In-Class OL - Update Weekly

Monday, August 29, 2016

11:32 PM

I. PROFESSIONAL RESPONSIBILITY (Model Rules)

a. Conflicts - 1.7
i. General Rule
ii. Exception
iii. Application
b Client/Organization - 1.13
i. General Rule
ii. Exception
iii. Application
b Business Transactions with Clients
i. Presumptively fraudulent
ii. 1.8(a) - requirements:
1. Fair terms
2. Advise client to seek independent counsel
3. Client must give informed, written consent
b Safeguard Property - 1.15
c Maintain Confidences - 1.6
d Use of Client Information - 1.8(b)
e Waivers
i Of liability - 1.8(h)
ii Of multiple client conflicts - 1.7(b)
II INTRO TO PRIMARY FORMS OF DOING BUSINESS (CHART OF LIFE)
a Basic Forms
i Sole Proprietorship
ii General Partnership (GP)
iii Corporation (Corp.)
iv Limited Partnership (LP)
v LP w/Corp. GP
vi Limited Liability Company (LLC)
vii Limited Liability Partnership (LLP)
viii Limited Liability Limited Partnership (LLLP)
b Factors
i Formality/Filing Requirements
ii Limited Liability
iii Control
iv Federal Income Tax
v Liquidity/Ease of Exit
b Application - Reproduce chart of life
c Pros and Cons of Limited Liability
II INTRO TO FEDERAL TAX
a Capital Gains vs. Ordinary Income Tax
b Calculation of Gains
 i Gains = (amount you received on sale) - (amount you gained,
aka "basis")
b Step-up in basis to FMV of property upon date of death
c Scheduled tax rates are DIFFERENT for corporations and individuals
d Money earned by the corp. and distributed to shareholders is taxed
at BOTH LEVELS
e Strategies for relieving effect of 2-tier taxation
i Zeroing Out
ii Accumulation/Bail-out
iii Subchapter S Election - Three Requirements:
1. MAX 100 shareholder
2. MAX 1 class of stock
3. NO non-human or non-resident alien shareholders
b Taxation of Incorporated Entities - General Rule:
i "Check the Box" UNLESS entity is publicly held
II INTRO TO AGENCY LAW
a Vocabulary
i Agent
ii Principal
iii Employee
iv Employer
v Independent Contractor (Ind. K-or)
b Types of Authority
i Actual
ii Apparent
iii Inherent
1. Q of Actual Authority
2. Q of Apparent Authority
3. Statutory Authority
ii Estoppel - requires detrimental reliance
iii Agent CANNOT create own authority
b Consequences of Agency Relationships
i Contracts
1. When is a principal liable for K entered into by
agent?
a. If K = AUTHORIZED, principal is always liable
2 When is an agent liable for K entered into on principal's
behalf?
a. Agent = always liable UNLESS acting on
behalf of fully disclosed principal
2 When is a 3rd Party (3P) liable to a principal for K entered
into by agent?
a. 3P = liable UNLESS K is assignable
ii Torts
1 When is a principal liable for an agent's torts? - DIRECT vs.
VICARIOUS LIABILITY
a. Intended Conduct (when conduct or its effect
= intended) - Direct Liability
 b. Principal's Own Negligence - Three
Categories (all require presence & violation of duty of
care) - Direct Liability:
i. Hiring
ii. Directing
iii. Supervising
b Agent's Authorized Conduct - Direct Liability
c Employee Acting Within Scope of Employment -
Factors - Vicarious Liability:
i. Time/Space
ii. Benefit
iii. Conduct (includes employee acting
"on a frolic of their own" - actions taken for
personal/other non-job related reasons)
2 When is an agent liable for his/her own torts?
a Always UNLESS privilege is extended to agent by
principal (e.g. parental discipline privilege given to
nanny by parent)
b Ratification - "Authorization after the fact" could result from:
i Express
ii Informed Acceptance of Benefits
II INTRO TO PARTNERSHIP
a No need for a writing or other formality (although it's still better
to have one)
b Inadvertent Partnerships
i Actual/"in fact"
1 Definition of a p-ship
2 Significance of profit share (RUPA 202) - 202(3)(i)-
(iv) lists presumption rebuttals
3 In evaluating p-ship, consider:
a Affirmative vs. Negative Powers
b Ability to bind
ii Purported P-ship/P-ship by Estoppel
1 UPA (1914) = holding out + faith on holding out +
giving credit
2 UPA (1997) = holding out + reliance + entering
transaction
b Intro to Accounting (Financial/P-ship Accounting)
i Balance Sheet
1 Assets = (liabilities) + (equity/net worth/capital
accounts)
ii Equity/Net worth/Capital Accounts
1 Equity = (owners' contributions) (profit/loss) -
(distributions)
ii Partner's capital accounts
1 Capital Account = (contributions) (profit/loss) -
(distributions)
ii Income Statement - shows the result of operations, NOT
contributions or distributions
1 Profit/Loss = (revenue) - (expense)
 ii Understand relationship b/t amounts on a balance sheet &
liquidation value; book value FMV
iii Accounting generally is historic cost based
iv Depreciation is a "scheduled expense" and represents a
diminution in the value of an asset
v Other vocabulary
1 Cash basis/accrual accounting
2 Calendar year
3 Fiscal year
ii Understand relationship b/t all of the above & profit and
loss between/among partners
b Sharing of Profits and Losses
i Subject to the agreement of the partners
ii Default rules
1 Equal profit shares (compare LPs)
2 Losses--including losses of capital and indemnification
for advances--follow profits
3 Partner's right to indemnification for amounts paid for
p-ship (w/interest) = p-ship obligation
4 Partners must contribute to permit that repayment
(RUPA 807)
5 Partners are paid the amount in their capital accounts
(obliged to return partner's capital)
6 No remuneration for services
ii Agreements
1 Express
2 Implied (see service cases)
a Minority position: implies equal valuation/"let
losses lie" approach
ii Distinguish from liability to 3Ps
b Liability to 3Ps
i NOT subject to agreement of the partners
ii By statute: joint and several for ALL p-ship obligations
b Management
i Actual/Inherent Authority
1 Partners have a right to agreement re: mgmt roles
2 Default Rules:
a Equal rights
b In case of dispute, MAJORITY of partners rules
c 50/50 p-ship analysis: status quo maintained?
(probably)
ii Apparent/Inherent Authority - consider past practices
iii Consider effect of statement of p-ship authority (CHART
OF LIFE)
1 Real Property: conclusive in favor of, and constructive
against, a 3P if filed w/chain of title
2 Other: conclusive in favor of, but NOT constructive
against, 3Ps
b Creditors
i Of the P-ship
 1 Exhaustion Rule
2 Consider personal guarantees
ii Of Partners
1 Charging order
2 Foreclosure
3 Judicial dissolution
b Transferees
i Have rights to distributions ONLY
ii NO mgmt rights and do NOT become partners
iii Unanimous vote to admit a new partner is req'd UNLESS
already agreed to the contrary
b Fiduciary Duty
i Common Law
1 Duty of Care
a Skill, diligence, prudence
b Business Judgment Rule - protects content
2 Duty of Loyalty
a General Duties
i. Avoid self-dealing
ii. Avoid multiple beneficiary conflicts
b Specific/Special Duties
i. Excess benefit
ii. Business opportunities (Meinhard)
iii. No competition
iv. Preserve properties
v. Preserve confidences
ii Statutes
1 21 UPA (1914)
2 404 and 103 RUPA
3 Delaware: all duties can be waived
b Dissolution and Dissociation (CHART OF LIFE)
i Vocabulary
1 Dissociation
2 Dissolution
3 Winding Up
ii Subject to Agreement - MAKE AN AGREEMENT!
iii Dissociation ( 601) leads to FMV buy-out ( 701) UNLESS
voluntary, at-will p-ship - then, may lead to dissolution
iv Wrongful Dissociation leads to damages, if proven
v Dissolution events ( 801) leads to winding up, either
piecemeal-y of by sale of going concern
1 Fiduciary duties control choice
2 Result = pay-off to creditors and settlement of
accounts b/t/among partners
ii Authority of Dissociating/Continuing Partners
1 Lose actual authority, BUT apparent authority can
continue up to 2 years (90 days if statement filed)
II OTHER UNINCORPORATED FORMS
a Limited P-ship
i Defined
 ii Filing
iii Name
iv Taxation = check-the-box UNLESS publicly traded (EXCEPT
favored industry)
v Profit-sharing
1 Default = per contribution
ii See UPA for rights & obligations of GP
iii GP liability = unlimited BUT
1 Corp. GP
2 LLLP (see chapter 11)
ii LPs have limited liability UNLESS
1 Also a GP
a Formal
b As principal
2 Participate in Control
a Reliance required
b Safe harbors specified
2 Name confusion
ii Contexts
1 Families
2 Favored industries
3 Venture capital
ii Re-RULPA/ULPA (2001)
1 GPs have limited liability
2 LPs can participate
b LLCs
i Defined
ii Filing
iii Naming
iv Management and Control
1 By agreement
2 Statutory defaults
a ULLCA to p-ship
b Other
ii Freedom of K
iii P-ship and corporate analogies, including "piercing the veil"
iv Dissociation does not dissolve an LLC.
1 In some states, it does lead to a buyout
2 In some states, "Hotel California" rule--no buyout,
distributions only until the LLC is dissolved
ii Dissolution procedures specified in statutes--failure to follow
them has consequences
iii Participation by members in mgmt does NOT lead to liability,
even if the LLC is supposed to be manager-managed
b LLPs
i Broad form: GPs in a General P-ship have limited liability
ii "Partial Shield" form: limited liability for partners' malpractice
iii Filing, naming, and reporting rqmts attach to both forms
b LLLPs
 i Defined: limited p-ship in which GPs have limited liability--two
ways to form
1 LP + LLP filing
2 ULPA (2001)
ii Filing and naming rqmts
II CORPORATE FORMATION
a Where?
i Internal Affairs Doctrine
ii Delaware - why?
iii "Home" - why?
iv Can you advise on DE if not admitted there? - YES; its a
competence question, not a jurisdictional issue
b How?
i Incorporator
ii Articles of Incorporation
1 Mandatory contents
2 Discretionary contents
ii Naming considerations
1 Inc, etc., rqmt
2 No Unlawful Purpose rqmt
3 Distinguishable Upon the Records test
ii Effectiveness of Articles -- retroactive to submission
iii Organizational meaning -- sense of what needs to be done
b Promoters' Liability
i To co-promoters (see p-ship rules)
ii To investors (see federal securities laws)
iii To corporation itself for self-dealing
1 Recognize the power
2 Understand the Old Dominion split (SCOTUS v. MA Sup.
Ct.--pre-Erie)
ii Premature commencement liability (see D)
b Premature Commencement
i General CL rule: promoter is bound unless agreement to the
contrary
ii Defective Incorporation
1 Liability of Promoters
a CL doctrines: Corporation De Facto, Corporation by
Estoppel
b Effective of Statutes: conclusive filing statutes (like
2.03), assume to act statutes (like old 139), purport
to act knowing corp not yet formed (like 2.04)
c Co-promoter v. innocent shareholder issue
(passive/active distinction)
2 Liability of Corporation
a Never before formation
b After formation, adoption possible (NOT ratification)
c By formal adoption or informally by "act and
acquiescence"
II CORPORATE POWER AND PURPOSE
a Historic- an act outside corporate purpose/power was void
 b Modern Business Corporation Act (MBCA)
i MBCA 3.01: any lawful purpose unless limited in articles
ii MBCA 3.02: enumerated powers and catch all powers of
individual necessary or convenient to carry on its business
which is to make money for shareholders
iii MBCA 3.04: Limits standing to assert Ultra Vires
1 note equitable limits to shareholder suit
b Continuing/ Resurgent Interest:
i Shareholder collusion
ii Charitable Giving Litigation (if unreasonable in amount)
1 If deductible always reasonable
2 3 unlawful acts
II STOCK, STOCKHOLDERS, AND DEBT
a Vocabulary
b Capital Accounting
i 69 MBCA/NJ/NY= DEL
1 Par Value
2 Stated Capital, Capital Surplus, Earned Surplus
ii 84 MBCA
1 Par value irrelevant
2 No specific accounting is compelled by state law but
accounting conventions and tac considerations that prompt
use of state capital additional paid in capital and retained
earnings (accumulated loss)
b Distributions to shareholders
i 69 MBCA regime
1 Equity insolvency
2 distributions from earned surplus; also from capital surplus
if articles or shareholders permit
ii 84 MBCA
1 Equity insolvency
2 Balance sheet test (assets> liabilities and preferences)
b Shareholder's Rights
i Right to Vote on designated matters
ii Rights wrt issuance of addt'l shares
1 SHs may have preemptive rights--check relevant statute &
art of inc
2 Shall have right to "be treated fairly"--no unfair dilution
ii Right to Sue Directly and Derivatively
b Debt
i Leverage
ii Risks of over-leverage
iii Right to enforce SHs obligation to pay for shares
iv Post-insolvency, DE creditors have right to sue derivatively
II SHAREHOLDER LIABILITY
a Non-Piercing Theories
i Shareholder as agent of the corp
ii Corporation as agent for shareholder
iii Personal guarantee
iv Because a statute says so--
 1 Statutory obligation to pay for shares
2 CERCLA liability as an operator
b Piercing Theories
i Fraud
ii Injustice assessed relevant to factors:
1 Undercapitalization--timing, role of insurance
2 Siphoning of funds
3 Comingling of funds
4 Use as an alter ego
5 Lack of corporate formalities--modern trend links to cause
ii Remember "horizontal" piercing, aka Enterprise Liability
b Think about piercing in non-corporate contexts--LLCs, LLPs, LLLPs
II MANAGEMENT AND CONTROL OF THE CORPORATION
a Action by the Shareholders
i What can they do?
1 Traditionally limited--see Gashweiler, McQuade, etc.
ii How do they do it?
1 Vocabulary
a Record Date
b Record Holder
c Beneficial owner
d Notice
e Waiver
f Quorum/dribbling quorum problem
g Voting requirement
h Voting group
i Proxy
j Coupled with an interest
k Plurality
l Straight voting
m Cumulative voting
2 Control Devices
a Super majorities
b Voting groups
c Cumulative voting
d Staggering board
e Board removal limits
f Irrecovable proxie
g SH voting agreements (see chapter 25)
b Action by Board
i Plan in advance
1 At meeting
a See shareholder vocabulary
b Meetings can be physical or simultaneous telephonic
(aka conference call)
2 Unanimous written consent
ii After the fact
1 If company wishes to be bound -- formal ratification
(adoption) at meeting or unanimous written consent
2 If 3P wishes to bind over company objection --
 a Apparent authority, e.g. resulting from act and
acquiescence
b Estoppel
c Authority of officers
i. Review types of authority -- actual,
apparent, or inherent (including as a matter of
statute)
ii. Specific examples -- secretary =
inherent authority to authenticate records;
president = inherent authority to enter Ks in
ordinary course of business
II DUTIES OF OFFICERS AND DIRECTORS
a Duty of Care
i Skill, diligence, and prudence
ii Standard = reasonable person in similar circumstances
iii Deviation punished =
1 Negligence (in many states)
2 Gross negligence (DE)
ii Business Judgement Rule
1 You don't have to be right, so long as you acted with the
skill, diligence, and prudence of a reasonable person
2 Effect of showing a business judgment = establishes
presumption of good faith & reasonable design
3 BJR presumption can be overcome (REBUTTABLE) by
a Fraud
b Bad faith
c Conflict of interest
d Illegality
e Inadequate process (lack of information)
f Lack of rationality (waste)
2 In oversight context, "utter failure"= lack of good faith,
removing the protection of the BJR
3 Raincoat provisions - exculpate for breaches of duty of
care, but not lack of good faith or self-dealing
b Duty of Loyalty
i Duty to avoid unfair self-dealing
1 What is self-dealing?
a Common sense
b Common directorates
c Sinclair test - extraction of benefit to the exclusion of
minority SHs (parent-subsidiaries)
2 What do we do with it?
a Old CL rule: per se voidability
b Modern CL rule: burden on interested party to show
fair; approval by disinterested decision-maker shifts
burden; uncertainty about counting interested
directors for quorum and approval purposes
c "First Generation" statutes (e.g. Del. 144)
i. Negation of per se voidability
 ii. Clarification re: counting interested
directors
b "Second Generation" statutes (e.g. MBCA 8.60 et.
seq.): epic failures.
2 What do you do with disinterested approvals in DE?
a Disinterested directors - burden shift
b Disinterested SHs - burden shift on controlling SH
transaxns; BJR protection wrt other self-dealing
transaxns; extinguishment of claims based on duty of
care
2 Interaction of self-dealing and BJR
a If decision-maker = interested, NO BJR protection
b If decision-maker = disinterested, still look for
satisfaction of other BJR conditions before recognizing
burden shift
ii Duty to avoid unfair usurpation of corporate opportunities -
different approaches
1 Line of Business (LOB)
a 4 factor approach (including financial ability)
b 4 factor correlative approach, aka safe harbor
2 Fairness
3 LOB + Fairness
4 ALI approach
a Broad test for corporate opportunity
b Absolute reqmt of offering opportunity to the
corporation
c Rejection by disinterested decision-maker under BJR
conditions - OK to take
d Rejection by interested decision-maker, fiduciary can
prove fair