Corporations Law Outline – Gabaldon – Fall 2010
I. Professional Responsibility Issues in Corporation Law
- 1. Conflicts of Interest
- ABA Model Rule 1.7 (Handout) (When representing 2/concurrent clients)
- 1) A Lawyer cannot represent a client if conflict of interest exists, and one does exist if:
- Representing one client directly adverse to another
- Risk that representing one will be materially limited by responsibilities to another
- 2) Exception
- The Lawyer reasonably believes he will be able to provide competent/diligent representation
- It is not prohibited by law
- Representing one does not involve assertion of one client against another
- Each gives written informed consent
- Generally
- Not an issue, and can concurrently represent
- 2. Business Transactions
- Are presumptively fraudulent with client
- Model Rule of Professional Conduct 1.8
- A Lawyer shall not enter into a business transaction with a client or knowingly acquire an ownership, possessory, security, or other pecuniary interest adverse to the client unless:
- 1) The transaction and terms on which lawyer acquires interest are fair and reasonable and fully disclosed, in writing to the client, in way which can be understood
- 2) The client is given a reasonable opportunity to seek the advice of the independent counsel in the transaction (Lawyer must advise client to seek independent counsel)
- 3) The client consents to it in writing
- 3. Note:
- If you are barred in 1 state, you may give advice on the law of another state
- Where you are located by “seat of your pants” doesn’t limit you, only your competence does
II. Basic Principles, Policies, and Theories of Corporation Law
- 1. Formalities and Filing Requirement
- Certain business organization types require a filing with state to “create”
- Filings can get very expensive
- Revenue Stream for the State
- 2. Factors Evaluated On
- Control of Business
- Filing Requirement
- Limited Liability for shareholders for tort, contractual, debt obligations
- Federal Tax Implications
- 3. Limited Liability Concept
- Greatly dependent on the corporate structure selected
- “Limit” is deceiving
- liability is limited, but not lost…merely shifted to 3rd parties ,entities, etc…
- Original Intentions:
- Limited Liability accompanied Passivity
- More Control of management Less Limited Liability
- The more passive control, the more liability was limited
- Policy:
- Encourages Investment
- Limits Risk Averse Investors risk they are taking
- Creates Revenue Stream for state with filing fees to gain LL
- Modernly:
- There has been a shift away from LL being based on control of business
- Now, if you “file” appropriate paper work, you gain limited liability
- Proponents/Opponents of Limited Liability
- Proponents
- Creates agglomeration of Capital
- Stimulates by investing in 1 large entity
- Diversification
- By limiting liability, allows you to invest in companies which may be riskier
- Don’t need to worry about the risks of the company, monitoring what they do day to day
- Can invest in more risky companies than
- Necessary to permit active trading
- People with different amounts of personal wealth will value certain investments less, if there is more to lose, through liability by investing in it
- By limiting liability, allows those with much and little $ to value investments the same, permitting more active trading
- Opponents
- Creates Aglomeration of Capital
- Too big to fail type companies
- Moral Hazard
- Allows risk taking, without risk on the risk-taker
- Only upside potential
- Downside risk is passed along to third parties (Gulf Coast, Workers, etc…)
- May not be entirely true
- Still have risk of losing $ in investment
- 4. Theories of Corporation Law:
- Traditionalist:
- Business is a fictional person
- Board brain
- Shareholders Stomach
- Officers Hands and Fingers
- Contractarian:
- Established in the 1980s through the Law and Economics Movement
- “Nexus of Contracts”
- The corporation is not an “entity,” but instead an assembly of contrcts between shareholders, employees, directors, business, etc…
- All are acting within their own best interest, with a common goal
- The Rules, then, attempt to apply the most efficient outcome they would have chosen attempt to substitute their bargains
- Progressives:
- Established in 1990s at GW
- Argued that with the prior 2 theories, there was not enough interests represented when rules were designed
- Argued that there were many more social stakeholder, that Social Corporate Responsibility needed to be represented
- Team Production Theory:
- Established in 200s
- Focused on the Board of Directors as the “Mediating Heirarchy”
- Mediating the team inputs
- Business is a team, made up of stockholders, employees, managers…which Board mediates
- Directors encourage investment by mediating all interests, and assets
III. Basic Business Forms
- 1. Sole Proprietorship
- Control Single Individual
- FilingNo Filing
- Created at start of business… As soon as you start making shoes in your garage
- Limited Liability None for Sole Proprietor
- Liable for torts of employees, contract, debt obligations
- Two Methods
- EG: A & B
- A as Proprietor, B as employee
- A is liable, B is not
- A as Lender, B as Sole Proprietor
- B is liable, A is not
- Federal Tax Direct Tax to individual tax return
- 2. General Partnership
- Default
- Def: An association of 2 or more people to carry on a business as co-owners for profit
- Control General partners Control
- Filing None required…just two or more people entering business
- Limited Liability None for general partners
- Ending GP:
- “Dissociation” UPA (1997) §601: Ends when partner gives express notice of withdrawal
- Federal Tax
- 3. Corporation
- Def: A type of juridical person; can do most things human beings can
- Have constitutional protections: Freedom of speech, due process, etc…
- A Creation of the state by filing articles of incorporation
- Control Directors
- FilingArticle of incorporation must be filed
- Can be very expensive
- Limited Liability Yes, for shareholders and participants
- Federal Tax
- 2-Tier Structure (not for S-Corp (see infra))
- Income Taxed in year earned by corporation
- Dividend payouts to shareholders is also taxed as income to shareholder
- 4. Limited Partnership
- 2 Types of Partners
- A partnership (2 or more people who carry on business as co-owners for profit) with an association of 2 different types of partners
- Must Include
- 1 or more general partners
- 1 or more Limited Partners
- Traditionally
- Limited Partners could not participate in “control of business”
- Back to the idea of Limited Liability being function of Passive Control
- Creature of statute, if not followed correctly, reverted to GP
- If Limited Partners participated in control of business, became General Partner
- Amended by ULPA (1976) §303:
- Control General Partners…Limited Partners cannot
- FilingYes
- Limited Liability Yes for Limited Partner, No for General Partners
- Federal Tax
- 5. Limited Partnership with Corporate General Partner
- Same as Limited Partnership, except that the general partner is a corporation
- Therefore, the Corporation (GP) has limited liability
- The shareholders of the Corporation are usually the limited partners, effectuating control over the GP, while maintaining limited liability
- Contrary to idea of passivity with Limited Liability
- Control Directors of Corporation (GP/LP)
- Filing 2 Filings
- File for Limited Partnership
- File for Corporation
- Federal Tax
- 6. Limited Liability Company
- A “person” formed by the state
- History
- First appeared in 1980s, in Wyoming
- After evaluated the factors that the IRS was judging how to tax businesses, several people figured out a way to meet the factors of gaining conduit tax, while still having limited liability
- The IRS agreed, and the LLC was borne…quickly spread to all states
- Passivity
- With the LLC, you could manage the business, and gain limited liability
- This went away from the idea of Passivity to create investment rewarding it with limited liability
- ControlTwo Types, depending on agreement
- Member Managed
- Can vote to decide business matters with majority
- Each member is an agent with respects to matters pertaining to business
- Manager Managed
- Managers have the right to control if 1 manager, or if more, by majority
- Members are not agents in Manager Managed LLC, Mangers are
- FilingRequired, ULLCA §202-203
- Limited Liability For members
- Federal TaxCheck the Box
- 7. Limited Liability Partnership
- General Partnership, which all members have Limited Liability
- ControlGeneral Partners
- Filing Required, GP’s get LL
- Limited Liability Yes
- 8. Limited Liability Limited Partnership
- All partners gain limited liability
- A result of legislature seeing that LP, the GP’s could not get LL, but LLP could
- Limited Partnership simply files for Limited Liability
- Control General partners
- Filing 2 Filings
- File for Limited Partnership
- File for LL for the general partners
- Limited Liability For GP and LP
- 9.Historical Alterations to Business Forms
- The above list is in chronological order
- From 1960s-1980s, much changed in attempt to gain Limited Liability
- Change also from attempt to get most beneficial tax form and limited liability
- Federal Tax Changes
- With the creation of the LLC, the IRS eventually gave in to change in corporate structures and taxing them
- As lawyers pushed to get the benefits of tax, while also getting Limited liability, IRS gave in
- Eventually granted “Check the Box Tax”
- Allows unincorporated businesses to choose their own tax form
- Not for publically traded businesses
- 10. Modernly
Type / Filing / Control / Limited Liability / Federal Tax
Sole Proprietor / No / Individual / No / Direct Tax
General Partnership / No / General Partners / No / Conduitgave way to “Check the Box”
Corporation / Yes / Director / Yes for shareholders and participants / 2-Tier Tax
Limited Partnership / Yes / General Partners / For Lmtd. Partners / Conduit “Check the Box”
LP with C. G. P. / Yes x 2 / General Partner (Shareholders of corporation who is GP) / Yes for LP and corporations shareholders / Conduit and 2 tier “Check the Box”
LLC / Yes / Members/Managers / Yes / Conduit “Check the Box”
LLP / Yes / General Partners / Yes / Check the Box
LLLP / Yes x 2 / General Partners / Yes for both GP and LP / “Check the Box”
IV. Agency Law in Business Transactions
- The Law of Agency is implicated in all corporate law
- 1. Why?
- Creates liability for principal when agent acts on their behalf
- Tort, Contract, Tax
- Implicates Employer versus Independent Contractor Vicarious Liability
- Corporations/Business Entities
- Can only act through an agent, although they can be both principal and agent
- 2. Basics
- Agent: Acts on behalf of the principal, who has manifested assent for agent to act on his behalf, and agent has accepted to do so creating a fiduciary relationship
- Agent is subject to the Principals control
- Principal: One for whom the agent acts, who is in control of agent, authorizing Agent to act on Principals behalf
- Authority Created in Agent
- Actual: Arises from express manifestation of Principal to the Agent, that he has power
- Agent is not liable for obligations he makes within scope of authority
- Principal is bound and liable
- Apparent: Arises from manifestation from Principal to a 3rd Party, that another (Agent) is authorized to act on his behalf, as his agent
- 3rd Party’s Reasonable Belief: If 3rd party acts on this apparent authority, he must have a reasonable belief that agent is authorized
- If he knows or has reason to know Agent is not authorized, authority ends
- Both can be simultaneous
- Scope of Authority created in Agent:
- Agent can act as designated (Actual), or implied, necessary and incidental to achieve the principals objectives the agent reasonably understood
- Inherent Authority- Arising from the type of agency
- Binds principal
- EG: Agent is manager of store
- Manager has inherent things that go along with this type of position
- Incidental Authority- Authority to do things incidental to completing transaction that was authorized
- Implied Authority- Based on conduct, implied manifestation may create:
- Implied Actual Authority
- Implied Apparent Authority
- Remember: With apparent, 3rd party must have reasonable belief that agent has the authority
- So, Authority does not have to be express but can be implied to the agent or 3rd party
- Authority is terminated the same way it was created
- C. Fiduciary Relationship
- Agent is accountable for all profits arising from his transactions; cannot act adversely to or assist adverse party to principal
- Breach of Duty if he acts for himself or someone other than principal
- Agent must act with reasonable care, meeting standard of care in locality
- D. Vicarious Liability
- A Principal is liable for his Servant/Employee’s torts
- Not those of Independent contractor
- Must Determine if Master/Servant (Employee) or Independent Contractor
- Servant/Employee: Physical conduct is controlled by the master
- Always an Agent of the Principal
- Master:Controls the servant, or has the right to control, by employing the servant’s service
- Independent Contractor: Person who contracts to do something, but who’s physical control is not controlled by the other
- Sometimes an Agent, but not always
- If Principal can control, but not control physically
- Factors to Determine if EE or IC:
- The extent of control the master may exercise over the details of the work
- The kind of occupation, reference to locality, and if it is done typically by employed at discretion of employer, or a specialist without supervision
- Skill required to perform occupation
- Does the Workman or the employer supply the instrumentalities
- EG: IC brings tools to job, which has planned outcome, but register worker comes and uses employers clothes, area, register, etc…
- Length of time employed
- Method of payment- by time or job?
- Is work part of regular business of employer?
- What the parties think
- But- Simply denominating the job as EE or IC will not create that
- Look to the factors and definition to determine
- EG:Is Professor Gabeldon a EE or IC?
- School could control, even though they choose not to
- They give her the class, student, room, pay her salary
- Part of regular business of employer
- Employee
- Overall, it really does not take much control to be considered an Employee
- EG:
- General Partners are Agents of Partnership and each other
- UPA (1997) §301: “Partners are mutual agents of partnership for purposes of the partnership”
- Limited Partners are not
- LLC- Depends on Member/Manager managed
- Look at filing to determine who is agent
- E. Liability
- Tort
- Principal is liable for agent’s tort
- Intentional
- Negligent
- Authorized
- EE/Servant
- Agent is always liable for his own tort
- 3rd party will not be liable to Principal for tort on Agent
- Makes no sense…no tort was committed on principal
- Contract
- 3 types of Principals only matter here, when dealing with Contract liability
- Disclosed Principal: When 3rd party knows who agent and principal are
- Undisclosed: When 3rd party does not know who principal, or agent is acting on behalf of someone
- 3rd party thinks A is doing it for himself
- Generally no apparent authority (3rd party doesn’t even know there is P)
- Partially Disclosed/ Unidentified: 3rd party knows Agent, and that there is a principal, but not who the principal is
- Stock-broker
- When is Principal liable for K Agent enters in to?
- Disclosed P: P is liable (assuming there is authority)
- Undisclosed P: P is liable (assuming there is authority)
- Partially Disclosed P: P is liable (assuming there is authority)
- When is Agent Liable for K he enters into on behalf of Principal?
- Disclosed P: Agent is not liable
- the Bloomingdales clerk is not liable to return your $ back
- Exception: if A personally guarantees then A may be liable, assuming contract law is satisfied (consideration, O&A, SOF)
- Undisclosed P: Agent is Liable
- When Disney’s people go into countryside to buy, but people don’t tell buyer that they are buying for Disney, agent is liable
- Makes Sense
- Fair that Agent liable in suit
- 3rd party thinks they’re making contract with Agent
- Partially Disclosed P: Agent is liable
- Exception: If A specifically disclaims, clarifying that he is not liable
- Overall, A will most likely be liable, unless P is Fully Disclosed
- When is 3rd Party liable to Principal for the contract he made with Agent?
- Disclosed P: 3rd party is liable
- Partially Disclosed:3rd party is liable
- Undisclosed P:
- 3rd party will be liable, unless
- 1) Fraudulent Concealment by Agent:
- Agent specifically says he is not buying for Disney
- 2) Knowledge of Principal is Material to the K:
- If $, knowledge of who P is probably won’t be material, unless you say it is specifically
- If personal services K, more likely to be material
- Overall, 3rd party will be bound to Principal unless Fraud or Materiality
- Ratification
- When the agent does something, the Principal can ratify it
- EG: Officer of company purchases land. The Board can ratifiy this purchase
- Express: Formally ratifying Agent’s action (above example)
- Implied: Accepting the benefits of the contract
- Ratification can create additional authority
- Actual or Apparent depending on what is said, implied to Agent or 3rd party
V. The Partnership
*Definition: UPA (1914) §6: 2 or more people carrying on as co-owners, a business for profit *
- 1. General:
- We will deal with law that applies to General Partners
- Also Applies to:
- General Partners within LLP
- General Partners in a Limited Partnership
- UPA (1914) §6/UPA (1997) §202 Both say to use the UPA to fill in gaps between GP and LP
- General Partners within a LLLP
- Remember:
- The UPA is not law, until it is adopted by the state
- It is a group of scholars who get together to create laws with uniformity
- The idea was that partnerships are casual, used in many states and across state boundaries, so we should have uniform laws governing them
- This is also true of Restatements and Model Acts (which we will deal with in Corporations)
- Subject to Agreement Language:
- UPA (1914)
- § say “subject to agreement”
- §13, 14, 15 may not change liability to 3rd parties
- UPA (1997) §103
- Creates blanket “subject to agreement” for all sections, rather then writing it out at the beginning of each section
- Applies to all except for Section §103 (B)
- Limits ability to contract out of fiduciary duty owed to partner (infra)
- §103 (b) (10) Agreement cant change liability to 3rd parties
- 2. Writing
- No writing is required
- But is advisable:
- Avoids potential disagreements about what agreement was
- Without it, UPA governs/applicable statute, and it may not represent best interest/desires
- Note THE UPA IS THE DEFAULT IF THERE IS NO WRITTEN AGREEMENT
- Creates Fee income for lawyers, and avoids possibility of malpractice suit
- Will be Required, However:
- If the Statute of Frauds applies to the provision, then a writing will need to exist for that provision to be enforceable
- Year or more, Real-Estate, etc…
- A partnership is created by it fitting into definitionEven if intentions show not wanting to be one
- If by definition you are, then you are partnership
- UPA (14) §6 / UPA (97) §202
- Note:
- See Inadvertent Partnership Section
- 3.