AGENCY Agency; Principal/ Agent
RSA §1
1 1. Fiduciary Relationship which results from the 2. manifestation of consent by the P to the A that the A shall act on P’s behalf, and 3. the consent by the agent to so act.
PrincipalPrincipal - the one whom the action is to be taken AgentAgent- the one who is to act §26
Actual Authority-created Authority-created by words or conduct from P to A Express Actual AuthorityAuthority- expressed from P to A Authority- do what is reasonably necessary to get the Implied Actual Authority job done.
Agency Authority
§27
Apparent Authority- manifestations by P to 3P, attributable to P known to 3P and must lead 3P to reasonably A is P’s A.
§140
Liability of Principal to 3P for transation conducted by an agent can be based on: 1. agent was authorized 2. agent was apparently authorized 3. agent had pwr arising from the agency relation and not dependent upon authority or apparent ap parent authority.
§320 §321
Principal DisclosedDisclosed- Agent does not become party to K Principal Partially disclosed- Unless otherwise agreed, A is party to the K. Principal UndisclosedUndisclosed- A purporting to act on his own account but actually for P, is a party to the K. Principal Known to be nonexistent or incompetent- unless otherwise agreed, A is party to contract
Liability Based on Agency
Liability of Agent to 3P for Contracts
§322 §326 §140
Liability of a P to a 3P for transactions conducted by an agent may be based on the act that: 1. The agent was authorized 2. the agent was apparently authorized 3. The agent had power arising from the agency relation not dependant on authority or apparent authority (i n h e r e n t )
§4
(1). If the 3P has notice that the A is acting for the principal and knows of P’s identity - A is acting for a disclosed P.
Liability of Principal to 3P for Contracts
Disclosed/ Undisclosed/ Partially Disclosed Principal
(2). If the 3P knows that the A is acting for the P but doesn’t know
who the P is, A is acting for a partially disclosed P. (3). If the 3P has no notice that the A is acting for the P- the one for whom A acts is an undisclosed P. §220 (1)
ig h t t o c o n t r o l The important ingredient is that the master has t h e r ig t h e d e t a ilil s o f h o w t h e s e r v a n t d o e s h i s j o b . The requirement goes
beyond the basic control in agency relationships.
§220(2)
Master/Servant Relationship
To determine whether one is acting as a servant consider these factors: a The extent of control control the the master master has over over details of the the work. work. b Whether the agent is engaged in a distinct occupation. c Whether the work is usually usually done under direction direction by employer or without without supervision. d The skill required to do the occupation e Whether the workman or employer employer supplies the tools, instrumentalities, instrumentalities, for the job f The method of payment g The length of time the person is employed h Whether the work is part part of the the regular regular business of the the employer. employer. i Whether the parties believe they are creating master/servant master/servant rship. j Whether the principal is a business.
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§228
Conduct of the servant is within the scope of employment only if: 1. it is the kind S is employed to perform 2. it occurs substantially within the authorized time time and space limits 3. it is actuated, actuated, in part, by a purpose to serve the master. 4. if force is intentionally used by the servant servant the force is not not unexpected by the master.
§229
To be within the SOE, the conduct must be of the same general nature as that authorized.
Servant Acting within scope of employment
In determining whther whther the conduct not authorized, but nevertheless so similar to be considered as within the scope of employment, the following are to be considered:
Kind of conduct within the scope of employment
1. 2. 3. 4. 5. 6. 7.
8. §219
Liability of Master for torts of servant
act commonly done by such servants? time, place, & purpose of the act previous relations between M &S whether the act is outside the business business of the servant whether master has reason to expect such act will be done whether the instrumentality of harm has been furnished furnished by the master. the extent the act departed from normal normal method of accomplishing accomplishing result. whether the act was criminal.
The master is liable for the torts of a servant o n l y i f t h e t o r t w a s c o m m i t t ed ed w i t h i n t h e s c o p e o f e m p l o y m e n t . If the tort is committed within the scope of employment the master is vicariously liable. liable. Compare f r o l i c (not l) v. D e t o u r (L).
§219(2)
A master is not liable for the torts of his servants acting outside scope of employment unless: 1. 2.
3.
the master intended the conduct or consequences the master was negligent or reckless the conduct violated a non-delegable duty of the master
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Partnership PARTNERSHIP RUPA (entity theory)
UPA §6(1) RUPA §202(a)
A partnership is an association of two or more persons to carry on as co-owners of a business for profit.
RUPA §201(a)
A partnership is an entity distinct from its partners
Partnership is not a separate legal person, but is an aggregate of its partners.
UPA (aggregate theory) UPA & RUPA as a default Provision
UPA §18
The rights and duties of the partners in a partnership are governed by the rules of UPA subject to an agreement.
RUPA §103
The general rule is that relations among partners are governed by the partnership agreement. To the extent that partners fail to agree, RUPA provides the default rule
UPA §8
UPA 1. All property property brought into the partnership or subsequently acquired by purchase 2. Property acquired with partnership funds 3. Real property acquired in partnership name. Title can only be conveyed in partnership name. 4. conveyance to the partnership- subject to contrary intent.
RUPA §§203, 204
PARTNERSHIP PROPERTY
RUPA Property acquired by the partnership is property of the partnership and not the partners individually. Property is partnership property if acquired in the mane of: 1. the partnership; 2. one or more partners with an indication that the property belongs to the partnership. 3. by transfer in the name of the the partnership or to partners in their capacity as partners for the partnership. 4. Property is p r e s u m e d to be pship property if purchased with partnership assets, even though not acquired in the name of the partnership. Comment §204: Ultimately it is the intent of the partners that controls
whether property belongs to the partnership
4 UPA §18(h)
PARTNERSHIP DECISION MAKING
Any difference arising as to ordinary matters with the partnership may be decided by a m a j o r i t y o f t h e p a r t n er er s . Any act that is contrary to any agreement between the partners must be decided by a l l (u (u n a n i m o u s ) p a r t n e r s .
RUPA § 401(j)
Any difference arising as to ordinary matters matters may be decided by a m a j o r i t y o f t h e p ar ar t n e r s .
An act o u t s i d e t h e o r d i n a r y c o u r s e o f b u s i n e s s and an a m e n d m e n t to the partnership agreement requires c o n s e n t o f all the partners.
RIGHTS OF 3 RD PARTIES THAT DEAL WITH PARTNERS OR PARTNERSHIP
RUPA §103(b)(10)
The p a r t n e r s h i p a g r e em em e n t m a y n o t r e s t r i c t t h e r i g h t s of third parties.
RUPA §201
The partnership is a legal person, an entity and can be sued.
RUPA §305
A pship is liable for loss or injury for act of partner acting with with in the ordinary course of business of the pship or with authority of pship.
RUPA §307
A pship may sue or be sued in the name of the pship. §307(c)- a judgment may not be satisfied from a partner’s assets unless there is also a judgment against the partner. The only place you can look is partnership assets.
LIABILITY OF THE PARTNERSHIP
§307 (d)- a judgment creditor cannot levy execution against the assets of the partner to satisfy a judgment based on a claim against the partnership, unless the partner is personally liable. Liability is imposed on the partner by law or contract independent of the existence of a partnership. ar e insufficient, can levy §307(d)(4)- if partnership assets are against the partner. RUPA says that you cannot go after the partner’s assets
unless you have exhausted the assets of the partnership.
LIABILITY OF THE PARTNERS
RUPA 401(c)
The partnership shall reimburse a partner for payments made and indemnify a partner for liabilities incurred in the normal course of business.
RUPA §§306 & 307
Partners are j o i n t l y an d s ev er al l y l i ab l e for all for all obligations of the partnership. §306(b)- A partner admitted to the partnership is not personally liable for obligation incurred prior to admission.
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NEW PARTNERS
UPA §15
Partners are j o in t l y li ab le i n c o n t r ac t . Partners are j o in t l y & s ev er al l y l i ab l e i n t o r t .
RUPA §401(i)
A person may become a partner only with the consent of al l the partners unless the pship agreement provides otherwise.
RUPA §306(b)
A new partner is not liable for debts incurred prior to admission.
UPA §18(g) No person can become a member of a partnership without the consent of al l the partners. RUPA §401(b)
PARTNERSHIP PROFITS
Each partner is entitled to an equal share of the partnership profits and is chargeable with a share of partnership losses.
UPA §18(a) Same RUPA §807 You cannot distribute to partners before c r e d i t o r s a r e p a i d f i r s t
TRANSFER OF INTEREST TO A 3rd PARTY WITHDRAWAL OF A PARTNER UNDER UPA
RUPA §502
The only transferable interest is the right to share profits and losses. There is no transfer of management interest.
UPA §26
Same Note: Distinguish between sale of an interest in pship v. transfer of interest. With sale of an interest, there is purchase of part of the entity, and purchaser will have management interest- §101(9).
UPA §29
Termination- point in time when all of the partnership affairs are wound up. Winding Up- the process of settling partnership affairs after dissolution.
Entity theory: if one partner leaves, dissolution is created and the partnership is no longer.
WITHDRAWAL OF A PARTNER UNDER RUPA
RUPA § 602 RUPA §601 (a)
Aggregate theory: If one partner leaves, partnership is still in tact and dissolution is not created. Instead, you buy-out the
Dissolution- designates the point in time when the partners cease to carry on the business together.
Any partner has the p o w e r t o d i s s o c i a t e at a n y t i m e . A partner r i g h t f u l l y disassociates upon the occurrence of: 1. 2. 3. 4.
Notice An event agreed to in the partnership agreement expulsion pursuant to partnership agreement By unanimous vote of the other partners if it is true that: a. It is unlawful to carry on pship with that partner b. There has been a transfer of all or substantially all of that partner’s interest.
1. The partner dies or becomes mentally incapacitated.
RUPA §602(b)
A partner’s disassociation is w r o n g f u l if:
6 1. 2. 3. 4. 5.
partner that left and keep the interest going. Buy-out is mandatory under RUPA §701(a). RUPA §602(c) RUPA §701(h)
RUPA §701 (b)
Buy-Out Price
RUPA §703
DISSOCIATED PARTNER’S LIABILITY TO OTHER PERSONS
Breaches express provision of pship agreement. It occurs before the expiration of a definite term. It is before 90 days when someone else has withdrawn Expelled by judicial determination- §601(a)(5) Partner is a debtor in Bankruptcy. §601(a)(6)
A partner who w r o n g f u l l y d i s s o c i a t e s i s l i ab l e o t h e r p a r t n e r s f o r d a m a g e s c a u s e d b y t h e d i s a s s o c i a t i o n in addition to other obligations owed. A partner who wrongfully dissociates is n o t e n t i t l ed t o b u y o u t p r i c e u n t i l e x p i r a t i o n o f t h e t e r m or completion of undertaking . u n l e s s c o u r t says p a y m e n t w i l l n o t h u r t p s h i p On the date of disassociation, the buy out price of the dissociated partner’s interest is the amount that would have been distributable if on that date the assets of the partnership were sold at a price equal to the greater of the liquidation value based on a sale of the entire business as a going concern without the partner. A d i s a s s o c i a t e d p a r t n e r i s n o t l i a b l e f o r a p a r t n e r s h i p o b l i g a t i o n i n c u r r e d af t e r d i s s o c i a t i o n except: If within 2 years of disassociation at the time the other party: 1. Reasonably believed that the dissociated partner was then a partner. 2. Did not have notice of the other partner’s dissociation; Note: Statement of Dissociation §704 A dissociated partner may file a statement of dissociation. A person not a party is deemed to have notice of dissociation 90 days after the statement of dissociation is filed.
RUPA §801 ONLY ATWILL PSHIP
PARTNERSHIP DISSOLUTION
A partnership is dissolved and its business must be wound up only upon the occurrence of any of the following events: 1. An a t w i l l partnership having express notice of another to withdrawal. 2. in a partnership for a definite amount of time. 3. upon an event agreed upon in the partnership agreement. 4. an event that makes it unlawful to continue partnership. Partnership continues after dissolution: By Waiver of ALL of the Partners
§802 (b) At any time a f t er t h e d i s s o l u t i o n o f a p s h i p a n d b e f o r e t h e w i n d i n g u p of its business is completed, al l of the partners (including any dissociating partner, but not one that is wrongful) may w aive the right to h ave the partnership’s business . w o u n d u p a n d p s h i p t e r m i n a t ed Pship resumes carrying on its business as if dissolution had never occurred.
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RUPA §401(b) RUPA §401(a)
WINDING UP RUPA §807(b)
CAPITAL CONTRIBUTIONS
Unless partners otherwise agree: 1. They share responsibility not only for the losses from operation of the pship but also partner’s losses from investments in the pship. 2. The amount of each partner’s loss from her investment in the partnership is determined from her p s h i p a c c o u n t (how much is put in and taken out.). 3. When a partnership ship is dissolved, the pship is legally o b l i g a t e d to pay each partner the amount measured by the balance in her partnership account. 4. If at dissolution, the sum of the balances in pship accounts of the partners exceeds the pship assets remaining after paying creditors, the partners will have to contribute additional funds to the pship so losses from investments are shared appropriately.
UPA §18 (a)
Profits and losses are shared equally.
UPA §18 (c)
A partner who aids the pship and makes payment or advance beyond the amount of capital agreed he agreed to shall be paid interest from date of payment or advance (loan).
UPA §18 (d)
A partner gets interest on capital contribution only from the date when repayment s h o u l d have been made.
RUPA §401
Pship account includes profits minus liabilities -§401(a) Profits and losses are shared equally-§401(b) Contribution of services rather than capital is not protected by §401 ( Kovacik v. Reed ). If you contribute services, it is not part of capital contribution, and you still share in losses equally. Comments to §401 state that parties should foresee application of default rule. To prevent this, a person contributing services can draw a salary, contract around it, or put it in the pship agreement.
RUPA §601
EXPULSION OF A PARTNER
Under RUPA §601-expulsion would be grounds for dissociation. Nothing requires that it has to be for cause, but you can contract around that. A partner can be expelled: 1. p u r s u a n t t o t h e p s h i p a g r ee m e n t 2. b y u n a n i m o u s v o t e o f t h e o t h e r p a r t n e r s if : a. it is unlawful to carry on business w/that ptner. b. Partner transfers all transferable interest 3. Judicial determination that partner has engaged in conduct that hurts partnership. 4. Partner violates partnership agreement by material breach.
The obligation of good faith and fair dealing under §404(d) does not require prior notice, specification of cause, or an opportunity
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to be heard (Boatch v. Butler & Binion) . Cannot expel in b a d f a i t h o r f o r p e r s o n a l g a i n . A situation in which a person who owns a majority interest in a business acts to compel a minority owner of the business to sell or otherwise give up her interest.
FREEZE-OUT
Page v. Page- Traynor says that you have a right to walk in at-
will partnerships however you can not dissolve a partnership to gain the benefits of the business for yourself unless you fully compensate co-partners for their share of the prospective business opportunity.
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CORPORATIONS MBCA §2.02
§2.02(a): Mandatory Requirements: 1. Corporate name 2. The # of shares the corp is authorized to issue 3. the street address of the corp’s initial registered office; and the name of official registered agent 4. the name and address of each incorporator
§2.02 (b): Permissive Requirements: 1. names and address of individual directors 2. a par value for authorized shares of stock 3. defining limiting and regulating the powers of the board and shareholders 4. liability issues.
DE §102
Articles of Incorporation
§102(a): Mandatory Requirements 1. The name of the corporation (must include one of the following words: association, company, corporation, club, foundation, incorporated, institute, society, union, syndicate, or limited).
2. The address of corp and name of registered agent. 3. The nature of the business or purpose to be conducted or promoted. 4. The total number of stock the corp has authority to issue and the par value of each of such shares, or a statement that the shares will be without par value. If it the corp is to authorize more than one class of stock, the total number for each class and which shares are to be without par value, and which have par value and the value for each class. 5. The name and address of each incorporator. 6. If the powers of the incorporators are terminated upon filing certificate of incorporation, the names and address of those who will serve as board of directors until the shareholders vote at first annual meeting. §102(b): Permissive requirements
Bylaws If the articles and bylaws are in conflict, the articles win!
Promoters
MBCA §2.06
§2.06(a): A corporation MUST adopt bylaws. §2.06(b): The bylaws may contain any provision for managing the business and regulating the affairs of the corporation as long as it is not inconsistent with the law or articles of incorporation.
DE §109 Definition
A promoter acts on behalf of a corporation not yet formed. A promoter purporting to act as or on behalf of a corporation
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MBCA §2.04
MBCA §6.03
knowing that there was no incorporation, is j o i n tl y an d s ev er al l y l i a b l e. Promoters still remain liable under a contract until n o v a t i o n . A corporation’s sale of it’s own stock is an i s s u a n c e . The articles of incorporation determine the number of shares a corporation has legal authority to issue- a u t h o r i z ed s h a r e s . The shares that are actually issued are referred to as o u t s t a n d i n g s h a r es .
Issuance rules only apply when a corporation sells stock, not an individual shareholder selling stock.
Issuing Stock
Par Value- the m i n i m u m price for which a corporation can issue its shares. It is not applicable when an individual sells shares. Stated Capital- includes at least the aggregate par value of all issued shares of par value stock.
MBCA §6.21(b)(c) DE §152
Things a Corporation can and can issue stock in exchange for.
Capital Surplus- funds received for issuance in excess of par value. DE MBCA OK- §152 (1) OK- 6.21 any Land tanagible names real property property OK- promissory NO-§152 does notes named in not list §6.21(b) promissory Promissory note notes- only okay for the excess amount over capital. OK (b/c it MAYBE (may be Release of benefits co.) an intangible obligation property) Good will OKOK (intangible property) OK- names NO –152(1) contracts to be services Promise of future performed rendered (past services §6.21(b) tense so future services are prohibited).
Piercing the Corporate Veil (PCV)
General rule of MBCA §6.22(b) and DE §162 is that shareholders protected from personal responsibility for the corporation’s liability. PCV allows the creditor to skip going after the corporation and go after the shareholders. This only happens in close corporations and there is no way to predict when it is going to happen. Alter Ego Doctrine/ Identity of Interest- the shareholder has failed to respect the corporation as a separate entity. The stockholder has essentially equated himself
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as a corporation and when there is no separation, the shareholder can be liable.
Factors to consider for PCV ( Dewitt): 1. Whether the corp was grossly undercapitalized 2. Failure to observe corporate formalities. 3. Non-payment of dividends 4. insolvency of the debtor corp at the time. 5. siphoning of funds of the corp by a dominant shareholder. 6. non-functioning of other directors & officers. 7. absence of corporate records. 8. corp is merely a façade for operations of dominant shareholders. Steps: 1. Show factors 2. Demonstrate that the shareholder was operating under alter ego principle. 3. Show the unfairness to creditors. Fraud is a way to pierce the corporate veil: Classic ex: individual is subject to a covenant not to compete. In order to avoid covenant, the individual forms corp to shield from liability. This is fraud.
Corporations enganged in a given industry are an ―enterprise‖ that should be treated
Enterprise Liability
as a single entity for purposes of liability. More often than not, a single large-scale business is conducted, not by a single corporation, but by a combination of corporations controlled by a single holding company. The enterprise liability pierces the walls of one corporation not to go after the assets of a shareholder but after the assets of other related companies.
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RUNNING A CORPORATION Directors are not agents for the corp. They cannot bind the corporation to anything. Officers are agents for the corp. Board of directors set the policy for the corporation. They do not make day-to day operational/micromanagement decfision.
Board of Directors
MBCA §8.01
Shareholders can enter into voting agreements to elect themselves to the board of directors. However, to select how they are going to bind themselves as officers and set their salaries is void.
Shareholder voting agreements
(Continued…)
Shareholder voting agreements
Requires that every corporation have a board of directors except that a corporation with shareholder agreement under §7.32 may dispose or limit the authority of the board of directors.
In a few states the shareholders can be empowered to select and remove the officers. Such authority must be put in the articles.
MBCA §7.32(b)
MBCA §7.32(f)
An agreement among shareholders must be 1. Set forth in the articles or bylaws and approved by all shareholders at the time of the agreement; or 2. In a written agreement signed by all the shareholders at the time of the agreement and is made known to the corporation. The agreement is not grounds for imposing personal liability on any of the shareholders and is not a basis for piercing the corporate veil.
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DE §350 DE §351
The agreement has to be written among stockholders with a majority of the outstanding shares. The articles may provide that the shareholders rather than the board of directors shall manage the corporation, if all of the shareholders of record authorize it. Voting agreements among directors are void as being contrary to public policy. Directors cannot enter into voting agreements. Directors cannot make an agreement to usurp management. This renders the board ineffectual and violates the public policy that the directors ae supposed to use their independent judgment. (McQuade)
Director Voting Agreements
Remember: Director voting agreements are contrary to public policy. REMEDY FOR BREACH OF AGREEMENT
DE §218(c)
DE- The remedy for breach of the share holder agreement is to void the votes of the breacher . MBCA- §7.31(b): A shareholder agreement is specifically enforceable.
Remedies for Violating Shareholder Voting Agreements
MBCA §7.31
§7.31(a): Two or more shareholders may provide for the manner in which they will vote their shares by signing an agreement for that purpose. §7.32- involves a close corporation where the shareholders are seizing management from the board. Voting Trust: §730 deals with a voting trust. If you give share to a trust, you give up legal title and retain equitable title. The trustee that has legal title votes the shares in accordance with the voting agreement.
(Ringling Brother’s
Case)
You would have a voting trust in states like DE where you cannot get specific performance. In MBCA specific performance states, there is no need to have a voting trust.
Voting to Remove a Director from office during her term The Number of Votes required to remove a director before
DE §141(k)
With or without cause by a majority of shareholders entitled to vote- unless the board is classified (staggered- each year you elect 3 directors for a 3 year term) you can only remove for cause.
NY Bus Corp §706
Remove for cause only. However, if the articles say so, you can remove without cause.
MBCA §8.08
May remove with or without cause unless the articles provide that the directors may be removed for cause only.
DE §141(k)
Majority of the shares entitled to vote.
MBCA§8.08
The majority of the shares that actually vote.
NY Bus §706
Same as MBCA
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term expires.
Note: For any stockolder meeting, you have to have a quorum: a majority of the shares entitled to vote. If there are 3000 shares entitled to vote at least 1501 shares must be present to vote in person or by proxy. Once you have a quorum, in DE you would have to have all 1501 votes to remove. Under MBCA & NY- you only need a majority of the number who show up.
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A corporation keeps records of who owns its stock. The corporation is required to send notice of annual and special meetings to its record shareholders. The corporation can fix a record date before the meeting and only those record owners as of that date are entitled to notice and a vote at the meeting.
Stockholders that get to vote
When is the record date set? DE §213(a)
No fewer than 10 days and no more than 60 days before the meeting.
MBCA §7.07(a)
Cannot be more than 70 days before the meeting and there is no minimum date.
MBCA §7.22
Can vote by person or proxy. May appoint a proxy vote by signing an appointment form. The proxy is good for 11 months unless another temporal time is noted on the proxy.
Voting by Proxy
DE 212(b)
Can authorize another to act by proxy. You can do it orally, but it is stupid. The proxy is good for 3 years unless otherwise noted.
DE§220 (d)
Proxies are revocable even if they say they are not. A proxy c o u p l e d w i t h a n i n t e r es t is irrevocable.
Directors: The director shall have the right to examine the corporation’s stock ledger, a list of its stockholders, and other books and records Once a director makes a §220 demand, the burden shifts to the corporation to show why the inspection should be denied.
Inspecting Corporate Records Under the DE code.
DE §220(c)
Shareholders: The shareholder makes the demand in accordance with §220(b) (to look at ledger, list of stockholders, and books and records) and it is refused. The burden will be on the corporation to show why the inspection is denied.
If the shareholder want to look at more than just the ledger and is refused, the shareholder has the burden to show: 1. The demand is in the proper form and manner -writing and under oath. 2. The stated purpose is bona fide. 3. That the stockholder ought to have access because it is tailored to his purpose.
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DUTY OF CARE & THE BUSINESS JUDGMENT RULE Courts are not going to second guess business decisions unless there is a showing of f r a u d , i l l e g a li t y , o r c o n f l i c t o f i n t e r e s t .
Requirements for BJR To Apply: 1. Director must not be interested. 2. Director must be reasonably informed 3. Director must reasonably believe that she is acting in the best interests of the corporation.
Business Judgment Rule
Policy Reasons for Business Judgment rule: 1. Buying stock is a voluntary act by the stockholder, there is an inherent assumption of risk that the stock might not do well. 2. After the fact litigation (post hoc) is a bad way to evaluate business decisions. 3. Profits are correlated to risks, and courts should not create incentives for caution. BJR does not apply when the corporate decision: Lacks business purpose Is tainted by a conflict of interest Is so egregious to amount to a no-win situation Results from an obvious and prolonged failure to exercise oversight or supervision. (Jay v. North) Outside directors can be held liable when they blindly allow others to make decisions without supervision.
17 MBCA §8.30(a)
A director shall discharge his duties as a director in: 1. Good faith 2. With the care an ordinarily prudent person in a like position would exercise under similar circumstances 3. In a manner that he reasonably believes is in the best interest of the corporation.
MBCA §8.30(b)
A director is entitled to rely on information, opinions, reports, or statements (including financial) if they are presented by: 1. officers or employees of corporation (whom the director reasonably believes to be reliable and competent 2. lawyers, accountants and others who the director reasonably believes are within the expertise and competence. Reliance on expert is not reasonable when director is on notice that the facts and circumstances indicate that the expert is wrong. 3. a committee of the board.
Standards of Care For Directors
RELIANCE MUST BE REASONABLE No liability if you are relying on information in good faith . DE § 141(e)
However, a good faith reliance that you are acting in the best interests of the corporation does not abdicate duty to be reasonably informed. Special skills- if a director has special skills that go beyond what an ordinary director would have, he must use those skills.
Duty to Monitor DE §102(b)(7)
Statute allows for articles provision to exculpate directors for liability on monetary damages cases. You can sue a director for equitable or injunctive relief. Lack of good faith not coveredIntentional misconduct or a knowing violation of the law.
Exculpation clauses for directors
DE allows protection from acts that are negligent, or grossly negligent. MBCA §2.02(b)(4)
This will not allow a director to escape liability for negligence, gross negligence, or intentional conduct- there is nothing about good faith. **** Intentional *** Lack of good Faith ** Gross Negligence * Negligence
MBCA is better protection for directors.
DUTY OF LOYALTY
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Generally three situations in which a director: 1. Competes with the company 2. Usurping a “corporate opportunity” 3. Interested Director Transactions
When does the duty of loyalty arise?
ALI Principles of Corporate Governance §5.06 Prohibits directors from engaging in competition with the corporation in order to realize a pecuniary gain.
Competing with the corporation
ALI Principles of Corporate Governance §505 ALI §505(b)
ALI §505(a)
Usurping A Corporate Opportunity
ALI §505(c)
Corporate opportunity is defined: 1. An opportunity to engage in business that a director or senior executive becomes aware: a. In connection with a position in the corporation. b. Using corporate information or property. 2. Any opportunity that a senior executive (not director) knows is closely related to a business that the corporation is engaged or expects to engage. A director or senior executive may not take advantage of a corporate opportunity unless: 1. they first offer it to the corporation and make disclosure concerning the conflict of interest 2. The corporate opportunity is rejected by the corporation and; 3. Either a. The rejection was fair to the corporation b. The opportunity was rejected by disinterested directors or senior executives c. The opportunity was rejected by disinterested shareholders. Burden of Proof: A party challenging the taking of a corporate opportunity has the burden except if it is established that notice and rejection were not met, the director or senior executive has the burden of proving that the opportunity was fair to the corporation. Remedy constructive trust. It attempts to put the corporation ina place it should have been had the director not usurped the opportunity.
Interested Director Transactions
ALI §505
Same as above. Good Faith Defective Disclosure- if liability rests on failure to first offer an opportunity to the corporation,
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ALI Approach
§505(e)- allows relief from liability if the failure resulted from good faith belief that the activity did not constitute corporate activity, AND Within a reasonable time after suit is filed, the opportunity is offered to the corporation.
A corporate officer or director may not take a business opportunity for themselves if the corporation is: 1. 2. 3. 4.
Interested Director Transactions
A corporate officer or director may take advantage of a corporate opportunity if:
DE Approach
1. it is presented to the director of officer in his individual, not corporate capacity. 2. The opportunity is not essential to the corporation. 3. the corp. holds no interest or expectancy in the opportunity. 4. the director or officer has not wrongfully used the recourses of the corporation in pursuing or exploiting the opportunity. DE §144
DE §144
Self-Dealing Transactions Under DE Statute
financially able to exploit the opportunity. the opportunity is within the corporation’s line of business has an interest or expectancy in the opportunity. by taking the opportunity, the corporate fiduciary will be compromising his duties to the corp.
There will be an interested transaction when there is a contract or transaction between and corporation and one or more of its director’s or officers that has a financial interest in that corporation. Three choices that allow for conflict of interest: 1. Material facts as to the interest are disclosed or known to the board or committee. All that is needed is a majority of disinterested director approval even though disinterested directors may be less than a quorum. §144 (b) 2. The material facts are disclosed or known to the shareholders entitled to vote, and it is approved in good faith by the vote of the shareholders. 3. The contract or transaction is fair to the corporation at the time it is authorized, approved, or ratified, by the board, committee, or shareholders. The court will always look to fairness. The different standard of fairness depends on whether Δ met §144(a)(1) or §144(a)(2): If met, fairness is considered under the BJR- the burden is on the Π to show unfairness.
If not met, fairness will be assessed under the Entire Fairness Doctrine: Burden is on the defendant
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Self-Dealing Transactions
MBCA §8.60
Must show fair dealing & fair price.
Conflict of interest if a director knows that he or a related person has a financial interest linked to cause a conflict of interest. This includes relatives. DE statute does not include relatives. You have to disclose relationship, interest, and all of the details about the transaction (broader than DE).
Under MBCA §8.61(a)
Safe Harbor- if it is not a conflict situation under (§8.60) you cannot be sued for it if it meets the definition under (b). You cannot be sued if: 1. director approval 2. shareholder approval 3. the transaction is fair.
§8.61(b) Approval by directors- must be a majority of the disinterested directors. A majority of all disinterested directors is the quorum.
§8.62(d) §8.62(c)
Ex: 9 directors, 4 disinterested directors, a quorum would be a majority of the four (under DE this would not be a quorum). If 3 show up and 2 voted, it would not be a quorum and would not pass.
Disclosure to directors prior to vote- director needs to disclose everything if others do not know. If they know, no need to disclose. Shareholder’s Action - must be a majority of disinterested
shareholders entitled to vote for a quorum.
§8.63
Ex: 50K shares; 10K are disinterested. 6K of 10K are preset at the meeting. 4K of 6K vote yes on the deal this is not valid under MBCA. 4K is not a majority of disinterested entitled to vote.
Disclosure to shareholders prior to vote: Director has to make the disclosure with the shareholder vote even if known . This is different than to the board because of confidentiality issues of telling things to the board. Safe Harbor is not available for a shareholder action.
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Shareholder Derivative Suits
Contemporaneous Ownership Requirement: Under both MBCA §7.41(1) and NY §626- the shareholder must have owned stock when claim arose or the shareholder gets stock by operation of law from someone who owned the stock at the time the claim arose. You have to be a shareholder at the beginning of the litigation. MBCA- you have to maintain ownership of the stock throughout the litigation. Not clear under NY if you have to maintain ownership. NY- Security for Expenses: the NY statute makes the Π put money up in a derivative suit so if the corporation loses, it has money to cover expenses. Covers reasonable expenses including attorney’s fees. (NY §627). The biggest requirement for a DS is a w r i t t e n d e m a n d on directors that the directors authorize the corporation to sue. Exception- Shareholder need not make a demand if it would be futile. Different
approaches to futility. Three Approaches:
Must a Shareholder Make a Demand in a Derivative Action?
1. DE Approach- Π must make a demand that there is reasonable doubt that two things are true: a. The directors are disinterested and independent b. The transaction was not a valid exercise of the BJR. o There must be particularized allegations as to why the demand is excused that create reasonable doubt. o If there is reasonable doubt it will be excused. o
Hard for Π to allege board misconduct in DE
A director whose independence is compromised by the influence of an interested party cannot exercise BJR.
2. MBCA Approacho Must make a demand, there is no excuse. o Cannot bring DS for 90 days unless bringing suit will cause irreparable harm to the corporation.
Harm might mean that SOL will run, or that the directors will take all corp’s
money.
3. NY ApproachIf a demand is excused if it would be futile because majority of the board is interested Allege with particularity that: 1. Director failed to fully inform themselves about the transaction. 2. The conduct was so egregious that it is not sound business judgment of the directors. o If a majority of the board is not interested and S/H fail to make a demand, then the demand is gone. o
o
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Making the Decision to Dismiss a Demand
§7.44(a): decision shall be dismissed on motion of the corporation after it is determined by the court that a reasonable inquiry was conducted in good faith. Who makes the decision?§7.44(b) 1. A majority of the independent directors present at a meeting if the independent directors constitute a quorum; OR 2. A committed of two or more independent directors appointed by the majority of independent directors at a meting whether or not such independent directors constitute a quorum. (SLC). - The MBCA rejects that structural bias makes it impossible for the tainted directors to appoint an independent SLC.
Special Litigation Committee
Special Litigation committee- they are going to decide whether to go forward with a suit via an investigation. Structural Bias- the board has bias in selecting the SLC.
What will the court do when the SLC decides not to pursue action? The court has the ability to second guess the selection procedures by the SLC 1. The Δ has the burden to show that they have investigated in good faith.
Judicial Review of Rejected Demand
2. Court looks at procedures, methodologies, chosen by the SLC- completeness, accuracy etc. Differences Between DE & NY Aproach DE- even if the committed passes the procedural inquiry into the investigation, the court may apply its own independent business judgment whether the suit will be dismissed. DE- SLC is not given the protection of the business judgment rule. NY- gives the committee the benefit of the BJR and will not inquire into substantive matters. NY only concerned about the adequacy of the investigation.
Demand on Shareholders
Older statutes require that the Π make demand on shareholders as well as d irectors.
Right to Jury Trial
If suit is for damages- jury trial. If suit is for equity- no jury trial
Court Approval of
Modern statutes do not make this requirement.
MBCA §7.45
Cannot dismiss or settle a derivative suit without court approval. Court can give notice to shareholders that are affectedcourt can S/H get input on proposed settlement.
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Settlement or Dismissal
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Recovery in Derivative Suits
Won If the judgment is won, attorneys will get paid and the rest will come back to the corporation. Lost If the judgment is lost, S/H will have to pay costs of litigation and it is res judicata to vindicate the corporation’s claim a second time. MBCA §8.57
Insurance
D & O Insurance Allows corporations to purchase liability insurance for its directors and officers.
There are three situations when you look at Indemnification. 1. Mandatory indemnification §8.52 The MBCA says that you have to be w h o l l y successful. Some states have provisions that say that you will be indemnified t o t h e extent that you are successful.
MBCA- “On the merits or otherwise” allows you to win on the merits or on a procedural technicality. 2. Prohibitive for the Corp to indemnify §8.51(d) MBCA §8.51(d)- the corporation cannot indemnify a director: 1. in connection with a case by or in the right of the corporation (derivative suit) except for reasonable expenses incurred if you meet 8.51(a).
Indemnity
3. Permissible for the Corp to Indemnify §8.51(a) This is a catchall possibility that allows every other case that is not mandatory or permissible. §8.51(a): You must show that the director incurred the liability if he was acting in good faith or in the best interest of the corporation. In a criminal proceeding, the director had no reason to believe that his conduct was unlawful. o
If you meet the standard of §8.51(a), a director may be indemnified for expenses for counsel fees and litigation fees, but n o t settlement fees or amount. If you fall within §8.51(a) & (d) you do not have a right to indemnification, but you have a right to ask for it. The right to purchase that number of shares of any new issuance of shares that will enable the shareholder to maintain her percentage of ownership.
MBCA §6.30(a)
Preemptive Rights
Shareholders do not have preemptive rights except for to the extent that the articles provide for them. Majority View- if the articles are silent, you do not have preemptive rights.
§6.30(b)(3)
There is no preemptive right if the stock is sold otherwise than for money.
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Ways in which minority stockholders can deal with oppression
Minority shareholders can seek d i s s o l u t i o n on the the basis of oppression (may not be available in every state). 2. Court ordered buy-out. Timing for valuation of a buy-out is when suit is filed. 3. Sue for Breach of Fiduciary Duty 1.
The reason there is judicial review of salaries is that a corporation gets to deduct salaries from its taxes as a reasonable business expense. Dividends are not deductible. Often times, corporations d i s g u i s e d i v i d e n d s a s s a l a r i e s .
Limitations On Salaries
To show self-interested dealing unprotected by BJR: 1. The shareholders object salaries. 2. Indirect Market Test- the company would have been more profitable had there not been excessive salaries paid. Can be shown by Δ’s lack of expertise or part -time work. Evidence that the business is not run very well. When Δ set their own salaries they will have the burden of proof. Conflict of
interest, the BJR goes out the window. The court will order a receiver to oversee the liquidation of assets.
Process of Court Ordered Dissolution
The receiver will make sure that the money goes back to the corporation. - this includes excess salary paid to officers/directors ALWAYS LOOK AT THE STATUTE!!
Not all states allow for dissolution due to oppression. Look to see if the statute allows alternative remedy to dissolution. It may allow buy-out in lieu of dissolution. In some states where the statute does not allow for a buy-out, some states will infer that it is there to prevent dissolution of a corporation.
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Three types of distributions: 1. Dividends (pro rata by share, payable by cash or property). Most close corporations don’t pay dividends. Whether to pay dividends are management decisions decided by the board.
Distributions
2. Repurchase- where the corporation buys back stock from stockholder. It is a payment to the shareholder because they are shareholders. 3. Redemption- set up in the articles. It gives the corporation the right to force the shareholder to sell back the stock to the corporation at a set price.
Dividends are payments to a stockholder because they are a stockholder.
Dividends
The corporation has to declare a right of dividends and whether they are going to use the company’s money for dividends.
1.
MBCA- Modern Approach A distribution is proper so long as the corporation is not insolvent, and the distribution does not render the corporation insolvent. Whether to make a dividend is protected by BJR.
2. Traditional Approach- NY, DE, TX Involves three kinds of accounts or funds that the corporation has to keep track of.
When Can A Corporation Declare A Dividend?
a. Earned Surplus- comes from business activity that does well in the real world. Also called retained earnings. This is earnings(-)losses(-)distributions already paid. CAN BE USED FOR DISTRIBUTION. b. Stated Capital- relates to making money from selling stock. Relates to the par value of the par issuance. Par stock- minimum issuance price If you have a par issuance, the par value (# of shares of issuance (x) par value) of the issuance must go into stated capital. CAN NEVER BE USED FOR DISTRIBUTION- the theory is that this is a cushion to protect creditors. c. Capital Surplus- relates to making money from selling stock This is the excess over par value of the issuance. CAN BE USED FOR DISTRIBUTIONS- some states impose additional requirements such as telling the stockholders that the dividend is coming from capital surplus. o
When Can A Director Be
When you are getting distribution on capital surplus, all you are getting is a return on what you paid for the stock.
Only when there is a showing of bad faith or oppression.
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Held Liable for Making Distributions?
If the Π’s only showing is that the corporation has money and won’t pay dividends, they won’t win because of BJR. Must be bad faith involved. Π has burden of proving bad faith. BJR will cover decision unless there is
proof of illegality, or self dealing. Director may be personally liable for distribution in excess of what was authorized.
Preferred Stock- gets paid first. Common Stock- what is left over after the to be distributed after preferred preference was made.
Different Classes of Stock
Ex: 1o,ooo common stock; 2,000 shares of $2 preferred stock= 4,000. Directors declare a 40,000 dividend. The preferred stock gets paid first 40,000 – 4,000. There is 36 thousand left over for the remaining 10,000 shares of common stock.
Preferred Participating Stock- not only gets paid first, but also gets paid again. Participating means that these shares also get paid along with the common shares in everything that is left over after payment of the preference. Not only do your preferred stock, but you get pro rata with the common stock. Preferred Cumulative- dividend is adding up year to year. All omitted cumulative dividends must be paid before any dividend is paid on common stock.
Stockholder is owed 4 years of a $2 preference. 4 X $2.0o= 8.00 per share. 2000 shares X $8.00= $16,000. 40,o00 of distribution - $16,000= $24,000 for the common stock. They common shareholders are going to get $2.40.
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10-b 5 CASE In a 10(b)(5) case, need to show all of the following: 1. Materiality – an omitted fact or stated fact is material if there is a substantial likelihood that a “reasonable person” would consider it important in making his decision.
Most of the time it is very easy to figure out if something is material BUT in certain situations, we need to apply the Probability-Magnitude balancing test. See Basic, Inc. We only apply this in situations which are very speculative and we are not sure about the outcome yet [potential mergers] Defendant is sometimes protected by the “bespeaks caution doctrine”
2. Reliance – this is really difficult to determine in a public market transaction
Elements of a 10b-5 case
Thus, it is determined by the “Fraud-on-the-market theory,” but only with regard to publicly traded companies. Reliance is presumed.
When there are face-to-face representations, reliance is much easier to prove and fraud-on-the-mkt theory does not apply] – it becomes a jury question
Bespeaks Caution Doctrine (safeharbor) misleading statements are not considered to be material if there is enough cautionary language specific to the misleading statements. And that the statements are forward-looking.
3. Loss Causation – P has the burden of proving that the act (lie) or omission of the defendant caused the loss [caused the P to buy the stock] This is very closely related to Reliance 4. Scienter – ―knowingly ‖ – the statements or omissions must be made in a slimy manner and NOT by accident 5. Particularity - When alleging fraud in the pleadings, must always do so with particularity (this is to avoid frivolous and cookie-cutter complaints) 6. 10(b)(5) requires there to be interstate commerce 10(b)(5) is really a criminal proceeding, thus, the SEC has the power to punish and fine D for violations (prosecuted criminally) BUT Cts have inferred that there is a private right of action for 10(b)(5) violations as well. To be a Plaintiff under 10(b)(5), the P must be: a. seeking damages (NOT equitable relief) b. Birnbaum rule – must be a buyer OR a seller of securities 1. 10(b)(5) applies to both Public and ―Close Corp’s.” 2. applies NOT just to re-purchases but issuances as well
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3. With respect to INSIDERS, 10(b)(5) imposes a duty upon them:
they either DISCLOSE the information OR ABSTAIN from buying it for personal benefit.
The part of 10(b)(5) that is violated as a result of insider information, are provisions (1) and (3), which talk about fraud, b/c we just expand the meaning of fraud.
How does 10b5 relate to insider trading?
We learn from this that 10(b)(5) is much BROADER then common law fraud, (b/c insider trading is NOT common law fraud b/c don’t have to disclose and under special facts doctrine only have to disclose to S/H’s, and therefore it is limited), rather 10(b)(5) is applying the federal meaning of fraud, which is much broader then common law fraud. The federal meaning of fraud adopts the notion of the special facts doctrine, but e x p a n d s i t and applies it even to p e o p l e w h o a r e NO T m e r e l y s h a r e h o l d e r s , but applies it to anyone that buys or sells securities. 10b-5 makes a requirement to disclose to fix the misstatement that has been made.
INSIDER TRADING Approach to Common Law Insider Trading 1. There is no duty to disclose. 2. However, there will be liability if you trade on special facts. a. Kansas Rule- if you have information you hold it as a trustee, it is like property held in trust for the stockholders.
Insider Trading
b. Silence is actionable only if it is a face-to face transaction and you got the information within your capacity as a director of officer. c. Special Facts Doctrine- if the insider seeks out the shareholder for the purpose of buying shares without making disclosure of material facts with in his knowledge and not within the reach of the shareholder. A tippee- is not himself an insider, but to whom an insider consciously gives inside information.
Tipping
Liability of Tippee Under 10b-5
Temporary Insider- people who have a special confidential relationship to conduct the business of the enterprise and are given access to information soley for corporate purposes. What do you have to do to be liable as a tippee under 10(b)-5? 1. There must be a tipper . Because the tippee’s duty is derivative of the insider’s duty. The tippee’s duty is inherited from the tipper. 2. The tippee must trade on the tip. Under 10(b)-5 there must involve a purchase or sale of a security. 3. That the tippee knew or should have known that the information was from a breach by the tipper. What do you have to show to be a tipper?
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You have to have relationship of trust or confidence (Chirella criteria). Tipper must gain a personal benefit from tip. o This is formed when tipper gets $-money, reputational benefit, or makes a gift to a family member or friend. o
Objective Inquiry- This requires the courts to focus on objective criteria, they want to know whether the insider receives a direct or indirect personal benefit from the disclosure, such as a pecuniary gain or reputational benefit that will translate into future earnings.
Only applies to large corporations- registered under §12 of the ’34 Act. Who is the Plaintiff? The Corp is the plaintiff. This is a cause of action that belongs to the corporation. If the Corp does not assert it, it can be asserted through a derivative suit. Who can be held liable? Only officers, directors, and individuals who own m o r e than 10% of shares. What must you do? You have to buy and sell your own corporation’s stock in less than 6 months.
§16(b) of the ’34 Act
Remedy If violate 16(b), must pay to the Corp the profit earned – usually a derivative suit Differences between 16(b) and 10(b)-5
16(b) is strict liability. The point is that it applies to transactions in which Congress thought that there would be a high possibility of fraud. You do not have to show scienter, it is strict liability. This only applies to reporting corporations- these are big publicly traded corporations (registered under 34 Act). Only addresses insider trading with respect to equity trading. 10(b)-5 applied to any kind of trading. 16(b) is very mechanical
Look at the level of ownership immediately before the purchase Duty to reasonably investigate the person you are selling the stock to. This is in response to corporate looting. The duty to investigate runs to both the Corporation and Minority Stockholders
Duties of Controlling stockholders when selling their stock
Damages arise out of tort liability:
Value of the corporation’s loss of assets Loss of Going Concern Value Creditor’s claims against the business
Direct Suit or Derivative Suit? If Derivative- the corporation is going to get the benefit of the recovery and so is the looter because of their ownership interest. This is a problem If Direct- the shareholders that brought the suit are only going to get damages that correspond to their personal loss. You can be a controlling stockholder even though you don’t own a m a j o r i t y of
the stock.
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To Whom Can A Shareholder Sell His Shares In A Close Corporation?
Equal Access Rule- in ―close Corp,‖ the minority S/H’s must be given the same equal opportunity to sell their shares as the majority S/H’s are given. (Donahue) Close corporations are like partnerships. Partners owe each other the utmost duty of good faith and loyalty. It is part of the director’s fiduciary duty to give minorities equal access to opportunities. The court in Donahue was worried about oppression of minority S/H. In Partnership- you can always dissociate. It might be wrongful, but you can walk. In Corporation- it is difficult to get Corporate dissolution. You cannot just walk at will. MA court say that because you cannot just walk at will, minority S/H in Close Corp need this type of protection from the court. W i l k e s Rule- the majority S/H can discriminate against the minority S/H if there is
a legitimate business reason for doing so. If there is a LBR, the Π can proffer evidence that proves that the Corp can do the same thing with out harming minority. A contract that requires the corporation or majority shareholder of the corporation is obligated to purchase shares in specified situations, at a specified price.
Buy-Sell Agreements
****Watch out for 10(b)-5 situations where there is not disclosure about something that will increase the price of the stock when the shareholder sells it back (like a merger). ***** OR **** Breach of fiduciary duty for failure to disclose material information
FUNDAMENTAL CORPORATE CHANGES
Types of FCCs
For a fundamental corporate change, you must have shareholder approval. Merger Amendments to articles of incorporation Sale of assets Three Approaches:
Shareholder Approval for FCC
1. Traditional: 2/3 of the shares entitled to vote. This is a tough standard. (TX) Ex: If you had 12,000 shares—8,000 would have to show up to vote. NEW YORK – if Corp is formed on or before 2/22/99, then need 2/3. BUT if Corp is formed after 2/22/99, then only need majority 2. Other states: majority of the shares entitled to vote. Ex: If you have 12,000 shares—6,001 would have to show up to vote. 3. MBCA §11.04(e): a majority of the shares present at the meeting. This is a more liberal approach. Three ways to have dissolution:
Dissolution of a Corporation
1. Administrative Dissolution- Secretary of State revokes charter for abuse of corporate form. This will happen for things that a corporation fails to do. 2. Involuntary Dissolution- someone goes to court to petition for the dissolution of
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the corporation because it qualifies for judicial dissolution. Can be based on o p p r e s s i o n of minority stockholders You have to be careful you must look at the statute to see if the court has power to dissolve because of illegal oppressive or fraudulent acts by the directors. If so, court may have the power to order a buy out of the corporation rather than dissolution. 3. Voluntary Dissolution- MBCA §14.02 The board of directors can propose it and approve it. Then you need stockholder approval. Every stockholder gets notice of the vote. Even non-voting stockholders get notice of the vote. §14.02(e) You need shareholder approval at a meeting at which a quorum consists of a majority is entitled to vote. Who has to approve? It depends on the jurisdiction you are in. In the MBCA all you need is shareholder approval. So you look at the number of shares that actually voted. Once you have a quorum, you need a majority of those that showed up. §14.03(e) all you need is a quorum, and all you need is a majority of those that voted on the deal.
Any merger must be approved by the boards of both corporations.
Merger
The s u r v i v i n g en t i t y succeeds to ALL the ―rights‖ AND ―liabilities‖ of the disappearing Corp. The S/H’s of the disappearing Corp get whatever the merger plan gives them (usually stock or cash buy-out).
Stockholder protection during a merger
Things a S/H can do to protect themselves. 1. Sue the directors who approved the merger alleging breach of common law or statutory duty of care. 2. Vote against the merger. 3. Assert dissenting shareholder’s right of appraisal MBCA § 11.04(e)&(g):
Voting against the merger
11.04(e): The disappearing Corp’s shareholders always must vote (3 different approaches) (b/c it is a fundamental Corp change) 11.04(g): BUT if you are a shareholder of the surviving Corp, and as a result of the merger your life as a shareholder does not change , then the shareholder’s do NOT get to vote. (Ex: same # of shares, identical preferences . . .) Must meet all 4 of the requirements in the statute
Dissenting Shareholder’s Right To Appraisal For
MBCA §13.02(b)(1); DE §262(b)(1) This only applies to close Corp’s or Corp’s with less than 2000 S/H’s Does not apply to publicly traded Corp’s , the value of the stock is well established by the market.
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Merger Price of Stock
DE (§262)- no right of appraisal. But makes an exception for cash mergers. MBCA says this also does not apply to any Corp with more than 2000 S/H’s and
the stock is worth $20 mill.- [MBCA 13.02(b)(1)]
this is the S/H’s right to force the Corp to buy him out at “fair value.”
This is NOT fair market value b/c there is No market
This right applies to Mergers (cash and stock mergers) and the Sale of the Assets (it can, but never really is applied to amendments of the Articles) Requirements There are 3 requirements that a l l m u s t b e s a t i s f i ed for the S/H to get this right: 1. S/H must make a written demand to the Corp before the deal goes through stating that you are against the deal and you want to be bought out if the deal goes through 2. The S/H must abstain or vote against the deal 3. After the vote, S/H must make a formal written demand against the Corp, saying that you have warned them and now you are making the demand. This must be made w/in 20 days of the deal
General Rule = can only make the demand if you are permitted to vote on the deal 1. Exception: Short Form Merger – this is 90% owned subsidiary is being merged into a parent. In this case, the S/H do NOT have to vote b/c obviously they will lose, yet, they still have this right of appraisal.
Can the court look at alleged breach of fiduciary duty in the context of an appraisal proceeding?
DE: 1. Π shows that there was a conflict of interest. The majority shareholder is sticking it to the minority. 2. The burden then shifts to the Δ to show Entire Fairness (fair dealing, fair price). Rejects Legitimate Business Test
MA: 1. The Δ must show that the deal has a legitimate business purpose (from Wilkes). 2. Even if LBP is shown, they Δ still has the burden of entire fairness. Entire fairness is viewed from totality of the circumstances. MBCA 1. The dissenting shareholder’s right of appraisal is exclusive. S/H cannot challenge corporate action as breach of fiduciary duty unless it is unlawful or fraudulent.
Setting the appraisal value
Differences between
Set the appraisal value by any generally accepted standard. If there is a conflict of interest in setting appraisal value, the BJR goes out the window, and the standard is assed by the court with the entire fairness test: 3. Δ has the burden of showing fair dealing and f a i r p r i c e . 1. Tax consequences (less favorale than a merger) there is taxation on the asset sale at the corporate level, and there is taxation to the shareholders when the corporation dissolves and distributes cash sale proceeds.
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merger and sale of assets
2. The notion of successor liability (better than merger). Generally, there is no successor liability. The purchaser can normally specify which liabilities that it does not specifically assume. Note that in a sale of assets for stock rather than cash, the purchaser will take the targets liabilities whether they want to or not. 3. Determining who has voting power Sale of Assets will have to be approved by at least a majority of the stockholders because it is a fundamental corporate change Merger DE: the shareholders of both corporations get to vote because it is a fundamental corporate change for both.
MBCA- S/H only gets to vote if they own shares in disappearing corporation. Most states- You have to get the boards of both companies to approve it, and only the selling company’s S/Hs need to vote.
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When a company sells all or substantially all of it’s assets , and the assets are liquidated into cash. There is no successor liability. Four Exceptions to non-liability for Sale of Assets 1. The purchaser expressly or impliedly agrees to such assumption 2. The transaction amounts to a consolidation or merger (de facto merger doctrine). 3. The purchasing corporation is merely a continuation of the selling corporation (mere continuation doctrine). 4. The transaction is entered into fraudulently to escape liability for debts. Inadequate Consideration: if the price of the sale was less than the value of consideration of the assets, then there is successor liability.
Sale of Assets
Reason is Predictability: The reason we have the rule about sufficient consideration is that we have to be able to predict the liabilities of the parties involved in the sale of assets. In addition, it would be unfair to creditors to make them go after the money from the sale when the value was not sufficient.
De Facto Merger Doctrine- where the purpose and economic reality of the sale of assets is equivalent to those of a merger, the court will treat it as a merger. Includes inadequate consideration for the sale. Mere Continuation Doctrine- the purchaser continued the same enterprise after the sale. Includes both inadequate consideration for assets, and that one or more persons were directors, officers, or stockholders of both corporations.
Note: Mere continuation & de facto merger doctrines are not applicable when there was sufficient consideration for the sale of assets.
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LIMITED PARTNERSHIPS Limited Partnerships have: 1. Flow Through Taxation- no entity liability for income tax 2. Limited Partners are not liable for the debts of the LP 3. LP is an entity. An LP has limited partners and at least one general partner General Partner - jointly & severally liable for LPs obligations. Limited Partner - no liability. How do you avoid personal liability in an LP? Have a corporation be the general partner.
Basics of an LP
What do you give up to have an LP? Traditionally, limited partners could not engage in control of the business. As soon as the limited partner engages in control of the LP with the GP, the LP is liable. o However, see safe harbor in MBCA §303(b). Lists things that do not constitute control. How do you form an LP? There must be a public filing with the state (in GP you don’t have to file anything) that includes the following: 1. Name of the LP 2. Name & Address of Registered Agent DE 3. Name & Address of each general partner. ULPA §201
Requires the same things as DE and requires: 1. The address of the office 2. Any other matters the general partners determine to include.
Who Decides What in an LP?
The general partner decides. Limited partners have no rights unless the limited partnership agreement allows them to vote.
How do you hold a Limited Partner Liable?
A Limited partner will be liable if: (§303(a)). 1. LP participates in control of the business; AND 2. The 3P who transacted with the limited partner reasonably believed limited partner was a general partner based on the limited partner’s conduct .
(Safe Harbor Provision-RULPA §303)
SAFE HARBOR (§303(b)) A limited partner DOES NOT participate in control by doing one or more of the following:
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1. Being a contractor, agent, or employee; officer, director, or shareholder of a LP that is a corporation. 2. Consulting and advising a general partnership 3. Acting as a surety for the LP or guaranteeing or assuming obligations of the partnerships 4. Taking action to pursue a derivative action 5. Requesting or attending a meeting of partners 6. Proposing, approving, or disapproving by voting on: a. the dissolution, and winding up of LP b. the sale of assets c. incurring indebtedness d. changing the nature of the business e. admission or removal of a limited partner or limited partner f. transaction involving a potential conflict of interest between general partners and the limited partners. g. Amendment to the partnership agreement or certificate of limited partnership. h. Winding up. If the GP is engaged self dealing and breaching fiduciary duty, you can have a derivative suit against the LP.
Derivative Suits in An LP
Contracting around Fiduciary Duties in an LP
This resembles the role of the limited partner like those of a shareholder in a corporation. Thus, right of derivative suit for S/H. This mirrors trust law. The GP has legal title to the money or property of the LP. There is a duty not to use control over the partnership’s property to the advantage of the corporate director (GP). The directors of a corporation for which a corporation serves as a general partner to an LP owe a duty to both the corporation and the LP. DE: Traditional fiduciary duties among and between partners are defaults that may be modified by LP agreements. This is the reason many chose the LP form in DE. DE§6.11- you can compete, but cannot usurp corporate opportunity. Considerations for usurpation in DE: a. the opportunity is essential to the corporation is one in which it has an interest or expectancy. b. the corporation is financially able to take advantage of the opportunity c. the party charged with taking the opportunity did so in an official rather than individual capacity.
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RULPA §504 DistributionDistribtuion is done pursuant to agreement. However, if there is no agreement, distribution is done in accordance with the value of your contributions. RULPA §503- Profits and Losses Take profits and losses pursuant to agreement. But if no agreement, profits and losses are pursuant to contribution by each partner.
How Does An LP Make Money?
RULPA §702- Assignment of Limited Pship Interest Partnership interest is assignable of whole or in part. It does not dissolve partnership Entitle the assignee to become or to exercise any rights of a partner (different from regular partnerships under RUPA §502- which allows transfer only of distribution and profits, not management).An assignment entitles the assignee to receive to the extent assigned, only the distribution to which the assignor would be entitled. Transfer of Ownership Interest to Limited Partnership Under RUPA you have a right to walk, and that triggered a buy-out. RULPA § 602- a general partner may withdrawl at any time (by giving written notice to other LPs and GP), but if it violates the partnership agreement, the LP may recover for damages. RULPA §603- a limited partner may withdrawl upon not less than 6 months prior written notice to each general partner. The GENERAL PARTNER can withdrawl at will away from LP, but the LIMITED PARTNER must give 6 months notice. Why?
The GP is the manager. It usually is not a major investor, not a source of capital, but a source of expertise. The LP is a source of capital. RULPA §602 & §603 recognizes that the LPs are the source of the capital, and it is harder to get capital, than it is to get a GP. GPs are more readily available than LPs.
RULPA §801 Dissolution
Dissolution of A Limited Partnership
A limited partnership is dissolved and affairs shall be wound up when the first of these happens: 1. a specified time 2. happening of events specified in the agreement 3. written consent of all the partners 4. judicial decree of dissolution 5. the withdrawal of the GP unless, a. at the time he walks there is at least one other GP and the written agreement of the LP allows the limited partnership to continue with that other GP. i. Must have multiple GPs ii. Must have provision in agreement about multiple GP taking over. Safe Harbor §801(A)(4) A Limited Partner will not dissolve if all of the partners agree
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LIMITED LIABILITY CORPORATIONS §103(a): All members of the LLC may enter in to an operating agreement, it does not have to be in writing, to regulate the affairs of the company and conduct of its business. §103(b): Everything here is a default provision. There is great contractual freedom.
Operating Agreement ULLCA §103
§103(b): The operating agreement cannot: 1. May not unreasonably restrict a right to information. 2. Cannot eliminate the duty of loyalty in §409(b)- However, a. Can identify specific types of activities that do not violate the duty of loyalty. Ex Ante b. Can ratify by a specified number of percentage of members after full disclosure. Ex Post c. Can contract around the duty of loyalty ex ante or ex post. 3. Cannot unreasonably reduce the duty of care 4. Eliminate the obligation of good faith and fair dealing, but the operating agreement may determine the standards of performance.
In all states, you must file a document with the secretary of state. DE- file a certificate of formation which includes: 1. name of the LLC 2. address of registered office. ULLCA §203- Articles of organization:(cannot use DE certificate in a state that has adopted ULLCA).
Requirements for creation of an LLC
Unlike DE, ULLCA articles or organization must include: 1. Name of Company 2. Address of initial designated office 3. The name and street address of initial agent 4. The name and street address of each organizer 5. Whether the company is to be a term, and if so, the term specified. 6. Whether the company is to member-managed, or manager-managed, and if so the name and address of each manager 7. Whether one or more of the members are to be liable for debts and obligations. a. ULLCA 303(c)- can provide for liability of individual members What words must be included in the document?
DE 18-102: shall include ―Limited Liability Company or LLC, or L.L.C.‖ ULLCA §105: shall include ―limited liability company, or limited company, or L.L.C. LLC or L.C. or LC
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Liability of Members and Managers
ULLCA §303(a)- debts, obligations, and liabilities are those of the company, not the individuals. A member or manager is not personally liable regardless of whether it is member managed, or manager managed. This is like the corporation, not LP. The entity is going to be liable. DE §18-402: If there is no operating agreement, all of the members have management rights in proportion to their ownership interest.
MemberManaged
ULLCA §404(a): each member has equal rights in the management and conduct of the business. The rights are in prortion to how many members (not ownership like in DE). Any matter relating to the business may be decided by a majority of the members. (Not a majority of those that show up) ULLCA §301(a): each member is an agent of the LLC and actions of a member binds the company unless the member had no authority and the person who the member is dealing with had notice of the lack of authority §404(b): each manager has equal rights in the management of the business. If more than one manager, business decisions are made by majority of managers.
ManagerManaged
a manager holds office upon designation, appointment, election, removal or replaced by vote, approval by all of the members.
ULLCA §301(b): the manager is the agent of the LLC, and members are not charged with agency authority to bind the LLC.
In KS, you can waive fiduciary duties all together ( Lynch). Member-Managed
Fiduciary Duties in LLC
§409(b) duty of loyalty runs to the entity and to other members limited to the following: 1. To account for property, profit, or benefit derived by the member in the conduct or winding up of the company’s business or derived from use of the company’s property- including appropriating of company’s opportunity. 2. Cannot go into competition with the company, and cannot have interested deals that adverse to the company. 3. Cannot compete in the conduct of the business. §409(c): in the conduct of winding up, the member is cannot engage in grossly negligent or reckless conduct, intentional misconduct, or kn owing violation of the law.
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§409(d): Member shall discharge duties to member-managed business consistent with the obligation of good faith and fair dealing. §103(b): the operating agreement may not eliminate the duty of loyalty, but you can identify specific types of conduct that do not limit the duty of loyalty or care so long as it is not manifestly unreasonable. Cannot unreasonably reduce the duty of care Manager Managed §409(h) A member, who is not a manager owes no duties to the company. A manager is held to the same standards of conduct for members in a membermanaged company (above).
Distributions in an LLC
ULLCA §405- distributions are to be equal among the members. DE §18-503 & 504- distributions are determined by contributions of the members into the firm. DE §18-702- an assignee has no right to participate in the management of the business and affairs of LLC except as provide in a LLC agreement.
Selling an Interest in an LLC
ULLCA §§502, 503- can transfer distributional interest. This is only a financial interest. It does not entitle the transferee to exercise the rights of a member.
§503(a)- operating agreement can allow transfer of member status. However, if the agreement does not provide for it, you can transfer with consent of all the members.
What happens under ULLCA? o
ULLCA provides for dissociation, and allows LLC’s purchase of the dissociating member’s distributional interest at ―Fair Vlaue‖ unless the
operating agreement provides otherwise.
Disassociation in an LLC
ULLCA §601: Events Causing Dissociation: o Walking o An event occurring in the operating agreement o Transfer of all of a member’s distributional interest o The member’s expulsion pursuant to agreement o Unanimous vote of other member o Member’s death ULLCA §602: There is the Power to dissociate but it may be wrongful.
