Corporations Outline Weinberger

CORPORATIONS OUTLINE – WEINBERGER

Jamie Rehmann

Topic Page

Part I - Background

1. Agency……………………………………………………………….………………..1

Part II – Forms of Business Organizations

1. General Partnership………………………………………………………………...….4
2. Limited Partnerships…………………………………………………………………..6
3. Corporations…………………………………………………………………………...7
4. Limited Liability Corporations………………………………………………………..8
5. Summary Chart………………………………………………………………………..9

Part III – Duties in a Corporation

1. Duties of the Corporation to Shareholders…………………………………………...10
2. Fiduciary Duties of Officers, Directors, Insiders…………………………………….10
3. Duties of Officers, Directors, Insiders w/ Respect to Securities……………………..12
4. Indemnification of Officers, Director Misconduct…………………………………..19

Part IV – Shareholder Participation/Control

1. Derivative Suits………………………………………………………………………21
2. Proxy Contests……………………………………………………………………….23
3. Shareholder Proposals………………………………………………………………..24
4. Inspection Rights…………………………………………………………………….25
5. Control in a Close Corporation………………………………………………………26

Part V – Takeovers

1. 3 Ways to Takeover………………………………………………………………….31
2. Tender Offers………………………………………………………………………...31
3. Transfer of Control…………………………………………………………………..33

Part VI – Mergers

1. Mergers………………………………………………………………………………34

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Part I –Background

1. Agency
2. Proponent of the agency relationship bears burden of proving 2 elements to hold principal liable for actions of the agent
3. The establishment of an agency relationship w/ a principal
4. Authority from the principal for the agent to bind the principal.
5. Establishment of an Agency Relationship
6. Test - Look to the totality of circumstances to see if principal had control over agent.
7. Specific examples
8. Rebuttable presumption that driver of a vehicle is agent of the owner
9. Husband and wife ARE NOT automatically agents for each other.
10. Effect of a Written K – Ct. will ignore K describing relationship as something other than agency, if totality of circumstances establish control over agent.
11. Authority for the agent to bind the principal
12. Rule: Principals are only liable to the extent the agent has authority to bind them.
13. Actual Authority
14. Express – express authorization to act for the principal
15. Implied – authority to take the steps necessary to carry out express instructions/authorization
16. Apparent Authority
17. Used by 3d pty to prove agency when there was not actual authority
18. Elements
19. Principal holds out the agent (manifestation) to the 3d pty
20. Key fact – needs to be some sort of communication or express holding out b/t the principal and a 3d pty
21. It is reasonable for the 3d pty to rely on the agents apparent authority.
22. If the agent is too high up or too low in the organization to be doing that kind of act, then probably not reasonable to rely.
23. The act must be something that is reasonable (an offer can’t be too high)
24. This inquiry focuses on the communications b/t principal and 3d pty.
25. From the principal’s holding out, was it reasonable for the 3d pty to believe the principal had given the agent authority.
26. Inherent Authority
27. Elements
28. Agent violated or acts contrary to express instructions given by principle
29. Causes loss to 3d pty
30. 3d pty is an innocent (blameless)
31. Reasoning – Even through principal is blameless too, more fair to place blame on him rather than innocent 3d pty, because principal benefits from agency relationship.
32. Ratification – A subsequent affirmation by the principle of promises made by the agent that the agent lacked authority to make.
33. Consequences of Agency for Principal
34. Principal’s Liability in Tort
35. Gen’l Rule – Principal is strictly liable for actions of the agent
36. Three defenses
37. Independent contractor/Franchisee
38. Factors:
39. Amount of control IC has over day to day activities
40. Intent of the ptys in forming the relationship
41. Was IC hired to produce a particular result or integral part of principals business
42. Exception where defense not allowed:
43. Principal retains ultimate decision making control over day to day activities of IC
44. If IC is financially dependant on principal
45. Where IC incompetent
46. Inherently dangerous activities – principal liable for IC’s neg’l
47. Ultra hazardous activities – principal strictly liable
48. Note – Prof. says the exceptions swallow this defense. You should almost always be able to find an exception to the defense
49. Agent outside scope of employment – Factors:
50. Foreseeability of agent’s action in questions – the act must not be any foreseeable more foreseeable than what the public might do
51. Known attributes of the agent are relevant here
52. Nature of the Act - Agent’s action of the same gen’l nature of that authorized?
53. Motivation - Agent’s motivation to serve employer or personal motivation?
54. Time/place dimension – frolic and detour
55. Note – even if act forbidden, principal still liable unless prove act was outside scope of employment (Restatement § 230)
56. Borrowed Servant – If agent of gen’l employer being borrowed by a special employer, special employer is liable but not gen’l employer.
57. Two principals can’t both be liable
58. But must be abandonment of agent’s allegiance to gen’l employer.
59. Ratification
60. Note – Ct.’s more likely to hold large employer liable b/c ec. efficiency
61. Consequence ofAgency for of Agent
62. Agent’s Liability in K
63. To escape personal liability agent must disclose to 3d pty:
64. He is acting in a representative capacity AND
65. The identity of the principal
66. This is objective test from view of 3d pty
67. Agent owes principal fiduciary duty of loyalty
68. Duty to subsume his own interests and act soley for benefit of principal in all matters connected w/ the agency (moral duty)
69. This is so even in the absence of a contractual relationship – the inquiry is simply whether an agency relationship is shown
70. Specific breaches of the duty:
71. Corporate Opportunity Doctrine
72. See under duties to officer/directors to shareholders
73. Grabbing and Leaving – Can’t leave employer and take trade secrets (includes client list) or all key employees.
74. Other prohibited activities
75. Deceit – lying about leaving if asked
76. Disparagement of former employer
77. Competing with employer
78. But can make preparations to compete if do it on own time and don’t start competing until after you leave.
79. ex. of permissible planning – lease, financing, purchasing, brainstorming
80. ex. of impermissible competing – soliciting clients, staff
81. gray area – disclosure to clients/staff about plans is okay so long as not disparaging and not done on employer’s time
82. Fiduciary duty lasts even after agency ends
83. Remedy for breach of fiduciary duty is punitive damages!!!!
84. Remedy for corp. opp. doct. is disgorgement

Part II – Forms of Business Organizations

1. General Partnership – UPA (Uniform Partnership Act – adopted by most states)
2. Formation
3. Rule: Partnership is the default organization of two or more ppl. carrying on business for profit (6)
4. This is so, regardless of their intent
5. Determining whether pty is a partner or not (e.g., employee/lender)
6. Totality of Circumstances Test (7) – look at pty’s actions
7. Proponent of partnership has burden of proof.
8. Presumption of partnership if pty receives share of profits
9. unless:
10. payment was wages for employment, debt, rent, ect.
11. share of profits are just icing on the cake
12. putting cap on amount of entitled profits is evid. of no partnership b/c partners split profits 50/50
13. Overcoming the presumption – evid. not partners (totality of circumstances)
14. control – participating v. just following orders
15. exercising negative veto rights is evid. of not partners
16. contribution – contributing property/$ to the partnership v. not contributing anything
17. loss sharing – express agreement to share losses v. no loss sharing
18. but not dispositive b/c UPA provides for default loss sharing
19. self labeling - what the parties hold themselves out as partners or something else (employee, lender, ect.)
20. Partnership by Estoppel – when a person represents himself, or permits others to represent him, to anyone as a partner he is bound
21. Two elements(16):
22. Alleged partner must give credit to the partnership by his words or conduct or allow another person to represent him as a partner
23. Proponent of the partnership relied on the alleged partner’s representation
24. Gen’l Rules of Partnership (absent a contrary agreement)
25. Partnership Interests - Every Partner has equal interest in partnership profits only (18(a))
26. Liable for losses only proportionate to his contribution.
27. Interest in partnership assets in possessory only, no property rights (26)
28. This means that creditors of an individual partners can only attach that partner’s share of profits – not partnership assets and must get a charging order to get access to profits (28)
29. Control - All partners have equal rights in management (majority rules in making business decisions) (18(e))
30. But must be unanimous vote in “extraordinary” decisions. “Extraordinary” = decisions that will incur joint liability under 15.
31. Liability - Partners are joint and severally liable for everything that the other partner does → they bind each other (15)
32. Fiduciary Duties of Partners
33. Duties Owed (common law and 404):
34. Loyalty – can’t act contrary to the interests of the partnership
35. Two standards – trending away from Meinhard
36. Meinhard v. Salmon standard - Must put interests of your partners above your own, thought of self should be renounced!
37. Other ct’s/UPA –Can put yourself first, so long as it doesn’t disadvantage the partnership.
38. Specific applications of (trending away from Meinhard)
39. Can’t compete w/ partnership b/f leave, but can start making preparations. (Meehan v. Shaughnessy)
40. No duty to render information, unless on demand – can’t lie!!(Day v. Sidley)
41. Can’t dissolve in bad faith (for purpose of asserting a partnership asset for yourself)
42. Can’t take partnership assets w/ you when you leave
43. business opportunities which come your way solely because of your interest in the partnership are considered partnership assets (see “businees opportunity doctrine” at pg.)
44. Care – limited to refraining from grossly neg’l conduct, intentional self dealing, knowing violations of the law
45. Business Judgment Rule applies
46. Partnership Agreements
47. All of the UPA rules, including fiduciary duties, are default and can be contracted around (UPA preamble)
48. Examples (all would be a breach of loyalty if not contracted around)
49. Contracting around dissolution
50. Guillotine method of expelling a pty for specified conduct is okay if written into partnership agreement.
51. But never okay if SOLE purpose of expulsion was to increase partnership profitability.
52. Contracting around partnership assets
53. Instead of clients of a partnership being firm assets, partners can agree that each client is an asset of the individual partner.
54. Contracting around equal control
55. Each partner has control equal to pro rata share of investment in partnership
56. Dissolution
57. UPA rules
58. Causes for dissolution (31)
59. Express term of partnership in a K
60. Partner chooses to leave
61. But if term stated in partnership K, partner that leaves would be in breach
62. Death of a partner (absent an agreement to continue)
63. Judicial dissolution for specified reasons (32)
64. Partner uses this when leaving the partnership when leaving on there own would put them in breach of K
65. Feuding partners IS NOT a cause for judicial dissolution
66. Procedure of dissolution (38)
67. Dissolution w/out fault → winding up → liquidation → termination
68. Absent an agreement, withdrawing partner can demand assets be liquidated and proceeds distributed (38(1))
69. Wrongful dissolution (partner breaches partnership K) → ct. may proceed as above OR continue partnership w/out the wrongful partner (38(2))
70. Partners who have breached K must pay non-breaching partners damages.
71. If non-breaching partners going to continue partnership, must pay breaching partner his share of partnership interests.
72. UPA procedure for dissolution IS NOT DEFAULT. This is one of the few UPA provisions that is not stated in conditional language.
73. Point – if ptys specify in K how to dissolve the partnership, ct. can ignore (ex. if partnership continues, leaving partner can’t take a partnership asset w/ him)
74. Even after partnership dissolved, it is not terminated until “winding up” of business affairs is completed (30)
75. This means partners, even after dissolution, have right to income from partnership assets (e.g., fees from firm clients)
76. Ct’s exercise broad equitable discretion to ignore default rules, or express K,to provide fair relief (judicial activism)
77. Examples:
78. Implied term of partnership, if a partner owes the partnership money, until loan repaid.
79. Allow partnership to continue even if no fault b/c partner buy-out more economically efficient then liquidating assets.
80. Where partner’s contribution is labor instead of money, not liable to pay proportionate share of losses.
81. Limited Partnerships (UPA applies)
82. Formation
83. Gen’l Partnership is default – same as above
84. Limited Partnership formed by (not sure where this is in UPA)
85. Filing certificate of limited partnership w/ Secretary of State setting out identify of gen’l partners and limited partners.
86. Purpose – bring together those w/ money w/ those w/ knowledge
87. Gen’l Rules of LP
88. Control (centralized)
89. GP exercises broad control
90. LP MUST NOT exercise control
91. This is separation of control from ownership b/c LP’s usually own most but GPs have all the control
92. Liability
93. GP is fully liable just like in a normal partnership because they have control
94. This is for protection of creditors
95. BUT CAN MAKE GP A CORPORATION TO LIMIT LIABILITY
96. LP are only liable for their contribution to partnership unless they start exercising control, in which case they will be liable like a GP
97. Fiduciary Duties
98. Gen’l Partners owe LP’s same fiduciary duties that GP’s owe each other in a gen’l partnership
99. What Makes it Unique
100. LP’s get tax benefit of a partnership but limited liability benefit of a corporation.
101. This is a trade off between no control = no liability
102. Corporations(Model Business Corporation Act)
103. Formation
104. Must file Art. of Incorporation w/ Secretary of State (2.01)
105. Must set forth name, address of corp., name, address of each incorporator, number of share (2.02)
106. If don’t state corp. purpose, default is “any lawful purpose” (3.01)
107. Rule of thumb is to put only mandatory info in art. of incorporation and include rest in corp. bylaws.
108. What makes a Corp. Different?
109. Limited Liability
110. Centralized Mngt.
111. Perpetual Existence
112. Free transferability
113. Extent of Limited Liability
114. Liability during the incorporation process
115. Rule – Promoter (office of a corp. pre-incorporation) is personally liable for pre-incorporation contracts, unless he makes clear to contracting pty that when corp. comes into existence, pty should look solely to corp. for performance
116. Corp. still not liable for the K unless they adopt or accept the benefits of the K.
117. Just a promoter is liable, so too can promoter enforce performance even if corp. never comes into existence
118. Piercing the Corp. Veil – losing liability after incorporation
119. How to pierce
120. Failure to pay att’n to corporate formalities (all ct.’s require this)
121. Annual meetings of shareholders
122. Annual minutes of meetings of directors
123. Commingling assets and affairs (THIS IS THE BIGGIE)
124. Failing to keep separate books/records
125. Failure to keep separate accounts/titles
126. Failure to pierce would sanction fraud or injustice (some ct.’s require this as a second prong)
127. Must show corp. formed just to escape debts that never intended to pay
128. Must show deception to creditors
129. Inadequacy of insurance, corp. assets is never enough to pierce veil
130. reason is b/c respect legis. decision in setting ins. minimums
131. Some evid. to suggest easier to piece for torts than for breach of K
132. Policy for allowing veil piercing
133. We allow ppl. to incorporate to avoid personal liability (that is okay) but if owner commingles personal identity w/ that of corp. then we should not give him the benefit of limited liability.
134. Remedy – shareholders/officers personally liable for their entire net worth
135. Limited Liability Corporations (LLC) (Uniform LLC Act)
136. Formation
137. Must file articles of organization w/ secretary of state (202)
138. Must set forth name, registered agent, duration, principal office
139. One person can form an LLC
140. Name must contain “Limited Liability Company” or “LLC”
141. What makes an LLC different?
142. Limited Liability (like a limited partnership)
143. Except no gen’l partner to remain liable
144. Pass through on taxes (like a partnership)
145. Control can be centralized or diffused – just state whichever in art. of org.
146. Solves problem of limited partnership, with limited partners crossing the line
147. Why would anybody still do a limited partnership?
148. Managers (GP) like limited partnership b/c keeps investors from exercising too much control
149. Other Similarities
150. Voting can be pro rata based on percentage each member gets or can be one vote per member (like partnership)
151. Promoters or principal can be liable for K made b/f LLC incorporated (like corporation)
152. Must be represented in court by a lawyer, not a member (like corporation)
153. Subject to corporate veil piercing (like corporation)
154. Courts tend to just be importing corporate law for LLC
155. Same fiduciary duties
156. but can be waived like a partnership
157. Veil piercing
158. BJR applies if centrally managed

1

Differences in the Organizational Forms

1

Part III – Duties of the Corp.

1. Duties of Corp to Shareholders
2. Purpose – The corporation exists for the primary purpose of making profit for its shareholders. Managers must operate to accomplish that end.
3. The Business Judgment Rule (BJR)
4. Decisions of corporate managers (officers/directors) on how to best accomplish the goals of the corp. are reviewed under the business judgment rule.
5. BJR – Decisions will not be second guess by courts unless P proves mngr:
6. Breached duty of care (see below)
7. Acted in bad faith (this is a breach of duty of loyalty)
8. fraud, illegality, self dealing, conflict of interest
9. Waste – not rationally motivated for purpose of making profits
10. Mngr can easily overcome this by making up any way the decision was “rationally” motivated to make corp. more profitable.
11. Ex. “Good will” (Wrigley case), saving money for long term profits, employee moral, pursuing lit. would be distraction, ect.
12. But “Benefit to society” is not enough to deprive shareholders of their profits (Dodge v.