OD Outline (UBE)

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Chapter 1 – Agency..................................................1 1. Who is an Agent?.....................................................1 2. Agency Power to Bind - Liability of Principals to 3rd Parties in Contract................................................................2 A. The Agent’s Authority.................................................................................................................................. 2 B. Ratification ................................................................................................................................................. 4 C. Estoppel ...................................................................................................................................................... 4 3. Liability of Principal to 3rd parties in Tort .......................5 A. Servant versus Independent Contractor..................................................................................................5 B. Tort Liability and Apparent Agency........................................................................................................... 7 C. Scope of Employment................................................................................................................................. 7 4. Fiduciary Obligation of Agents.......................................8 A. Duties During Agency................................................................................................................................. 8 B. Duties During and After Termination of Agency: “Grabbing and Leaving”..........................................9 Chapter 2 - Partnerships...........................................10 1. What is a Partnership? And Who are the Partners?....................10 A. Partners Compared with Employees...................................................................................................... 12 B. Partners Compared with Lenders........................................................................................................... 13 C. Partnership By Estoppel .......................................................................................................................... 13 2. The Fiduciary Obligations of Partners ..............................14 A. Introduction.............................................................................................................................................. 14 B. Grabbing and Leaving: Duty of Good Faith and Fair Dealing.............................................................15 3. The Rights of Partners in Management................................15 4. Partnership Dissolution - The Right to Dissolve.....................17 B. The Consequences of Dissolution...........................................................................................................17 C. The Sharing of Losses............................................................................................................................... 18 D. Buyout Agreements.................................................................................................................................. 18 5. Limited Partnerships................................................18 Chapter 3 – The Nature of the Corporation..........................19 1. Promoters and the Corporate Entity..................................20 2. Peircing the Corporate Veil.........................................21 3. Business Judgment Rule and Purposes of the Corp.....................22 Chapter 4 – The Limited Liability Company..........................23 1. Formation ..........................................................24 2. The Operating Agreement (Joint Venture).............................25 3. Piercing the “LLC” Veil.............................................25 Chapter 5 – Duties of Officers, Directors, and Other Insiders......25 1. Duty of Care - The Obligations of Control...........................26 2. Duty of Loyalty and Good Faith......................................27 A. Directors and Managers.......................................................................................................................... 27 B. Dominant Shareholders........................................................................................................................... 27 Securities and M&A’s...............................................29

Transcript of OD Outline (UBE)

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Chapter 1 – Agency......................................................................................................................................... 11. Who is an Agent?...........................................................................................................................................................................12. Agency Power to Bind - Liability of Principals to 3rd Parties in Contract...........................................................2A. The Agent’s Authority....................................................................................................................................................................... 2B. Ratification ........................................................................................................................................................................................... 4C. Estoppel .................................................................................................................................................................................................. 43. Liability of Principal to 3rd parties in Tort .......................................................................................................................5A. Servant versus Independent Contractor................................................................................................................................... 5B. Tort Liability and Apparent Agency........................................................................................................................................... 7C. Scope of Employment........................................................................................................................................................................ 74. Fiduciary Obligation of Agents............................................................................................................................................... 8A. Duties During Agency....................................................................................................................................................................... 8B. Duties During and After Termination of Agency: “Grabbing and Leaving”...............................................................9

Chapter 2 - Partnerships............................................................................................................................ 101. What is a Partnership? And Who are the Partners?....................................................................................................10A. Partners Compared with Employees........................................................................................................................................ 12B. Partners Compared with Lenders............................................................................................................................................. 13C. Partnership By Estoppel ............................................................................................................................................................... 132. The Fiduciary Obligations of Partners .............................................................................................................................14A. Introduction....................................................................................................................................................................................... 14B. Grabbing and Leaving: Duty of Good Faith and Fair Dealing.......................................................................................153. The Rights of Partners in Management............................................................................................................................154. Partnership Dissolution - The Right to Dissolve...........................................................................................................17B. The Consequences of Dissolution............................................................................................................................................... 17C. The Sharing of Losses..................................................................................................................................................................... 18D. Buyout Agreements......................................................................................................................................................................... 185. Limited Partnerships................................................................................................................................................................18

Chapter 3 – The Nature of the Corporation.......................................................................................... 191. Promoters and the Corporate Entity.................................................................................................................................202. Peircing the Corporate Veil....................................................................................................................................................213. Business Judgment Rule and Purposes of the Corp....................................................................................................22

Chapter 4 – The Limited Liability Company........................................................................................231. Formation ..................................................................................................................................................................................... 242. The Operating Agreement (Joint Venture)......................................................................................................................253. Piercing the “LLC” Veil............................................................................................................................................................. 25

Chapter 5 – Duties of Officers, Directors, and Other Insiders........................................................251. Duty of Care - The Obligations of Control........................................................................................................................262. Duty of Loyalty and Good Faith............................................................................................................................................27A. Directors and Managers................................................................................................................................................................ 27B. Dominant Shareholders................................................................................................................................................................ 27

Securities and M&A’s................................................................................................................................... 291. Disclosure and Fairness.......................................................................................................................................................... 29A. Definition of a Security.................................................................................................................................................................. 29B. Rule 10b-5........................................................................................................................................................................................... 30

Chapter 7 – Mergers, Acquisitions, and Takeovers............................................................................311. Mergers and Acquisitions.......................................................................................................................................................31A. The De Facto Merger Doctrine................................................................................................................................................... 32

Business Structures..................................................................................................................................... 32

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Article Cases:................................................................................................................................................. 36

Chapter 1 – Agency1. Who is an Agent?Gorton v. Doty – Permission to drive one’s vehicle creates an agency relationship. P hurt in car accident after D loaned vehicle to 3rd party to transport to fb game.

i. An Pal-agency relationship arises when one is authorized to “manage some affair for another.”: 1. Manifestation of consent of principal to agent, and agent to principal2. Act on behalf of second party3. Control by principal over agent.

a. Control only over the goal, not the means of accomplishing it.ii. How you describe it makes the diff on whether or not it’s agency:

1. Gave permission – this is a loan, not agency2. Directed - telling him what to do – this is agency.

iii. May rebut w/ evidence that driver acted w/o the owner’s express or implied permissioniv. Agency has 3 forms: Pal-agent, master-servant, and employer-employee or independent

contractor.1. Bc no compensation for D, cannot be master-servant or employer-employee....

v. It is not essential that there be a contract between the principle and agent or that the agent promise to act as such, nor is it essential to the relationship of principle and agent that they, or either, receive compensation.

vi. Dissent : agency requires a specific undertaking, and loaning was merely a kind gesture. Garst was a gratuitous bailee, not D’s agent.

Jenson Farm v. Cargill – A creditor who controls its debtor’s business operations is liable for the debtor’s debts. P’s contracted w/ Warren for grain, which was financed/controlled by D

vii. “A creditor that assumes control of its debtor’s business may become liable as principal for the debtor’s acts in connection w/ the business.”

viii.Indications of D’s Control: consistent recommendations, rights of 1st refusal, power to inspect and audit, prohibition of mortgages, stock purchases, or dividend declarations.

ix. Nearly all grain was sold to D, indicating that they weren’t separate enterprises.x. Control over sales and purchases isn’t sufficient; De facto control over management is

determinative.xi. An agreement may result in the creation of an agency even though parties

didn’t call it an agency and did not intend the legal consequences of the relation to follow.1. Difference for a bank is that the lender’s reason for financing is for the interest received. In

Cargill, the reason for the financing was to establish a source of market grain for its business & took control of the operation for this purpose.

2. If you’re lending money to a borrower, you would probably take the steps Cargill did to make sure operating properly. Any of the measures Cargill took would be appropriate, but the problem in Cargill is that there is an extraordinary amount of control – too many of these things put together.

Restatement of the Law (Third) AgencyThree Types of Authority:1. Actual – Express or Implied (to do what is necessary to accomplish goal; or to reasonably interpret)2. Apparent – (1) “Holding Out” – Pal is holding out relationship to some 3rd party; (2) Reasonable Belief – 3rd party has reasonable belief based on conduct (agent in normal course of biz)3. Inherent (to prevent inequitable results) –RS2 § 8A (not actual, apparent, or estoppel)

**Apparent Authority Versus Apparent Agency: The key difference between these theories, apart from one obviously being authority and the other agency, is that a finding of apparent agency will in no way bind the principal--it is only a requisite step to finding authority when actual agency does not exist. The fact that apparent

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agency, and hence apparent authority along with it, is not found, does not mean that if actual agency existed apparent authority could not be found. Though a job title alone is almost never enough to lead to apparent authority, the mere existence of actual agency, by virtue of employment, is a substantial factor supporting the reasonableness of the third party's reliance--possibly leading to a finding of apparent authority.

2. Agency Power to Bind - Liability of Principals to 3rd Parties in ContractA. The Agent’s AuthorityDistinguishing Actual, Apparent, and Implied Authority: Look at the knowledge of the parties involved:

If an agent knows he has a Pal’s authority, actual authority exists. If actual authority does not exist, but a 3rd party reasonably believes from the Pal’s actions that authority

exists, apparent authority is created. Implied authority is actual authority that the Pal never formally conferred, but that can be inferred

based on the authority granted and past conduct btw the Pal and the agent.

*If the 3rd party knows the authority does not in fact exist, any inference of authority is destroyed.Implied AuthorityMill Street Church v. Hogan – Continuous past authorized acts sufficiently confer Implied Authority on an agent. P was injured after he was hired by his brother, who lacked actual authority to hire, to paint the church.

i. Implied authority is actual authority that the P intended the agent to possess and includes such powers as are practically necessary to carry out the delegated duties.

ii. To establish implied authority: the A must establish through circumstantial evidence, including the parties’ acts and conduct and especially the continuous past conduct, that the A reasonably believed the P wished him to act in a certain manner bc he had been similarly authorized in the past.

iii. Also, church ratified that P was an employee when they paid him for his time. a. past conduct - Bill had been allowed to hire Sam for previous work. b. necessary to implement the express authority - in order to finish the work, Bill had to hire a helper. c. agent reasonably believed he had the authority - practice in the past; Bill never told otherwise;

Church even paid Sam for hours worked.Apparent AuthorityDweck v. Nasser – Settlement agreement was binding when signed by Pal’s primary attorney, not attorney on record. P settled a dispute w/ D’s long-time regular attorney (shibboleth) w/o D’s approval.

iv. Actual authority – expressly granted either orally or in writing, D said to “do what you want.”v. Implied authority – means actual authority either (1) to do what is necessary, proper, and usual to

accomplish or perform an agent’s express responsibilities or (2) to act in a manner in which an A believes the pal wishes the A to act based on the A’s reasonable interpretation of the Pal’s manifestation in light of the pal’s objectives and other facts known to the A.”may be proved by acquiescence (assent) of the pal w/ knowledge of A’s acts, shown by long course of dealing that assent may be assumed.

vi. Apparent authority – A Pal is bound by an A’s apparent authority which he knowingly permits the A to assume of which he holds the agent out as possessing - shibboleth had all three authorities because of past dealings and D’s manifestations.

Apparent Authority370 Leasing v. Ampex – Absent contrary knowledge, a salesperson has apparent authority to bind his p to sell its products. P executed a document provided by D’s sales rep for the purchase of computer equipment, but D never executed the document. D argued it was merely an offer to purcahse that D didn't accept

vii. “An Agent has apparent authority sufficient to bind the P when the P’s acts would lead a reasonably prudent person to suppose that the A had the authority he purports to exercise.”

3. This was despite that the rep knew that “only managers could sign,” bc, absent knowledge on the part of 3rd parties to the contrary, an agent has the apparent authority to do those things which are usual and proper to the conduct of the biz which he is employed to conduct.

viii.Agents representations can’t create apparent authority, however, the agents pal informed P that all communication w/ D would go through D’s agent, which was sufficient, so there was “acceptance”

xii. D failed to “expressly limit” Agents authority - Limits on authority must be disclosed to the 3rd party.

ix. Apparent authority exists when a 3rd party has no reason to believe actual authority does not exist and the authority is exercised in the furtherance of the usual/proper business duties A was employed to perform.

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Inherent Agency Power – authority that comes from the role/status that comes w/ being an agent. The agent (in the role/status) ordinarily possess certain powers.Watteau v. Fenwick – Undisclosed Principal (tavern owner) is liable for his agent’s debts owed to an unknowing cigar vendor. Humble operated D’s Tavern and purchased goods from P, despite D’s express denial!

x. When a Pal is undisclosed to 3rd parties, the actions taken by an agent in furtherance of the P’s usual and ordinary business binds the Pal, regardless of whether the A has actual authority.

xi. No apparent authority where pal is undisclosed and P was unaware that person he was dealing was an A.xii. If 3rd party knows he’s dealing w/ an A, the A may bind the Pal only if he acts w/ actual authority or the

Pal otherwise holds the agent out as having authority. See RS (2 nd ) §194/195 .xiii.§ 6.03 Agent for Undisclosed Pal. When an agent acting w/ actual authority makes a K on behalf of an

undisclosed Pal, (1) unless excluded by the K, the Pal is a party to the K; (2) the agent and the 4d party are parties to the K; and (3) the Pal, if a party to the K, and the 3rd party have the same rights, liabilities, and defenses against each other as if the pal made the K personally.

xiv. Rest (2nd) Agency § 194 - an undisclosed principle is liable for acts of an agent done on his account, if usual or necessary in such transactions, although forbidden by the principle.

xv. Rest (2nd) Agency § 195 - an undisclosed principal who entrusts an agent with the management of his business is subject to liability to third person with whom the agent enters into transactions usual in such business and on the principal’s account, although contrary to the directions of the principal.

B. Ratification Boticello v. Stefanovicz – Receipt of rent under a lease w/ an option does not constitute ratification of the lease . P agreed w/ D to lease property that he owned as T-I-C w/ his wife, and lease contained option to purchase.

i. Ratification requires affirmance by a person w/ full knowledge of the material terms of a prior act which did not bind him but which was done or professedly done on his account.

ii. Neither marital status nor joint property ownership (TIC) alone establish agency. No agency here.iii. No agency, bc husband never signed an documents as wife’s agent before... so issue is ratification?iv. Evidence only showed wife knew she was getting rent, not about the material option to buy. Husband

never said he was acting on his wife’s behalf. Husband may lose his own interest in SP damages.v. Rule – Pal must investigate further if Pal has knowledge of facts that would’ve led a reasonable person

to investigate further.

C. Estoppel Hoddeson v. Koos Bros – Proprietor is estopped from claiming lack of authority if reasonable diligence could have prevented the actions. P paid money to buy furniture to an imposter salesperson in Koos’ store.

i. If D by failing to act enables one who is not his A to act conspicuously as such, estoppel prevents the business from defensively availing himself of the imposter’s lack of authority in order to escape liability for the customer’s consequential loss.

ii. No apparent authority bc no consent by D, however, estoppel bc equities at play justify holding D liable.

Restatement of the Law (Second) Agency§35 When Incidental Authority is Inferred – unless otherwise agreed, authority to conduct a transaction includes authority to do acts which are incidental to it, usually accompany it, or are reasonably necessary to accomplish it§144 General Rule – a disclosed or partially disclosed Pal is subject to liability upon Ks made by an A acting w/in his authority if made in proper form and w/ the understanding that the P is a party.§195 Acts of Manager Appearing to be Owner – an undisclosed P who entrusts an A w/ the mgmt of his business is subject to liability to 3rd persons w/ whom the A enters into transactions usual in such businesses and on the P’s account, although contrary to the directions of the P.

3. Liability of Principal to 3rd parties in Tort RS §7.02 – Duty to Principal; Duty to 3rd Party – An Agent is subject to tort liability to a 3rd party harmed by the agent’s conduct only when the agent’s conduct breaches a duty that the agent owes to the 3rd party.RS § 7.08 – Agent Acts w/ Apparent Authority – A Pal is subject to vicarious liability for a tort committed by an agent in dealing or communicating w/ a 3rd party on or purportedly on behalf of the Pal when actions taken by the agent w/ apparent authority constitute the tort or enable the agent to conceal its commission.

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A. Servant versus Independent ContractorMaster/Servant Relationship Legal Consequences:

i. Taxes/regulation – worker’s comp, income taxes, unemployment, ii. Liability – a servant can create vicarious liability in the Pal for physical harms caused to 3rd persons by

the torts of the servant (RS 2nd § 219)iii. Duties/immunities – Master may owe special duties to the servant.

B. To Distinguish:i. Amount of Control. Does Master specify time and place of performance? Is worker paid per

job?ii. Whether or not employee is engaged in a distinct business, kind of occupation, skill required in

the particular occupation, who supplied the tools and place of work, method of payment (by hour or job), whether the work is part of the regular business of the employer, and the parties belief.

C. Master is Liable for what acts of the Servant?i. Torts in the scope of employment. ii. Scope of employment: most cts hold “the acts giving rise to the liability must be to service the

Master.D. A master is subject to liability for the torts of his servants committed while acting in the scope

of their employment. As a general rule, a principle is not liable for the torts of his non-servant agents - i.e., independent contractors. i. Servant-Master Relationship – respondeat superior; master liable for torts of his servants

1. Master/servant relationship exists where the servant has agreed to work on behalf of the master and to be subject to the master's control or right to control the "physical conduct" of the servant (the manner in which the job is performed as opposed to the result alone).

ii. Independent contractors

1. Agent-type independent contractor - one who has agreed to act on behalf of another, the principal, but not subject to the principal's control over how the result is accomplished (over the physical conduct of the task).

2. Non-agent independent contractor - one who operates independently and simply enters into arm's length transactions with others

E. Whether the relationship between the parties is an agency relationship does not depend on what the parties call it, but what it actually is. The parties cannot effectively disclaim it by formal consent.

Humble Oil v. Martin – Master-Servant relationship exists. Owner is liable for an operator’s negligence if the owner directs the manner under which the station is operated. P was hurt by car that rolled away from a station owned by Humble but operated by another person under contract. D claimed station was independent contractor.

i. One who maintains control over a business’s operation, even if it entrusts the operation to one acting w/o meaningful discretion, is liable as a Pal for the negligence of those entrusted w/ his business.

ii. Station could only hire, compensat, manage and discharge employees. D controlled everything else:iii. D made Schneider perform certain duties, retained title to the station/products, and paid advertising and

operating expenses; D gave the station a commission on profits.Master-Servant – relationship where master has authority over the servant, w/ the power to direct the time, manner, and place of the services. Applies to where servant is almost completely under the control of the master. Servant does not usually act for the master in business relations w/ 3rd parties.

I. Control is an essential element of an agency relationship, whether a servant or an independent contractor. To determine whether the relationship is master-servant, the court will look at whether the principle had control over the day-to-day operations.

Hoover v. Sun Oil – Independent contractor exists. No agency exists if an oil company does not control a service station’s operations. P was injured when his car caught fire while a stations employee was fueling it. Less control over day-to-day operations.

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i. D visited station weekly to inspect and take orders, and discuss customer service, but Station owner bore risk of profit/loss, determined his own hours, managed workforce = Ind Contractor.a. Barone was permitted to sell other products, but required to sell D’s products.

ii. Test : did D retain right to control the details of the day-to-day operation? *Control or influence over results alone is insufficient to show D controlled day-to-day.

iii. Express contract language is NOT always dispositive. Must look at actual control used.iv. Independent K – contracts w/ another to do work, but is not controlled by the other with respect to his

physical conduct in the performance of the undertaking. He may or may not be an Agent.

F. Franchise agreement - the franchisee will agree to operate its business in certain ways, as required by the franchisor, in exchange for the use of the license. The purpose of this is to create standardization in all the franchises nationwide (to achieve the "brand"). However, a franchise could still be a servant-master relationship if there is sufficient control by the franchisor.

Murphy v. Holiday Inns – Franchise agreement that provides an operation system for a franchisee does not establish a P-A relationship. P slipped in a motel owned and operated by a franchisee under a license agreement.

i. If a franchise K regulates the activities of the franchisee as to vest the franchiser w/ control w/in the definition of agency, the agency relationship arises even if the parties expressly deny it.

Test: Nature and extent of control agreed upon – depends on D’s level of control over the alleged “instrumentality” which caused the harm (i.e. security for rape issue) *doesn’t matter if they exercise the right to control, but only that they have the right to do so.

ii. Here, Holiday had no control to maintain premises or managerial activities, so no P-A relationship.

B. Tort Liability and Apparent AgencyMiller v. McDonald’s – Apparent Agency exists. Franchisor liable for holding Franchise out as Agent and 3 rd person relied on holding out. P got hurt after biting into sapphire in Big Mac.

i. Liability under Actual Agency Test : Actual agency for vicarious liability requires that D have the right to control the franchisee’s daily operations, an agency relationship exists.

ii. McDonalds controlled by “making” 3k follow their procedures for doing things, like assembling the mac.

iii. Apparent Agency - One who represents that another is his servant or other agent and thereby causes a third person justifiably to rely upon the care or skill of such apparent agent is subject to liability to the third person for hard caused by the lack of care or skill of the one appearing to be a servant or other agent as if he were such.

iv. (Representation) Everything about the appearance of the restaurant identified it with McDonald's - this image the McDonald’s had worked to create - reputation, etc.

v. (Reliance) D countered that P’s reliance was not there – she had to prove her past experiences with McD’s were all with restaurants owned by McD’s and not franchisors – but no good bcGeneral public not expected to understand how franchise works. McDonald’s cannot ignore its own efforts to lead the public to believe that all McDonald's are the same.a. Court found P-A existed bc sign wasn't enough to show it was a franchise, and P relied on

appearance that it was a McDonald’s.vi. Absent actual control, pal can still be Pal if they have ability or intent to control.

C. Scope of EmploymentConduct of a servant is within the scope of employment if it is actuated, at least in part, by a purpose to serve the master. Ira Bushey & Sons v. U.S. – Foreseeable Test. Government is liable for damage caused by drunk sailor returning to a docked ship. A drunk sailor caused damage to the P’s dock while returning to the ship.

i. Respondeat Superior imposes liability on an employer for an employee’s conduct if the employer created the risk that the conduct would occur.a. It was foreseeable that drunk seaman may cause “some type of damage,” so gov is responsible.

ii. Must be w/in Scope of Employ; RS 228 “must be at least in part by a purpose to serve the master.” Focus not on employee’s motive, but on the necessary conduct characteristic in the employers enterprise.

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iii. If some harm is foreseeable it will give rise to liability, even if the particular type of harm was unforeseeable. But the conduct by the servant which does not create risks different from those attendant on the activities of the community in general will not give rise to liability; and the conduct must relate to the employment.

Clover v. Snowbird Ski – sky employee went to fast and injured P; he was working, then took a few runs for fun then head back to work. A jury could find he resumed employment and his deviation wasn't enough.

D. Liability for Torts of Independent Contractors

A. Ordinarily when a person engages an independent contractor (who conducts an independent business by means of his own employees), he is not liable for the negligent acts of the contractor in the performance of the contract, but there are exceptions:

i. When landowner retains control of the manner & means of the work contracted forii. Where he engages an incompetent contractoriii. Where the activity contracted for constitutes a nuisance per se.

4. Fiduciary Obligation of AgentsA. Duties During AgencyReading v. Regem – A sergeant must surrender illegal bribes received bc of his employment position. P obtained payments for accompanying unlawful contraband past civilian police while working for Army.

i. A servant is accountable to his master for profits he obtains bc of his position, if the servant takes advantage of his position & violates his duty of good faith & honesty to make the profit for himself.

ii. Whether master lost profits or had capacity anyway is irrelevant. If servant is unjustly enriched solely based on his service to his master w/o master’s position, servant must surrender his profit to his master.

iii. P earned profit solely bc of the unifrom and position bestowed by his master. iv. Exceptions:

a. Money goes to master - Police officer accepts bribes to direct traffic away from crime scene. The only reason he had any authority to be able to direct traffic away & the only reason he got paid, was b/c of his position as a police officer & his uniform.

b. Servant keeps the money - Employee during time he's supposed to work, gambles. Employer can sue him for breach of K, but the money he makes from the gambling is his.

I. Agent has the fiduciary duty to act solely for the benefit of the principle. An employee violates this duty by failing to disclose all facts relating to his work and by receiving secret profits from it.

General Auto v. Singer – D is liable to his employer for profits derived from an undisclosed competing business. While employed w/ GA, P secretly concealed profits earned by accepting personal orders from P’s customers.

v. As P’s agent, P owed the P the duty of good faith and loyalty not to act adversely to his Pal’s business interests in the furtherance of his own.

vi. To determine if D’s interests are adverse, court must examine the nature of the competing business.vii. D violated duty of good faith by not disclosing the orders that D thought P couldn’t handle.viii. Crucial element - Singer failed to disclose extra orders to GA and never gave them the opportunity to

decide if they wanted to fill them

B. Duties During and After Termination of Agency: “Grabbing and Leaving”i. Post-termination competition with a former principle is permitted, but the former agent is barred

from disclosure of trade secrets or other confidential information obtained during his employment.

Town & Country Home Service v. Newberry – Former employees may not target a competing business exclusively at their former employer’s established customers. D’s left P to start their own housekeeping biz.

i. A biz proprietor may not solicit his former employer’s customers “who are not openly engaged in business in advertised locations or whose availability as patrons cannot be readily ascertained.

ii. All P’s customers were secured by years of effort of advertising, time and money, and good will.

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1. Here, nothing alone would do it, but the combo of taking everything (list, methods, pricing) did.

iii. Only used duty here because they didn't sign non-compete, which they would then sue under K law.

Two General duties of Agent to Principal:1) Duty of Care – “what would a similar reasonable agent do?” (i.e. a similar sailor)2) Duty of Loyalty – “duty not to take from P during P/A/ relationship

-secret transactions - usurping business opportunities from P - taking confidential info

A. General Rules i. While an employee you can't compete with employer b/c you have a fiduciary duty.ii. You can terminate the agency at will, however, so once you quit, you no longer owe a fiduciary

duty & you can compete.a. Knowledge received by employment, reputation, etc. – you can take this with you. What

you can't do is walk away with a client list on paper.b. Reason: Otherwise, it would be like slavery – either you stay with the same company

forever, change careers, or pay royalties to previous employer. 1. Exception – information that’s confidential like patents. But this is addressed by non-

competes (contract), so unnecessary to address in agency law.

Chapter 2 - Partnerships1. What is a Partnership? And Who are the Partners?

2 Competing Theories of Partnership: Entity (more common) and Aggregation

Distinct ENTITY separate from Partners -if divided, depends how its set up-lawsuit is against entity-tax – separate tax file for the partnership

Legal aggregation of its partners -if divided, equal shares to all members-lawsuit against all partners-tax – each individual partner files

I. Elements of a Partnership A. 5 Elements of a Partnership - RUPA § 202. Partnership is the association of 2 or more

persons to carry on as co-owners a business for profit forms a ship, whether or not the persons intend to form a ship.i. Association of two or more

a. agreement necessary, but no written contract. Agreement is to associate, not to form a ship.

b. no formal partnership agreement requiredc. no governmental registration requiredd. If you fit the elements of a partnership, you’re a partnership.

ii. Personsa. Person can be a corporation (or any other business entity) or a natural person. b. can't form a partnership with yourself, but you could with a corporation of which you

were the sole shareholder.iii. As co-owners

a. not employee/employer. iv. In a business

a. Not a church, not a share of stocksb. co-ownership of a rental property as joint tenants is not enough

v. For profit.a. Not-for-profits don't countb. Just b/c no profit made won't mean it’s not a partnership, as long as they intended to

make profit

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B. RUPA §202(c) - In determining whether a partnership is formed, the following rules apply: i. Joint Tenancy, TIC, Tenancy by the entireties, joint property, common property, or part

ownership does not by itself establish a ship, even if co-owners share profits made by the use of the property.

ii. The sharing of gross returns does not by itself establish a partnership, even if the persons sharing them have a joint or common right or interest in property from which the returns are derived.

iii. A person who receives a share of the profits of a biz is presumed to be a partner in the biz, unless the profits were received in payment: a. (1) of a debt by installments or otherwise; b. (ii) for services as an independent K or of wages or other compensation to an

employee; c. (iii) of rent; d. (iv) of an annuity or other retirement or health benefit to a beneficiary, representative,

or designee of a deceased or retired partner; e. (v) of interest or other charge on a loan, even if the amount of payment varies w/ the

profits of the biz, including a direct or indirect present or future ownership of the collateral, or rights to income, proceeds, or increase in value derived from the collateral; or

f. (vi) for the sale of the goodwill of a biz or other property by installments or otherwise.II. § 301. Partner Agent of Partnership – (1) Each partner is an agent of the partnership for the purpose

of its biz. An act of a partner binds the partnership for apparently carrying on in the ordinary course of the partnership biz, unless the partner had no authority and the 3rd party knew the partner lacked authority.

III. § 306. Partner’s Liability – (a) all partners are Joint and severally liable. (b) a person admitted as a partner into an existing partnership is not personally liable for any partnership obligation incurred before the person’s admission as a partner. (c) if an LLP, only the partnership is liable.

A. Partners Compared with EmployeesFenwick v. Unemployment Commission – A partnership is not formed by merely agreeing to share business profits.. D and his secretary entered into partnership where D contributed all capital, had exclusive control over management, and bore the risks of all losses. See RS §202 (PF evidence) and RS2§102 (label not controlling)

i. A partnership is an association of 2 or more persons to carry on as co-owners of a business for profit.

ii. Here, secretary wanted a raise, but D couldn’t afford it if no profits. So no intent to form a partnership

A. Next, look at the 8 elements: i. The intention of the parties – just b/c K said partnership, doesn’t make it so. The real

reason for the K was to provide calculation for an increase in compensation, but to protect Fenwick in case he couldn’t afford it.

ii. The right to share profits – not every agreement that gives a right to shares profits is a partnership, so not conclusive.

iii. The obligation to share losses – only Fenwick liable for debts of partnership.iv. The ownership and control of the partnership property & business - Fenwick

contributed all the capital & Chesire had no right to share capital upon dissolution. Fenwick also retained all control.

v. Community of power in administration - Fenwick had exclusive control of mgmt of the biz.

vi. Language in the agreement – K called it a partnership, but also excluded Chesire from most of the ordinary rights of a partner.

vii. Conduct of the parties towards third persons – didn’t hold themselves out as partners, she was still working as the receptionist.

viii. The rights of the parties on dissolution- No diff for Chesire than if she quitix. Co-ownership – agreement only to share profits, Fenwick had ownership.

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Partner versus Wage EarnerPartner

-------------------------------------- Wage Earner

Participates in all important decisions

Control Obeys instructions; has no important discretion

Has expressly agreed to share losses

Express Loss Sharing Agreement never agreed to share losses; when losses occur, payout doesn’t change

Contributed property to the biz Contribution Merely works in the businessAll payout via profit share Importance of Profit Share Profit share is only icing on cakeCalled a partnership Self-Labeling Called an employee

B. Partners Compared with LendersI. While evidence of profit sharing is prima facie evidence of the existence of a

partnership, it is not dispositve, and other factors may indicate no partnership was intended.

Martin v. Peyton – A loan that allows for sharing of profits as repayment and (speculative securities) does not establish a partnership absent intent. P sued D’s, as alleged partners of a firm that owed P money, when D’s gave an elaborate loan to firm.

i. A partnership is created by an express or implied K btw 2 persons w/ the intention to form a partnership.ii. The firm rejected D’s as partners, but gave the D’s as collateral speculative securities owned by the

firm, and 40% of the firm’s profits until the loan was repaid. Also, D’s had an option to join firm as partners.

iii. The securities makes the D’s trustees, and trustees have the right to be informed of all transactions affecting the securities and the power to veto any decisions that may be detrimental to their value.

1. This is just to safeguard the loan; its noted the trustees may not: (1) initiate any transaction as a partner may do; (2) bind the firm by any action of their own.

iv. The profit-sharing provision is merely protection for the Ds’ loan.v. The option to join firm demonstrates at most a future intent to create a partnership, not an immediate

one.vi. INTENT: the focus is on the intended consequences of the parties’ agreement, not the label attached.RS §202(c)(3)(i): A person who receives a share of the profits of a business is presumed to be a partner in the business, unless the profits were received in payment: (i) of a debt by installments or otherwise;

C. Partnership By Estoppel I. General Rule : Persons who are not actual partners as to each other are not partners as to

third persons.Exception: RUPA § 308. Liability of Purported Partner – If a person purports to be a partner or consents to being represented by another as a partner, the purported partner is liable to a person to whom the representation is made, if that person relies on the representation and enters into the transaction.

Young v. Jones – PW-US is not a partner by estoppel w/ PW-Bahamas. P and others invested in reliance on fraudulent audit statement prepared by PW-Bahamas, but wanted partnership to be able to sue PW-US.

i. A person who represents himself, or permits another to represent him, as a partner in an existing partnership w/ others not actual partners, is liable to any person whom such a representation is made who has, in reliance on the representation, given credit to the actual or apparent partnership.

ii. Sued on estoppel theory bc two firms provided documents establishing that they were operated independently and had no control over one another.

2. Brochure says they're part of a global conglomerate to gain public confidence in quality, but it doesn’t indicate that US is liable for debts of Bahamas or any other affiliate.

iii. No estoppel bc P did not rely on the brochure when investing or the partnership relationship... and PW-US has no involvement in the inaccurate statement .

iv. *Note: if there was partnership by estoppel, P may hold each partner liable, but the partners can’t hold each other liable, as no partnership exists.

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If Partnership by Estoppel does exist, then the person who was represented as a partner is personally liable on the transaction, even though that person is not in face a partner, and others who have either made or consented to the representation are bound by the person’s acts. (invoke UPA §16 or RUPA § 308)*With respect to binding, to the extent that others consent to the representation, a partner-like power to bind should apply.

2. The Fiduciary Obligations of Partners A. IntroductionSee § 404. General Stds of Partner’s Conduct:(c) Duty of Care (RUPA § 404) – partners are not liable for ordinary mistakes in judgment, but are liable to the partnership for grossly negligent or reckless conduct, intentional misconduct, or a knowing violation of law.(b)Duty of Loyalty (see Meinhard) – don’t deal w/ ship on behalf of an adverse party. Don’t compete.

Partner v. Partnership: may not profit at the expense, direct or indirect, of the partnership; prohibited from: (i) competing with the partnership, (ii) taking biz opportunities that may have benefitted the ship, (iii) using ship property for personal gain, or (iv) engaging in conflict-of-interest transactions. Partner v. Partner: when partners’ interests are potentially adverse, a partner is obliged to: (1) provide full disclosure and (ii) engage in “fair dealing”

(e) A partner does not violate a duty or obligation merely bc the partner’s conduct furthers the partner’s own interest.

I. Partners in a business have a fiduciary duty to inform one another of biz opportunities that arise. JV partners owe each other the highest obligation of loyalty as long as their venture continues.

Meinhard v. Salmon – A Joint Adventurer’s seizure of a JV’s opportunity breaches his duty of loyalty to the other joint adventurers. D terminated a lease belonging to his JV w/ P to enter a new self-owned lease.

iii. Like partners, joint adventurers owe one another the duty of loyaltyiv. When lease approached expiration, D was approached by developer, the successor of the lease,

to join his project, so D cancelled lease and joined the developer, never informing P. P sued and got ½ of new lease.

v. D had all management rights, and held the lease as a fiduciary to P. By failing to disclose his JV partner to the developer, and not telling his partner, D deprived P of the chance to compete for the new lease.

vi. Duty of Loyalty requires a good faith disclosure of the JV, and D’s actual motive is irrelevant.vii. Dissent : it was JV, not partnership, so more lenient principles apply. JV had limited

purpose/duration.viii.There was a close nexus between the original joint venture and the new opportunity, since

it was essentially an extension & enlargement of the subject matter of the old one. This would be diff if the new opportunity didn’t involve the same thing.

ix. Salmon was also an agent of the joint venture, and this new opportunity was only made available because he held that position in the joint venture. Salmon would never have had this opportunity were it not for Meinhard’s initial investment.

Partnership – generally a longstanding relationship w/ general undertakings designed to generate profit.Joint Venture – more limited in duration and generally for a specific undertaking. Necessary elements: (1) an express or implied agreement; (2) a common purpose that the group intends to carry out; (3) shared profits and losses; and (4) each member’s equal voice in controlling the project. *Courts often apply partnership law to JVs

B. Grabbing and Leaving: Duty of Good Faith and Fair DealingRS3 §8.04 Competition - During the relationship, an agent may take action, not otherwise wrongful, to prepare for competition following termination of the agency relationship.Meehan v. Shaughnessy – One-sided solicitations to a partnership’s clients breach the duty of good faith and fair dealing. Partners of a firm separated from Parker Coulter (D) to form a new law firm w/ cases removed from D.

x. D didn't mishandle cases, D didn't secretly compete (a partner may plan to compete as long as he doesn’t otherwise breach a fiduciary duty owed to the partnership.)

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xi. P’s breached their fiduciary duties by unfairly and secretly inducing the clients to transfer the business and failing to disclose their method of obtaining the clients’ consent to D.

xii. A partner must render on demand true and full info of all things affecting the partnership to any partner.

xiii.After P sent letters to clients, partners asked if they were leaving, and they said no. xiv. Also, they delayed D’s request for the list of clients, and didn't inform clients the right to stay w/

the firmB. Partners owe each other fiduciary duty of "utmost good faith and loyalty," must

consider other partners' welfare & refrain from acting for purely private gain.C. A partner has an obligation to render on demand true and full information of all

things affecting the partnership to any partner

3. The Rights of Partners in Management1. Default rights of partners:

a. Control – equal rights of management and operation of the business (RS 401(f))b. Profits – divided evenly among partners absent other agreement (even if someone contributes more,

the default is 50/50. (401(b))c. Liability – all or jointly liability, unless brought in after the factd. Partners not generally liable for earlier debtse. Division of losses – 401(j)f. During ordinary course - Majority voteg. Outside ordinary course - unanimoush. Amendments to existing – absent other provision, unanimous

2. Raising Additional Capital a. Partnerships sometimes need to raise additional capital to finance their activities. Sometimes

the issue is addressed in the partnership agreement itself. Examples:i. “Pro rata dilution” provision – permits a call to each partner for a certain sum and provides

for a reduction in partnership shares of any partner who does not contribute the requested sum.

ii. Provision might allow partners to invest in the firm at a reduced price or require partners to make loans that will bear interest at a higher rate.

iii. May provide for the sale of new partnership assets to people outside the partnership, similar to a corporation’s placing new shares on the stock market.

3. The acts of a partner within the scope of the partnership business bind all partners; all partners are J&S liable for the acts and obligations of the partnership (unless no authority to act & 3rd party knows the restriction). A majority of partners can make a decision and inform creditors and will thereafter not be bound by acts of minority partners in contravention of the majority decision.

National Biscuit v. Stroud – An objecting Partner is liable for the debt resulting from his partner’s purchase. F bought bread from NBC, although D informed F and NBC that he would no longer be responsible for bread.

i. Every partner is an agent of the partnership for the purpose of its business, and every partner’s acts for apparently carrying on in the usual way of the partnership’s business binds the partnership, unless the acting partner has in fact no authority to act for the partnership and the person w/ whom he is dealing knows that he has no such authority.

ii. Its because they both had equal control over the daily business, (bc only 2 partners so no maj. vote), and purchasing bread was part of the ordinary business.

iii. As long as both parties act in good faith w/o violating fiduciary duties, a disagreeing partner is powerless to veto his partner’s ordinary business decisions.

1. Caveat – choose what to challenge – if Stroud seeks right to object, then Stroud needs majority. If its Freemans seeking right to order, then does he need majority?

D. Where equal partners, differences on business matters must be decided by a maj. of the partners.

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Summers v. Dooley – A partner is not liable for expenses incurred by another partner’s unilateral decision to hire an additional employee. P hired a new guy despite D’s objection, then tried to sue for half the wages P paid.

iv. Absent a contrary agreement, each partner posses equal rights to manage the partnership’s affairs, and no partner is responsible for expenses incurred w/o majority approval.

v. Any difference arising as to ordinary matters of the partnership may be decided by a majority. P didn't have majority, so D isn’t liable for the expenses arising, despite him sharing the profits arising from it.

vi. If hiring was ordinary business matter, it will bind the partnership in the absence of a majority objection.vii. Hiring was not ordinary here bc partnership had never hired anyone before. So, D didn't ratify.

RUPA §401 Voting : Need Unanimous for: (1) a person becoming a partner; (2) An act outside the ordinary course of biz of a partnership and an amendment to the partnership agreement.

4. Partnership Dissolution - The Right to DissolveOwen v. Cohen – Mutual disharmony and disrespect are bases for a judicial dissolution of a partnership. The court dissolved P’s and D’s partnership upon finding that parties couldn’t practicably continue in biz together.

i. Courts may order dissolution of a partnership if the partners’ quarrels and disagreements are of such a nature and to such an extent that all confidence and cooperation between the parties has been destroyed or if a partner’s misbehavior materially hinders the proper conduct of the partnership’s business.

Collins v. Lewis – A partner’s interference in a partnership’s proper management may not create a right to dissolution. P and D operated a cafeteria, w/ P financing and D managing.

ii. A partner may not obtain a judicial dissolution of the partnership if his own interference causes the partnership to be unprofitable.

Page v. Page – absent bad faith or breach of fiduciary duty, a partner may dissolve a partnership at will by express notice to his partner. P seeks to dissolve unprofitable partnership with the D.

iii. a partnership may be dissolved by the express will of any partner if the partnership agreement specifies no definite term or particular undertaking.

B. The Consequences of DissolutionPrentiss v. Sheffel – Former Partners may purchase the at-will partnership assets. Two main partners excluded D (15% owner) from management and tried to freeze D out when D didn't pay its debts. Upon dissolution, the two main partners who had 85% purchased the partnership assets at the judicial sale requested by the D.

i. P’s could bid because D wasn't wrongfully excluded – D had rights to participate in the sale, which is essential, and P’s bid actually raised the price of the sale and gave D more money.

1. Absent an agreement otherwise, P’s should have an equal opportunity to bid as everyone else.

2. Note that the D did not attack the fact that the T/C ordered a sale of the assets, just P’s participation.

Pan-Saver v. Vasso – Upon wrongful dissolution, a partner retains the use of a former partner’s TMs and Patents. P contributed TM and know-how, and D financed. The agreement was permanent unless there was mutual agreement to dissolve, and there was an LD provision against a breacher.

ii. Agreement said if someone wrongfully breaches, LD and other partners may continue. Partner that hasn’t wrongfully dissolved the partnership is entitled to damages for breach and may continue the business for the term set in the partnership agreement (permanent) and with the right to possess the IP technology.

iii. D has a statutory right to continue the partnership business once P wrongfully dissolved, so the IP, which is essential to the business, must remain in the partnership’s possession. The IP has no value, it’s the good will of the business

C. The Sharing of LossesKovacik v. Reed – Investor is not entitled to recover lost capital from a joint adventurer who had invested only his labor. P sought to recover from D of ½ of the money capital he invested in a losing kitchen remodeling biz.

i. If one partner or joint adventurer contributes the money capital and the other contributes the skill/labor, the Labor partner shares losses only if he/she has expressly agreed to do so. *this is minority jdx; the majority follows UPA § 401 and makes Labor partner share in losses.*

ii. P simply informed D that P would invest the money, and they would split profits equally.iii. In event of a loss, each party loses the value of his contribution: P lost money and D lost time and labor.

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A. RUPA § 401(b) expressly cites and rejects Kovacik: “Each partner is entitled to an equal share of the partnership’s profits and is chargeable with a share of partnership losses in proportion to the partner’s share of the profits.” [losses follow profits]

iv. Although RS 401 says partners share equally in profits and losses, other sections indicate an implied agreement that a partner contributing only his services could not bear liability for capital losses.

D. Buyout AgreementsG&S Inv. v. Belman – The court must honor a partnership agreement’s term providing for the buy-out of a partner upon death. D, a partner of P, abused drugs and got crazy, making P seek dissolution under UPA to buyout D. D died while suit for dissolution was pending, triggering the partnership’s buy-out provision.

v. After D’s death, P was entitled to continue the partnership upon payment of D’s interest to his estate.vi. Filing the dissolution didn't dissolve the partnership, only when decreed by the court. vii. Court must follow the contract, and it called to measure the capital by book value (which was less).

5. Limited PartnershipsHolzman v. De Escamilla – Control over LP’s business and bank transactions establishes LPs as GPs. P, as bankruptcy trustee, sued the LPs of a bankrupt partnership to make them as GPs liable for their creditor’s debts. D entered into a LP, Hacienda Farms, ltd., with two other LP’s, who were somehwhat involved.

i. “A LP is not liable as a GP unless, in addition to exercising his rights and powers as a LP, he takes part in control of the business. Bc they took control of the business, they are liable as GPs for the debts.”

ii. P’s gave biz advice & dictated transactions; bank needed 2/3 of their signatures; LPs could remove GP.iii. Not sufficient control to make LP a GP: (1) consulting w/ GPs, (2) asking to see records; (3) voting or

conferring on biz decisions that relate to financing or dissolution; (4) deciding on a change in the biz.

Partnership CorporationFormation Informal Formalities/paperworkLiability GP – no shield; LP – no liability Limited liabilityContinuity Indefinite / at-will IndefiniteManagement Partners / agents Board / executivesSet up costs Free Fees / lawyersClient perception Easy to understand More complex / prestigious Flexibility Greater flexibility Less flexible – need shareholders

approval thru vote for major decisionsTax No double tax Double tax

Chapter 3 – The Nature of the Corporation1. Principle/Agency relationships:

a. Shareholders (P) – B of D (A)b. B of D (P) – officers (A)c. Corp (P) – B of D (A)

2. Delaware benefits: 60% of fortune 500; 50% of all companies on NYSE; becausea. no capital requirements; only need 1 incorporator, or 1 legal person to file, can be non-human.b. Extremely favorable franchise taxesc. No corporate income tax; no sales tax; property tax if you don’t do business in Deld. No taxes on shares held by non-residents and no inheritance taxe. Corp can keep all books/records and PPB outside of Del

3. Ultra Vires – outside power (sell vitamin water when not in agreement)a. To do it, amend by laws to allow anything. If corps don’t do that and engage in ultra vires,

shareholders can sue for injunction and damages and state can come in and say you’re not authorized.

4. De facto Corp – folks take all the proper steps to file but it never gets formed, in good faith.... treat the firm as a corporation (These are done to protect the entity).

5. Corporation by estoppel – (1) person dealing w/ firm thought it was a Corp all along even though its not incorporated, and (2) the entity would take a windfall if it wasn't a corp.a. In most Jdx’s, only applies to contractual claims (not tort or criminal act), done to protect 3rd parties

6. Characteristics of the Corporation

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a. Separate Legal Entity. A corporation is a separate legal entity (created by the law of a specific state), apart from the individuals that may own it (shareholders) or manage it (directors, officers, etc.). Thus, the corporation has legal rights and duties as a separate legal entity.

b. Limited Liability. The owners (shareholders) have limited liability; debts and liabilities incurred by the corporation belong to the corporation and not to the shareholders, since they are separate legal entities. (Also vice versa, corporation not responsible for debts of shareholders.)

c. Continuity of existence. The death of the owners (shareholders) does not terminate the entity, since shares can be transferred.

d. Management and control. Management is centralized with the officers and directors. Each is charged by law with specific duties to the corporation and its shareholders.

e. Corporate powers. As a legal entity, a corporation can sue or be sued, contract, own property, etc.

7. Exceptions to the Limited Liability Rule – In some circumstances, the court may “pierce the corporate veil” and dissolve the distinction between the corporate entity and its shareholders so that the shareholders may be held liable as individuals despite the existence of the corporation.a. Fraud or Injustice. Where the maintenance of the corporation as a separate entity results in

fraud or injustice to outside parties (i.e. creditors).b. Disregard of corporate requirements. Where the shareholders do not maintain the

corporation as a separate entity but use it for personal purposes. The rationale is that if the shareholders have disregarded the corporate form, then the entity is really the alter ego of the individuals and decisions made are for their benefit and not the entity’s. This is most likely to occur with close corporations.

c. Undercapitalization. Where the corporation is undercapitalized given the liabilities, debts, and risk it reasonably could be expected to incur.

d. Fairness. The veil may also be pierced in any other situation where it is only fair that the corporate form be disregarded.

1. Promoters and the Corporate EntitySouthern-Gulf Marine v. Camcraft – Lack of formal corporate status does not excuse nonperformance. P signed an agreement as a Corp to buy a boat, but it didn't incorporate till later, so D tried to rescind.

i. D may not interpose as a defense to a breach of K that a P corp lacked the capacity to contract bc it was not incorporated at the time it executed the K, unless the failure to incorporate actually harmed the D.

ii. P’s president signed in his own capacity, and when they changed incorp to Cayman, they notified D.

iii. (a) No facts show that the lack of status affected the D’s rights, and the K allowed the parties to assign their rights, (b) D ratified and accepted the agreement after P informed D of the change of corp. status.

iv. MBC 2.04 – all persons acting on behalf of a corp, knowing there isn’t one, will be J&S liable – here, they both knew there was no corp yet, so if something went wrong, they would both be liable.

Derivative suit – shareholder is suing on behalf of the company (winnings go to the corp.)Direct Suit – shareholders are suing on their own behalf

A. Derivative Suits . A shareholder may sue to enforce mgmt’s duties. If the claim is that mgmt’s breach reduced the residual value of the business, the shareholder must due derivatively in the name of the corporation. i. Problem - A person with a relatively small stake in the residual value of a business might want

to bring derivative suit just to be bought off. Requiring the Δs to make payment to the corporation reduces this temptation for the complaining shareholder. The real party in interest here though, is the shareholder’s attorney, b/c he may legitimately demand payment from the corporation in connection with a settlement.

B. Direct Suits - If the claim is that mgmt’s breach deprived the shareholder of some other right (like right to inspect shareholder list), the shareholder must sue directly in her own name.

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i. If the Π-shareholder brings suit alleging that management is interfering with the rights and privileges of stockholders and is not challenging management’s acts on behalf of the corporation, it is a personal suit. Since this is not a derivative action, posting of a security bond is not required.

2. Peircing the Corporate Veil-If you create Corp or LLC solely for the purpose to avoid liability or avoid taxes, it will be pierced.-two ways to pierce: (1) fraud; and (2) equitable purposes

I. Piercing the corporate veil is allowed whenever necessary to prevent fraud or to achieve equity. Whenever anyone uses control of the corporation to further his own, rather than the corporation’s business, he will be liable for the corporation’s acts.

Walkovszky v. Carlton – Although the law permits individuals to incorporate solely to avoid personal liability, a court may disregard corporate form to prevent fraud or achieve equity . A pedestrian hit by cab sued the guy who owned 10 corps that each had only 2 cabs in order to minimize required insurance. The 10 companies shared: financing, supplies repairs, employees, and garages, but didn't comingle funds, undercapitalize, and did follow all corporate procedures and laws and bought the minimum insurance.

i. P couldn’t recover against individual stockholders bc no showing that the stockholder used the companies for personal , rather than corporate , gain. To pierce, cts are guided by general agency rules:

1. If individual controls for personal gain, individual is responsible under respondeat superior for the corp’s acts in commercial dealings and in tort claims. But here, P failed to allege this, so P failed.

ii. P alleged only that the corps didn't exists separately and fraud , but not that the individual D’s were acting in their individual capacities . But, doesn’t matter if none of the corps existed separately; and no fraud bc D followed all formalities and had minimum insurance (an issue for the legislature)

iii. Dissent: D’s manipulated law to D’s benefit to eliminate reserves that could support higher premiums.iv. Goldberg – opposite outcome - P alleged the same individual operated all the companies, commingled

financial records, purchased supplies through 1 source, and had one pool of dispatchers, etc. So fraud

Alter Ego theory –Two requirements must be met before the corporate veil can be pierced: (1) such a “unity of interest and ownership” that the corporation and the individual are not separate personalities, and (2) circumstances are such that not piercing the veil would “sanction a fraud or promote injustice.”

A. To determine whether a corporation is so controlled by an individual or another corporation that the court would be justified in disregarding their separate identities, courts looks to four factors:i. The failure to comply with corporate formalities or to keep sufficient business recordsii. A commingling of corporate assetsiii. Undercapitalization; andiv. One corporation’s treatment of another corporation’s assets as its own.

Sea-Land Services v. Pepper Source – Inability to satisfy a judgment may be sufficient to pierce the Corp veil. D owed P for the cost of shipping peppers, but D was dissolved before P could enforce the judgment. So P sued former shareholder of D and 5 entites owned by D (reverse peirce) saying they are alter egos.

v. Van Dorn Test - to pierce the corp veil, P must show: (1) that there was such a shared control / unity of interest between the individual and the corp entity that separate identities no longer existed (little weight with small biz bc they rarely hold meetings, etc.), and (2) that a failure to do so would promote “injustice” in some way beyond simply leaving creditor unable to satisfy its judgment.

vi. Unity of Interest: P satisfied first prong bc D operated all companies or playthings in same office, shared accounts, never held board meetings, bylaws, or other Corp formalities. a. Only one of the man co.’s ever held board meetings adopted articles/bylaws, or followed formalities

vii. Fraud/injustice: - must be something more than just a creditor not being able to recover. P didn't satisfy 2nd prong because P chose injustice rather than fraud (injustice = lesser standard) which is not

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satisfied simply by a showing of an unsatisfied debt. Something beyond inability to collect must be shown, i.e. (a) unjust enrichment or (b) an intentional scheme to defraud creditors.a. On remand – it was found that D was unjustly enriched by using corps to avoid debts to creditors.

Alter Ego – a corp used by an individual in conducting personal biz, the result being that a court may impose liability on the individual by piercing the corp veil when fraud has been perpetrated on someone dealing w/ the corp, or whenever it is necessary to do so to prevent fraud or to do justice.

Piercing the Corp Veil: The judicial act of imposing personal liability on otherwise immune corp officers, directors, and stockholders for the Corp’s wrongful acts. Factors to Consider: whether1) the entity was the alter ego or “mere instrumentality” of a dominant owner2) the dominant owner used the entity shield not merely for the legitimate purpose of limiting personal liability but somehow to promote a fraud or injustice3) the entity was undercapitalized, i.e., lacked enough assets to meet the obligations normally to be expected to arise from the entity’s operations4) the dominant owner: (a) disregarded the entity’s economic separateness (e.g. by commingling entity and personal funds, commingling entity and personal business records, or using the entity’s credit to obtain personal loans); (b) siphoned funds from the entity (e.g., through inappropriately timed or sized distributions of profits, or by unsecured loans to the owner); (c) disregarded the entity’s governance “formalities” (e.g., by ignoring requirements for meetings, or allowing owners to usurp the functions formally allocated to managers)

3. Business Judgment Rule and Purposes of the Corp

BJR – [ONLY APPLIES TO CORPS]– rebuttable presumption that in making business decisions not involving direct self-interest or self-dealing, corporate directors act on an informed basis, in good faith, and in the honest belief that their actions are in the corporation’s best interest. (This shields directors/officers from liability for unprofitable biz transactions.)Elements of the BJR: (1) there must be Business decision; (2) the decision must be made by the directors in the good faith belief that it is in the best interests of the Corp and its shareholders; (3) the decision must be made w/ due care; (4) the decision must be made by disinterested and independent directors; and (5) (in some courts) the board must have acted without abusing its discretion.DGCL §141(e)(pg. 117) – BoD members may rely in good faith on records of the Corp or other professionals.

AP Smith v. Barlow – A Corporation need not have specific authority to make valid charitable contributions. Barlow, a shareholder of AP (fire hydrant), brought an action to find a $1,500 donation to Princeton was invalid.

i. Court found for AP – intra vires. A corporation may make reasonable charitable contributions, even in the absence of express statutory provisions. Can give away as long as there is a legitimate Corp reason.

ii. AP successfully argued it was a sound business practice to establish good will and gain interest of grads.iii. Del C. § 122 : Corp may make donation for public welfare or charitable, scientific/educational purposesiv. Shareholders lost bc they didn't argue that AP’s donations furthered personal rather than corp interest.

2. Marsili – same argument prevented company’s management from donating to political campaigns that were designed to affect legislation.

Dodge v. Ford Motor – A for-profit corporation must pay dividends absent a justifiable business reason. Ford made extraordinary profits and intended to use them to lower the price of cars and build a steel plant, but Dodge, minority shareholder, objected claiming that Ford’s first obligation was to make profits for shareholders.

i. Directors may not reduce profits or withhold dividends from shareholders in order to benefit the public.ii. It is not lawful for the BoD to shape and conduct the affairs of a Corp for the merely incidental

benefit of shareholders and for the primary purpose of benefiting others...iii. Ford’s argument that lowering prices had charitable motives in the community failed, contrary to AP.iv. Courts will not interfere in the management of the directors unless it is clearly made to appear

that they are guilty of fraud or misappropriation of the Corp funds or if P can show that D’s biz expansion is inimical to the company’s best interest and that withholding dividends is arbitrary.

v. Held: special dividends were awarded, but court left Ford w/ ability to make biz decision to expand.vi. A corporation is organized primarily for profit of the stockholders, and the powers of the

directors are to be used for that end. However, directors have reasonable discretion, to be exercised in good faith, to act for this end. Directors also have the power to declare dividends and

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their amounts. Their discretion will not be interfered with unless they are guilty of fraud, misappropriation or bad faith (when there are sufficient funds to do so w/o detriment to the business).

I. It is not the function of the courts to resolve a corporation’s questions of policy and management, and the judgment of directors will be accepted by the courts unless those decisions are shown to be tainted by fraud, illegality or a conflict of interest.

Shlensky v. Wrigley – Officers’ and Directors’ decisions are protected by the BJR. P, a Chicago Cubs shareholder, brought derivative suit against Cubs and directors for an order to install lights for night games.

i. Action was dismissed - No CoA unless P alleges that a Corp’s directors’ conduct was causing financial loss to the shareholder and was based upon fraud, illegality or conflict of interest.

ii. D’s argument about his concern of the quality of the surrounding neighborhood held up... courts give broad discretion to Corp managers for making policy decisions unless the decisions are tainted.

3. The judgment of directors enjoys a presumption it was formed in good faith and in the best interest.

A. Rule - Corporations are not obliged to follow the direction taken by other, similar corporations. Directors are elected for their own business capabilities and not for their abilities to follow others.

Chapter 4 – The Limited Liability Company

-LCC investors are called Members. More flexibility than the Corp in developing management rules & control.-LLC may be managed by all its members (as in a partnership) or by managers, who may/may not be members.-LLC has tax advantages: only taxed once and investors can “pass though” the losses on their indiv tax returns.-LLC requires paperwork and filings w/ a state agency:

-must use “LLC”; must designate an office; have operating agreement in lieu of bylaws-LLC is easier to expand, just sell stocks rather than alter the agreement. But, case law is shaky- Also now LLP – achieved by filing a document w/ a state official. Most provide limited liability only for partnership debts arising from negligence and similar misconduct, not for contractual obligations.

TermsManager-managed company – an LLC which is so designated in its articles of organizationMember-managed company – LLC that’s not manager-managed.Operating Agreement – agreement under §103 concerning the relations among members, managers, and LLC.Management of LLC - ULLCA§404 (pg. 81) – member: equal rights/maj.; manager: equal rights/maj.; consent:Conversion/merger – Partnership to LLC

1. Formation Westec v. Lanham/Clark – If 3 rd party is not aware that an agent is acting for a Pal, the agent may be liable to the 3 rd party . P negotiated w/ Clark, believing Clark was D’s agent, but Clark & D were members of P.I.I., LLC.

i. when 3rd party sues member of LLC under agency, principles of agency law may apply despite LLC Act’s statutory notice rules. The LLCA’s notice provision effectively notified P of D’s agency to PII, but it didn't eliminate CL agency doctrines, which were used here.

ii. The statutory notice provision applies only to parties looking to impose personal liability on the members or managers of an LLC simply bc their “status” and when they know the individuals have formed an LLC (here, P didn't know)

iii. Uniform LLC Act - §105: must contain “limited liability company or ltd., etc...iv. At CL, an agent is liable on a K made for his Pal if the agent did not disclose his Pal’s identity:

PII on business card was not enough to inform P that D had an LLC, so P thought Clark was D’s agent.1. T/c found Clark was the agent of D, so Clark wasn't liable but D was. On appeal, they both

were.If existence & identity of Agents Pal disclosed = agent not party to K and thus not liableIf pal is partially disclosed (existence of pal is known, but not identity) = agent is liable*Whether Pal is partially or completely disclosed is a question of fact.

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2. The Operating Agreement (Joint Venture)Elf Atochem N. Am. V. Jaffari – A LLC’s operating agreement governs its member’s acts. P engaged in a JV w/ D, president of Malk, and the 2 entities formed a LLC, but the company didn't sign its operating agreement.

v. P tried to bring the claim on behalf of the LLC (Derivative Suit), and bc the LLC was not a party to the Agreement, the Agreement’s arbitration provision wouldn’t control bc it only applied to parties of the K.

vi. A LLC is bound by the terms of an operating agreement that is signed by some of its members and that defines the LLC’s governance and operation, even if the LLC did not execute the agreement.

vii. Bc no statutory provision prohibits the parties to agree to arbitration in Cali, P can’t avoid the arbitration process by characterizing its claims as Derivative.

Joint Venture – a business undertaking by 2 or more persons engaged in a single defined project. Necessary elements: (1) an express or implied agreement; (2) a common purpose that the group intends to carry out; (3) shared profits and losses; and (4) each member’s equal voice in controlling the project.

3. Piercing the “LLC” VeilKaycee Land & Livestock v. Flahive – A court may pierce the corporate veil of a LLC. D, through his LLC, leased undeveloped property from P and contaminated the property, so P tried to pierce to pay for the clean-up.

viii.Some state statutes contain specific provisions that allow courts to apply CL principles of piercing.

See also Robinson v. Glynn for another LLC case.

Chapter 5 – Duties of Officers, Directors, and Other InsidersDirectors are normally held to have the duty of mgmt of the corporation. These duties are normally delegated to the officers; so, the directors must supervise the officers. The legal duties of the directors and officers are owed to the corporation, so the performance of these duties is usually enforced by an action on behalf of the corporation brought by an individual shareholder (derivative action).

1. Duty of Care – Directors must exercise reasonable care, prudence, and diligence in the mgmt of the corporation. Expected to act in good faith and in best interest of corporationa. If you don’t exercise a reasonable duty of care, you can be personably liable.

i. Similar to negligence standard (what would a reasonable director do in his shoes...)b. Directors must discharge their duties in good faith and with that degree of diligence, care and

skill which ordinary prudent men would exercise under similar circumstances in like positions. A lack of knowledge about the business or failure to monitor the corporate affairs is not a defense to this requirement.

2. Duty of Loyalty – Directors are bound by the rules of fairness, loyalty, honesty and good faith in their relationship, dealings and mgmt of the corporation, as are officers. Put interest of corporation above yours. (usually conflict of interest)a. Conflict of interest – must offer up any opportunity to corp before taking adv of itb. No insider tradingc. Can’t transact if wholly detrimental to minority shareholders; can’t target specific minority

i. In situation on board, where shareholder of 1% was requested to sell to someone acquiring the corp at a huge premium, there would not be a breach bc you just have to be reasonable, and he wasn't doing anything to hurt the company. Fact that hes getting a premium doesn’t change principle “to protect minority shareholders.

3. Obligation of Good Faith and Fair Dealing: Bad actions that don’t fit into conflict of interest categories:

i. Waste (grossly irrational action) and no proof.ii. Illegality – any unlawful act is automatically breach in most jdx’siii. Agent simply refuses to act (CEO just checks out)

4. COURTS WILL NOT SECOND GUESS A BUSINESS DECISION IF IT WAS MADE IN GOOD FAITH, WAS INFORMED, AND HAD A RATIONAL BASIS.

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1. Duty of Care - The Obligations of ControlII. Courts will not interfere with the business judgment of the Board unless it appears that the

directors have acted or are about to act in bad faith and for a dishonest purpose. More than imprudence or mistaken judgment must be shown.

Kamin v. American Express – A Corp’s Directors are not liable merely because a better course of action existed. Stockholders brought a derivative action, asking for a declaration that a certain dividend was a waste of assets.

i. D acquired shares for 29 mil that fell to 4 mil, so they distributed to avoid a big hit on bottom line.

ii. A complaint alleging that some other course of action would have been better is not a CoA for damages.

iii. Shareholders said itd be better to realize loss to save 8 mil on taxes, but courts wont interfere w/ directors acts unless it appears the acts were fraudulent or collusive, and destructive of the shareholder’s rights.

iv. BoP on P to show fraud, dishonesty, or malfeasance was present or director was negligent in decision making process. - Directors liable only if their actions were illegal or unconscionable.

III. The determination of whether a business judgment is an informed one turns on whether the directors have informed themselves, prior to making a business decision, of all material information reasonably available to them. The concept of gross negligence is the proper standard for determining whether a business judgment reached by a board of directors was an informed one.

Smith v. Van Gorkom – The BJR presumes all decisions made by a company’s directors are INFORMED. Trans Union’s (D) stockholder brought a class action against the board for negligent decision making.

i. D wanted a leverage buyout to use tax credits, but when he proposed, meeting was only 2 hours, didn't bring copies, and he just randomly picked the $55 price after discussing with his pal Pritzker.

ii. Courts care about the process you took to get there, not about the outcome (here, they made money).

1. The more procedures you follow, i.e. hire experts and banks, the more protected you are by the BJR.

iii. The Bd breached their fiduciary duty of care to stockholders by (1) failure to inform themselves of all info reasonably available to them and relevant to their decision to recommend the merger and (2) failure to disclose all material info such as a reasonable stockholder would consider important in deciding whether to approve the offer.

iv. Dissent : they had 116 years of experience, unlikely board was persuaded by Pritzker’s fast sales pitch.v. Brehm v. Eisner,

2. The standard for judging the informational component of the Bd’s decision does not require that it be informed of every fact. The Bd is only required to be reasonably informed.

2. Duty of Loyalty and Good FaithA. Directors and ManagersDirectors and Managers – Duty of loyalty means that the directors must place the interests of the corporation above their own personal gains. Problems arise though b/c directors have other business involvements (causing a conflict of interest), & it is often for this reason that they are placed on the Bd.

II. If a director has a conflict of interest with a corporation’s transactions, the motives of the directors are questioned, and the court will examine the conflict with the most scrupulous care. The director has the burden to show not only good faith in the transaction, but also the inherent fairness to the corporation.

Bayer v. Beran – Rule requiring directors’ undivided loyalty avoids possibility of fraud and the temptation of self-interest. Shareholders brought derivative against D’s directors for breach of fiduciary duty for approving and extending a $1 mil radio advertising program.

i. Rule of undivided loyalty – directors have a duty not to act out of self-interest (comes up w/ conflicts)

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ii. Court may apply the rule where director stands to benefit personally, but just because they authorized the campaign w/ the president’s wife, there was no breach because no evidence to show the program’s purpose was to enhance the wife’s career or finance.

iii. As long as the ad served a legitimate and useful corporate purpose, the fact that the wife might benefit is not enough to show breach of duty.

3. Plus, research showed the success of the campaign, and they needed radio bc the name change.

B. Dominant Shareholdersi. Shareholders hold not duty to the corporation. SH can use info and give it to a competitor,

use dividends to set up a competitor. SHs are not agents of the corporation, and are not responsible to it. BUT this rule changes when the shareholder dominates the corporation.

ii. Majority shareholders have a fiduciary relationship to the corporation and the minority SH. a. This duty is manifest in several circumstances:

1. If a majority SH deals with the corporation (such as a contractual relationship), the transaction will be closely scrutinized to see that minority SH are treated fairly.

2. Also in corporate transactions, where the majority has the voting power to effectuate a transaction, the effect on minority SH may be reviewed by the cts to see that the majority acted in “good faith” and not to the specific detriment of the minority SH.

iii. A parent owes fiduciary duty to its subsidiary in parent-subsidiary dealings. When fiduciary duty is combined with self-dealing – when parent is on both sides of transaction – the intrinsic fairness standard applies. This standard involves a high degree of fairness and a shift in the burden of proof to the parent to prove that its dealings with the subsidiary were objectively fair.

Sinclair Oil v. Levien – A transaction between a parent and its subsidiary must be intrinsically fair. Shareholders brought derivative against Sinclair for damages after a transaction that benefited Sinclair but damaged SV. Sinclair also made SV pay out more in dividends bc Sinclair owned a majority of the stock.

iv. Although the Dividend payments were excessive, they were legal bc distributing more than net profits is not illegal and they did it equally to minority shareholders, so not self-dealing.

4. However, forcing SV to make the sale/transaction was self-dealing. v. A transaction involving a parent and its subsidiary that is controlled and fixed by the parent must pass

the intrinsic fairness test: (Only invoked if the parent is on both sides of a transaction w/ its sub, and self-dealing is suspected.) dominant co. must prove that its transaction w/ the subsidiary was objectively fair.

vi. Self-dealing : is present if parent uses power to enter into a transaction w/ the subsidiary and the parent co. receives a benefit from the subsidiary to the subsidiary’s detriment.

vii. *note- motives for issuing dividends are immaterial unless the dividends amount to waste and arise out of improper motives. Here, the P didn't contend waste, but rather it drained money for expansion, so P lost.

When a parent corporation controls several subsidiaries, a subsidiary is not liable for the actions of the other subsidiaries.

iv. Unity of interest and ownership - was a distinct legal entity from the monastery had no Δknowledge of the contract, and no dealings with the monastery. did not allege that Π Δwas involved in the transaction. Although the monastery may have been an alter ego of the Catholic Church, that’s not the case here. There is no respondeat superior between subagents.

v. Non-piercing would sanction fraud or promote injustice – Not enough that won't be ableΠ to collect if not permitted to sue . Δ

A parent corporation is expected to exert some control over its subsidiary. When, however, a corporation is controlled to such an extent that it is merely the alter ego or instrumentality of its shareholder, the corporate veil should be pierced in the interest of justice.

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vi. To determine if a subsidiary is merely the alter ego of the parent, the court must evaluate the totality of the circumstances, considering factors like (1) same directors or officers, (2) they file consolidated taxes, (3) the subsidiary is undercapitalized, (4) the subsidiary gets all its business from the parent, (5) the parent uses the subsidiary’s property for its own, (6) the parent pays expenses or wages for the subsidiary, (7) their daily operations are commingled. a. To determine whether to pierce the veil in a parent-subsidiary situation, no showing of

fraud is required under DE law. Most states that require fraud only do so in contracts cases, not torts.

b. Even in fraud required – MEC’s funds may be insufficient to satisfy ’s claims. Also, Π Δmay have induced ppl to believe it was vouching for MEC, so allowing to escape Δliabily would be unjust.

IV. The majority has the right to control; but when it does so, it occupies a fiduciary relation toward the minority, as much so as the corporation itself or its officers and directors.

Zahn v. Transamerica – A stockholder voting as a director must vote in all shareholders’ best interests. Stockholders of AF Tobacco sued D claiming D made them redeem their class-A for $80 when they found out the price of Tobacco soared, which was unknown to the shareholders. (who could’ve eventually made $240).

viii.If a stockholder who is also a director is voting as a director, he or she represents all stockholders in the capacity of a trustee and cannot use the director’s position for his or her personal benefit to the stockholders’ detriment.

ix. Basically, the decision to call Class-A was made by the Class-B holders (board) which was ran by D w/o candor with material facts.

5. D was only liable bc they withheld material facts. If they were candor, BJR would’ve protected them.

x. It was a Hostile takeover: D slowly acquire 51%, rather than friendly, where they say they wanna merge.

Securities and M&A’s1. Disclosure and FairnessA. Definition of a SecuritySecurities Act of 1933 – primarily concerned with primary market (the company that created the securities sells them to investors, i.e. IPO). Two Goals: (1) Mandating disclosure of material information to investors and (2) to prevent fraud.

Once you establish it’s a security, you need to say “it must be registered under the 1933 ACT!

unless the context otherwise requires (this is the escape hatch to say that although it looks like a security, its not) (1) The term “security” means any note, stock, treasury stock, security future, bond, debenture, evidence of indebtedness, certificate of interest or participation in any profit-sharing agreement . . . investment contract . . . or any interest or instrument commonly known as a ‘security’ . . . “

Securities Exchange Act of 1934 – concerned w/ secondary market transactions (investors trade securities among themselves w/o participation of original issuer (trading on floor at NYSE)

vi. Insider information, short-swing profits, other securities fraud, regulation of voting, etc...1. Why know a securities? Its easier for a P to bring suit under the securities laws than under state CL

fraud rules, as the elements of fed securities fraud are less demanding and easier to prove.

Robinson v. Glynn – P’s $25 mil investment in D’s LLC Geophone was not a security . P claimed securities fraud (certificate was labeled as a security) against D after D made misreps about using a technology.

i. P failed to prove that his investment was either an investment contract or stock under securities law.

ii. Held that: (1) investor's membership interest in LLC permitted him too much control to qualify as investment contract within definition of securities protected by federal securities laws, and (2) membership interest did not qualify as stock within definition of securities.

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iii. Court denied “Investment contract” claim– Howey Test – (1) a contract, transaction or scheme whereby a person invests his money in a (2) common enterprise and (3) is led to expect profits (4) solely from the efforts of the promoter or a 3rd party. P had too much control so NOT an investment K

iv. Court denied “stock” claim because (1) it is narrower than investment K; (2) securities law applies when “an instrument is both called ‘stock’ and bears stock’s usual characteristics (i.e. (a) right to receive dividends, (b) negotiability, (c) ability to be pledged, (d) voting rights, (e)capacity to appreciate in value.

v. It is the “economic reality” of the particular instrument, rather than its label, that ultimately determines whether it falls within reach of the securities law.

B. Rule 10b-5§10(b)(5) - (requires intent) It shall be unlawful in connection with the purchase or sale of any security, for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce, or of the mails or of any facility of any national securities exchange,(a) To employ any device, scheme, or artifice to defraud,(b) To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or(c) To engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any personElements of 10b-5 CoA1. The person is an insider . 2 elements of an insider: (i) the person must have a relationship giving access, directly or indirectly, to info intended to be available only for a biz purpose and not for the personal benefit of anyone. (ii) there must be the presence of an inherent unfairness where a party takes advantage of such info, knowing it is unavailable to those w/ whom he is dealing.

Basic Inc. v. Levinson – Shareholders determine which omitted facts are material. Former Basic shareholders brought a class action against Basic/Directors under 10b-5 , claiming thy issued false statements about a M&A.

i. Materiality – An omitted fact is material if there is a substantial likelihood that the avg, reasonable shareholder would have considered it important knowledge to have before deciding how to vote.

1. Must be a substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the “total mix” of information made available.

2. always a case-by-case analysis (at first meeting, probably don’t have to disclose much, but later on)

3. courts look at balance of “probability of merger and magnitude”ii. Under 10b-5, P must prove reliance on a misleading statement in order for it to be material.iii. Applies to preliminary merger discussions when “agreement-in-principle” as to $/structure is made.iv. Reliance – requiring P to show reliance (by acting differently had the omitted material info been

disclosed or if misrep never made) places an unrealistic evidentiary burden on him, so...a. Fraud on Market theory- court will presume reliance b/c market price of shares reflect publicly

available information and an investor relies on that information to determine the price (and thus make decisions). But,

4. D’s could rebut the presumption by showing that there was no link between the misstatements and plaintiff's price paid or received. (i.e. he went bankrupt so decided to liquidate, had to pay for kids college tuition, etc.. more on pg. 446-447.)

v. Concur/Dissent : Fraud-o-Market-theory should not be applied in this case and should be refutable – it means investors should be able to rely on the stock’s price as a reflection of its value, which is absurd bc stock values are constantly changing and stock shares have no true value.a. RULE - If you make factual misstatements, but the correct factual information is out there, it

doesn’t matter -its not material. i.e. you say Tony Blair is prime minister, but he wasn't, its ok!vi. Scienter - In order to be held liable under Rule 10b-5, the Δ must have scienter.

i. Scienter is defined as the mental state embracing the “intent to deceive, manipulate, or defraud.” a. Some courts have also held that recklessness also satisfies the scienter requirement.

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Chapter 7 – Mergers, Acquisitions, and Takeovers

1. Mergers and Acquisitionsi. Merger – A & B turn into just A (if B has a bunch of liabilities, A will acquire them)ii. Consolidation – A & B turn into C, a completely new company.

Steps of Mergeri. High level managers at A and B start prelim negotiations, or a 3rd party bank will make proposal to themii. After this, A & B sign a merger agreement. Then Board of directors has to approve the agreement. Once

they approve, shareholders have to approve.1. Shareholders only approve mergers that a material to the company.

iii. If shareholders approve, a general filing is made, “Articles of merger”iv. If 60% say yes, and 40% say no, it goes through. The approving voters will get new shares for new

company. However, the “no” voters have appraisal rights and can cash in their shares for market value (but no appraisal rights if stock is publicly traded, bc the market will show the price)

Merger Asset PurchaseLiabilities Assume liabilities Not transferred (unless expressly assumed)Approval/Appraisal Shareholder approval and Board of

directors for bothTarget co: requires B of Ds and shareholdersAcquiring: only the board has to approve

Tax Tax free if structured so Generally have to pay taxes.Transfer of control Easy transfer of title Complex – you must individually acquire

every single IP right.Statutory Merger – requires vote of board and shareholders for each company. Drafter merger agreement. All property interests, rights and obligations of smaller company pass to new company by law.

Practical Merger – don’t use statutory procedure; rather, big company offers its shares to the smaller companies shareholders in return for their shares of the smaller company. They seek to acquire just enough shares to gain control. No votes are required, nor any appraisal rights. Then it can use “short-form merger” to merge smaller company into bigger company.

Asset sale – big company deals with small company rather than it’s shareholders. Does not succeed to unforeseen liabilities. (known liabilities will be settled by seller or assumed by buyer). Acquiring co. may be liable for products liabilities that didn't arise until years after the asset transfer. State laws vary on requirement of shareholder vote and availability of an appraisal right for asset-acquisitions.

A. The De Facto Merger DoctrineFarris v. Glenn Alden – Shareholders have dissenters’ rights in a De Facto Merger that is disguised as an Asset Sale. List purchased 40% of GA’s stock for 8 mil then signed a re-organization agreement for GA to acquire List’s assets and liabilities, give List 3 directors on new “List-Alden”, and dissolve List.

v. If statutory merger was used and merger agreement drafted, approval by vote of both the board and shareholders would’ve been required. Dissenting voters would’ve been entitled to FMV of their shares.

vi. If a contemplated transaction’s result is the same as a merger, the transaction is a de facto merger, and the target Corp’s shareholders have the right to dissent and receive fair value for their shares.

2. In DEL, no approval required for asset sale bc you don’t incur liabilities, same BoD, more common.

vii. Distinguishing factor – in addition to sale of assets, the acquiring co. also takes on the other liabilities.a. Also: company became holding co., rather than coal co. directors will be a minority on new board.

New co. will have 7 times the amount of debt.viii.To avoid merger: don’t pay for assets in stock, pay in cash. This way, they still keep some assets

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Business StructuresCorporation

problems with partnership: (1) instability; (2) illiquidity of assets; (3) personal liability; (4) cumbersome joint managemento BUT corporation has tax disadvantages and more complex operations

investor ownership – earnings, controlled apportioned according to amount invested legal personalty with indefinite life

o separate assets and contractso investors can’t w/draw investments arbitrarily

limited liability for SHs and managers free transferability of share interests

o owners can exit w/o dissolving firm no hold-up power by threatening to leave centralized management

o clarifies and focuses authority NOTE – closely-held corporations

o few shareholders – often same as officers and directorso SHs get money in three ways

pay dividends according to pro-rata rule pay out compensation in (tax-deductible to corp.) salaries and perks repurchase shares

must be pro rata (See Donahue v. Rodd, MA) – basically equal opportunity in closed cops o BUT other juris have not followed

o incorporated for tax or liability reasons rather than raising capitalo also can take advantage of default provisionso really just incorporated partnerships so drop some characteristics of corporation (e.g., limits on transferability)

Partnership receipt of share of profits is PF evidence of existence of partnership

o See RUPA § 202 (unless payment for something specific); Vohland all property owned by partnership as entity partners all jointly and several liable for obligations of partnership (unlimited liability)

o so one partner has power to bind even if other partner disclaims liability (Nat’l Biscuit Co.)o BUT if one partner assumes K upon dissolution liability of others ends (See Munn v. Scalera)o bankruptcy

partnership creditors have 1st priority over partnership assets and placed on parity with individual creditors for individual assets - RUPA

can’t sue partners individually (and claim individual assets) until bankruptcy estate finishes proceedings (See In re Comark)

Meinhard v. Salmon – breach of fiduciary duty not to tell partner about corp. opportunity dissolution

o all assets liquidated unless K specifies differently (Dreifuerst v. Dreifuerst – court refused to allow for distribution in kind b/c not in K)

o w/drawal of one partner leads to disassociation – paid full share – RUPA § 601o owe fiduciary duty even at dissolution (See Page v. Page)

partnership at will (not term) absent evidence to contrary (See Page v. Page, UPA § 31(1)(b)) limited partnerships

o must register w/ state to give notice o one gen’l partner with unlimited liability and one or more limited partners

LPs can vote on major decisions such as dissolution, but can’t represent partnership in dealings w/ 3d parties

LPs can only lose up to investment amount BUT if limited partner exercises control, previously became defacto gen’l partner unlimited liability

(See Delaney v. Fidelity Lease Limited) now RUPA exempts LPs from becoming gen. partners via control

typical structure = gen. partner gets fixed salary and % of profits; next slice goes to LPs; after that, money divided equally between GPs and LPs

LLP – all partners have limited liability (only liable to extent of investment)o NEVER tested in courto initially just limited liability for torts but now trend toward limiting K liability

HH thinks this is unfair b/c should be all or nothing)

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Other Forms LLC – investors operate firm and serve as agent but have limited liability

o advantages not governed by RUPA (so no dissolution; auctioning of assets) centralized management – delegate authority to board transferability of shares continuity of liability freedom to opt out (e.g., pass out earnings however you want; owners can be only managers; no board; no

elections) taxed like partnership but assigns liability like corp

o BUT CANNOT be publicly traded business trust (based on common law trust)

o full limited liability for beneficiaries of trusto firm can own its own assets, which creditors can’t get ato governance open (no defaults) SO draft everything rather than DGCLo fiduciary duties are contractual

cooperative firm o looks like regular corporation (voting might depend on how many prods you buy)

nonprofits – barred from giving any profits to memberso fiduciary duties really impt b/c that’s all you have

Article Cases:Tyco:

1. Duty of Care: A. Breach:

i. Outside scope of authorityii. Not acting in “best interests of Corp.”iii. Un-informed decision making (Van Korkam)iv. Heightened duty to Corp – hes a board, officers and shareholderv. Comingled funds – always fishy

B. No Breach:i. Reasonable for executives like him – its not a big deal on the grand scheme of things.ii. He didn't plan party, someone else did... plus, he is CEO so hard to say its out of scopeiii. BJR – candor in books...iv. Stock charts – went up

2. Duty of Loyalty: A. Breach:

i. Self dealing (bayer) – home sale w/ no appraisalii. Just bc profit doesn’t mean there's no breachiii. 2nd relocation plan for execs only (Sinclair)iv. failure to be candid (Zahn)

B. No Breach:i. Made business sense (BJR), No Special Conflicted treatment for CEO only, CEO’s discretion to

executive, Common practice / good decision process (just bc it was tacky, you can’t convict).

Steps for Breach1. First, analyze whether proper authority was given and if it was in scope2. Next, which duty

a. Duty of care (reasonable similarly situated)b. Duty of loyalty (selfless; see if there's conflicted dealings – it doesn’t have to be real, just an

appearance of it. See if there's candor with regard to material information.)i. They sometimes overlap, but its not either or. The duties vary depending on the relationship of

the parties3. Procedural process outcome (to see if you can get protection under BJR). 4. BJR does not apply if not a Corp or:

a. Fraud, Illegality, Self-dealing, Bad faith or gross negligence

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i. **If you spot one of these issues say, in a jdx that adopts it officers can be indemnified. If jdx does not accept it, officers will be liable for negligence.)

Google Article - must disclose everything for IPO, all material information

Apple – Steve Jobs - what does he have to disclose? What’s material?Material Not Material

If he is unhealthy, he will lose control/management of company i.e. “Diminished Capacity.”

Leading innovator at Apple Alter-ego of Apple Serious health condition Stock price – some weight, but not primary

significance because stock price can flcutuate for any reason.

Death is inevitable – disclosed known fact Secrecy – competitive advantage Not important bc investors should base their

decisions on the #’s, not solely CEO’s health. PRIVATE MATTER – no disclosure, it’s a

personal matter; where do we draw the line.

AOL-Time Warner1. AOL:

i. Breach of duty of care (lack of due diligence) and good faith (Zahn)ii. Defense – internet co.’s are intangible, balance sheets don’t say what they really are

2. Time Warner:i. Chargers: issues of due diligence; breach of duty of care; lack of candor; self-dealing; BoD left

in dark.ii. Defenses: BJR (only applies if informed); duty of care (at time of decision, hard to tell

outcome); duty of Loyalty (when making decision, you have a better sense if something is wrong or not right

Enron1. “No accounting issues...” and “Our liquidity is strong....” violated security and corporate law:

i. Prosecutors: 10b-5 – it was misleading. And it was an omissionii. Fiduciary duty of care and loyalty –

1. Care – what would a reasonable CEO in his position do? 2. Vinson & Elkins – Enron’s lawyers

i. Role of business lawyer – VE says his job is only to give advice - he can trust the experts in accounting.

ii. In entity jdx sign in name of partnership. In aggregate jdx, sign in name of partners.

Practice Exam Notes:1. Partnership is based on a lie, but the lie was made before the partnership was formed so no duty of care.2. Two partnerships or they evolved. When they decided to 3. 10b-5 issue – it’s a security because it’s an investment contract under the howie test.

a. Needs scienter that there's an intent to defraud or material misstatement.b. Are they material collectively or on their own? Collectively its material because it alters the total

mix 4. You can argue there is no real partnership because they weren’t aware of the material terms.

a. That they ratified5. Tyco – breach of duty of care because they themselves are benefitting from the use of partnership funds.6. How do we categorize the relation with JJ?

a. Employer to employee; independent contractor, because no control...b. Argue that all partnership agreement allowed them to make all business decisions, and since this is

an ordinary business decision they were allowed to do it.7. JJ issue:

a. What type of authority does he have? Did he go beyond the scope.i. Apparent authorityii. Inherent authority

b. Dating situation: its foreseeable he might date people why learning about wine...

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c. One can say he breached his duty of care and loyalty to the partnership because taking the waitress out

8. Transfer of land to Corp: asset purchase, M&A, or entity transformation?a. Shareholders are only liable for what they put in initially.b. QAZ has board member of new court member

i. That’s a conflict bc he’s staying on the board “solely” to stay close to Penelope.ii. Wes ca counter with Steve Jobs argument that its personal and irrelevant to business.iii. That he offered to take her to wine convention, Penelope should have offered it to her partner

1. Her counter is that it was a personal offer.9. Issue of QAZ getting two companies to test the ground:

a. Relationship of QAZ – independent contractor, but P-A with regards to hiring the other 2 companies.

b. Duty of loyalty (Sinclair) they are benefitting both sides of the transaction.c. Self-dealing: they should've disclosed that they owned the companies.

10. Investors argument: (how to categorize them is important for determining their liability)a. They try to say they're just shareholders

Question 21. You have to address all the concerns of the client: tax, potential expansion, personal liability.

a. Partnership in entity theory jurisdiction.b. You want to warn them about the pitfalls of whatever you propose.

i. i.e. if you say a corp, you must say its great for xyz, but if you don’t set it up and keep up with corp formalities, you can be liable...

c. also, at beginning of fact patter, it says they don’t agree, so if you talk about partnership problem, you should've discussed the problems from a 2 person partnership.

2. He split each truck into a LLC’s. with P and S as controlling members in their own LLC.a. Tax – it makes it more advantageous.b. Expansion – its not as good as what they have now which is nothing.c. Enterprise theory liability? is it just one big enterprise?

M & A exercise1. Partnership: ABB LP– what advice and what questions do you have for them?

a. LP’s generally have no management rights, so if they want to sell, there's nothing he can do.b. Should recommend to get an expert valuationc. M&A vs. Asset Sale (Maybe sell just the IP then divide what is left between the 3 partners)d. Brandon rights of first refusal?

i. If so, separate parties must retain individual counsel to avoid conflict of interest.e. Who represents the entity? Depends on jurisdiction:

i. Entity jdx (predominant; DEL uses this)– if the general partners interest differs from the entity’s interest, should probably seek separate counsel.

ii. Aggregate – just the partners need their own lawyersf. If Brandon as LP thinks the GP’s are selling for way less and don’t care about max profits:

i. There may be an issue of him, as a LP, bidding for the stakes of the company.ii. Because he may have inside information against outside bidders. So

1. If GP’s can do it, and they have way more info, than surely LP can do it.iii. Is competitive bidding necessary? Depends what GP’s want to do. (Meinhart). If they think its

in the best interest of the partnership to use competitive bidding, rather than just sell to LP.g. If we add a 2nd LP (owns 5%), the negotiations are just between the major 3 shareholders. Do they

owe a duty to the 4th minority shareholder, in a general partnership?i. If partnership agreement doesn’t say, there is a duty of care/loyalty to 2nd LP, absent some

contractual provision stating otherwise.h. Key advice – get outside evaluation, get separate counsel for each partner involved to avoid conflict,

Kaplan2. M&A or Asset Purchase

a. If LP thinks GPs sold it for too low, what can he do? He would have to allege it was so unreasonably low that the GPs breached a duty of care to him (30 minutes is not enough time to decide)

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b. you can’t just determine materiality based on the ratio of your worth to the companies worth that you’re acquiring. Depends if you buy or merge, bc merging takes over all the liability

c. even once a partnership evolves, there's a continuing obligation of a duty to the former partners.3. Business Judgment Rule – applies to Principal Agent relationship. As long as agent is acting within his

proper scope of authority, the BJR will apply to himDK

4. Expert opinion/valuation5. IP rights (Ownership of key ingredients. For CLN, he doesn’t own the outlines, they share. )6. Organize legally to limit liability

a. Want to avoid pepper source to avoid piercing. b. Should organize CLN and DLP separately, both to be managed by another LLC (DK LLC)c. How do you keep the separate entities from looking like just one centrally managed co.?

i. Be anti-Sinclair, don’t share people on each board, etc...ii. Hire non-owner managers

Final Exam Tips:

1. Prefer sentences, but may list if out of time2. Use short paragraphs rather than long.3. Use IRAC (R means Rule Support)4. DISCUSS BOTH SIDES of argument