Professional Documents
Culture Documents
AGENCY: R2 1
Fiduciary relation which results from:
1. The manifestation of consent by one person (the principal) to another (the
agent) that the other shall act
1) On his behalf AND
2) Subject to his control AND
2. Consent by the other (the agent) so to act.
PARTNERSHIP
Sole proprietorship: 1 person is the owner and operator of the business, and they have
NOT taken the formal step of operating a business.
Partnership: NOT officially incorporated, but must have more than 1 owner.
Common Law
Characteristics:
Partnership by Estoppel
• Young v. Jones- (page 106): Ps were investors from TX, funds disappeared and
tried to use argument of partnership by estoppel. Ps relied on the fact that PW
was a large company, so PW-US should be held liable for PW-Bahamas. Rule: NO.
PW brought documents that say they are separately organized. UPA §308.
FORMATION:
1. Deliberately
2. Inadvertently
TYPES:
2. Partnership for a term- set out explicitly how long the partnership will last
OPERATION:
• Fiduciary obligations
o Account for benefits, hold as trustee any profits from transaction connected
with partnership or from use of its property: UPA §21 compare with RUPA
§404
o Meinhard v. Salmon- (page 109)- lease of Hotel Bristol, for 20 years. New,
more profitable lease was entered into by Salmon, and did not disclose to
Meinhard. Rule: duty to disclose, so Meinhard could have become a part of
it. Doesn’t matter that it might have been for little value- should have been
disclosed. Different result: if the contract was for a different building in a
different area. Dissent- limited duration, not a partnership, no breach.
Limitations:
o Putnam v. Shoaf- (page 132)- Mr. P died, wife took over, and sold share to
Shoafs. Wife wanted half her money back b/c she owned it when money
was stolen. Rule: NO. she gave her interest away, once leave partnership,
not possible to go back and have an interest in the partnership property that
surfaces later.
Rights as a partner:
• UPA §9 (1): Each partner is an agent for the partnership AND the
act of every partner for APPARENTLY carrying on in the usual
way in the business BINDS the partnership UNLESS:
o Confess a judgment
• Partnership Liability:
o Joint liability for other debts and obligations. UPA §15 (b)
FIRST sue pship as a separate legal entity, and go after partner assets
first THEN go after individual partners. RUPA §307 (d)
• Moren v. Jax (pg. 144)- mother puts son on counter, gets hurt.
RULE: partnership held liable b/c she came in, made pizza=
ordinary course of business. RUPA §401 (c)- indemnification
o UPA §18 (b): partner’s right to indemnify other partners for personal
liabilities incurred by him.
• Transferable Interest:
Effect: does not make the transferee a partner- ONLY get profits,
cannot make managerial decisions.
• Partnership is NOT terminated once someone leaves, pship continues until the
winding up of their affairs are finished. UPA §30
• Causes: UPA § 31
o Death of a partner
o Court decree
• Types:
• Voluntary
• Liquidate
• Sharing of losses:
• Buyout Agreements
o UPA §38
o Death
o Expulsion
LIMITED PARTNERSHIP:
General partners have more control, limited partners have limited role.
o Limited partners are liable as general partners if they take part in the control
of the business, as they did here- they chose the crops to be planted, and
could withdraw the entire funds if they chose. Holzman v. De Escamilla- (pg.
197)
CORPORATION
FORMATION
Participants:
Board of directors
Corporation
MECHANICS OF INCORPORATION
Approve bylaws
Issue stock
Promoter: an individual who develops the business idea for the corporation, and
who brings together the investors and other corporation participants.
Promoter is still liable when the corporation is never formed. MBCA 2.04- people
who take an active role will be liable for a business that is not properly
incorporated.
Unless otherwise provided, a shareholder is NOT personally liable for the acts or
debts of the obligations- MBCA 6.22 (b)
Theories of liability:
• Walkovsky v. Carlton-(pg. 207)- P was run down by taxi cab. RULE: court did
not find Carlton liable b/c he was not acting in his individual capacity.
Corporate veil could not be pierced.
• Test:
Sea Land v. Pepper Source (pg. 212)- establishes test. P argues that he
wasn’t paid by Pepper Source. Met first part of test, didn’t meet second
b/c could not show a kind of wrong. RULE: need something that arises
to the level of fraud to pierce the corporate veil.
In re Silicone Gel Breast Plants (pg. 222)- Bristol bought out MEC, 2/3
of MEC’s directors were Bristol’s directors. Filed consolidated returns
prepared by Bristol and Bristol provided loans to MEC. Showing of fraud
is NOT necessary to pierce the corporate veil. RULE: “when a
corporation is so controlled as to be the alter ego or mere
instrumentality of its stockholder, the corporation may be disregarded
in the interests of justice.” p.226 –ok to have some overlap, but make
sure that the board is in place is an active board. Here, it was not.
Also, Bristol may be liable b/c it held its name out there- by putting
it on the products.
Tort v. Contract
Tort: courts are generally more lenient when there is a tort plaintiff,
require less proof. Don’t have to show fraud.
Requirements:
• 1. Demand – that the corporation bring the suit on its own behalf
♦ Why? –cuts off possible litigation, board’s decision to make, gives the
corporation one more time to look at the potential for litigation
♦ Grimes v. Donald (p. 241)- Grimes attacks board’s decision to enter into
the agreement on the grounds that it was wasteful, excessive and
operates as an abdication. Demand was refused. RULE: the shareholder
must overcome the presumption (business judgment rule) that the
rejection of the demand was made in good faith, MUST be proven with
particular facts. Here, it was not. ALSO, cannot contest that demand was
excused IF already made the demand. Have to allege wrongful refusal.
Wrongful refusal:
1. if a demand is made and rejected, the board rejecting the
demand is entitled to the presumption of the business judgment
rule UNLESS the stockholder can allege facts with particularity
creating a reasonable doubt that the board is entitled to the benefit
of the presumption.
Dodge v. Ford Motor Co. (pg. 288)- Ford decides: no more special dividends.
Wants the extra profits to go back to the company, wants to build smelter,
raises wages of employees. RULE: “a business corporation is organized and
carried on primarily for the profit of the stockholders.” Court ruled that the
corporation had must pay the special dividend, and because it was in the best
interests of the corporation, Ford was permitted to move forward with the
smelting plant.
Shlensky v. Wrigley- (p. 293)- P wants Wrigley Field to use lights to have night
games, Wrigley refuses. RULE: do NOT have to prove fraud, illegality, or
conflict of interest to win, however, the claim MUST border on one of the three in
order for the court to interfere. Here, there is a presumption that Wrigley acted
within the best interests of the corporation, concerns about the surrounding
neighborhood were legitimate.
DUTIES OF DIRECTORS
Chosen by shareholders
(b) all corporate powers shall be exercised under the authority of the Board of
Directors
MBCA §8.21- can take action without a meeting by giving consent and writing
out a statement of the possible action.
OFFICERS
One person can have more than one role- MBCA §8.40 (d)
1. Duty of Care:
♦ Brehm- (p. 345)- Eisner, the Chairman of Disney, hired his friend Ovits as
a top company executive. O’s contract contains provisions regarding his
compensation under several different scenarios. The scenario under
which he could receive the most compensation- where O was unable to
fulfill his obligations through no fault of his own. Shareholders objected.
RULE: the court rejected shareholder’s argument that the directors’
decision was uninformed. The board relied on an expert advice when
making the agreement.
2. Duty of Loyalty:
Test:
♦ Conflicting interest
Proper approval by directors will get you off the hook, cannot be held
liable
♦ 2. Interested parties have to disclose that they are interested, the rest of
the board who is not interested must approve- approval by a disinterested
and informed board
• Test:
• In Re Ebay- (p. 389)- shareholders of Ebay found out that directors and
officers have taken advantage of investment opportunity. Given the
opportunity to buy stock that could quickly go up in value. RULE: could be a
corporate opportunity.
Shareholders in closely held corporations have a more active role than in bigger
corporations.
Galler- (p. 618)- two brothers owned drug company, disagreement about whether they
were going to enforce an agreement that was made and executed before one of the
brothers got ill and passed away. RULE: agreement had to be enforced, there was no
objection due to fraud or disadvantage minority interest
Abuse of Control:
Wilkes (p. 630)- W and four other partners ran retirement home. Began to do well,
but relationships became strained. W notified that he intended to sell his shares.
The board ceased W’s salary and did not reelect him as director or officer. W sued.
RULE: majority shareholders have to deal with minority according to good faith
standard. There was NO legitimate business purpose for severing him from payroll.
This was a freeze out. Majority should be entitled to a little bit of selfish ownership.
2 part balancing test/approach:
Controlling groups must show legit business purpose for oppressive conduct
minority must show less harmful ways to achieve the same thing.
Securities:
Bonds= debt securities- represent debt owed by the corp. to the bondholder.
Covers:
-takeover regulation
-proxy regulation
Registration: Section 5
REGISTERED = when SEC signed off on the registration statement’s compliance with
disclosure requirements NOT on merits/ value of stock, etc.
o Exempted securities
o Exempted transactions
o Cost of process
• Benefits of Registration:
o Easier to re-sell
Review corp. minute books, articles and bylaws, annual and other
reports, etc.
• The 1933 act was designed to ensure that prospective investors receive disclosure
of information so that they can make informed decisions prior to buying securities
in registered offerings.
o Purchasers of securities that are sold in an offering that was exempt from the
registration requirement WILL NEED to make sure that their re-sale
transaction qualifies for one of the exemptions: NOT A FUNCTION of the ACT.
o Covers:
Insider trading
o U.S. v. O’Hagan- (p. 501)- insider trading. Lawyer in firm which was retained
by Grand Met regarding a potential tender offer for the common stock of
Pillsbury Company- headquartered in Minneapolis. Lawyer- Ohagen- bought
the stock and sold it for millions in profit. RULE: he was involved in insider
trading b/c he was a temporary insider. When a peron misappropriates
confidential information he is violating 10b-5. Traditional theory: applies to
insiders who owe shareholders a fiduciary duty, here no duty was owed,
however the misappropriation theory applies: you have a duty to disclose to
the SOURCE OF THE INFORMATION. Here, law firm = provider, and Ohagen
breached duty.
Ex. Attorney uses info received from law firm client to trade in the
stock of another corp. O’Hagen
o Process:
• LEGAL RELATIONSHIP
o b/t LLC, its members and managers to 3rd parties
Agency/ authority
LLC liability for 3rd party losses for wrongful acts or omissions, etc.
§302.
o Manager Rights
o Standards of Conduct:
o Walter, Waste and Land v. Lanham-(p. 300)- Need to make clearly that it is
an LLC, otherwise you could end up with personal liability as was found here).