Principles of Business Organizations
Authors:
Freer, Richard D. / Moll, Douglas K.
Edition:
2nd
Copyright Date:
2018
26 chapters
have results for Principles of Business Organizations
Chapter 2. Agency 304 results (showing 5 best matches)
- Agency concepts explicitly appear in the statutory schemes of many business organizations. In the general partnership, for example, partners are agents with apparent authority to bind the partnership for acts in the ordinary course of the partnership business.
- The law of agency is the law of delegation—i.e., the legal principles that govern the ability of one person (the principal) to have another person (the agent) act on his behalf. Basic agency relationships underlie virtually all commercial dealings in the modern world. For example, the relationship between a sole proprietor and his employees is governed by the law of agency, as is
- The plaintiff also sought to recover damages for losses suffered in the business prior to rescission, loss of time devoted to the operation, and the expenses and attorneys’ fees incurred in connection with the suit against the sellers. The court allowed the plaintiff to recover all of these damages. Citing agency principles, the court noted that when an agent receives a benefit as a result of violating his duty of loyalty, the principal is entitled to recover that benefit as well as the amount of damages caused by the breach. Citing tort principles, the court observed that a wrongdoer is liable for all of the foreseeable injuries resulting from his tortious acts.
- The principles of agency have made it possible for persons to utilize the services of others in accomplishing far more than could be done by their unaided efforts. . . . Partnerships and corporations, through which most of the work of the world is done today, depend for their existence upon agency principles. The rules designed to promote the interests of these enterprises are necessarily accompanied by rules to police them. It is inevitable that in doing their work, either through negligence or excess of zeal, agents will harm third persons or will deal with them in unauthorized ways. It would be unfair for an enterprise to have the benefit of the work of its agents without making it responsible to some extent for their excesses and failures to act carefully. The answer of the common law has been the creation of special agency powers or, to phrase it otherwise, the imposition of liability upon the principal because of unauthorized or negligent acts of his servants and other...
- Even assuming that the control element was met, what about the “on behalf of” element of the agency inquiry? Was Warren acting primarily for the benefit of Cargill? Cargill clearly benefitted from its relationship by receiving interest on the loaned sums as well as a steady supply of grain, but Warren also benefitted by earning money from its grain resale business as well as its other business pursuits.
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Title Page 3 results
Chapter 16. The Limited Liability Company 322 results (showing 5 best matches)
- The limited liability company (“LLC”) is a noncorporate business structure that provides its owners, known as “members,” with several benefits: (1) limited liability for the obligations of the venture, even if a member participates in the control of the business; (2) pass-through tax treatment; and (3) contractual freedom to arrange the internal operations of the venture. Because of this favorable combination of attributes, the LLC has emerged as the preferred business structure for many closely held businesses. in mind, however, that the LLC is a relatively new form of business organization in this country. Although its “birth” dates back to 1977, its widespread use is more recent. Compared to other forms of business organization, therefore, the LLC is less established, and lawyers and courts continue to wrestle with many open questions.
- As we have seen, the LLC possesses many of the best features of other business organizations. It is worth asking, therefore, why anyone would choose to conduct a closely held business in a non-LLC form. Consider the following issues:
- It is important to keep the history of LLC development in perspective when working with LLCs and court interpretations of LLC acts. . . . The typical LLC act is usually a hybrid of provisions culled from the individual state’s partnership statutes and business corporation law. . . . [W]hen a court is interpreting an LLC act or agreement, the court will focus on the particular aspect of the LLC that gives rise to the problem, with emphasis on the foundational business form from which that characteristic originated. Usually, the particular aspect can be traced to either the corporate components or the partnership components of the LLC act or agreement. In such cases where the characteristic originated from the partnership aspects of the LLC, the court will use the established [principles] and precedent of the partnership law to resolve the issue . . . . In such cases where the characteristic originated from the corporate aspects of the LLC, the court will utilize the established [
- Is an LLC more like a partnership or a corporation? The question is an important one, particularly because the applicability of various regulatory statutes may turn on the answer. Many of these statutes were enacted when partnerships and corporations were the only options for business organizations with more than one owner. As a result, the statutes tend to refer only to partnerships and corporations, leaving considerable uncertainty about whether newer business forms, such as the LLC, fall within the statutory coverage.
- if the business organization at issue was a limited partnership with an individual general partner? The Oklahoma Constitution allowed non-secret general and limited partnerships to hold liquor licenses. Because a limited partnership always has at least one general partner with unlimited personal liability, a limited partnership with an individual general partner is consistent with both the language of the Constitution and the concern for personal responsibility. The court would likely allow such an organization to hold a liquor license.
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Chapter 1. Introduction 24 results (showing 5 best matches)
- The study of business organizations is, broadly speaking, a study of how people engage in business and, more importantly, how the law facilitates and regulates the operation of such businesses. This book examines many of the legal rules and doctrines associated with running a business—from formation to dissolution to everything in between. These rules and doctrines are explored within the context of the various organizational forms in which a business may be operated.
- As you proceed through the various business organizations discussed in this book, you may find it useful to return to this list. Ideally, it will focus your attention on some of the critical issues that determine whether a particular business form is suitable (or unsuitable) for a specific business situation.
- Chapter 3 explores the general partnership—an association of two or more persons to carry on, as co-owners, a business for profit. Among the modern forms of business organization that involve two or more owners, the general partnership is unique in that it can be informally created. Put differently, establishing a general partnership does not require the filing of an organizational document with the state. So long as two or more persons are carrying on, as co-owners, a business for profit, a general partnership is created, regardless of whether the co-owning persons intended that result.
- Chapter 2 examines the law of agency—the law governing the relationships between principals, agents, and third parties. Although agency law applies to all forms of business, it is frequently invoked when dealing with the most basic (and most common) form, the sole proprietorship. A sole proprietorship is a business owned by a single individual that is not operated as a corporation or other special legal form. The major advantage of a sole proprietorship is that it is easy to establish—the proprietor simply begins to conduct business. In some jurisdictions, a proprietor using an assumed name for the business must also file an “assumed name” or “fictitious name” certificate with the county clerk specifying the name of the owner and the name of the business. The major disadvantage of a sole proprietorship is that the owner is liable for the obligations of the business. Debts of the business, in other words, are viewed by the law as debts of the owner, and the owner’s personal...
- Whether you are taking a course on Corporations, Business Associations, or Business Organizations, the centerpiece of your study will be the corporation. It has
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Preface 2 results
- This book is designed for use in law school courses that focus on Business Organizations. Although course names differ from school to school, the book is ideally suited for courses such as “Business Organizations,” “Business Associations,” “Agency, Partnerships, and Limited Liability Companies,” or “Unincorporated Business Associations.” If we have done our jobs, reading this book will provide you with a solid grounding in the law of agency, general partnerships, corporations, limited partnerships, limited liability partnerships, and limited liability companies.
- We very much hope that you will find this book to be informative, “user-friendly,” and enjoyable. Most importantly, we hope that the book will help you learn about a subject that is of great significance to a tremendous number of companies and individuals—the law of business organizations.
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Chapter 4. The Corporation: Overview, Theory, and History 104 results (showing 5 best matches)
- County Business Patterns by Legal Form of Organization 2015 Business Patterns
- Trying to capture more business, several states have modernized their statutes. The New York legislature—which must be frustrated at having all those corporate headquarters in Manhattan for businesses incorporated in Delaware—substantially amended its Business Corporation Act in 1998. Massachusetts scrapped its century-old corporation code in 2004 in favor of a modern law, in the process sweeping away some bizarre and arcane requirements. Texas completely overhauled its business organization laws in 2010. It is not clear, however, that these efforts are cutting into Delaware’s primacy as the state of incorporation for publicly traded entities.
- There are many non-profit businesses, including charitable organizations and universities. They, and the law governing them, are beyond our scope.
- It is worth noting that corporate philanthropy consists of the business’s managers deciding to give away money that otherwise might go to shareholders. Warren Buffett, the famous investor, relates an interesting tale about a friend who sought charitable contributions for various organizations. Buffett said: “in the process of raising . . . eight million dollars from 60 corporations from people who nod and say that’s a marvelous idea, it’s pro-social, etc., not one [executive] reached in his pocket and pulled out ten bucks of his own to give to this marvelous charity.”
- In determining what form of business best suits a client’s needs, the business lawyer must consider income tax ramifications. Federal income tax law has three basic regimes for taxation of businesses, routinely referred to by the subchapter of the Internal Revenue Code dealing with that regime.
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Chapter 7. Fiduciary Duties 320 results (showing 5 best matches)
- In Delaware, an interested director transaction is one between the corporation and (1) one or more of its directors, (2) a business or organization in which one of its directors also serves as a director, or (3) a business or organization in which one of its directors has “a financial interest.” Does this definition cover a transaction between the corporation and a director’s spouse? It does not seem to, but most people would probably consider such transactions to raise serious issues of self-interest.
- Statutes Relating to the Business Judgment Rule
- The Business Judgment Rule
- The answer is yes—but only if she breached a duty owed to the corporation and the minority shareholders. Everyone agrees that the controlling shareholder owes such a duty, but there is some debate about its scope. There is some case support for two extreme positions: (1) that the seller must always investigate the buyer and (2) that the seller can be liable only if she knows that the buyer plans to loot the business. Most courts, however, seem to take a middle course, and hold that the seller will be liable only if she failed to follow up on some facts that should have alerted her to the risk that the buyer planned to loot. There are various red flags, such as the third party’s willingness to pay an exorbitant price, or an excessive interest in liquidity or immediately sellable assets of the business. The American Law Institute’s Principles of Corporate Governance ...that the seller can be liable if “it is apparent” that the third party “is likely to violate the duty of...
- The Delaware Supreme Court held that Guth had breached his duty of loyalty to Loft. He usurped a corporate opportunity. Pepsi was an opportunity for the candy company, at least in part because the cola company was in the candy company’s “line of business.” But, as we saw in Hypothetical B at the beginning of this Subsection, this just begs the question: was Loft’s “line of business” to be defined narrowly (as operating candy shops) or broadly (as preparing and dispensing sweets, including soda pop)? In the facts made the court’s decision a bit easier because Loft already manufactured syrups and served soft drinks. On the other hand, one could argue that while acquiring a source of cola syrup was in Loft’s line of business, going into the cola business was not. The court took a broad view and held that the assets of Pepsi fit into Loft’s business line. Courts employing this “line of business” test sometimes speak of an opportunity as something “logically related to the...
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Chapter 15. The Limited Liability Partnership 74 results (showing 5 best matches)
- This point may not be particularly significant for business organizations law, but it can be important in other areas of the law. For example, under article 9 of the Uniform Commercial Code, a “registered organization” is an “organization formed or organized solely under the law of a single State or the United States by the filing of a public organic record with, the issuance of a public organic record by, or the enactment of legislation by the State or the United States.” UCC § 9–102(a)(71). A general partnership (whether an LLP or not) is not a registered organization because “
- Texas no longer requires annual renewal of the LLP registration. There is an annual reporting requirement, but “the risk of a lapse in liability protection is substantially lessened under the new annual reporting scheme.”
- The LLP form of business organization is a relatively recent development. Texas passed the first LLP statute in 1991 as a result of leading the nation in bank and savings and loan failures in the 1980s. The Federal Deposit Insurance Corporation and related governmental entities brought lawsuits against hundreds of shareholders, directors, and officers of these failed financial institutions in an effort to recover funds. When the amounts recovered from the principal wrongdoers amounted to only a tiny fraction of the total losses, malpractice lawsuits were then directed against the lawyers and accountants who had represented the failed institutions. The fear of massive personal liability on the part of “innocent” partners for the banking work of fellow partners spurred a vigorous lobbying effort that ultimately resulted in the passage of the first LLP statute. Other states followed suit, and the LLP quickly became a viable business option across the country.
- In short, to the extent that limited liability results in a disincentive to monitor the work of fellow partners, one could argue that LLP provisions are a negative development. Presumably the quality of professional or other work improves to some degree if partners are incentivized to collaborate and to help one another. As mentioned, however, reputational concerns still exist to encourage monitoring and assistance. Further, even before the LLP, professional firms could achieve limited liability by using the professional corporation structure. Thus, the LLP is not the first business organization to raise monitoring concerns in the professional firm setting. As far as we know, there has been no hue and cry from clients of professional corporations that the quality of work has suffered due to a purported lack of monitoring.
- The emphasis on vicarious liability is important; indeed, no LLP statute (and, for that matter, no statute related to any business organization) provides protection to a partner for his own direct liability (i.e., liability stemming from the partner’s own wrongful acts).
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Chapter 3. The General Partnership 370 results (showing 5 best matches)
- The general partnership is unique among business organizations with two or more owners because its formation does not require a public filing with the state. Instead, under UPA, a general partnership is formed whenever there is an “association of two or more persons to carry on as co-owners a business for profit.” Both UPA and RUPA contain rules for determining whether a partnership has been formed. The most important of these rules is that 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 of a debt, as wages, or for other listed exceptions.
- There are many business organizations that have the partnership structure. This Chapter focuses on the general partnership, which can be thought of as the basic partnership form. Other partnership structures, such as the limited partnership and the limited liability partnership, are discussed in later Chapters. When people use the term “partnership,” they are typically referring to the general partnership form; nevertheless, you should always confirm this.
- Since each partner is an agent of the partnership, with an equal right to conduct partnership business, actual authority to bind the partnership is inherent in the position.”);
- General agency principles, such as ratification, do apply in the partnership setting. UPA § 9(1) (stating that “[e]very partner is an agent of the partnership for the purpose of its business”);
- A recurring question in the law of business organizations is whether contractual provisions can modify the obligations imposed by fiduciary duties. In the Singer family formed an oil production partnership called Josaline Production Co. Andrea and her brother Stanley were partners. On July 25, 1979, the partnership held a meeting and discussed several investment opportunities. One item of interest was the availability of 95 acres of land owned by IDS. Prior to the meeting, Stanley had been asked to look into the possibility of purchasing the land. At the meeting, however, the partners deferred the decision.
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Chapter 5. Formation of Corporations (and Related Pre-Incorporation Activities) 155 results (showing 5 best matches)
- A promoter is a person who takes the initiative in developing and organizing a new business venture. Promoters are often imaginative entrepreneurs who take an idea and create a profitable business to capitalize on it. Though one person may serve both as incorporator and promoter, the roles are different. As we saw, the incorporator executes the document that forms the corporation and oversees the initial organization of the business. The promoter’s role is broader. She is responsible for assuring that the corporation is an economic success.
- Failure to satisfy the requirements of organization and operation may attract the attention of the state itself, which may be empowered to dissolve the corporation for such failures. One requirement is particularly important in this regard. Each state levies a tax on each corporation it charters to pay for the privilege of conducting business. This “franchise tax” is usually payable annually. There is also a requirement of an annual report, which is filed with the state. Failure to pay the tax or to file the report may subject the corporation to administrative dissolution. We discuss dissolution in Chapter 12(H).
- In a good many states, including Delaware, however, there is no statutory provision such as RMBCA § 2.04. One possibility in such states is to view the issue as a matter of agency law. Because no corporation was formed, the person purporting to act for the business acted on behalf of a nonexistent principal and therefore must be liable. Another possibility is to consider the form of business actually created. If the defectively incorporated business has one owner, it is a sole proprietorship. If it has more than one owner, it is a partnership. Neither of those business structures requires filing with the state; each is formed by conduct. And in each, the sole proprietor and the partners are personally liable for business debts in contract and tort. Thus, failure to achieve corporate status leaves the proprietors on the hook for personal liability because of the business structure she or they actually created.
- As a rule of thumb, older statutes tend to impose more formalistic requirements on the formation and operation of the business, while newer statutes (typified by the RMBCA) permit the proprietors to tailor their business to suit their needs. Still, no two states’ corporation laws are identical, and the proprietors will incorporate (or “charter”) in a state that makes sense for them. The majority of corporations are small, closely held businesses, with only a handful of owners (often, in fact, with only one owner). They do business in a single state. Usually, it makes sense to form the corporation in that state.
- These problems are now a thing of the past. Today, all states permit a foreign corporation to “qualify” to do business within its borders. So a company can incorporate in State A and qualify to do business in State B (and others). As we will see in Section E of this Chapter, such qualification is rather easy.
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Chapter 14. The Limited Partnership 155 results (showing 5 best matches)
- From 2009–2013, NCCUSL undertook an intensive effort to harmonize, to the extent possible, all of the uniform acts that addressed unincorporated business organizations. As part of that effort, an amended version of ULPA (2001) was promulgated (“ULPA (2013)”).
- § 153.110 (“A limited partner may withdraw from a limited partnership only at the time or on the occurrence of an event specified in a written partnership agreement.”). Many states are eliminating default exit rights in the LLC setting as well. Chapter 16(I). In both contexts, this elimination facilitates the business organization’s use as an estate planning vehicle.
- For many years, the limited partnership stood alone as the only business form that provided the best of both worlds—the corporate trait of limited liability, and the partnership traits of pass-through taxation and structural flexibility. With the birth of the limited liability partnership (“LLP”) and the limited liability company (“LLC”), however, the modern business owner now has multiple options that fuse limited liability, operational flexibility, and favorable tax treatment. As a result, a number of commentators have predicted that the usage of the limited partnership will dramatically wane. Nevertheless, keep the following in mind: (1) the relatively long history of use of limited partnerships in this country has produced a level of comfort among many attorneys and business owners with that form; (2) that same history of use has generated a significant body of common-law precedent that makes the limited partnership’s operation more “predictable” than newer business... ...of...
- RULPA (1976) § 303(a) retained the control rule and added a new second sentence that narrowed the scope of a limited partner’s liability: “However, if the limited partner’s participation in the control of the business is not substantially the same as the exercise of the powers of a general partner, he [or she] is liable only to persons who transact business with the limited partnership with actual knowledge of his participation in control.” RULPA (1976) § 303(b) also added a “safe harbor”—i.e., a list of protected limited partner activities that did not constitute “participat[ion] in the control of the business.” The list included, among other activities, “consulting with and advising a general partner with respect to the business of the limited partnership,” “being a contractor for or an agent or employee of the limited partnership or of a general partner,” “acting as surety for the limited partnership,” and voting on various listed matters.
- , the general partner has the fiduciary duty to manage the partnership in its interest and in the interests of the limited partners. That qualified statement necessarily marries common law fiduciary duties to contract theory when it comes to considering actions undertaken in the limited partnership context. Thus, I think it a correct statement of law that principles of contract preempt fiduciary principles where the parties to a limited partnership have made their intentions to do so plain. . . In short, I think that under Delaware limited partnership law a claim of breach of fiduciary duty must first be analyzed in terms of the operative governing instrument—the partnership agreement—and only where that document is silent or ambiguous, or where principles of equity are implicated, will a Court begin to look for guidance from the statutory default rules, traditional notions of fiduciary duties, or other extrinsic evidence. . . .
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Chapter 11. Potential Liability in Securities Transactions 160 results (showing 5 best matches)
- Remember that § 16(b) applies only to publicly held corporations. Very few individuals hold more than ten percent of the stock of a public corporation. Such a shareholder will almost always be another business organization. Typically, it will be
- to engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person,
- No matter what kind of defendant is involved, the most vexing issue in applying § 16(b) can be the math. The goal of § 16(b) is to disgorge the statutory insider’s
- Shareholder owns 100 shares of XYZ Corp. She is thinking about selling them because the company has not been doing very well. The company issues a press release full of lies. It says that the company has new business prospects and that the stock price will go up. In reliance on the press release, Shareholder does not sell her stock. After the lies are exposed, the value of the stock plummets. Shareholder has been hurt by the fraudulent act of XYZ Corp., but she cannot bring a private action for damages under Rule 10b–5. She did not buy or sell, so she cannot sue.
- Because it applies to “any person,” Rule 10b–5 is relevant in all business forms. Thus, it might be implicated in the purchase and sale of securities in partnerships, limited partnerships, closely held corporations, publicly traded corporations, limited liability companies—anything. As we will see in Section D, this is quite different from § 16(b), which applies only in publicly traded entities.
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Index 123 results (showing 5 best matches)
Chapter 12. Fundamental Corporate Changes 118 results (showing 5 best matches)
- that may take considerable time. Assets must be gathered and sold, liabilities must be paid, and any remaining surplus must be distributed to shareholders. At the end of the process, the corporate existence will cease. Some recent statutes, such as the Texas Business
- Third, the disposition of all or substantially all assets is only a fundamental change if it is not in the ordinary course of business. Some corporations are in the business of selling their assets—for example, a company that buys and sells real estate. But most companies are not, and it will usually be obvious when this is true.
- Selling all (or “substantially all”) of a business’s assets, “not in the ordinary course of business,” is a fundamental corporate change which must be approved by the procedure detailed in Section B above. Though it may seem counterintuitive that a company would sell off its assets, there are good reasons for doing so. Often, the corporation is planning to go out of business, but does so in two steps. First it sells all of its assets (a fundamental change) and, second, it undertakes voluntary dissolution (another fundamental change). In the voluntary dissolution, it will use the proceeds of the sale of assets to pay creditors. Any amount left over will then be distributed to its shareholders. Thus, often, the disposition of assets is the first step in ending the company’s existence. Often, the thinking is that the sale of substantially all assets, as a separate step before dissolution, will generate a higher price for the assets than will be realized through dissolution....
- Suppose the managers of a corporation decide that they would rather run their business as a partnership or limited liability company. Historically, they would need to dissolve the corporation and form a new business, which is obviously disruptive. Increasingly, this is unnecessary because states permit a new fundamental change: the conversion. It is exactly what it sounds like. A corporation can convert to any other form of business by going through the procedure discussed above for any fundamental change. Those states permitting conversion generally provide that a dissenting shareholder has appraisal rights.
- the plaintiff bears the initial burden of showing self-dealing by the defendant. If she does this, the burden shifts to the defendant to show: (1) a legitimate business (as opposed to personal) purpose for the transaction and (2) that the transaction was fair to the minority shareholders. Because Sullivan could not show a business reason for the merger, the court was not required to address the question of fairness.
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Chapter 6. Distribution of Powers in the Corporation 340 results (showing 5 best matches)
- Corporations routinely maintain certain records, such as articles, bylaws, records of actions taken at meetings of shareholders and the board of directors, lists of directors, officers, and
- Corporation sends notice of a special meeting, the purpose of which is to vote on the removal of a particular director. That is the only item of business they can transact at the meeting. They could not, for example, then vote to approve a plan to merge Corporation with another business.
- Corporation has nine directors and no relevant corporate document defines the quorum. That means at least five of the nine must attend the meeting to constitute a quorum and conduct business. If only four directors attend, they simply cannot conduct corporate business.
- fact that shareholders could not remove directors “without cause” was consistent with the principle that directors were elected for their independence and that shareholders should not interfere with their discretionary business judgments.
- The Massachusetts provision on this applies only if the articles do not provide for a different number of directors. ch. 156D, § 8.03(a) (“[U]nless otherwise provided in the articles of organization, if the corporation has more than 1 shareholder, the number of directors shall not be less than 3, except that whenever there shall be only 2 shareholders, the number of directors shall not be less than 2.”).
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Chapter 10. Finance, Issuance, and Distributions 222 results (showing 5 best matches)
- In the business world, debt means exactly what it means in our everyday world—you borrowed money and must pay it back, with
- Your friend is forming a corporation to manufacture widgets. She needs $20,000 to get the business going. She will put in $10,000 of her own money and wants you to provide the other $10,000. You agree. Now, do you lend the money to the business or do you buy an equity interest in the business?
- Suppose the business starts with $10,000 of cash invested by shareholders. The business assets consist of that $10,000, which is put on the left side of the balance sheet. What are the liabilities? There are none—because the business did not borrow the money, so it need not be paid back. So liabilities are zero. What is the equity? It is $10,000 (assets minus zero liabilities). So the balance sheet looks like this:
- In the real world, these documents may be far more difficult to understand than the examples we will see. In addition, there are other records that will be of use in assessing the fiscal health of a business. These advanced considerations are covered in the course on Business Accounting.
- In general terms, debt is riskier for the business because it must be repaid. On the other hand, if the business does well, the gain does not have to be shared with the lender. Equity is riskier for the investor because she can lose her investment. So why wouldn’t businesses always use equity financing? For one thing, it may be difficult to get. People (and banks) may be more willing to lend to an unproven business than to own a piece of it. For another, owners of stock usually have the right to vote. So issuing stock means sharing power with others. A founder of a business may want to retain control and thus may choose not to have the corporation issue stock to others.
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Chapter 9. Special Issues in the Publicly Traded Corporation 150 results (showing 5 best matches)
- If the CEO loses confidence in the chief financial officer (CFO), she replaces the CFO. In theory, the CEO has the power to call the shots in the bureaucracy on all issues, narrow and broad. In practice, though, the CEO, as the head of a large bureaucratic organization, cannot hope to know, let alone direct, the operational details. To be
- This is true even when the corporation does not do business in the state of formation because the corporation nonetheless pays fees and taxes in that state. If the corporation also does business in the state, it is even more important to that state’s economy because it hires people and buys things there.
- The number of publicly traded companies has declined sharply in recent decades. In 1997, over 7,300 stocks were regularly traded on the two largest exchanges, the New York Stock Exchange and the NASDAQ. Today there are fewer than 4,000. There are several possible explanations for this trend, each discussed in this Chapter. One is the regulatory red tape imposed on public corporations, including registration requirements and Sarbanes-Oxley, which may dissuade people from seeking financing from the public. Another is the flood of venture capital into start-up businesses, which makes it possible to get a business going without selling stock to the public. Yet another is the activity of private equity firms in facilitating buyouts of public companies, which converts them into closely held businesses.
- Board reactions to takeover attempts raise an important question. On the one hand, they look like any other business decision, so the board’s choice should be protected by the business judgment rule. On the other hand, though, the defensive tactics might be seen as efforts by directors to hold onto their own positions. After all, if the bidder is successful, she will likely replace the present board. So fending off a hostile takeover might be seen as a conflict-of-interest situation, in which the business judgment rule would not apply.
- Courts have addressed the validity of various defensive tactics. In Chapter 7, we address the fiduciary duties owed to corporations by their directors—duties which defensive tactics may violate. One such duty is the duty of care, which means that a director must discharge her duties as a reasonable person would in similar circumstances. Board action is judged under the “business judgment rule,” which is a presumption that directors used due care in arriving at a business decision. Courts will not second-guess the wisdom of that decision unless the plaintiff can show that the directors were uninformed or that their action was essentially irrational. One of the hallmarks of the business judgment rule, however, is that it applies (and therefore protects directors from liability) only if there is no conflict of interest. It does not apply if there is a conflict of interest—if the director is put in a position in which her own interest clashes with that of the company.
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Chapter 8. Special Issues in the Closely Held Corporation 194 results (showing 5 best matches)
- Of course, managers in all corporations owe fiduciary duties to the entity itself. Those duties are the focus of Chapter 7. What we address in this Section is quite different. These are not fiduciary duties owed to the business itself, but to the other shareholders in the business. Thus, a breach of these duties gives rise to a personal claim by the shareholder who is harmed by the breach.
- The broad recognition of shareholder management agreements reflects the influence of law and economics scholars. They have long argued that statutes should impose relatively few requirements on how a business is run. Instead, internal matters, such as governance, should be left to the business people. They are presumably rational actors who can protect their own interests.
- Third is the question of liability for business debts. While partners generally are liable for debts incurred in the operation of the business, the corporation, in contrast, features limited liability. Thus, generally, shareholders are not liable for business debts. On the other hand, though, if the corporation is run like a partnership, there may be circumstances in which limited liability will not apply. As we will see in Section E, under the doctrine of “piercing the corporate veil,” shareholders may be personally liable for what the business does.
- In the partnership, a partner might be able to force the business to dissolve and liquidate. In contrast, as we will see in Chapter 12, shareholders have no general right to force dissolution and liquidation. At any rate, dissolution and liquidation may not be preferred because the process will cease the existence of what could be a very profitable business.
- For example, suppose that a shareholder punched a customer of the business. The shareholder would be personally liable. The fact that she is also a shareholder in the business will not shield her from direct tort liability.
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Chapter 13. Shareholder as Plaintiff: Derivative Litigation 106 results (showing 5 best matches)
- Second, assuming the first requirement is met, the court must undertake an independent review of the substance of the SLC’s recommendation. The court is to apply its “own independent business judgment” to determine whether the case should be dismissed as not in the best interest of the corporation.
- Why should a shareholder be able to do this? After all, whether to have the corporation assert a claim is a management decision, which should be made by the board of directors. In two situations, though, the board might not have the corporation sue. First, there might be good business reasons not to sue. For example, suppose that the corporation has an ongoing relationship with a supplier, and a contract dispute arises. The corporation could sue, but it values the relationship with the supplier and decides that the parties will work out the problem in the future. A derivative suit here seems
- In Delaware, in a “demand required” case—that is, one in which making a demand on the board was not futile—the court generally will grant the motion to dismiss based upon the SLC’s recommendation. This makes sense. If the demand was required, there was no conflict of interest and the corporate decision should be protected by the business judgment rule.
- Corporations today may provide three layers of protection. Whether to do so—and, to a degree, to what extent—are business decisions to be answered by each company. As a general rule, however, publicly held corporations provide all three to the maximum extent permitted. One layer is a provision in the articles exculpating or exonerating managers from personal liability. The second is liability insurance. Each of these is discussed in the next Section. The focus in this Section is the third layer of protection: indemnification statutes.
- The New York Court of Appeals found the “reasonable doubt” language in
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Table of Cases 18 results (showing 5 best matches)
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West Academic Publishing’s Law School Advisory Board 9 results (showing 5 best matches)
- Professor of Law Emeritus, University of San Diego Professor of Law Emeritus, University of Michigan
- Professor of Law, Chancellor and Dean Emeritus, University of California, Hastings College of the Law
- Professor of Law Emeritus, Pepperdine University Professor of Law Emeritus, University of California, Los Angeles
- Professor of Law, University of Virginia School of Law
- Professor of Law and Dean Emeritus, University of California, Berkeley
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- The publisher is not engaged in rendering legal or other professional advice, and this publication is not a substitute for the advice of an attorney. If you require legal or other expert advice, you should seek the services of a competent attorney or other professional.
- Printed in the United States of America
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Acknowledgments 1 result
- Several students provided us with invaluable research assistance during the preparation of this book: Andrew Filipour (Emory 2019), Sangeetha Krishnakumar (Emory LL.M. 2013), Dominic Valponi (Emory 2014), and Monica White (Houston 2012). Our families also deserve a tremendous amount of thanks for their patience and support throughout this project.
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- Publication Date: March 21st, 2018
- ISBN: 9781634607612
- Subject: Business Organizations
- Series: Concise Hornbook Series
- Type: Hornbook Treatises
- Description: The study of business organizations is, broadly speaking, a study of how people engage in business and, more importantly, how the law facilitates and regulates the operation of such businesses. Written in a clear and informative style, and chock full of examples and illustrations, this book examines the legal rules and doctrines associated with running a business—from formation to dissolution to everything in between. These rules and doctrines are explored within the context of the various organizational forms in which a business may be operated. Thus, reading this book will provide you with a solid grounding in the law of agency, general partnerships, corporations, limited partnerships, limited liability partnerships, and limited liability companies.
