You are on page 1of 28

CORPORATIONS OUTLINE

Agency I.

Who is an Agent? a. Agency i. Agency exists where one person consents that another shall act on that persons behalf and is subject to his control, and the other consents to such [Rst. 3d 1.01] Principal one for whom the action(s) are being performed Agent performer of these actions ii. Gorton v. Doty Accident occurred when s car (which was loaned to the football coach) was involved in an accident a. claims because the owned the car, she is responsible alleged principal; Gorst (coach) alleged agent Court says there was an agency relationship a. Manifestation of consent do not let the players drive the car (also control issue) SPECIFIC LIMITING INSTRUCTIONS b. Accepted the car consent required to create the agency relationship iii. Control Control is a concept that embraces a wide spectrum of meanings [Rst 3d 1] a. Principal initially states what the agent shall and shall not do in specific/general terms b. Principals right to give interim instructions or directions once relationship is established c. Principal control as a practical matter incomplete d. Interim instructions distinguish principals in agency relationships from those in non-agency relationships iv. Creation of an agency relationship Do not need a business purpose/relationship to consummate No contract/compensation necessary Cannot agree to not create an agency relationship Can be express or implied v. Jensen Farms v. Cargill s are the farmers who sold grain to Warren for the grain elevator (s were corporation who was financing his operations) Warren goes bankrupt owes s $2 million a. s claim that Warren was the agent of the and they are liable claims it was a separate entity and had no direct control Just creditors and suppliers Court dismisses the s arguments too much control/invested to not be a principal

II.

vi. Rst 140 Creditors Creditors that have significant control (de facto control) over the operations of the debtor are considered principals a. Shared bank account, telling them how to operate, etc. Some level of input/control is allowed and expected so the creditor can protect its investment vii. Rst 14K Supplier Suppliers have a completely independent relationship; considered an agent when the actions of one is significantly for the benefit of the other (Warren had little business independent of Cargill) Liability of Principal to Third Parties in Contract a. The agents authority i. Mill St. Church of Christ v. Hogan Church hires Bill Hogan to paint, who then hired his brother Sam to help (despite the Church wanting him to hire someone else) a. Sam fell after a ladder broke and broke his arm filed a workers comp claim (has to show he was an employee) Church says Bill lacked the implied authority as an agent to hire Sam a. Implied authority actual authority circumstantially proven which the P actually intended the A to possess (practically necessary to carry out the delegated duties) b. Apparent authority the authority the agent is held out by the principal as possessing (power third party reasonably believes the As power to be) Rst 144 a P is liable to contacts made by an A acting within his authority if made in proper form and with the understanding that the P is a party Court says it must be reasonably believed by the agent that, due to past/present conduct by the P, that the P wishes them to have certain authority a. Existence of prior, similar practices one of the most important factors (past specific conduct by the P allowing similar practices) b. Bill had implied authority to hire Sam had hired him in the past to help ii. Three Seventy Leasing Co. v. Ampex Co. A contract for 6 core memory units was allegedly entered into by the and a. says that this was not a purchase agreement, but simply a solicitation to purchase b. says it was an offer to sell and was accepted by representatives of the Contract lacks requisite intent from at most an offer

An agent has apparent authority sufficient to bind the P when the P acts in such a manner that would lead a reasonable person to suppose that the agent had authority he purports to exercise a. Third party needs to know that the P exists if not: inherent agency Kays employed as a salesman reasonable to believe a salesman can bind his employer to sell ( did nothing to dispel this inference) a. Document submitted to the for signature, all communications through Kays b. had every reason to believe Kays spoke on behalf of his company iii. Watteau v. Fenwick Action brought to recover the price of goods delivered to the Victoria Hotel over some years for which the gave credit to Humble only a. Humble had no authority to buy any goods for the business (only beer and water) bought cigars Can only sue a principal for acts done within the scope of ones agency; cannot sue when there has been an excess of authority Court says dormant partner/active partner will not avail itself to any limitation of authority (basically a P-A relationsip) b. Ratification i. Botticello v. Stefanovicz bought property from the who only had an undivided half interest in the property a. made no representations they did not own the property outright b. took possession of the property and exercised his right to purchase (option) refused to honor the option claims cotenant wasnt party to the agreement so the terms are not binding on them a. claims the defendant was the authorized agent of the tenancy Court says facts are insufficient to determine agency (marital status does not create an agency relationship) a. The fact that one spouse tends to more business matters than the other does not constitute delegation of power as to an agent ii. Ratification An agency that occurs when: a. A person misrepresents themselves as anothers agent when in fact they arent, AND b. The purported principal ratifies the unauthorized act Ratification can be: (P must know details of agreement) a. Express

b. Implied c. Acceptance of benefits i. Need to be able to decline while there is an ability to d. Inaction e. Enforcement of the contract The affirmance by a person of a prior act which did not bind him, but was done/professedly done on his account a. Requires acceptance of the results of the act with an intent to ratify, and with full knowledge of all the material circumstances

III.

c. Estoppel i. Hoodeson v. Koos Bros. was defrauded by someone posing as a salesman at the furniture store Presence of apparent authority needed to create an agency relationship (P did nothing to indicate con as their agent) Agency by estoppel a. Would preclude s denial of liability Court says if the was so negligent as to allow such a character to pose as a salesman, they cannot use the imposters lack of authority as a defense Requirements: a. Acts/omissions by the P that create an appearance of authority for the imposters to which the third party reasonably relied upon to their detriment d. Agents liability i. Status of the principal Disclosed No agent liability (2 exceptions:) a. Agent included as party in deal b. Agent acts without authority Partially disclosed (know there is a P but dont know who P is) Agent a party to the contract Undisclosed Agent treated as a party to the contract ii. Atlantic Salmon Bought salmon under a bunch of fake corporations, but had a corporation in the past that was dissolved (did not pay) claims he was an agent for Marketing Design, Inc. (the dissolved corporation) cant sue me Court says agent is liable in the case of an undisclosed principal a. Entirely up to an agent to protect themselves Liability of Principal to Third Parties in Tort a. Master-Servant relationship i. Types of liability Direct

ii.

iii.

iv.

v.

a. Agent acts with actual authority or principal ratifies agents conduct and As conduct is tortious or P was negligent Vicarious a. A commits a tort while acting within the scope of employment or is acting with apparent authority in dealing with a third party Servant An agent performing services in the masters affairs whose physical conduct is controlled or is subjected to the right of control by the master a. Master does not actually have to exercise control (merely needs the right to control) Independent Contractor A person who agrees to carry out some task, but is not subject to the Ps control in doing so Humble Oil v. Martin An unattended car rolled down a hill into the Martins home Humble argues that they arent liable because Schneider was an independent contractor a. Martin claims master-servant relationship claims that Schneider was a servant because Humble exuded a lot of power of the operations: a. Kept title of products until theyre sold (no risk to Schneider) b. Lease terminable at will by Humble only c. Required duties that basically entailed Schneider doing whatever Humble told him to do Agreement actually says Humble has no control over Schneiders business/employees and the employees think Schneider is the boss Court disagrees Actual actions show substantial control Hoover v. Sun Oil A fire occurs at a gas station purportedly due to employees negligence a. claims independent contractor owned the equipment, but rented to the gas station (Barone) a. Barone set the stations schedule, took title of the products, could sell competitors products b. gave recommendations Barone under no obligation to take the advice (some evidence of control) c. Court says did not have control over the day-to-day operations i. Need to look at how things are getting done in order to determine a master-servant relationship ii. Apparent agency uniformity of the gas station to other Sunoco stations

iii. Who is bearing the financial risk? (party with risk likely to exert control) b. Tort liability and apparent agency i. Miller v. McDonalds Corp. bites into a Big Mac and injures herself a. 3K Restaurants franchises this particular McDonalds from the s Actual agency right to control test a. If in practical effect, the franchise agreement goes beyond the stage of setting standards and allocates to the franchisor, the tight to exercise control over the daily operations of the franchise, an agency relationship exists b. 3K must follow the McDonalds system can lose franchise if they dont Apparent agency a. One that represents that another is his servant or agent and thereby causes a third party justifiably to rely upon the care/skill of such apparent agent b. Crucial issues: (1) P held third party out as an agent: AND (2) there was a reliance upon that holding out c. Centrally-imposed uniformity McDonalds claims there was not justifiable reliance on 3K as their agent a. Court says the could reasonably believe all McDonalds were owned by McDonalds and were not francishes c. Scope of Employment i. Rst 3d 7.07(1) An employer is subject to vicarious liability for a tort committed by its employee acting within the scope of employment An employee acts within the scope of employment when performing work assigned by the employer or engaging in a course of conduct subject to the employers control ii. Ira S. Bushey & Sons v. US Employee of the US Coast Guard messes with valves of a boat drydocked which then damages the dock a. says US is vicariously liable for the tort Lane committed Court says that turning valves did not serve any purpose to the US Coast Guard a. Test should be a cross between notions of fairness and foreseeability b. Employer should be held liable for any actions forseeable in the course of his employment that relates to the employment that is fair to charge the employer with Court says Lane would not have had to walk across the drydock without his employment

IV.

a. Didn't need to anticipate he was going to do this specifically; need to be able to foresee some harm iii. Manning v. Grimsley At a baseball game, some fans heckled the (a pitcher for the Orioles) who then threw a ball at them a. suing the Orioles saying they were vicariously liable for the b. Court says that one could make their employer vicariously liable if they are responding to conduct that presently affects ones ability to perform their abilities successfully d. Independent Contractors i. General rule: P has no liability for torts committed by independent contractors ii. Majestic Realty v. Toti Contracting Co. s had a building next to one the demolished (which damaged their building) 3 exceptions to the general rule: a. Land owner retains control of the manner and means of doing the work b. Landowner engages an incompetent contractor c. Where the activity contracted for constitutes a nuisance per se Nuisance per se a. Condition involving a particular risk of harm to others unless special precautions are taken (inherently dangerous activity) b. Does not include ultrahazardous always strict liability Fiduciary Obligations of Agents a. Duties during agency i. Reading v. Regem puts British uniform on to escort items through Cairo so they will not be inspected a. sues because the Crown takes his profits when discovered No actual loss to the employer (not usurping any opportunity) Court says the only reason he got the job was because of his uniform a. Govt is the only proper recipient violated his duty of loyalty and was unjustly enriched ($ must go to ) b. No need for actual loss Not allowed to enrich himself as a result of the agency relationships AGENCY IS A FIDUCIARY RELATIONSHIP ii. General Automotive Manufacturing, Co. v. Singer was a consultant for the was to devote the entire time of his skill, labor, etc.

a. If felt that could not fulfill an order, he would broker a deal with another manufacturer claims he violated his fiduciary duty (could have also brought a breach of contract claim) a. Had to prove damages for the contract claim for the fiduciary duty claim the secret profits are the damages Court says by not disclosing to the all facts regarding this matter, the breached his fiduciary duty a. Give the the right to refuse the orders themselves

Partnerships I. What is a Partnership? a. Partners v. Employees i. UPA 6(1) A partnership is an association of two or more persons to carry on as co-owners a business for profit UPA 202 Formation of Partnerships o 202(a): The association of two or more persons to carry on as co-owners of a business for profit forms a partnership, whether or not the persons intend to do so o 202(c)(3): a person who receives a share of profits from a business is presumed to be a partner in the business, unless the profits were received in payment: Of a debt by installments or otherwise For services as an independent contractor or of wages Of rent Of an annuity or other retirement or health benefit Of interest or other charge on a loan For the sale of the goodwill of a business Liability o Partners are responsible personally for the liabilities of a partnership Continued existence o Terminates when a partner leaves/dies Transferability of interest o No secondary market for partnership shares; o Typically extremely difficult to transfer a partnership share Flexibility o Most partnership rules provide default rules that the parties can contract out of [EXTREMELY FLEXIBLE] II. Formation a. Overview i. You form a partnership by acting like one Contract law applies, but you dont need anything in writing Two key rules: a. UPA 7

b. RUPA 202 Do the potential partners share profits? Other factors: a. Joint control of the business b. Intent of the parties ii. Fenwick v. Unemployment Compensation Commn worked at United Beauty and offered to give Chesire a share of the profits instead of giving her a raise (partnership agreement) a. claims Chesire was an employee, not a partner should be paying into the unemployment fund Provisions indicating partnership: a. Chesire receiving 20% of profits b. Agreement explicitly states partnership Provisions indicating employee a. No managerial control b. alone responsible for debts c. Result of dissolution the same as if she was an employee d. No capital contribution Court says there was not enough of an indication of a partnership a. Chesire was an employee iii. Elements of a partnership: Intention of the parties Rights to share in profits/obligation to share in losses Community of power in administration Language in the agreement Conduct of the parties toward third persons Rights of parties in dissolution b. Partners v. Lenders i. Martin v. Perkins PPF is lending $2.5m in liquid securities to KNK as collateral for a loan a. PPF receives dividends, 40% of profits (capped), an option to buy equity, inspection and veto rights KNK becomes insolvent creditors come after PPF claiming them as a partner in the business a. claims they exercised control and received profits so they became partners b. says this was just in protection of their loan to KNK Court says this was not enough for a partnership a. Inspection/veto rights not an unusual step to take to protect your investment b. No legal right to control Hall does not allow him to become an agent c. Partnership Fiduciary Duties i. Meinhard v. Salmon

The negotiates a lease with the landlord and left out the with whom he had a partnership (which was expiring) a. Does have the duty to include the in the negotiations? Court says breached his duty of loyalty to the a. gets an equitable profit interest in 50% of the value of the lease b. needed to disclose (at a minimum) the extension of the lease If knew, the would have seemingly met his duty a. Other language seems to say you must value your partner above yourself disclosure (potentially) not enough b. There is some extra duty other than disclosure owed to a partner sharing in a future opportunity Can take a wholly different opportunity Cannot negotiate out of the duty of loyalty a. Can identify types of activities that do not violate a duty of loyalty as long as they are not unreasonable ii. Meehan v. Shaughnessy Two partners in a law firm decide to leave in July (and begin planning their exit then) a. Deny departure until December b. s want their partnership interest and a declaratory judgment of what they owe the firm Court said they did breach some duties: a. Letters to clients on old firms letterhead b. Blatantly lied to the other partners and only gave 1 month notice s maintained their workloads positive (need to keep the workload stable) s allowed to leave but there were constraints on that departure a. Cannot lie to the other partners b. Some covert dealings are to be expected differently than overtly lying to partners c. Added duty in conducting relationships with clients of the firm as well as the interest of your employer d. Expulsion of a partner i. Lawlis v. Kightlinger & Gray was an alcoholic and was not meeting his responsibilities a. Partnership agreement allows for a 2/3 vote to expel a partner from the firm claims that he was told he was going to be terminated before the partners voted and that constituted a dissolution a. Court dismisses this also claims that the other partners acted in bad faith when they terminated him (expelled for a predatory purpose)

III.

Court says there is a standard of good faith when a partner is being expelled a. Partnership needs to treat his interest in the partnership in good faith and any property associated with it b. The partnership agreement was agreed to by the partners good faith is inherent in using the dissolution clause in the agreement Partners can set up contract provisions that are reasonable and negotiated (meet good faith) Rights of Partners in Management a. Control and Economic Rights i. Default control rights RUPA 401(f): each partner has equal rights in the management and conduct of a partnership business a. True even if partners contribute different capital interests ii. Default economic rights RUPA 401(b): equal share of partnership profits RUPA 807(b): entitled to settlement of all partnership accounts upon winding-up RUPA 502: only transferrable interest of a partner is that partners share of the profit/losses and that partners right to receive distributions b. Management decisions i. RUPA 401(f): equal rights in management 401(i): new partner only with consent of all partners ii. RUPA 401(j): any decision as to a matter of ordinary course of business may be decided by majority vote; outside of ordinary business requires consent of all partners c. National Biscuit Co. v. Stroud i. One partner 9Stroud) goes to and says the other partner does not have the authority to buy bread, but sells bread to him anyway ii. Court says partnership is bound by what the one partner did UPA 9(1): every partner is an agent of the partnership for the purpose of its businessfor apparently carrying on in the usual way the business of the partnership of which he is a member binds the partnership unless: a. The partner so acting has in fact no authority to act for the partnership, AND b. The person whom he is dealing knows they have no authority Stroud cannot unilaterally change the partnership agreement, let alone the status quo (does not have a majority) a. Freeman has authority 401(f); Strouds letter is essentially meaningless d. Summers v. Dooley

IV.

i. sues that he had to pay $11,000 out of his own pocket for additional help he hired despite s constant objections Court says did not sit idly by and acquiesce to the actions of his partner Manifestly unjust to allow to recover for an expense that was incurred individually ii. Difference to National Biscuit Biscuit in the course of normal business, this was not (trying to change) iii. Biscuit third party suing (binding the partnership to a third party); this case among partners (changing the status quo) Partnership Dissolution a. The right to dissolve i. Partnership term Default: at-will Can have a set term (explicit or implied) Dissolving partnerships with a set term will typically include a case for breach of contract if dissolved before term is finished ii. UPA 31 (causes of dissolution) and 32 (dissolution by decree of court) give ways a partnership can be dissolved iii. Owen v. Cohen Partners owned a bowling alley a. was generally unbearable to work with and had begun to affect the business b. made a loan to the partnership of about $7000 Wants a judicial decree [32(1)] for dissolution (was a partnership for a term) 32(1)(c): prejudicial on the partnerships business a. Court affirms the dissolution any proceeds from the sale go to paying back the loan 40(b) Rules for distribution a. Creditors b. Loans from partners c. Partner capital d. Profits to be shared iv. Implicit partnership terms Page v. Page a. is arguing that this is a partnership at-will and wishes to dissolve i. claims there is a term for the time it takes to recoup the money they invested in the business b. Has to be some evidence to support the finding of an implied term no more than a common hope the partnership earnings would pay for the necessary expenses i. Formed a partnership and hoped it would be successful (no implied term)

UPA 3(1)(a): need to find evidence of a particular understanding in the agreement for an implied term to be found Page and fiduciary duties a. Partners may not, by use of adverse pressure, freeze out a co-partner and appropriate the business for their own use b. Court did not fin any such issue in Page v. Collins v. Lewis Agreement for a cafeteria to be built; financed and managed a. wants to dissolve the partnership by judicial decree (30 year term) Jury found was not at fault for delays/issues and that but for the conduct of the there would have been a reasonable expectation of profit a. Court refuses to dissolve the partnership b. can dissolve hefty breach of contract damages gave a mortgage on his partnership interest to the who wants to foreclose on it a. can only foreclose if does not pay the set dollar amount per year b. Did not pay it to the , but did pay it to the creditors due to the s refusal to do so (NOT FORECLOSABLE) b. Consequences of dissolution i. Winding-up process Authorities of partners changes Dissolving partner(s) get their fair share (minus any potential damages if contract breached) ii. Existing liabilities Still owe liabilities as a partnership UPA 40 iii. Prentiss v. Sheffel 3 person partnership 2 vote to dissolve a. Excluded the from the management decisions b. fails to make a contribution and s file for dissolution Partnership is auctioned and the s buy back the partnership a. s feels the s should not have been able to bid in the public auction b. s bidding with money they had in the partnership iv. Pav-Saver Co. v. Vasso Co. Partnership is stated to be permanent (or dissolved through mutual agreement terminating party must pay liquidated damages) v. wants to dissolve takes over the business (78 can continue to operate and collect damages) wants patents/trademarks back vi. Court said does not have to give the patents back and is entitled to damages Get the damages the partnership agreement sets out

Not congruent to 38(2)(c) c. Sharing of interests i. Kovacik v. Reed invests $10,000 in the business and invests his labor and skill General rule is that each partner shares the same % of losses as the profits they earn a. Court said this is for partners that contribute capital only put in services Not changing the rule in 18 making an exception a. Not the rule when a partner contributes $0 b. Exception to the exception: if one party (who contributes no capital) earns a salary before profits are split Corporations I. Nature of the Corporation a. Incorporation Process i. MBCA 2.01: one or more persons may act as the incorporator(s) of a corporation by delivering articles of incorporation to the Secretary of State for filing ii. MBCA 2.02: (a) the articles of incorporation must set forth (b) the articles may set forth 2.02(a): corporate name, number of authorized shares, name and addresses of corporations registered agent, name and address of each incorporator iii. Purpose of the corporation Ultra vires (beyond the powers) a. Corporations cannot act beyond the purposes for which they are incorporated iv. Effective date 2.03(a): unless a delayed effective date is specified, the corporation begins when the articles of incorporation are filed b. Liability for pre-corporation contracts i. Promoter Binds corporation if he has authority cannot bind a non-existent principal a. Corporation not automatically a party to the contract, but can adopt it once it is in existence Liable for pre-corporation contracts until they are adopted by the corporation Remains liable on breached contracts by corporation [2.04], if no corporation is ever formed or unless agreed to otherwise ii. Southern Gulf Marine v. Comcroft, Inc. says the did not honor a contract to furnish a ship a. says they are not bound because the was not a corporation until after the contract was signed (done through a promoter)

Court says if you contract with an entity and treat them as a corporation, and it has no negative impact on your substantial rights, one cannot deny the existence of the corporation or any agreement with said corporation [ESTOPPEL] a. Corporation by estoppel if a third party thought it was a corporation and would earn some windfalls if they were allowed to deny the corporations existence (unjust enrichment) c. Corporate limited liability i. Underlying principle: corporation is a separate entity distinct from its owners 6.22(b): unless otherwise provided, 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 ii. Piercing the corporate veil Exception to limited liability; when courts hold SHs liable for the obligations of the corporation a. Typically when SHs do not treat the corporation as a separate entity MOST COMMON: co-mingling assets b. Amount of control the SHs have over the management decisions of the corporation is a large factor Typically requires some amount of fraud or injustice Walkovsky v. Carlton a. s cab company hit the and severely injured him and has a controlling stake in 10 corporations i. Limits assets that can lose by keeping corporations small instead of one aggregate one ii. claims the multi-corporation structure constitutes an unlawful attempt to defraud the public b. Enterprise liability i. Fragments of a larger corporate structure that is truly just an entity of a larger corporation ii. Allows you to get at the assets of all 10 corporations (hold all 10 liable) iii. Must show did not respect the separate entities (comingling, same cab drivers, under same management) c. Court says has not shown any fraud the complaint barren of any sufficiently particularized statements i. Not enough fraud that the isnt getting paid Would satisfy all cases SeaLand Services v. Pepper Sources a. sues the to recover an unpaid freight bill of $87k

II.

i. no longer in business, suing individual to get the money from one of the other corporations he owns/is a SH of b. Two prong test to pierce the corporate veil: i. Must be such a unity of interest and ownership that the separate personalities of the corporation and the individual and corporation no longer exist, AND ii. Circumstances must be such that adherence to the fiction of separate corporate existence would sanction fraud/promote injustice c. Factors that will justify disregarding separate entities: i. Failure to maintain corporate formalities/records ii. Comingling funds/assets iii. Undercapitalization iv. One corporation treating the assets of another corporation as its own Frigidaire Sales Corp. v. Union Properties a. claims that partners should not be liable exercised day-to-day management of Commercial b. Court says a limited partnership is allowed to have a partnership with a corporation as a general partner i. Doing it as officers/directors of the corporation is OK ii. To find [limited partners] liable for the limited partnerships obligations would require the court to ignore the corporate entity of Union Properties, when the knew they would be dealing with a corporate entity Parties to a Corporation a. Overview i. Shareholders Own the company; participate in the profits of the enterprise Limited involvement in companys affairs ii. Board of directors (BOD) Elected by SHs Individual directors are not agents of the corporation Collectively the corporate principal iii. Management Appointed by the BOD b. Board v. SHs i. AP Smith v. Barlow Charitable donations are OK within the business judgment of the corporation Some instances it may not be OK: a. Pet charities b. If the company isnt making money

III.

ii. Dodge v. Ford Motor Co. s wanted Ford to pay more dividends and stop construction of a new car plant Court says on the basis of the balance sheet, more dividends should have been paid out Does not stop construction of the proposed expansion plant a. Judges are not business experts iii. Shlemsky v. Wrigley believes lights should have been installed in order for them to play night games a. making decisions based on personal opinions and will lose money if they dont have night games Business judgment rule (BJR) a. Courts will not interfere with honest business judgment unless there is a showing of fraud, illegality or conflict of interest Limited Liability Corporations [LLCs] a. Characteristics of LLCs i. Formation IRS taxes LLCs as partnerships (single taxation) Provides the pass-through taxation of a partnership and the limited liability of a corporation Requires: a. Charter b. Operating Agreement ii. Management and Ownership structure Owners are called members Default Management conducted by all members a. Member-managed LLC b. Manager-managed LLC i. Specific members are designated managers who run the LLC (looks like a corporation; separation between management and owners) c. Equal distribution of profits iii. Agency of an LLC Member-managed a. Every member is an agent of an LLC Manager-managed a. Only the managed are agents for the LLC (non-manager members are not agents) iv. Limited liability Members are not personally liable for obligations of the LLC unless the LLC-veil is pierced by a court v. Westec v. Lanham Are members of an LLC excused from personal liability on a contract where one party to the contract did not have notice that the

member was negotiating on behalf of an LLC when the contract was made knew Lanham existed thought Clark (another member of the LLC) was s agent Trial court says Clark is not liable and Lanham is a. Agreed with by the high court of CO Clark was s agent creates liability for the a. s argument were agents for PII ( doesnt know about PII undisclosed principal) b. Hold agents liable for contracts entered into on behalf of the undisclosed principal c. claims the CO statute for LLCs put on constructive notice of PIIs existence Court disagrees with the saying its an invitation of fraud a. Hide the LLC status but use the benefits of it b. Must disclose youre an LLC b. Operating Agreement i. ULLCA 103(a): ..,All members of an LLC may enter into an OAto the extent the OA does not otherwise provide, this Act governs relations among the members, managers and company 103(b): The OA may not waive: a. Member access to records, duty of loyalty to the company, reducing the duty of care, eliminate obligation of good faith, varying right to expel members/wind up company under specific events, restricting distribution rights ii. Elf Atochem NA v. Jaffari The LLC statute provides the default rules upon which an LLC is based a. All (or most) of which can be contracted out of i. Must conform to contract laws ii. May not violate things in 103(b) c. LLC Liability i. ULLCA 302: an LLC is liable for conduct of a member or manager acting in the ordinary course of business or with authority of the company ii. ULLCA 303(a): a member/manager is not personally liable for a debt or obligation of the company 303(b): the failure of an LLC to observe the usual company formalities is not ground for imposing personal liability on the members or managers iii. Kaycee Land & Livestock v. Falhire Can LLCs be pierced like a corporation? a. says the WY statute is silent on piercing a LLC veil so the court shouldnt do it Court says the statute only indicates minimal requirements and because piercing is left out does not mean the legislature intended to preclude it

a. Other states had allowed piercing of an LLC Court says they can discern no reason to treat LLCs differently than a corporation a. Factors to consider should be similar to those for a cororation d. Fiduciary Obligations of an LLC i. Members owe a duty of loyalty and a duty of care to the LLC 409(b): duty of loyalty is limited to: a. 409(b)(1): Return all benefits derived from company property b. 409(b)(3): Refrain from competing with the LLC ii. McConnell v. Hunt Sports Enterprises contracted with Nationwide to lease an arena in Columbus for the Blue Jackets despite s rejection of the proposed lease 3.3 of the OA was titled Members May Compete a. says the agreement is unenforceable Court says the OA contracted out of the duty of loyalty a. Fiduciary duties of the members can be limited through the OA b. Can only limit the duties cant contract out of them completely 103(b)(2): May not eliminate the duty of loyalty but may identify specific types or categories of activities that do not violate the duty of loyalty if not manifestly unreasonable e. Dissociation v. Dissolution i. Dissociation 601: withdrawal or expulsion of a member two choices: a. Dissolution end of LLC b. No dissolution LLC continues (leaving member gets his share) Duties of Officers, Directors and Other Insiders I. Obligations of Control Duty of Care a. Business Judgment Rule i. Grants a presumption to officers and directors that their decisions were made in good faith Shields them from liability and shields the decision from review by the court questioning a decision bears the burden of rebutting the presumption a. If decision is within the realm of reason it will be upheld ii. Acts to protect the authority of business managers Duty of care does create some accountability to the SHs b. Fiduciary Duty overview i. Duty of care

Directors must take reasonable care when making decisions on behalf of the corporation [MBCA 8.30] Decision protected if: a. Director is not interested b. Director acted in good faith c. Director made an informed decision, AND d. Decision was not irrational ii. Duty of loyalty Directors must not compete with the business (unless otherwise stated) iii. Substantive director action Decision-making Conflict of interest Oversight c. Duty of Care i. Kamin v. American Express Co. sues the s BOD saying they bought shares in the company for $29 million to assign dividends to the SHs a. Tax deductions for SHs sell first, take a loss and then give a cash dividend (save $8m) Court says it is not enough to allege that the directors made an imprudent decisionmore than imprudence or mistaken judgment must be shown a. A complaint must be dismissed if all that is presented is a decision to pay dividends rather than pursuing some other course of conduct MBCA 6.40: a BOD may authorize and the corporation may make distributions to its SHs ii. Distinction between: Standard of conduct a. How we want people to interact with each other Standard of review a. How a court determines liability for an actors actions b. Extremely deferential in corporate law (Especially due to the BJR) iii. Smith v. Van Gorkum wants to sell his company to Pritzker quickly, so he quotes a seemingly arbitrary price and presented it to the BOD a. Leveraged buyout BOD seems aware of only a cursory presentation and approves it feels they could have gotten more money sues the BOD Court says that the BOD did not reach an informed business decision a. Did not adequately inform themselves as to s role in forcing a sale and establishing the per share purchase price b. Were unaware as to the intrinsic value of the company

c. Given the circumstances, were grossly negligent in approving the sale of the firm upon two hours consideration iv. BJR Burden Shifting Step 1: bears burden of proof; must rebut presumption of BJR Step 2: If cannot rebut presumption, keeps protection of BJR and court will not review Step 3: If successfully rebuts presumption, then loses protection of BJR and court will review the decision v. Legislative response to Van Gorkum 102(b)(7): any corporation may include in its certificate of incorporation a provision eliminating or limiting the personal liability of a director to the corporation or SHs for damages for breach of fiduciary duty vi. Francis v. United Jersey Bank claims that the 2 sons who owned 52% of the corporation stole that money and put the company in bankruptcy (going after the minority owner and the estate) a. completely disengaged from the business (Claim is had she done something, she would have known about the fraud) No BJR No decisions made had to show she breached her duty of care (court agrees) a. If she didnt want to/couldnt, she should have found someone else to do it Directors should acquire at least a rudimentary understanding of the business of the corporation a. Being old, drunk and apathetic is not a defense for ignorance d. Duty of Loyalty i. Three basic scenarios: Agent usurping an opportunity from their principal Agent competing with the principal Agent entering into a transaction with their principal ii. 144(a): an interested director transaction will not automatically be void or voidable if there has been: Informed, disinterested board approval Informed SH approval, OR The transaction is fair to the corporation iii. Evaluation of conflicted transactions: Director or SH ratification? a. NO complete fairness standard b. YES Some say shift back to BJR, some say must prove unfairness iv. Bayer v. Beran

II.

SHs say that the $1m spent on a radio ad campaign is just to get the Presidents wife off the ground Court said it was fine to hire the presidents wife a. Looked at past marketing decisions had previously wanted to get into radio b. Wife not making any more than other performers The entire transaction, if challenged, must be subjected to the most rigorous scrutiny to determine whether the action of the directors was intended or calculated to subserve some outside purpose, regardless of the consequences to the company, and in a manner inconsistent with its interests a. bears the burden of proving decision was fair b. Fact that Dreyfus wife gained prestige is no ground for liability as long as the gained due to the ad being for a legitimate corporate purpose Court treats all directors as having a conflict (even though one was only truly conflicted) Corporate Opportunities and Ratification a. Shareholder Ratification i. Fleigler v. Lawrence USAC, a corporation, is being bought by Agau, who shares a BOD with USAC a. s claim the s wrongly usurped an opportunity from Agau and the s wrongfully profited by exercising an option for Agau to purchase USAC 144 requires that interested directors dealing need to be voted on by the SHs a. Does not require a vote of disinterested SHs Court says transactions were fair ii. DE approach to ratification Benihana a. 144 provides a safe harbor for interested transactions i. Successful ratification leads to BJR deference (do not need to show fairness) Wheelabrator a. Approval pursuant to 144(a)(2) invokes the BJR and limits judicial review to issues of gift or waste with the burden of proof on the i. SH ratification results in BJR review b. Corporate Opportunity Doctrine [COD] i. Forbids directors, officers or managers from diverting to themselves any business opportunity that belongs to the corporation ii. Broz v. Cellular Information Systems Broz is the sole SH and President of RFB Cellular and a director of CIS

Broz learns of Michigan-2 license bid in capacity of President of RFB a. Tells other directors of CIS who say it didnt fit and showed no interest b. Broz bids on license for RFB and gets it PriCellular (who also bid on the license) has a tender offer for shares of CIS a. Unhappy that RFB ended up with the license 4 factor test for COD: (no one factor dispositive) a. Does the corporation have the financial ability to undertake the opportunity? b. Is the opportunity within the scope of business of the corporation (within the line of business) c. Is there a tie between the property and nature of the business? (significant/integral to corporations business?) d. Is there an inherent conflict with interested party taking the opportunity? iii. eBay Shareholders Litigation eBay was using Goldman for many investing-related opportunities a. Spinning allowing shares of lucrative IPOs of stock to go to favored clients s claim that s usurped an opportunity of eBays by using Goldman Court determines COD using Broz factors: a. Financially able to undertake opportunity b. eBay puts a lot of cash into investments (within scope) c. Cash management/investing integral part of eBays business d. Never given opportunity to turn down IPO allocations c. Dominant SHs i. Basic principles: SHs acting as SHs owe one another no fiduciary duties Controlling SHs owe fiduciary duties to the minority SHs ii. Subject to an intrinsic fairness test: Controlling SH must prove the transaction was fair (only if there was a conflict of interest) iii. Sinclair Oil v. Levien Sinclair had to account for damages sustained by a subsidiary (Sinven) Two standards: a. BJR b. Intrinsic fairness s claim did not allow Sinven to develop business excessive dividends, forced contract with Sinclair Court rules against the on corporate opportunity & dividends but they win on breach of contract

III.

a. There is a difference between 97% and 100% control (3% of minority SHs) Dividends dont involve self-dealing minority interests received the correct proportion of dividends (no unfair treatment) a. No self-dealing = BJR Court says minority SHs cannot point out a specific opportunity that was usurped (subsidiaries are regional OK) iv. Zahn v. Transamerica Corp. is a Class A SH in Axton-Fisher who sued , a controlling SH in A-F a. Claims caused A-F to redeem Class A stock at $80.80 per share instead of permitting the Class A SHs to participate in the assets upon liquidation of A-F b. Claim they would have received $240/share s cannot stop redemption, but also have a redemption right to convert to Class B a. Share in the pool with the other Class B SHs Court says because the company did not fully disclose all the relevant info (rise in tobacco asset) to the Class A SHs, this was a violation of the BODs fiduciary duty a. Needed to disclose the company was worth more than the Class A SHs thought it was b. Class A does not get the unlimited upside of Class B, but does get downside preference Obligation of Good Faith a. Overview i. DGCL 145 Only directors who, inter alia, act in good faith are entitled to indemnification from legal expenses ii. DGCL 141(e) Only directors who, inter alia, rely in good faith on corporate books/records or reports from corporate officers or certain advisors are fully protected against SH claims iii. BJR a presumption that the directors acted in good faith towards the corporation b. In re Walt Disney Co. Derivative Litigation i. Disneys Eisner (current Chairman and CEO) hires Ovitz as his successor Had 25 year social and professional agreement ii. Ovitz owned 55% of CAA and earned $20-$25m from the company annually (had to sell him on coming to Disney) iii. If Disney fires Ovitz in a non-fault situation, his severance package includes: 3 million options that vest immediately (around $50m) Additional cash payment iv. 14 months after the start of his employment, Ovitz was terminated No fault termination severance package applies

Needed to entice him to come to Disney (rational business decision) Disneys board did not formally approve the OEA with Ovitz, nor his termination a. Approved by compensation committee (subset of BOD) v. s have 2 arguments: Old board (time of hiring) hiring not approved in the right way (violation of duty of care/good faith) a. Also claim waste against them New board (time of firing) Terminating Ovitz as a no-fault termination was a violation of due care/good faith a. Also claim waste Claim this does not fall under the BJR because Ovitzs hiring under the OEA was grossly negligent and/or not performed in good faith a. Law presumes directors acted in good faith in an informed manner s burden to show they did not vi. Court says the compensation committee approved the OEA had adequate information on any potential severance package to Ovitz Consulted a firm, had numerous negotiations, consulted compensation committee 141(e) Charter includes a non-liability provision for directors who violate the duty of care vii. Court says Disneys directors did not violate their duty of care, nor did they act in bad faith Lack of due care fiduciary action taken solely by reason of gross negligence and without malevolent intent a. Dont need to follow the best practice Waste claim a. If BJR applies, can only win by showing waste b. To recover for waste, s shoulder the burden of showing the exchange was so one sided no business person of ordinary, sound judgment would conclude the corporation has received adequate consideration Seems to say bad faith is distinct from the duties of care and loyalty (triad) c. Stone v. Ritter [Oversight] i. Caremark Directors obligation includes a duty to attempt in good faith to assure a corporate info/reporting system, which the board concludes is adequate, exists Only a sustained or systemic failure of the board to exercise oversight will establish the lack of good faith that is a necessary condition of liability ii. claims boards bad oversight of SAR reports for suspicious banking caused them to have to pay $50m in fines

IV.

Caremark Absent grounds to suspect deception, neither corporate boards nor senior officers can be charged with wrongdoing simply for assuming the integrity of employees and the honesty of their dealings on the companys behalf Good faith violation must have a sustained/systemic failure a. Must show: (1) duty of care is breached, and (2) duty of care knowingly breached iii. Good faith is not its own fiduciary duty (part of the duty of loyalty) Not based in conflict of interest Shareholder Derivative Suits a. Introduction i. If a corporation is injured, he directors are the only ones with standing to sue Will not sue themselves DERIVATIVE SOLUTION ii. Direct v. derivative actions Direct brought by a SH in their own name a. Cause of action belongs to SH in an individual capacity b. Arises from injury directly to SH Derivative brought by SH on corporations behalf a. Cause of action belongs to corporation b. Arises out of injury done to corporation Analysis must be based on the following questions: a. Who suffered the alleged harm b. Who would receive the benefit of recovery iii. Eisenberg v. Flying Tiger Flying Tiger becomes a wholly owned subsidiary after a merger a. now claims (due to only owning shares in the holding company) his voting power has been diminished b. did this to avoid regulations that would be imposed upon it If this is a derivative claim, must post a bond to cover the cost of the litigation (does not have to if a direct claim) Court says this is a direct claim a. Characterizes his claim as one for dilution of voting rights only benefits SHs iv. Demand requirement At a minimum, a demand must identify the alleged wrongdoers, describe the factual basis of the wrongful acts and the harm caused to the corporation, and request remedial relief [Allison v. CM Corp.] Basic demand rule: a. A SH must first make demand on the BOD unless demand is considered futile b. Grimes v. Donald [Demand Requirement] i. CEO has complete authority to state if the BOD oversteps their bounds to quit and trigger a heft severance package

makes demand of the board who denies it ii. claims: Abdication claim was direct a. If you sign a contract with the CEO that delegates responsibility, it is valid b. Does not preclude BOD from taking action (might have to pay for it, but thats OK) Excessive compensation was a derivative claim (requires demand) iii. Three usual bases for excusing demand as futile: Majority of board has a material financial or familial interest; Majority of the board is incapable of acting independently for some other reason such as domination/control, OR Underlying transaction is not the product of a valid exercise of business judgment iv. Cannot make a demand of the BOD and then say demand was futile If demand is refused, the court applies the BJR to evaluate the decision a. Likely only overturned if theres a conflict of interest b. Making demand probably not the best option c. Universal Demand i. ALI and RMBCA have eliminated demand futility inquiry Must make demand Need a different tool to balance board autonomy and accountability ii. Marx v. Akers claims BOD is awarding themselves excessive compensation a. Does not make demand futile argument Court reluctant about SH derivative suits a. Do not want to interfere with BODs Court speaks to length about Barr test concerned that previous courts have excused demand when all directors have been named in the suit a. Need particular allegations supporting the criteria 15 of 18 on the board were interested and demand deemed futile a. Claim not excessive however (case dismissed) d. Special committees i. Auerbach v. Bennett GT&E created a committee to investigate bribe claims (which were found) a. Created litigation committee after a SH sued, and determined it was not in the best interests of the company to pursue litigation Court will first look at whether the litigation committee was created legitimately (independent, non-interested party whose investigation was adequate)

a. If satisfied, any decision made by the committee is protected by the BJR

You might also like