Business Associations Outline + Checklist

Agency

Corporations Securities Policy Formation: formal filing (MBCA 2) Is it a security? Economic reality Assigning liability to the least-cost Archbishops Sale of securities (§ 5) avoider (e.g., P, employer) Piercing the veil (never works for public) SEC registration + approval Reduce total agency agency cost = Personal liability (Sea-Land) Exempt transactions o monitoring + residual (fringe) 1) Unity of interest + § 4(1) o  2) Sx injustice or fraud Private offerings P’s liability to 3P in K can come from o  Subsidiary as alter ego Exempt securities A’s… o o 1. Express authority Fact-based TOTC Material misstatement/omission o 2. Implied authority No respondeat superior Exchange Act disclosures 3. Apparent authority – requires requires among subagents Insider trading – silent about about material fact? awareness of P Tort action (e.g., products liability) Insiders o a. DEFENSE: estoppel Roles with director discretion Temporary fiduciaries o by 3P Corporate gift giving 10b-5 policy vs. CL 4. Inherent agency power from Dividends Misappropriation undisclosed P? GF business judgment (BJR) Cady, Roberts duty to disc o atification vs. P’s… R atification “while in possession” o CL vs. 10b-5 P’s liability to 3P in tort  Limited Liability Companies Relationships in law, not labeled LP vs. GP – see Tippees see RULPA 303 liabilities Apparent agency  control LLPs – only only covers negligence, pro service Proxy fights S/h list – right right of inspection by s/h Over “instrumentality”? LLCs – best o best choice unless startup Type of A Conflicting state laws o Member/manager managed? Employee? Respondeat Other corp records – prove prove purpose o - No personal liability superior – “enhanced scrutiny” o Agents disclose to avoid Takeovers (t-offers) – “enhanced o IC (non-servant agent)? Revlon duties – sale sale of control o Dissolve properly to avoid Not liable Unocal duties – if if no Revlon duties Generally, freedom of K o o Franchisee (hybrid)? Self-interest? Entirely fair PCV – same same as corporations Depends on purpose Concern for non-s/h? o Fid duties to LLC (ULLCA 409) No discrim self-tender A’s liability to 3P in K can come from o Loyalty, care, noncompete o nondisclosure of unidentified P. Poison pill OK o Members can agree waiver o Fiduciary duties of A to P Ends upon dissociation o Unjust enrichment Corporate Litigation Duty to inform (disclose/abstain) Derivative suits Board of Directors Duties Loyalty, noncompetition, care, Demand requirement BJR presumption (Π burden to rebut), unless competence, diligence Rejected? BJR o uninformed (gross negligence std), fraud, Cannot bifurcate claims o dishonest practice, bad faith, irrational BP Partnerships Futility EXCEPTION o Rebut  Δ burden “entire fairness” Formation: Act like it Demand excused? Litigation Dissent: directors always informed o Existence: 2+ co-owners SLC determination Duty of care (hasty decision-making o TOTC to assess existence 2-step test for MTD process) o Partners vs. employees Indemnification & insurance (DGCL 145) Informed? Gross negligence std o Partners vs. lenders Rights must be consistent w/ statute Rely in GF on officer reports Profit sharing necessary, Must indemnify: D/O successful o Merger duties: be informed, have rebuttable presumption May indemnify: Pt in good faith adequate basis, disclose to s/h Partnership by estoppel May pay suit expenses in advance DGCL 102(b)(7) limits $ dmg Fiduciary duties of partners to ptship Rsbl agreements enforced o Duty of loyalty (self-dealing, COI + GF) Loyalty: Act in best interest of May maintain insurance Trumps BJR – ↑ – ↑ scrutiny if COI ptship; disclose Safe harbor EXCEPTION o Care: Negl/careless/violate law Close Corporations Corporate opportunity doctrine – 4 4Breach limited to “secret profits”? part Broz test Ways for minority s/h to get more power No specific possessory property rights. Shareholder agreement? Dominant/controlling s/h’s duty Vs. joint ventures o o Self-dealing? “Fairness” By 100% shareholders? Fact-dependent scope and effect o Ratified by interested director s/h City magistrate Same fiduciary duties as partners Duties of care & loyalty Fiduciary duty – utmost utmost GF and loyalty Rights of partners in management Revlon (sale of control) Minority squeezed out? 2-person ptrship o Unocal (takeover defenses) Mass. vs. Del. Disagree on “ordinary”? Duty of good faith (condition to loyalty) o Remedy o Maj. in two-person ptship? o - More than gross negligence Terminating directors? Who’s suing: 3P or ptr? o In executive compensation Ad-hoc controlling minority? Recover expenses by one? o Corporate waste? Both employee and s/h? o Agreements very flexible, comes In executive oversight with risks of disagreement BF necessary cond for liability

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Agency “Agency” indicates the relation that exists where one person acts for another. Specifically, another. Specifically, an agency relationship results from assent by one person (principal) to another (agent) that the agent shall act on the principal’s behalf principal’s behalf and subject to the th e principal’s control, and assent/consent by the agent so to act (1.01-03) Assent or intention manifests through words or conduct Dissent: Agency means more than mere passive permission. It involves request, instruction or o command (Klee) Control ex – ex – condition condition that coach drive it (or merely a natural precaution) Control is NOT: characterization in agreement, context of industry, popular usage status, joint ownership o Not probative by itself: marital status, 

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The principal is responsible for the acts of his agent. Where one undertakes to transact some business or manage some affair for another by authority and on account of the latter, l atter, the principal-agent relationship arises. (See R.3d 2.04, 7.07(2) respondeat superior) Not necessary: K, compensation, business matter 

A creditor (security holder) who assumes control of his debtor’s business may become liable as principal for the acts of the debtor in connection with the business. 1 Can show control in light of all the circumstances an active participant in the debtor’s business debtor’s business A creditor becomes a principal when he assumes de facto (actual) control over the conduct condu ct of his o debtor, whatever the formal K may say If he takes over management of debtor’s biz in person/through agent and directs what K o may/may not be made NOT merely holding veto power over business acts of debtor 

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Buyer-supplier vs. principal-agent Factors showing one is a supplier: Receives fixed price for property regardless of price paid b y him! o Acts in his own name and receive title to property o o Has an indep biz (operations not financed by someone else like a buyer) in buying and selling similar property Agent: One who contracts to acquire property from a 3rd pt and conveys it to another, only if it is agreed that he is to act primarily for the benefit ben efit of the other and not for himself 

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Moral hazard: hazard: when someone knows he doesn’t have to bear the full costs of bad things that might happen if the decision turns out bad, changes his behavior, beh avior, making losses likelier Liability of principal to 3 rd parties in contract Type

Description

Dutiful Agent

Rogue Agent

Imposter Agent

Actual Express Authority

Authority through express manifestations to A Actual + incidental,

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 But implied

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Apparent Authority Undisclosed Principal Ratification Estoppel

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Manifestations to 3 party traceable to P (holding out) Negates unusual limitations by undisclosed principal Acceptance of results w/ intent Carelessly allowing rogue or imposter agent

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 Holding out

But not necessary b/c actual

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 Requires P

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 Just the way rule

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is written

unlikely & maybe agency required

Apparent easier b/c it’s not equitable

The liability of a principal to third parties for the acts of an agent may be shown sh own by proof of: Express, real, or actual authority that was definitely granted a. What A believes Implied authority (to do all that is proper, customarily incidental, reasonabl y appropriate to the exercise of the authority granted) a. What A reasonably believes P would authorize A to do on P’s behalf Apparent authority (where (where the principal by words/conduct has “held out” the person to be his agent) a. What 3P reasonably believes (no direct communication b/w 3P and P required) b. Requires awareness of P: P: 3P’s belief is traceable to P’s manifestations Inherent agency power? a. Liability of undisclosed P possible 

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Implied vs. apparent authority an agent can exercise (R.3d 2.01-03) Implied authority is actual authority circumstantially proven which the principal actually intended the agent to possess. P can’t think of and articulate everything everything for A to do. Includes powers necessary to carry out the duties actually delegated o Determine whether A reasonably believes because of present or past conduct of P that P wishes him to act in a certain way or have certain authority Existence of prior similar practices is one of the most important factors. Specific conduct by the o principal in the past permitting the agent to exercise similar powers powers is crucial Apparent authority is not actual authority but is the authority the agent is held out by the principal as possessing Depends on principal’s manifestations: An agent has apparent authority sufficient to bind the o principal when the principal (not (not the agent) acts (or refrains from acting) so as to lead a rd reasonably prudent 3 person to suppose that the agent had the authority he purports to exercise 2 An agent has the apparent authority as long as 3rd parties lack knowledge to the contrary o o P just has to bear the risk of A doing something P doesn’t want, if P wants A working for him (“agency (“agency costs”). costs”). Or f ire ire A if he goes beyond scope of duty 

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Ways to protect oneself 1. Put a disclaimer in the document documen t that only certain officers could sign on P’s P ’s behalf 2. Make explicit on form K. Could make compensation contingent to non-deviation















Inherent agency power R.2d 8A: Power of an agent a gent derived not from authority, apparent authority or estoppel but solely from the agency relation and exists for the protection of persons dealing with an agent R.3d threw out inherent agency Liability of undisclosed principal3 R.2d 194: An undisclosed principal is liable to 3rd parties for an agent’s acts “done on his o account, if usual or necessary in such transactions, although forbidden by the the principal” R.3d 2.06(1) covers Watteau: An undisclosed P is subject to liability to 3P who is justifiably o induced to make a detrimental change in position by an A on P’s behalf and without actual authority, if P, having notice of A’s conduct and that it might induce others to change their positions, did not take reasonable steps to notify them of the facts no rmal course of business that P doesn’t notify  Rogue A doing things outside normal R.3d 2.06(2) o 

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Contracts w/ 3rd parties (R.3d 6.01-03) Agent for undisclosed principal (PAT all bound) Principal is party to K, unless excluded by K o  Principal (if party to K) and 3P have h ave same rights against each other as if principal made ma de K personally Agent and 3P are parties to K o Agent for disclosed or unidentified principal principal Only principal and 3P are the parties to the K, unless agent and 3P agree otherwise o 

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Ratification: The affirmance by a person of a prior act of another, whereby whereb y the act is given effect as if done do ne by an agent acting with actual authority. a uthority. Retroactively creates the effects of actual authority to act on P’s behalf (R.3d 4.01-02) and binds P. To exist, ratification requires acceptance of the results of the act with an intent to ratify and with full knowledge of all the material circumstances 4 Must be done before any manifestation of intention by 3P to withdraw from the transaction o o Receipt of benefits? Before this may constitute ratification, other requisites for ratification must first be there Implied affirmance through o  Silence about lack of real authority  Acceptance of benefits before P had opportunity to decline  Resulting in prejudice of innocent 3P (buyer who buys from an unauthorized agent a house that later burns before P could affirm the K), unless 3P assents to being bound 

Estoppel (vs. apparent authority): authority): T reasonably believes “A” has h as authority; P carelessly permits belief; T detrimentally changes position. If a proprietor of a place of business by his careless neglect (e.g., not monitoring) enables one who is not his agent conspicuously to act to lead a person of ordinary prudence to believe that the impostor impostor was actually the proprietor’s agent, then the proprietor may NOT defensively avail himself of the impostor’s lack of authority and escape liability for the customer’s loss 5 















No manifestation by P required. P need not have put him out as an agent — — just careless holding out as agent such that a 3P 3 P could reasonably infer that the purported agent has authority to contract on your behalf See R.3d 2.05: intentionally/carelessly caused belief of agency to 3P, or did not take reasonable o steps to notify 3P of the facts For P to win, show reasonable belief and GF that the impostor was real, that tha t it’s reasonable reasonable that the nonagent’s behavior was reasonable Cf. apparent authority (tracing back to P involved) o

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Agent’s Agent’s liability (on K) under a partially disclosed / unidentified principal Actual (or reasonably equivalent) knowledge is the test for liability: It is the duty of the agent to to disclose (not the other pt to discover) not only that he is acting as a representative but also the identity of the principal, if he wants to avoid personal liability. 6 (If A wants to avoid liability, must disclose P’s identity) 

Liability of principal to 3 rd parties in tort The relationship of the parties does not depend on what the parties themselves call it but rather in law what it actually is. Type

Description

Actual Agency (vicarious liability/respondeat superior)

Employer/master liable for employee/servant torts in scope of employment

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Apparent Agency

Holding out causing plaintiff to rely on skill skill and care of purported agent; reliance tricky to prove

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Degree of control See also R.2d 220(2).

Actual control over details of the work E.g., McDonald’s McDonald’s

Employee/servant – Employee/servant – principal principal liable A person employed to perform services in the affairs of another who with respect to the physical conduct in the performance of the services is subject to the other’s other’s control or control or right to control (R.2d 220(1)).

Limited agent (for contracts) E.g., Sun Oil Oil

Looser affiliations E.g., franchisor franchisor

Independent contractor – contractor – principal principal not liable Agent-type IC Agrees to act on behalf of principal NOT subject to principal’s control over method of accomplishing result — — the the physical conduct of the task Non-agent IC Operates independently in arm’sarm’slength transactions  

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Scope of employment

The agent also remains subject to liability even though the actor acted as an agent or employee, with actual or apparent authority, or within the scope of employment (R.3d 7.01). An employer will be held liable under respondeat superior if the actions of the employee arise out of the course of his employment. 2 tests for employee’s actions: actions: (Restatement): plausible story for why e’ee was acting in e’er interest Intent (Restatement): plausible emplo yer could perceive that harm could flow Foreseeability : It is only required that an employer from actions of their employees related to work (activities “characteristic” of the business). business) . The level of foreseeability in a respondeat superior issue is lower than in a negligence case.7 Course of employment E’ee acts within scope of employment when performing p erforming work assigned by e’er or engaging in a course of conduct subject to e’er’s control. NOT within scope of employment when it occurs within an independent course of conduct not intended by e’ee to serve any purpose of e’er. R.3d 7.07(2)

Control is an essential element of the relationship to distinguish employee and IC (and franchisee): Does the principal have the right to control the details of the day-to-day operation of the alleged employee/IC? Control or influence over results alone is insufficient. 8 Hoover (Sun)  not liable (didn’t control hours of operation, less control o ver pricing…) No bright line: More quality of analysis than conclusion on exam  

Assigning liability to the least-cost avoider: Party with incentive to minimize losses is the one with biggest opportunity to profit, one who controls how the store is run, how employees are trained, variable fees, etc. Can use to justify assigning liability to P/employer, who can better spread risk of losses (cost of doing business, distribute to customers) 

Franchisor-franchisee relationship (E-IC hybrid) Is the purpose of the franchise K to achieve system-wide standardization of business identity, uniformity of commercial service, optimum public good will, or benefit both parties? Or is it to regulate day-to-day activities (control) — daily daily maintenance, power to hire/fire employees, set standards for employee skills, or supervise work routine? 

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Bushey, 52: Lane, a U.S. Coast Guard seaman, returned to Plaintiff ’s drydock after a night of drinking. For some unexplained reason, Lane opened three water intake valves, flooding the drydock. drydock. The drydock and vessel were damaged by Lane’s actions. POLICY of economic incentives was not a basis; the fact that D is better able to afford damages is not alone sufficient to justify legal

















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Tort liability9 Apparent agency? If the franchise agreement goes beyond setting standards and allocates to o the franchisor the right to exercise control over the daily operations of the franchise, an agency relationship exists (and franchisor becomes subject to vicariously liability as effective “employers”)10  3P must have relied on a manifestation of apparent principal, and it must have been that reliance that exposed 3P to harm  Vandemark focuses on control over “instrumentality” that caused the harm Apparent authority would not work in tort cases! P would not authorize its agent to act o negligently Tradeoff between taking on more legal le gal risk from control and reputational risk from substandard service. Is there a way to eliminate both risks? Try to control compensation structure o Try to end the relationship (drastic) o

Fiduciary obligation (duty of loyalty, care) of agents Unjust enrichment : If an employee takes advantage of his service and violates his duty of honesty and good faith to make a profit for himself, and the principal’s assets and the employee’s position play position play the predominant 11 (sole) part in enriching himself, then he is accountable for it to the principal. P doesn’t need to be harmed as a result Accountable to P for profit solely due to opportunity created by employee’s position, rank, facilities, etc. Law professors, war heroes, etc. generally not going to be a problem o  

“Disclose (& secure P’s assent) or abstain” duty to disclose/inform self-dealing in conflict with P : An agent has a duty to disclose to the principal what the principal should rightly know — matters matters aff ecting ecting the principal’s business. An agent cannot use the relationship to benefit his personal interest, except with the full knowledge and consent of the principal.12 Duty to deal fairly and openly with the principal applies in all transactions transactions between them. An employee’s independent enterprise cannot compete or contract with the employer without the employer’s full knowledge 

dut y to act loyally for the principal's benefit in all matters connected 8.01 Loyalty : An agent has a fiduciary duty with the agency relationship. 8.04 Non-Competition : Throughout the duration of an agency relationship, an agent has a duty to refrain from

















During that time, an agent may take tak e action, not otherwise wrongful, to prepare for competition following termination of the agency relationship. 8.08 Duties to Principal to Act with Care, Competence, and Diligence : Normally exercised by agents in similar circumstances Normally exercised by agents with special skills or knowledge  

8.09 Duty to Act Only Within Scope of Actual Authority and to Comply with Principal’s Lawful Instructions 8.14 Duty to Indemnify (Compensate) Agent Contract Agent makes a payment w/in scope of actual authority o o beneficial to the principal, unless the agent acts unofficially Agent suffers a loss that should fairly be borne by b y principal  

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Partnerships Liability

Corporations Limited

Tax VC & IPO?

Double tax (C-corp) Yes (C-corp)

Formalities Separate ownership/ control?

Important Yes

LLC

Limited Single tax No (no IPO; VC rare but possible) Less important? Somewhat

Partnership Ptrs pers liable

Single tax No Not important No

Big differences between corporations? Liability: Partners are personally liable for liabilities of partnership. Shareholders are not personally liable — all all they can lose is the money invested in the corporation Limited liability important for large corporations o Legal formality: Start a corporation by filing the appropriate docum ents with secretary of state. Start a partnership by acting like one (see the Uniform Partnership Act (1997), CA adopted) — — share share profits and control Term: Corporations are theoretically immortal (until dissolution). Partnerships by default (unless contracted) dissolve when one of the partners drops out Taxation: Partners pay taxes on partnership profits as part of normal income. Corporation pays taxes, and then shareholders pay taxes on dividends Partners are all agents and principals to each other (UPA 301). Often in a corp, the managers are agents, and shareholders are principals Don’t need a board of director in in a partnership Partners share profits and losses in proportion (UPA 401(b)) 

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A partnership is an association of 2+ persons to carry on a business for profit as co-owners. See also UPA § 101(6). “business”: a series of acts directed toward an end, which includes every trade, occupation and profession (UPA § 202 comment 1, 101(1)) If partners want to modify the default statutory requirements, they need a written partnership agreement. The primary source of “partnership law” is the partnership p artnership agreement. Thus, much of the law of partnerships is K law: Was there an agreement? If so, what does it say about the issue in question? 

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The labels the parties assign to their intended legal lega l relationship, while probative of (relevant to) partnership formation, are not necessarily dispositive as a matter of law. Its existence must be assessed under a TOTC test (factors that indicate the extent of the relationship). 15 Profit sharing creates rebuttable presumption of partnership, but rebuttal is not limited to list of exceptions in statute. Receipt by a person p erson of a share of the profits p rofits of a business is prima facie evidence that he is a partner in the business, but no such inference is drawn if profits were received: As a debt o Employee wages o Annuity o o Loan interest Consideration o 

Partnership by estoppel (cf. partners in fact)16 If a person represents himself (or permits another to represent him) to anyone as a partner in an existing ex isting partnership or with others not actual partners + the 3P to whom such a representation is made relies on the actual or apparent partnership on the faith of such representation, then the first person is liable to the 3P Generally, partners are jointly and severally liable for everything chargeable to the partnership (UPA 306) If two partners are partners by estoppel, one partner can be held jointly and severally liable for o the negligent acts of the other partner 

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Fiduciary obligations of partners Each partner (or joint adventurer) in a partnership owes the other partners a fiduciary duty to act in the best interests of the partnership over the interests of the individual in matters concerning the partnership. 17 Disclose the deals, opportunity, information 

Partnership requires money. Each partner contributes capital. Default rule is that partners share equally in profits and is chargeable with a share of the losses in proportion to the share of the profits (UPA 401). Account balance can be negative. Fiduciary duties a partner owes to the partnership pa rtnership (UPA § 404) Duties of loyalty to Account to the partnership and hold as trustee for it any property, profit or benefit derived by the o 

















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Duties of care to refrain from engaging in grossly negligent or reckless conduct, intentional conduct or knowing violation of the law Day implies breach of fiduciary duty is limited to cases of “secret profits” advantaging oneself at ptship’s expense: expense: One partner is essentially stealing opportunity from partnership, kickbacks, contracting with another business, etc.

Joint ventures18 A JV is similar to a partnership but is more limited in scope and duration, and principles of partnership law apply Joint adventurers owe the same duty of loyalty lo yalty as partners o o JV vs. partnership is also arguable For a business enterprise to constitute a JV, these must be present: (1) contribution by the parties of money, property, time, or skill in some common undertaking, o but the contributions need not be equal or of the same nature; (2) a proprietary interest and right of mutual control over ov er the engaged property; o (3) an express or implied agreement for the sharing of profits, and usually, but not necessarily, of o losses; and (4) an express or implied contract showing a joint venture was formed o There is, however, no fixed formula for identifying a joint ven ture relationship in all cases, and o each case will depend upon its own unique facts 

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Partnership property: A conveyance of partnership property propert y by one partner held in the name of the partnership is made in the name of the th e partnership and not as a conveyance of the individual interests of the partners. p artners. A partner does not personally own any specific property of the partnership (only possessory rights on the claims to profits/losses) and therefore cannot retain any rights to the partnership after conveyance.19 Interest in a partnership is interest in “share of the profits” (and losses) A partner is not a co-owner of partnership property and has no interest in partnership property o that can be transferred (UPA 501) Like a hypothetical oil discovery on the partnership real property after transfer of a partnership interest with neither pt believing oil to be there: The interest in the real property remains in the partnership. The transferor wouldn’t have transferred have transferred his partnership interest had he known of o f the oil, but mutual ignorance wouldn’t warrant a reformation of the contract c ontract for sale of the interest nor a share of the value of the oil It might matter if there was a failure to disclose, though. Partners who convey interest in the o partnership are not entitled to profits to a surprise surprise discovery 

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Court may charge the transferable interest of a judgment debtor d ebtor to satisfy the judgment for a judgment creditor of a partner (UPA 504)

Rights of partners in management If there is a disagreement as to an “ordinary course of business,” the decision of the majority controls. An act outside the ordinary course of business and an amendment to the partnership agreement may be undertaken only with the consent of all of the partners (UPA 401(j)).

Nabisco: two-person partnership + claim from 3P (biased for first first acting partner)20 Partners are jointly and severally liable for the actions of the partnership Buying bread from Nabisco was the status quo, need a majority to change this What could Stroud have done to protect himself? He could have amended the partnership agreement. They could bring in a mediator they trusted. They could delineate areas a reas of responsibility and provide one party with greater voice in certain c ertain areas (one gets to control bread buying). bu ying). Tiebreaker is what is considered what is “ordinary course of business” On the other hand, couldn’t the court view Stroud’s refusal of the deliveries as a decision within the scope of the business that cannot cannot be overruled by Freeman’s consent? Is it less “ordinary” to refuse deliveries?   

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Two partners in conflict (biased for second acting partner) A partner will not be permitted to recover expenses that benefit the partner individually (even fulfilling a K obligation) rather than benefiting the partnership 21 

A way to resolve: Who’s suing, 3P or partner? 3P creditor who relied on 1 partner acting as agent? Then this partner bound the partnership (Nabisco) 



















In an absence of an agreement a greement to the contrary, none of the partners is entitled to a salary. Can draw a return from the ptrship (like a salary) by agreeing that all partners do. Ptrs cannot pay themselves without paying others. Any ptr can dissolve the ptship, forcing the others oth ers to buy him out.



















Corporations Differences between partnerships and corporations How to form

Liability

Continuity Management

Partnerships

Act like it

Can bargain with creditors to limit liability, and buy insurance Partnerships at will, can end at any time Partner is an agent but can agree to the contrary

Corporations

File articles of incorporation with secretary of state Must include name of corporation, which must include words like “corporation,” “company,” “incorporated” or abbrs. C shareholders have limited liability, but not absolute (veil piercing) Default is indefinite, but possible (rare) to limit term of corporation Centralized management

What rights do shareholders have? Voting rights on who is on board b oard of directors, big decisions (mergers) Receive dividends Be residual claimants, get paid whatever is leftover when a corp goes bust Amendments to articles of incorporation (constitution), bylaws (statutes)    

Limited liability



















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Bylaws may have any provision prov ision not inconsistent with law or AOI (2.06) Shareholders are not liable to the corporation or its creditors except to pay the consideration con sideration for the shares (6.22) o Shareholders are not personally liable for the acts/debts of the corporation except by reason of his own acts A director who assents to a distribution to shareholders in excess ex cess of what may be authorized is personally liable to the corporation for the amount of the distribution that exceeds the art of inc/6.40(c) limit

An archbishop can be a corporation sole under CA Corp. Code with the same civil rights and duties as a s other corps (Sheffield). Piercing the veil / “alter ego” (CA) ego” (CA) theory NEVER works for public companies (can own AAPL and sleep soundly)! Only for private companies (usually smaller group of shareholders) OR wholly owned subsidiary of larger, public compa ny. An individual can be held liable for the acts of a corporation through the doctrine of respondeat superior only if it can be shown that the individual used his control of the corporation for personal gain rather than furthering the corporation’s business .23 Makes a “parent” liable for the actions of o f a “subsidiary” which it controls, but it doesn’t mean that where a parent controls several subsidiaries each subsidiary then b ecomes liable for the actions of all subsidiaries. There is no respondeat superior between the subagents! 24 Need something like other subsidiaries. enterprise liability The veil of limited corporate liability will be pierced when the plaintiff proves that 1) not only does the corp appear to be influenced and governed by the individual, there is a unity o of interest between the individual and the corporation such that the separate personalities of the 

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Not having an elected board  Treated as “mere instrumentality” 2) to allow the limited liability would promote an injustice i njustice (injured the party seeking to pierce 25 the veil) or sanction sanction a fraud.  To afford creditor protection where some bad faith conduct co nduct makes it inequitable for the equitable owner of a corporation to hide behind its corporate veil  Not required to fully prove intent to defraud  Courts that have properly pierced the corporate veils v eils to avoid promoting injustice found that some “wrong” beyond a creditor’s inability to collect would result, result, e.g., A corp would be unjustly enriched unless liability is shared by all Usage of corporate facades to avoid responsibilities to creditors 26  NOT satisfied when an unsatisfied creditor is trying to collecting payment  

General doctrinal approach : If shareholder observes formalities and “respects separate existence of corporation,” no PCV. Otherwise, may be liable— depending depending on jx, usually need to show some injustice for PCV, not just unhappy creditor.

Subsidiary as alter ego of parent Fact based: TOTC must be evaluated in determining whether a subsidiary may be found to be the alter ego or “mere instrumentality” instrumentality” of the parent corporation.27 All jx require a showing of substantial domination. Factors to be considered in applying the doctrine: Sheffield o  Commingling of funds  Holding out by one entity that it is liable for the debts of the other  Identical equitable ownership in the two entities  Use of the same offices and employees 





















Tort actions To PCV in tort actions against corporations, a plaintiff needs to show that the corporation is a “mere instrumentality” instrument ality” of of the stockholder, and there is no burden to prove fraud. 28 Where arguing to pierce the corporate veil, v eil, a decision based upon a totality of the circumstances, summary judgments will rarely be granted because the decision is so fact-based 

Respect the corporate formalities to avoid liabilities! Have shareholder meetings, have a real board, let them keep money in their own bank account, and be careful with using corp name. Can retain control by selecting directors who know what’s expected of them, know who they need to please, and act formally as independent directors. Roles and purposes Corporate gift-giving is an allowable method of increasing goodwill. Any corporation could cooperate with other corporations and persons in the creation and maintenance of community funds and charitable, cha ritable, philanthropic or benevolent instrumentalities conducive to public welfare, and could for such purposes expend such corporate sums as the directors deem expedient expe dient and as in their judgment will contribute to corporate



















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Business judgment rule: A court will not interfere with an honest business judgment as to the best interests of the corporation and the stockholders, absent a showing of fraud, illegality or conflict of interest, clearly not aligned with shareholder interest 31 Unless there’s evidence of fraud, illegality, or COI, courts will be deferential to company boardo of-director decisions. Mention what is the best interest of s/h As π, try to show action (e.g., night baseball) is profitable pro fitable to to director o As Δ, try to show action is not in conflict or is profitable to company o

Limited-liability companies Partnerships General partnership Limited-liability partnership o Limited partnership (not as common anymore) Corporations C corporation S corporation Limited-liability company (corporation x general partnership) 

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If the LP takes part in the control of the business and is not also a GP, the LP is liable only to persons who transact business with the limited partnership and who reasonably believe, believe, based on the LP’s conduct, that the LP is a GP  Mt. Vernon, 168 A LP acting substantially the same as a GP has unlimited liability regardless of π’s knowledge of his role Unlimited liability for exercising less than a GP’s power if the fact that he acted as more than a LP was actually known to π 303(b): A LP does not participate in control solely by consulting with and advising a dvising a GP with respect to the business of the limited partnership 

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LLPs are general partnerships that permit general partners to limit their personal liability (by filing with the Secretary of State, statutory requirements, and revising the partnership agreement to provide for limited liability). Most LLP statutes provide limited liability only for partnership debts arising from negligence an d similar misconduct (other than misconduct the partner is directly responsible for), not for contractual obligations. A few statutes provide protection for both 



















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A member is not an agent of the company  Each manager is an agent of the company (c) Any member or manager may sign and deliver any instrument transferring or affecting the o company’s interest in real real property 303. Liability of members and managers A member or manager is not personally liable for a debt, obligation and liability o  Debts, obligations and liabilities of a LLC are liabilities of the compa ny compan y formalities or requirements is not a ground for  A LLC not observing usual company imposing personal liabilities  UNLESS provided in articles of organization + written consent by a liable member to the adoption or to be bound by the provision

Agents of a LLC When a 3P sues a manager or member of an LLC under an agency theory, the principles of agency law apply notwithstanding statutory notice rules (i.e., filing of the articles of organization serve as c onstructive notice of a company’s status as a LLC). An agent who negotiates a contract with a third party can be personally liable for breach, unless the agent disclosed both the fact that he or she is acting on behalf of a principal + the



















Members of an LLC can agree to limit the scope of the fiduciary (of trust and confidence in another) duty they owe to the LLC. 37

ULLCA 603(b): 603(b): Upon dissociation of a member… Member’s duty of loyalty under 409(b)(3) (noncompete) terminates Member’s other duties of loyalty under 409(b)(1)-(2), 409(c) (no grossly negligent conduct) condu ct) continue only with regard to matters arising before member’s dissociation  

Members of an LLC can be held (proportionately) personally liable for the debts of their LLC if they fail to properly dissolve the LLC under the relevant statutes. 38

Board of directors Manager/director = agent  shareholder = principal Business judgment rule : The business judgment rule posits a powerful presumption in favor of actions taken by directors in that a decision made by loyal and informed board will not be overturned by courts unless it cannot be attributed to rational business purpose . A shareholder plaintiff challenging a board decision has





















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Leveraged buyout (LBO): Put down little equity and large debt load to buy a company (usually public) Under the business judgment rule, there is no protection for directors who have made an unintelligent or unadvised judgment The rule itself is a presumption that in making mak ing a business decision, the directors of a corporation acted ac ted on an informed basis, in good faith and in the honest hon est belief that the action taken was in the best interests of the company. The party attacking a board decision as uninformed must rebut the presumption that its business judgment was an informed one



















judgment judgment rule is trumped trumped by the rule of undivide undivided d loyalty, to avoid the possibility possibility of of fraud and and the 43 temptation of self-interest. Where a close relative of an executive ex ecutive officer of a corporation takes a position po sition closely associated with a new and expensive field of activity, the motives of the directors are likely to be questioned (unless one director owns all or most the stock for example) Business decisions that would not typically merit an analysis under the normal business judgment rule will undergo strict scrutiny when there is a conflict of interest : If there is any evidence or 

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(4) by taking the opportunity for his own, the corporate fiduciary will thereby be placed in a position adverse to his duties to the corporation (the self-interest of the officer or director will be brought into conflict with that of the corporation). In this case, the officer/director needs the board to approve it! TOTC: No single factor is dispositive. The court must balance all factors as they apply to a particular case.47



















all the stockholders in the capacity of trustee for them and cannot use his h is office as director for his 49 personal benefit at the expense of the stockholders. Directors may not declare or withhold the declaration of dividends for the purpose of personal o profit or, by analogy, take any corporate action for such a purpose See also MBCA 8.61-63.



















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Categories of “bad faith” fiduciary behavior (examples (examples of conduct that would wou ld establish a failure to act in good faith) Intentional dereliction of duty (between subjective intent to do harm to the corp & lack l ack of due o care) – care) – a a legally appropriate, although not the exclusive, definition of fiduciary bad faith  A conscious disregard for one's responsibilities is an appropriate (although not the only) standard for determining whether fiduciaries have acted in good faith i s conduct that is clearly  Deliberate indifference and inaction in the face of a duty to act is

































































































































































































































Business Associations Outline + Checklist

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