to be renounced”
3. if a fiduciary learns of a corporate opportunity during
employment, opportunity belongs to the firm, not the
individual
4. S must permit M to participate in reversion – “only through
disclosure could opportunity be equalized”
5. fiduciary duty even after leave partnership
b. After Dissolution
i. Bane v. Ferguson
1. facts: plaintiff retires from law firm, firm merges with
another, firm dissolved; plaintiff claims that they acted
unreasonably in deciding the merge the firm
2. a partner is a fiduciary of his partners, but not of his former
partners- partners owe no duty to former partners because
they have left the partnership
3. if plaintiff could have shown that there was bad faith, might
have had K claim, but there was no money there anyway
(bad faith: fraud, intentionally taking away benefits)
c. Grabbing and Leaving
i. Meehan v. Shaughnessy
1. Facts: Meehan and Boyle partners of PC; decide to leave
because didn’t like pension plan and overall compensation
and start own firm
2. M & B breached their duties to partnership by contacting
clients before they left in a way that didn’t fairly give the
clients a choice to stay with PC; until Dec. they lied to their
partners about their plans to leave- denying plans when
asked is critical
d. Expulsion
i. Lawlis v. Kightlinger & Gray
1. Facts: alcoholic partner in firm gets in trouble, agreement
reached explicitly providing he would have no second
chance; began drinking again and firm gave him a second
chance with conditions he must meet; when he proposed
his units of participation be increased, firm want to expel
him

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 2. when expel a partner, technically dissolve partnership
3. plaintiff claims wrongful dissolution; court rejects it
because even though default position under act requires
showing cause, their partnership agreement contained a
guillotine clause in which don’t have to show cause for
termination
III. Partnership Property
a. Putnam v. Shoaf
i. Facts: one partner sells her half to another person. Bookkeeper
embezzling money and discover this. Former partner claims
entitled to half of recovery from bookkeeper
ii. A partnership is a separate legal entity and not an aggregate of the
partners; is a separate legal entity that owns the property
IV. Raising Additional Capital- Problem
a. You need to draft partnership agreement so that you can raise additional
capital without problems
b. Can have a service partner- provides something other than cash
c. Capital account is a running balance reflecting each partner’s equity
interest; ways to change capital account:
i. Allocation of profits increases a capital account
ii. allocation of losses decreases capital account
iii. taking a draw (distribution) decreases the account
d. Profits and Losses under the UPA
i. default rule if agreement doesn’t provide otherwise
ii. profits are divided pro rata, and then equally
1. After pay off outside creditors, next pay back partners the
amount they initially contributed
2. After do this, if there is anything left over, that money is
divided equally between the partners
iii. Losses are more ambiguous- it says losses follow profits
1. interpreted that partners equally bear
2. a partner that did not contribute any capital initially does
not have to bear any losses
V. The Rights of Partners in Management
a. UPA default: all partners have equal rights in the management and
conduct of the partnership business
b. National Biscuit Co v. Stroud
i. Facts: 2 partners, no agreement, running grocery store. One partner
agrees to buy more bread, other says no. Nabisco sues for payment
ii. What either partner does with a third party is binding on the
partnership
iii. If partner who didn’t want bread had 51% control, could restrict
other who wanted the bread
iv. If Nabisco knew that one partner didn’t have authority, wouldn’t
have been binding
c. Summers v. Dooley

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 i. Two equal partners. Dooley hires another worker to take his place
because unable to work. Summers wanted to hire a third guy, but
Dooley didn’t; Summers hires anyway and tried to bill the
partnership
ii. Summers loses- partnerships, absent an agreement to the contrary,
decided by a majority vote; hiring an employee requires a majority
vote and Summers doesn’t control the majority
iii. What Summers could have done- terminated partnership, get rid of
guy Dooley hired
iv. Reconcile this case National- that one dealt with dispute with third
party regarding existing K whereas this one deals with dispute
between partners regarding new K
v. Can’t freeze out a partner
d. Moren ex rel. Moren v. JAX Restaurant
i. Facts: mother and sister have partnership in restaurant; mother
took son to work at restaurant; son injured on dough making
machine and father sues partnership
ii. Issue: whether making pizza dough part of the normal course of
business- yes, so partnership liable
iii. UPA: partnership shall indemnify a partner for liabilities incurred
by the partner in the ordinary course of the business of the
partnership
e. Day v. Sidley & Austin
i. Facts: plaintiff in charge of firm’s DC office which he founded, but
not on firm’s executive committee. Firm merges with another DC
firm which plaintiff agrees to. DC offices merged and plaintiff no
longer in charge. Even though he signed off on merger claims
misrepresentation.
ii. Illustrates extent to which courts allow partnership agreements to
derogate from statute
iii. Partnership agreement gave operational control to executive
committee, so no cause of action even though it seems extremely
unfair to plaintiff
VI. Partnership Dissolution
a. The Right to Dissolve
i. Owen v. Cohen
1. Facts: O and C partners in bowling alley; O put up money
which was to be repaid out of business’s profits and treated
as a loan; C is pain to work with and O sues for dissolution
because wants to be paid back
2. dissolution is not the same as going out of business
a. dissolution is simply the change in relationship of
the partners caused by any partner ceasing to be
associated with the carrying on of the firm’s
business

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 b. can occur by one or more partners, operation of law,
or by court order
c. always have power to dissolve partnership, but not
always have right
i. can always dissolve partnership, but if
wrongful will be penalized
3. court allowed dissolution- found bad blood, partnership no
longer functional
ii. Collins v. Lewis
1. facts: partnership for cafeteria; C to provide all necessary
funds, L to plan, supervise, and manage; cafeteria losing
money and C wants out
2. court denies dissolution. C must continue to financially
support cafeteria because he agreed to contribute money
until partnership made a profit
3. in order for C to get out, must show turned a profit or not a
viable business
4. when a partner advances a sum of money to a partnership
with the understanding that the amount contributed was to
be a loan to the partnership and was to be repaid as soon as
feasible from the prospective profits of the business, the
partnership is for the term reasonably required to repay the
loan
iii. Page v. Page
1. issue was whether the partnership was for term or a will;
plaintiff wanted to dissolve because not making money and
argued was a partnership at will and could dissolve at any
time; defendant argued it was partnership for term and
plaintiff couldn’t dissolve
2. court found that defendant failed to prove any facts from
which an agreement to continue the partnership for a term
may be implied
3. UPA: partnership at will may be dissolved by the express
will of any partner, but this power, like any other power
held by a fiduciary, must be exercised in good faith
4. a partner may not dissolve a partnership to gain the benefits
of the business for himself, unless he fully compensates his
co-partner
b. The Consequences of Dissolution
i. Intro
1. time line:
dissolution-------------winding up------------final termination
2. after dissolution, partnership must be wound up, absent
agreement among partners to carry on business

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 3. assuming that the business will not continue, the winding
up process generally contemplates that the firm’s assets
will be distributed to the partners
4. authority of partners to act on behalf of partnership
terminates except in connection with winding up of
partnership business
5. Continuation per agreement
a. effect on the partnership
i. technically creates a new partnership
ii. creditors of former partnership automatically
become creditors of new partnership
b. effect on departing partners
i. entitled to an accounting
ii. remains liable unless released by creditors
c. effect on new partners
i. also liable for the firm’s old debts, but such
liability can only be satisfied out of
partnership property- capital he contributed
ii. can only be held personally liable for old
debts if expressly agreed to
ii. Prentiss v. Sheffel
1. Facts: 2 majority partners file for dissolution because didn’t
like Prentiss; trial court granted dissolution because
Prentiss frozen out; Prentiss claims that other 2 got
dissolution in order to buy him out cheaply
2. court says that Prentiss failed to show he was injured from
the dissolution and that if anything the judicial sale helped
him
iii. Disotell v. Stiltner- skipped in class
iv. Pav-Saver Corp. v. Vasso Corp.
1. Facts: Dale owns PSC, Meersman owns Vasso. PSC and V
form PSMC. PSC contributed patents, V cash. PSC wants
out and wants to take patents with it
2. Had dissolution section in written agreement, but could be
read two ways- does this clause create right to terminate?
3. early dissolution of a term partnership is a wrongful
dissolution; court says wrongful dissolution so PSC can’t
take patents with it and remaining partners have right to
continue business
c. The Sharing of Losses
i. Kovacik v. Reed
1. Facts: K fronted money, R is the brains; profits to be
equally divided, no salaries; K dissolves on grounds
partnership losing business
2. court ruled that parties don’t equally bear loss when
contribute different amounts

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 3. 1997 UPA section 18 overrules this case- must equally
share losses unless otherwise agreed
d. Buyout Agreements
i. Intro
1. Buy-out agreement is an agreement that allows a partner to
end his relationship with the other partners and receive a
cash payment, or series of payments, or some assets of the
firm, in return for his interest in the firm
2. Many possible approaches; here is a brief outline:
a. trigger events: death, disability, will of any partner
b. obligation to buy versus option
i. firm
ii. other investors
iii. consequences of refusal to buy: if there is an
obligation, if there is no obligation
c. price: book value, appraisal, formula (ex: 5 year
earnings), set price each year, relation to duration
d. method of payment: cash, installments
e. protection against debts of partnership
f. procedure for offering either to buy or sell: first
mover sets price to buy or sell, first mover forces
others to set price
ii. G & S Investments v. Belman
1. Facts: partnership to own and manage apts. One partner
Nordale live in one apt and use cocaine- other partners
want to buy out his interest and file complaint for
dissolution; then Nordale dies.
2. court says that if Nordale hadn’t died, his conduct would
amount to wrongful dissolution
3. limited partnerships allow for managing partner and other
partners to participate in profit but not in day to day
operations
4. issue: when did partnership dissolve- Court says filing
didn’t dissolve partnership and not dissolved until court
says so
5. next issue- how much is Nordale’s estate entitled to?
a. Partnership buy out agreement states entitled to
capital account, but estate claims its meaning is
ambiguous and should mean the FMV
b. Court says not ambiguous and clearly means the
partner’s capital account as it appears on the
partnership books
e. Law Partnership Dissolutions
i. Jewel v. Boxer

16
 1. trial court came up funky scheme awarding partners for
amount of time worked on cases- this leads to partners
fighting over cases
2. appellate court overrules and says that since there was no
written partnership agreement, UPA governs
a. no partner entitled to extra compensation for
services rendered in completing unfinished business
b. partners awarded compensation based on
interest/percentage owned in partnership
ii. Meehan v. Shaughnessy
1. see above for facts- M and B decide to leave PC and form
own law firm
2. issue as to whether partnership agreement or UPA applied
regarding removal of cases-
a. although provision in the partnership agreement
which divide the dissolved firm’s unfinished
business didn’t expressly apply to the removal of
cases which did not come to PC through the efforts
of a departing partner, court believed that parties
intended this provision to apply to these cases also
b. court ruled that partnership agreement applied (M
and B would have faired better if UPA applied)-
upon payment of a fair charge, any case may be
removed regardless of whether the case came to the
firm through the personal efforts of the departing
partner
3. M and B breached their duty to PC; on remand if judge
determines that as a result of this breach certain clients left
PC, M and B must give PC any profits they receive from
these cases and pay PC the fair charge for removal
VII. Limited Partnerships
a. Intro
i. Formed by two or more persons and having one or more general
partners and one or more limited partners
1. general partners: liable for all the debts of the partnership
2. limited partners: not liable for the debts of the partnership
beyond the amount they have contributed UNLESS take
actual control
ii. ULPA: a limited partner shall not become liable as a general
partner unless in addition to the exercise of his rights and powers
as a limited partner he takes part in the control of the business-
actual control
iii. Can only be created where there is a written agreement among the
partners and a formal document is filed with state officials
b. Holzman v. De Escamilla

17
 i. Facts: R and A limited partners; issue: where they involved in the
management with input in crop planting and ability to write
checks?
ii. Court says yes
iii. Had agreement that allowed them to do this even though formal
structure didn’t have them in control- actual operation had them in
control and formality doesn’t matter

CHAPTER 3: THE NATURE OF THE CORPORATION

I. Intro
a. Historically to form a corporation had to ask state to charter corporation;
had to articulate a public purpose and have a public benefit; today this has
been done away with and only need to state purpose as business for profit
and the public benefit is to create profit
b. Corporations account for the bulk of “receipts” in the US although they
are only about 5% out of the total
c. Public corporation
i. Ex: IBM, Microsoft
ii. Characterized by a public secondary market in which shares of the
company are listed for trade
d. Close corporation
i. Characterized by absence of a secondary market for its stock;
closely held
ii. Often, not always, a relatively small number of shareholders who
actively participate in the firm’s management
iii. May display characteristics of partnerships
iv. Ex: banks
e. Critical attributes of a corporation
i. Legal personality
ii. Limited liability
iii. Separation of ownership and control
iv. Liquidity
v. Flexible capital structure
f. Rule of thumb: boards ACT, shareholders REACT
g. What shareholders are entitled to vote on
i. Election of directors
ii. Any amendments to the articles of incorporation and generally
speaking by-laws
iii. Fundamental transactions
iv. Odds and ends, such as approval of independent auditors
h. Incorporation process
i. Chose a state of incorporation- find a state which laws that best fit
your needs
ii. More than 300,000 companies incorporated in Delaware
1. no minimum capital requirements- don’t have to put up a
certain amt of capital to start a corporation

18
 2. only need 1 incorporator (entity)
3. favorable franchise tax
4. favorable for companies doing business outside of
Delaware
a. no corporation income tax
b. no sales tax, personal property tax, or intangible
property tax
c. no taxation on shares of stock held by non-residents
and no inheritance tax on non-resident holders
5. may keep all of its book and records outside of Delaware
and may have principal place of business/address outside of
the state
6. highly competent judiciary in company law and detailed
case law on this subject
iii. pick a company name and now also pick a domain name for
internet
iv. Draft Articles of Incorporation;
1. required things:
a. address for service of process
b. names of promoters
c. proxy if going to allow it
2. filing this with the Secretary of State initiates incorporation
3. can be amended at any time after the filing- must be
approved by majority vote if any class of stockholders
would be adversely affected
v. have incorporation meeting in which name board of directors
1. President, Secretary, and Treasurer are required
vi. then make the by-laws of the incorporation
vii. state may not exclude a foreign corporation (out-of-state) engaged
in interstate commerce
i. Post-incorporation
i. draft by-laws
ii. organizational meeting
j. authorized shares
i. how many shares state authorizes business to have
ii. created in articles of incorporation
k. treasury shares
i. is an old term
ii. once issued and outstanding, but now repurchased
l. Intro to corporation law and economics: why are there firms?
i. In a capitalist society, there are 2 principal ways of conducting
economic activity:
1. across markets
2. within firms
a. gives one person specialized job of providing the
service

19
 b. much more efficient
c. reduces transaction cost of having officer to find
next job- one person in charge of landing next deal
while the rest work on the deals
m. Liability for pre-incorporation activity
i. Promoter: someone who purports to act as an agent of the business
prior to its incorporation
ii. a corporation doesn’t become a party to a K until the corporation
adopts the K- either expressly or implicitly
iii. promoter retains liability until released by the other party to the
unless there is an agreement to the contrary; remains liable on K if
articles of incorporation aren’t filed
iv. during this time the promoter has a fiduciary obligation to the to-
be-corporation
n. Corporation Formalities
i. These are factors, not elements, so court will evaluate and weigh
ii. Effort to make a real corporation or is it just an alter ego?
iii. Annual meetings- required by statute
iv. Keeping books separate
v. The business’s actual operation
vi. Annual report- required by statute
II. Promoters and the Corporate Entity
a. Southern-Gulf Marine Co. v. Camcraft
i. Facts: promoter and Camcraft entered into K before corporation
formed, corporation supposed to be in TX but in Caymans instead.
Camcraft tries to get out of K and SG trying to enforce K
ii. Rule: A third party (Camcraft) who deals with a firm as though it
were a corporation and relied on the firm, not the individual
defendant, for performance is estopped- must honor K
iii. One who contracts with what he acknowledges and treats as a
corporation is estopped from denying its corporate existence,
particularly when the obligations are sought to be enforced
iv. Bottom line: doesn’t matter if one party not incorporated; K
enforceable
III. The Corporate Entity and Limited Liability
a. Walkovszky v. Carlton
i. General rule: shareholder not personally liable for the acts/debts of
the corporation
ii. Shareholder can lose the amount he invested
iii. Shareholder can become personally liable for his own acts or
conduct
iv. There are 3 legal doctrines that the plaintiff can invoke in case like
this
1. Enterprise liability
a. D didn’t respect the separate identities of the
corporation

20
 b. to recover P must show assignment of drivers, use
of joint bank accounts, ordering supplies
c. although seemingly independent of each other,
theses corporations are alleged to be operated as a
single entity, unit, and enterprise with regard to
financing, supplies, repairs, employees, and
garaging
d. “horizontal”
e. Corporation that committed tort actually part of a
larger corporation which actually conducts the
business
f. “brother-sister” corporations
g. Court is more likely to allow a creditor to recover
assets from the ten corporations collectively than to
pierce the veil against the individual shareholder
2. Respondeat superior (agency)
a. a principal (employer) is responsible for the actions
of his/her/its agent (employee) in the "course of
employment"
b. this is always a possibility when the shareholders
are acting on behalf of the corporation
3. Disregard of the corporate entity (piercing the veil)
a. “Vertical”
b. The corporation is a “dummy” for its individual
stockholders who are in reality carrying on the
business for their personal capacities for purely
personal rather than corporate ends
c. 3 requirements to pierce the corporate veil
i. Lack of formalities AND
ii. Under capitalization AND
iii. Injustice will result – fraud or wrongdoing

d. Alter ego is another term used to describe this

v. isn’t a problem to incorporate to the express purpose of avoiding
personal liability- whole reasoning behind having corporations
vi. it isn’t a problem to split a single business into multiple
corporations to avoid liability either
b. Sea-Land Services v. Pepper Source
i. Pierce and reverse pierce action
1. reverse pierces are VERY RARE
2. reverse pierce occurs when you go vertically up to hold
shareholder(s) liable, and then go down to all their other
corporations and hold them liable
3. this is unfair to other creditors of corporations when you go
down the other side-

21
 ii. Facts: SL ship peppers for PS, the PS stiffed SL on the bill. PS had
been dissolved, but SL sought to pierce PS’s corporate veil and
render Marchese personally liable and then reverse pierce
Marchese’s other corporations so that they too would be liable
iii. Not only were the corporations alter egos of each other, but they
are also alter egos of Marchese
iv. The corporate entity will be disregarded and the veil of limited
liability pierced when 2 requirements are met:
1. unity of interest AND
2. fraud/injustice
a. some element of unfairness, something akin to fraud
or deception or the existence of a compelling public
interest
v. 4 factors to determine unity
1. failure to maintain adequate corporate records or to comply
with corporate formalities
2. the commingling of funds or assets
3. undercapitalization
4. one corporation treating the assets of another corporation as
its own
c. Roman Catholic Archbishop v. Sheffield
i. Piercing the corporate veil refers to situations where there has been
an abuse of corporate privilege, because of which the equitable
owner of a corporation will be held liable for the actions of the
corporation
ii. Alter ego is another name for piercing the corporate veil
iii. Here, it was not sufficient injustice that the plaintiff will not be
able to collect if the corporate veil is not pierced
d. In Re Silicone Gel Breast Implants Products Liability Litigation
i. Control issue was at stake- was the parent operating the subsidiary
as the alter ego?
e. Frigidaire Sales Corp. v. Union Properties- skipped in class
i. Beginning in the 1960’s limited partnerships came into widespread
use for tax shelter purposes- show losses for tax purposes even
though they may be successful economically
ii. Also in the 1960’s lawyers for the promoters of tax shelter
investments developed a variation on the basic limited partnership-
a limited partnership with a corporation as the sole general partner
iii. Facts: general partner was a corporation, limited partners were
individuals, but they also controlled the corporation
iv. Rule: when the shareholders of a corporation, who are also the
corporation’s officers and directors, conscientiously keep the
affairs of the corporation separate from their personal affairs, and
no fraud or manifest injustice is perpetrated upon third persons
who deal with the corporation, the corporation’s separate entity
should be respected

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IV. Shareholder Derivative Actions
a. Lee’s background Intro
i. Derivative actions exited at CL, so have been around a long time
ii. First question: who brings the action and on who’s behalf?
1. Direct
a. cause of action belongs to the shareholder in his
individual capacity
b. injury is directly to the shareholder
c. done in equity and at law
d. examples:
i. action to enforce the holder’s voting rights
or to prevent some other shareholder from
improperly voting his shares
ii. compel payment of dividends
e. easier to bring a direct action because there are less
procedural rules to follow than derivative
2. Derivative
a. brought by the shareholder on corporation’s behalf
b. cause of action belongs to the corporation and arises
out of an injury to the corporation
c. examples: breach of duty of care or duty of loyalty
d. may be a reason why the corporation decides not to
sue
e. usually brought because board has breached their
fiduciary duty of care
b. Intro
i. Cohen v. Beneficial Industrial Loan Corp
1. Facts: NJ statute required P/shareholder to pay legal
expenses if suit fails if the shareholder owns less than 5%
or less than 50K worth of stock. Corporation may ask court
to require that a bond be posted before the suit goes
forward. P claims this law unconstitutional. D claims that
bond posting mechanism is a way to limit frivolous suits
2. bond posting mechanism constitutional
3. shareholder derivative action- are actions in equity because
fix injustice and shareholder doesn’t have standing to sue
under the law
ii. Eisenberg v. Flying Tiger Line
1. Facts: after company’s reorganization, P claims voting
rights diluted because now can only vote for board
members
2. Issue in the case was whether the suit was direct or
derivative. Court found it to be direct
3. Gordon Test: whether the object of the lawsuit is to recover
upon a chose in action belonging directly to the
stockholders, or whether it is to compel the performance of

23
 corporate acts which in good faith requires the directors to
take in order to perform a duty which they owe to the
corporation, and through it, to its stockholders
4. Test refined in this case - suit is individual in nature if the
injury is one to the plaintiff as a shareholder, and to him
individually and not to the corporation. Procedural
instrument is class action. A suit is derivative only if it is
brought in the right of a corporation to procure judgment in
its favor.
iii. Note on Settlements and Attorney Fees
1. if a derivative action is settled before judgment, the
corporation can pay the legal fees of the plaintiff and of the
defendants
2. if a judgment for money damages is imposed on the
defendants, except to the extent that they are covered by
insurance, they will be required to pay those damages and
may be required to bear the cost of their defense as well
3. with a derivative action, court must approve any settlement
iv. Note on Individual Recovery in a Derivative Action
1. sometimes a court awards an individual recovery in a
derivative action
c. The Requirement of Demand on the Directors
i. Intro
1. The role of the demand requirement
a. innocuous procedural step that has become a sieve
to separate cases in which the board is allowed to
control the suit from those in which shareholder is
allowed to do so
b. board gets first shot at litigation- demand notice
must be filed by P before filing suit unless demand
excused
c. complex law, not uniform state to state
2. Demand futility- demand excused when futile
a. Grimes rule is the majority rule and in Delaware
b. Marx is the NY rule
c. Example: if board holds shareholder meeting and
doesn’t give notice of it
3. see slide print-outs for flow chart
4. what really happens: usually P won’t file demand and then
the issue is whether the demand was excused which allows
you to get to the substance of why P suing
ii. Grimes v. Donald- Delaware Demand Rule
1. derivative and direct action
2. general rule: if asking for injunction, it’s a direct claim
3. Delaware demand requirement established (majority)

24
 4. P must allege particularized facts (pre-discovery using the
“tools at hand”) creating a reasonable doubt that the board
is capable of making a good faith decision on the suit
a. Majority of board has a material financial or
familial interest (loyalty) OR
b. Majority of board lacks independence (domination
and control by wrongdoers) (loyalty) OR
c. Challenged transaction is not the product of a valid
exercise of business judgment (care)
i. Requires you to show how the crazy
outcome was reached
ii. Essentially, says that the business judgment
rule does not apply
iii. Marx v. Akers- New York Demand Rule
1. alleged breach of fiduciary duty to excessive director
compensation and excessive executive compensation
2. NY demand requirement (3-prong disjunctive standard)
a. Majority of directors interested in challenged
transaction (loyalty), OR
i. Essentially is a way around the business
judgment rule
b. Directors failed to inform themselves to a degree
reasonably appropriate (care), OR
c. Challenged transaction could not have been the
product of sound business judgment (care)
i. Basically requires that you file with
particularity that the outcome of the board’s
decision was crazy- able to draw an
inference of bad behavior from the outcome
ii. This requirement is what makes NY’s
unique- DE doesn’t have this factor
iv. Difference between DE and NY demand requirements
1. DE
a. Decision-making process was the problem
b. DE breaks up NY’s 1st factor into 2 factors
i. NY: majority of directors interested in
challenged transaction
1. DE: majority of board as a material
financial or familial interest
2. DE: majority of board lacks
independence
c. This standard doesn’t look at the outcome- can’t
make any inferences and must be able to prove bad
conduct which led to bad outcome
2. NY
a. Outcome was the problem

25
 b. This standard tends to hold boards more
accountable
c. This standard doesn’t require that allegations
possess specific particularity
d. The Role of Special Committees
i. Auerbach v. Bennett
1. Facts: GTE made 11 million in illegal bribes and
kickbacks. GTE shareholder brought derivative action
against GTE, directors, and outside auditor for beaches of
duties to the corporation. Board responded by appointing a
special litigation committee
2. court assumed that the demand was excused
3. special committee didn’t include any members who
committed the fraud and none who personally benefited
from kickbacks
4. court will only look at special committee’s decision making
process; it is a business judgment of the board to pursue
litigation
5. almost impossible to pursue action after special committee
decides not to- only way is to show committee biased
6. followed NY Rule
ii. Zapata Corp. v. Maldonado
1. Facts: excessive compensation claim. Demand not made
but excused as futile. Board appoints special litigation
committee composed of new board members and
recommends dismissal.
2. 2 step process:
a. One
i. Inquiry into the independence and good faith
of the committee
ii. Inquire into the bases supporting the
committee’s recommendations
iii. Limited discovery may be ordered
iv. Corporation has the burden of proving
independence, good faith, and reasonable
investigation
b. Two
i. Court may go on to apply its own business
judgment as to whether the case is to be
dismissed- if no basis for special committee
dismissing suit
e. The Role and Purposes of Corporations
i. A.P. Smith Mfg Co v. Barlow
1. Facts: company gave 150K to Princeton. Shareholders
bring derivative action
2. company must be giving money for the general public good

26
 3. there must be a separation of interest between the company
directors and the charity- can’t give to charity that director
founded because it’s his pet charity
ii. Dodge v. Ford Motor Co.
1. Facts: FMC very successful, Henry Ford dominated with
58% of stock and wants to cut dividends back. Dodge boys
sue with 10% of stock
2. standard of review
a. courts will generally leave dividend decisions to the
director’s discretion, but will intervene if refusal to
pay amounts to such an abuse of discretion as
would constitute fraud or breach of good faith
b. inherent in the board’s fiduciary duties is protecting
the shareholder’s ownership rights:
i. right to participate in future earnings
ii. right to control
3. shareholders have a right to money made by their
investment
4. a corporation is organized and carried on primarily for the
profit of the stockholders
5. powers of the directors are to be employed to that end
6. limits to the “for profit of shareholder” rule
a. compliance with the law
b. charitable giving
7. expansion issue- the court did not enjoin the expansion of
the plant because this decision implicates the business
judgment rule and is beyond the court’s scope
8. duty of care:
a. each member of the board when discharging the
duties of director shall act
i. in good faith AND
ii. in a manner the director reasonably believes
to be in the best interest of the corporation
b. application to this case
i. did HF reasonably believe that building the
new plant was in the best interest of FMC?
Don’t know for sure
ii. could he have reasonably believed this?
Yes- could have been to avoid competition
with Dodge boys
iii. Shlensky v. Wrigley
1. Facts: S minority shareholder in corporation that owned
Cubs and operated Wrigley Field. W owned 80% of stock
and refused to install lights on field
2. W wins

27
 3. in the absence of a showing of fraud, illegality, or self
dealing by the directors, their decision is final and not
subject to review by the courts- business judgment rule
4. since the courts won’t review such decisions, P has no
standing
iv. Reconciling duty of care and the business judgment rule
1. duty of care tells directors “don’t be negligent”
2. business judgment rule insulates directors from negligence,
only liable for fraud or self dealing
v. MBCA provisions: standards of conduct vs. standards of liability
1. standard of conduct is aspirational
2. liability is legal trouble

Chapter 4: The Limited Liability Company

I. Intro
a. “Partnership with no personal liability”
b. Cross between a partnership and corporation
i. Tax advantages of partnerships
ii. Limited liability of corporations
iii. None of the restrictions- number and type of shareholders that are
applicable to corporations
c. Typically look to partnership laws when membership agreement is silent,
but this is rare
d. The ULLCA is very similar to the UPA
e. Funding
i. Members typically contribute capital (just like partnership)
ii. Contribution may be cash, property, services rendered, promissory
note
f. Liability
i. Members stand to lose capital, but not their personal assets
ii. because LLC’s did not exist at CL, it is not possible to have a LLC
by estoppel- therefore, you must have a document in order to find
an LLC exists
g. Tax consequences
i. Income passes through to members
ii. LLC itself doesn’t pay taxes
h. Formation
i. File articles of organization in the designated state office
1. filing fees and $800 minimum franchise tax
ii. other tasks
1. choose and register name: LLC statutes generally require
the name of the LLC to include the words LLC or similar
phrase
2. designate office and agent for SOP

28
 3. draft operating agreement- basic contract governing the
affairs of the LLC and stating the various rights and duties
of the members
4. good idea to also have annual report
i. Conversion of existing entities: partnership
i. ULLCA authorizes conversion of partnerships or limited
partnerships into LLC’s
ii. Can also convert debts of partnership to debts of LLC- this has the
effect of insulating the LLC members with limited liability to the
surprise of creditors- now lenders make conversion an event of
default
iii. IRS treats as a potential recognition event/no tax consequences
j. Conversion of existing entities: corporations
i. No ULLCA provision
ii. IRS treats as a potential recognition event
k. Members’ interests
i. Include financial interests (ex: right to distributions and liquidation
participation)
ii. And management rights
l. Financial interests
i. Profit and loss sharing
1. absent contrary agreement, most statutes allocate profits
and losses on the basis of the value of members’
contributions (versus partnership default is equal)
ii. withdrawal
1. member may withdraw and demand payment of his interest
upon giving the notice specified in the statute or LLC
operating agreement
m. Management rights
i. Absent contrary agreement, each member has equal rights in the
LLC management
1. most matters decided by majority vote
2. significant matters require unanimous consent
n. Assignment of LLC Interests
i. Unless otherwise agreed upon, member may assign his financial
interest in the LLC
ii. an assignee of a financial interest in an LLC may acquire other
rights only by being admitted as a member of the company if all
the remaining members consent or the operating agreement so
provides
o. Fiduciary Duties
i. Manager-managed LLC
1. treated like a corporation: members are like shareholders
and managers and like board directors
2. the managers have a duty of care and loyalty

29
 3. usually, members have no duties to the LLC or its members
by reason of being members other than their shareholder
duties
ii. Member-managed LLC
1. treated more like a partnership
2. all members have a duty of care and loyalty
iii. derivative actions: member may bring an action on behalf of the
LLC to recover a judgment in its favor if the members with
authority to bring the action refuse to do so
iv. LLC agreement can limit and even eliminate fiduciary duties, but
must be specific- can’t just say “there is no duty of care or loyalty”
p. Liabilities
i. No member or manager of a LLC is obligated personally for any
debt, obligation, or liability of the LLC solely by reason of being a
member or acting as a manager of the LLC
ii. But veil piercing may apply
II. Formation
a. Water, Waste & Land Westec v. Lanham
i. Must give notice its an LLC in order to be shielded from liability
ii. If no notice, then members personally liable
iii. Extension of the agency rule regarding undisclosed principal
III. The Operating Agreement
a. Elf Atochem North America v. Jaffari
i. Operating agreement is very flexible
ii. As long as code doesn’t specifically prohibit something LLC
agreement can do whatever
IV. Piercing the LLC Veil
a. Kaycee Land and Livestock v. Flahhive
i. Failure of a LLC to observe formalities or requirements relating to
the exercise of its company powers or management of its business
is not ground for imposing personal liability
ii. Nothing in ULLCA that allows for veil piercing – members can be
liable for their own acts
iii. Sometimes statutes say that corporate law applies to LLC – if so
then corporate veil piercing applies to LLC
iv. This court found that there is no reason to treat LLC’s differently
than corporations
b. Possible to pierce the LLC veil; 3 approaches
i. most courts apply the rules for corporate piercing to LLC’s
ii. have modified the Uniform Act to allow for LLC piercing
iii. some have either not addressed LLC piercing or do not allow it
V. Fiduciary Obligation
a. McConnell v. Hunt Sports Enterprises
i. An LLC operating agreement may limit or define the scope of the
fiduciary duties imposed upon its members
ii. ULLCA governs when agreement doesn’t address

30
 VI. Dissolution
a. New Horizons Supply Cooperative v. Haack
i. If you properly wind-up members are not liable
ii. Wind-up: pay off outside debts, then member debts, then distribute
any assets
1. in this case, member paid off her own debts first
2. wind- up for LLC is just like a partnership
b. generally follows partnership rules, but is more flexible
c. because LLC’s are a creature of statute, there is no such thing as an LLC
for term

Business Judgment Rule

I. 2 ways of thinking about the business judgment rule:
a. As an abstention doctrine- Lee likes this one
i. Court will not review a board decision
ii. Preconditions
1. no fraud
2. no illegality
3. no self-dealing
4. decision not egregious
b. As a standard of liability
i. No liability for negligence
ii. Instead, liability is based on fraud, illegal conduct, self-dealing,
and perhaps egregious conduct
II. Rule saves many actions from being held to be violations of the duty of care
III. How BJR relates to the duty of care:
a. The duty of care imposes a fairly stern set of procedural requirements for
directors’ actions
b. Once these procedural requirements are satisfied, the BJR then supplies a
much easier to satisfy standard which respect to the substance of the
business decision
IV. Basically provides that a substantively-unwise decision by a director or officer
will not by itself constitute a lack of due care. However, there are 3
requirements (two of them procedural) which a decision by a director or
officer must meet before it will be upheld by application of the rule
a. No self dealing
b. Informed decision
c. Rational belief
d. Exceptions: illegal or pursuit of own goals

Chapter 5: The Duties of Officers, Directors, and Other Insiders

I. Duty of Care (Obligations of Control)
a. Intro
i. Definition: the director or officer must behave with that level of
care which a reasonable person in similar circumstances would use
ii. Competence

31
 iii. Excessive compensation is usually a duty of care problem, unless it
board is granting its own salaries at which point it becomes a duty
of loyalty issue
iv. Can get insurance for breach of duty and loyalty for board
members (in order to attract a wide variety of people)
v. Most breaches for both care and loyalty are intentional
vi. Very rare for directors and officers to be found liable for breach of
care- when this happens it’s usually because there is some taint of
self-dealing, but not enough to cause the court to find a formal
violation of the duty of loyalty
b. Kamin v. American Express Company
i. Board does not act negligently when it results in a bad judgment;
negligence means the failure to exercise judgment
ii. Here, the court wouldn’t substitute its judgment. The court only
needed to look at the process, not the substantive decision. Only 4
out of the 20 directors had a personal stake. If only the minority is
tainted you have to be able to show that this minority affected the
outcome
c. Smith v. Van Gorkom
i. Prior to this case, BJR was a blanket protection against board
ii. Issue here was breach of care- board rushed through decision-
making process; willful blindness of deal transaction
iii. The board should have gone to an investment bank and gotten an
external opinion on how much stock worth
iv. The need for expert opinion in major corporate decisions comes
from this case
v. Forces board to have some type of actual decision making process
1. court will review this process and it must be reasonable
2. even if there is a defect in the decision-making process,
must show caused actual injury to corporation
3. no protection for uninformed decision because that is an
defect in the decision-making process
vi. party attacking the board has the burden of proof
1. must prove gross negligence by directors (in failing to
adequately inform themselves of the decision
2. directors failed to inform itself of “all material information
reasonably available to them”
d. Brehm v. Eisner
i. Corporate waste: transaction that is so one sided that no business
person of ordinary sound judgment could conclude that the
corporation has received adequate consideration
ii. Compensation is a matter of business judgment unless there is
severe irrationality court will not review
iii. Delaware General Corporation Law §141(e) allows board
members to in good faith rely on corporation’s records
1. preconditions to this defense: duty of inquiry

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 2. possibility that it won’t apply when decision is beyond the
pale
iv. Duty of good faith was a separate cause of action in this case
v. To prove a violation of due care, must show that the board was
grossly negligent in failing to inform itself of all material
information reasonably available to it
1. even if board doesn’t do this, board can hire an expert to
conduct a study and board can in good faith rely upon the
expert’s findings- this would avoid liability
e. Illegality is treated as a violation of the duty of care
f. Relationship between duty of care and the business judgment rule
g. Francis v. United Jersey Bank
i. The business judgment rule has no application where directors
have failed to exercise a business judgment- i.e. have failed to
make a judgment at all
ii. If the business judgment rule doesn’t apply, the defendant director
is not automatically liable- plaintiff must show that defendant
breached duty of care
iii. Here, defendant breached duty of care because she was inattentive,
inactive, listless, a drunk, ignorant, and sons were dominate figures
iv. Court expected a duty to be informed (under the duty of care)
1. obligation of basic knowledge and supervision
2. read and understand financial statements
3. object to misconduct and if necessary resign
h. In Re Caremark International Derivative Litigation
i. The business judgment rule did not apply in this case because there
was a lack of oversight and no board decision
ii. Court did not decide whether board breached duty of care, but it
probably didn’t because there was no evidence of sustained failure
to exercise oversight
iii. Duty of care requires
iv. Must attempt in good faith to assure a corporate information and
reporting system
v. Elements of a corporate compliance program
1. policy manual
2. training of employees
3. compliance audits
4. sanctions for violation
5. provisions for self reporting of violations to regulators
vi. if the board decides not to adopt a corporate compliance program,
the business judgment rule applies since they made a decision; no
liability if they acted in good faith and followed a rational process
vii. before this case, unless the board had affirmative knowledge of a
wrongdoing there was no liability. After this case, there is a duty to
make rational, informed choices about whether to have a system in
place

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II. Duty of Loyalty
a. Intro
i. Definition: a person’s duty not to engage in self-dealing or
otherwise use his position to further personal interests rather than
those of organization
ii. Business judgment isn’t involved here because it concerns loyalty-
not making judgment to benefit company, but decision to benefit
yourself, so it’s not a business judgment at all
iii. Direct interested director transactions
1. K between director and corporation
iv. indirect interested director transactions
1. there is 1 director and 2 corporations, person is in some
fiduciary position to both
2. director is benefiting through a 3rd party
b. Directors and Managers
i. Bayer v. Beran
1. plaintiff must make prima facie case that a interested
transaction existed, then board has an opportunity to
respond
2. ultra vires
a. this occurs when a transaction is beyond a
corporation’s power and thus is illegal
b. normally, it would be beyond scope if one director
acted, but here court found it wasn’t
c. formal actions/proceedings by board is preferable in
order to be within scope
d. now corporate laws have changed and corporations
can do just about anything without being beyond its
scope
ii. Lewis v. SL&E Inc- skipped in class
c. Corporate Opportunities
i. Broz v. Cellular Information Systems
1. doctrine of corporate opportunities
a. usurpation by an officer or director for personal
gain of some prospective business venture or
development in which the firm has a property right
2. Under Delaware law, a corporate opportunity exists where
a. Corporation is financially able to take the
opportunity
b. Opportunity is in the corporation’s line of business
c. Corporation has an interest or expectancy in the
opportunity
i. This is critical
ii. Interest is something to which the firm has a
better right

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 iii. Expectancy: takes something which in the
ordinary course of things would come to the
corporation
d. Embracing the opportunity would create a conflict
between the director’s self interest and that of the
corporation
e. Not clear whether these 4 things are factors or
elements- courts call them factors but then implies
that absence of any one is enough
3. relevance of board approval or lack thereof- not required,
but board approval creates a safe harbor because there is no
longer a conflict
d. Dominate Shareholders
i. Intro
1. shareholders acting as shareholders owe one another no
fiduciary duties
2. controlling shareholders owe fiduciary duties to the
minority shareholders
3. parent and subsidiary corporations
a. subsidiary can be wholly owned by “parent”
b. if parent owns 50.1%, then the subsidiary is called a
“majority controlled subsidiary”
c. if parent owns less than 50%, then subsidiary is
called a “minority-controlled subsidiary”
d. transactions between parent and subsidiary
corporations
ii. Zahn v. Transamerica Corporation
1. Facts: Transamerica was the controlling shareholder of AF.
There were two classes of stock; Transamerica owned 2/3
of Class A Stock and owned almost all of the Class B
stock. Class B stock contained the voting rights. Class A
could be converted into Class B and that is what
Transamerica did without disclosing intent to liquidate
2. The majority has the right to control; but when it does so, it
occupies a fiduciary relation toward the minority, as much
so as the corporation itself of its officers and directors
3. when a director/stockholder votes as a director, he
represents all the stockholders in the capacity of a trustee
for them and cannot use his office as director for his
personal benefit at the expense of the stockholders
4. in this case, the directors of AF were the instruments of
Transamerica, were directors voting in favor of their
special interest, Transamerica, and could not and did not
exercise an independent judgment in calling the Class A
stock, but made the call for the purpose of profiting their
true principal, Transamerica

35
 5. importance
a. can create different classes of stock with different
rights
b. minimum fiduciary duties of shareholders to each
other

Chapter 6: Problems of Control- Proxy Fights

I. Intro
a. Because few shareholders of public corporations attend the annual
meeting, the outcome will generally depend on which group has collected
the most proxies. Under corporate law, shareholders may appoint an agent
to attend the meeting and vote on their behalf. Because the outcome of the
meeting depends on the number of votes cast, the person with the most
proxies usually wins
b. Generally, the incumbent members of a large firm will solicit proxies from
shareholders directly
c. Proxy fights result when an insurgent group tries to oust incumbent
managers by soliciting proxy cards and electing its own representatives to
the board
d. In designating a proxy (proxy card) can specify how shares are to be voted
or give agent discretion; are revocable
e. Incumbent directors must provide annual report before soliciting proxies
for annual meeting; anyone who solicits a proxy must prove a written
proxy statement BEFORE soliciting the proxy
f. The management can use corporate funds to pay for expenses they incur in
conducting their own proxy solicitation as long as the amounts are
reasonable and the contest involves policy questions rather than just a
purely personal power struggle
i. Reasonable expenses: disclosure statement to shareholders,
telephone solicitations, in person visits to major shareholders,
giving corporate contract to major shareholder
g. The insurgent can only use corporate funds to pay for the expenses it
incurs in conducting their proxy solitation if approved by shareholders
h. Proxy contests are relatively rare because they are costly and shareholders
are apathetic
II. Strategic Use of Proxies- Levin v. Metro-Goldwyn
III. Shareholder Proposals
a. Intro
i. Shareholder proposals allows qualifying shareholders to put a
proposal before their fellow shareholders- and have proxies
solicited in favor of them in the company’s proxy statement and
the expense is borne by the company
ii. Grounds for exclusion
1. allows exclusion of proposals that relate to operations
which account for less than 5% of firm’s assets, etc and is
NOT otherwise significantly related to the firm’s business

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 b. Lovenheim v. Iroquois Brands, Ltd
i. Otherwise significant related includes ethical and/or social
significance
IV. Shareholder Inspection Rights
a. Intro
i. Shareholders have a legitimate interest in using the proxy system
to hold the board accountable
ii. Delaware Statute
1. shareholder must make a written demand setting forth a
“proper purpose”
2. a proper purpose is one reasonably related to such person’s
interest as a stockholder
iii. proper purposes
1. investigate alleged corporate misconduct
2. collect information relevant to valuing shares
3. communicate with fellow shareholders in connection with a
planned proxy contest
iv. improper purposes
1. attempting to discover proprietary business information for
the benefit of a competitor
2. secure prospects for personal business
3. institute strike suits
b. State Ex Rel. Pillsbury v. Honeywell, Inc.
i. Plaintiff/shareholder lacked a proper purpose for requesting
shareholder list or corporate records- the purpose was based solely
on his pre-existing social and political views rather than any
economic interest
ii. Essentially, a proper purpose is an economic purpose
iii. The suit might have been appropriate when a shareholder has a
bona fide concern about the adverse effects of abstention from
profitable war contracts on his investment in Honeywell
V. Control in Closely Held Corporations
a. Intro
i. A close corporation is one in which the stock is held in a few
hands, or in a few families, and wherein it is not at all, or only
rarely, dealt in by buying or selling- no secondary market for
shares
b. Ringling Bros v. Ringing
i. Corporation used cumulative voting to elect directors
1. cumulative voting is a mechanism by which the minority
gets to elect some directors
2. directors are elected all at once
3. each shareholder gets the number of votes equal to the
number of board vacancies times the number of shares
owned

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 4. may cast all votes for one (or more) member of the board of
directors
5. ex: H owns 100 shares and there are 3 slots available. H
may cast all 300 votes for 1 candidate, thereby making it
more likely that as a minority shareholder he will get a
director elected
ii. facts: 2 parties had a written agreement under which they would
vote together. The effect of the agreement was that the third party
was only able to elect 2 directors and the 2 parties were able to
elect 5 directors by combining their votes. In the event of a
deadlock, the disagreement was to be determined by an arbitrator-
they disagreed. Arbitrator made a decision, but one of the parties
defected
iii. the court ruled that the agreement was valid, but the defecting
party’s votes were not counted
iv. importance: can have voting agreements

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TERMS FROM OLD EXAM AND REVIEW SHEET
1. Greenmail:
• A situation in which a large block of stock is held by an unfriendly company. This
forces the target company to repurchase the stock at a substantial premium to
prevent takeover
• Like blackmail, this is a dirty tactic, but it’s very effective
• Defensive strategy
• One corporation is trying to take over another and has one person buy up a bunch
of the other’s stock
2. Stalking Horse
• See Smith v. Van Gorkham for example
• Test market prices for the shares by offering to buy them at a particular price
usually with guarantees of stock options so that the stalking horse gets something
no matter what
3. Articles of Incorporation- (see above)
• Comes before the by laws
• Document filed at the time of incorporation with the state
• Very simple, plain
• Critical that there is contact information for the incorporators/promoters and who
is the agent for service of process
4. Leveraged Buyout
• Taking on debt; borrow against some assets; secure loan with some asset
• One corporation attempting to buy out another and buying the shares
• Typical strategy: secure the loan with the assets of the targeted corporation.
• Ex: A wants to buy B. B has money in its treasury. A promises lender that if the
takeover is successful A will secure loan with B’s assets. If takeover is successful
B’s assets are A’s assets
5. Preferred Stock
• Stock issued after common stock; different rights from those originally issued
• Generally no voting rights, but has a premium on dividends
• First on liquidation
6. Cumulative Voting Rights- see Ringling Bros.
• Voting strategy for electing board by accumulating votes
• Must be provided for in the by laws
• Aggregate votes toward one person rather than spreading them out
7. Black Shoals Valuation
• Used to evaluate stock
• The thing being valued is the present value of stock options
• I can buy 100 shares of IMB 6 months from now at $20/share- how do I know
how much that’s worth 6 months from now?
• Traditional way of dealing with this problem is to ignore it
• These are often found in executive bonus packages
• If you’re an investor investing in the company and there are a lot of stock options
out there you have no idea what a company is worth

39
• With this valuation investors can tell what it’s worth
8. Actual Express Authority- see above
• “you are my agent and you can do _____”
9. Actual Implied Authority- see above
• Something is necessarily included in your express duties
• “authority implied from actual authority”- according to Lee
• Ex: manager of pie shop will have implied authority to buy dough
10. Apparent Authority- see above
• Show a holding out between principal and third party
• Manifestation by principal to third party
• It is within the scope of his authority- very broad standard
• Third party’s reliance must be reasonable (what would a reasonable lawn service
believe was the customary authority of a manager of a housing community)
11. Customary authority
• Usually proper to the conduct of the business for that particular position
12. Inherent Authority- “
13. Ratification- “
14. Inherent Agency Power- is the same as inherent authority
15. Annual General Meeting
• A mandatory yearly meeting of shareholders that allows stakeholders to stay
informed and involved with company decisions and workings
• This yearly meeting is the single event whereby shareholders are able to gather
and ask the board of directors questions pertaining to corporate health and
strategy. Proper notice must be given to shareholders with regards to meeting
times and agenda
16. Proxy
• A formal document signed by a shareholder to authorize another shareholder, or
commonly the company’s management, to vote the holder’s shares at the annual
meeting
• The proxy discloses important information about issues to be discussed at an
annual meeting
17. Proxy Fight
• When a group of shareholders are persuaded to join forces and gather enough
shareholder proxies to win a corporate vote. This is sometimes also referred to as
a proxy battle
• This term is mainly used in the context of takeovers. The acquirer will persuade
existing shareholders to vote out company management so that the company will
be easier to takeover
18. Proxy Statement
• A document containing the information that the company is required by the SEC
to prove shareholders so they can make informed decisions about matters that will
be brought up at an annual stockholder meeting
• Issues covered in a proxy statement can include proposals for new additions to the
board of directors, information on directors’ salaries, information on bonus and
options plans for directors, and any declarations made by company management

40
• Required by law, statement that explains why the proxy is being requested, who
are the new members, what are, the issues, and what will be voted on
19. Tender Offers
• An offer to purchase some or all of shareholders’ shares in a corporation. The
price offered is usually at a premium to the market
• Tender offers may be friendly or unfriendly. SEC laws require any corporation or
individual acquiring 5% of a company to disclose information to SEC, the target
company, and the exchange
20. Shark Watcher
• A firm specializing in the early decision of takeovers. The firm’s primary
business is usually the solicitation of proxies for client corporations. A shark
watcher monitors trading patterns in a client’s stock and attempts to determine
who is accumulating shares
21. Quorum
• The minimum acceptable level of individuals with a vested interest in a company
needed to make the proceedings of a meeting valid under the corporate charter
• This clause within a company’s charter ensures that there is a sufficient
representation of stockholders present at meetings before any changes can be
made by the board

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