Law School Legends Audio on Business Organizations
Author:
Epstein, David G.
Edition:
2nd
Copyright Date:
2020
/
31 tracks
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Introduction 2 results
- Hello. My name is David Epstein. I'm pleased to have this opportunity to talk with you about business associations, what your law school might call "business organizations" or "business enterprises" or "corporations." I've taught this course for 50 years, starting at the University of North Carolina, then at the University of Texas, then at Emory, then at Alabama, SMU, now at the University of Richmond, and I did some bar review lectures on corporations. And when I was in law school, this was my lowest grade after the first year. That's not gonna happen to you if you listen to this lecture. I'm hoping that you're listening to this at the end of the semester and getting ready for your final exams in a few days.
- Now, there are some great student guides to help you get ready for class. Freer's "Principles of Business Organizations" is really the best of them. You read Freer, you can answer any cold call question. The purpose of this lecture and my "Short and Happy Student Guide" is different. It's not about answering cold call questions in class, but about answering questions on your final exam. I'm gonna help you understand the material your professor covered over the course of the semester and help you understand how your prof is gonna test this material. I'm gonna cover everything that might possibly be on any business associations exam. Now, no professor covers everything that I'm gonna cover. And so, you've got access to my lecture notes to show what I'm covering. Your fast-forward and skipping, not gonna hurt my feelings.
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Exam Prep Suggestions 1 result
- Finally, to further my objective, where you're making a good grade on your business organization or business associations or corporations final, here's some exam-taking suggestions, should already be familiar to you. Really important to organize your thoughts. Really important that your essays regularly use the words "because," which means you're giving reasons, and the word "here," H-E-R-E, which means you're applying the law to the facts. Don't use the word "clearly." Don't use the word "obviously." Your professors worked long and hard on the exam. They don't believe that anything in the exam is clear or obvious. Most professors, I think, find it helpful for you to use headings. I know that it is helpful to use short sentences, use short paragraphs. Final reminder, you get an agency question, the word "principal" ends in an A-L. Thanks for spending this time with me. Know you'll find it helpful. Good luck on your exam.
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What Law Governs Corporations 3 results
- Now, a little bit of vocabulary. If we have this business in New York incorporated in Delaware, then, for purposes of New York law, that business located in New York but incorporated in Delaware, that business located in New York is gonna be called, in New York, a foreign corporation. "Foreign corporation" simply means that it is incorporated. It is incorporated under the laws of some other state. Now, I keep using Delaware in my hypotheticals because, in all likelihood, that's what you're gonna see on the exam. Most corporations, size and substance, most of the corporations in the cases in the book that you read are incorporated in Delaware. Your professor may have emphasized only Delaware law or alternatively, Delaware law and the Model Business Corporation Act because some professors do both the MBCA and Delaware law, other professors doing simply one or the other.
- So, let's assume for the moment that we have articles filed. The corporation comes into existence. And again, the articles could be filed in any state, even though we have a business limited to New York. It could file its articles in Delaware. Now, the choice of the state in which to file the articles is important because of something called the internal, I-N-T-E-R-N-A-L, the internal affairs doctrine. If our New York business incorporates in Delaware and then there's a later dispute about the internal affairs, governance, maybe it's some sort of issue about voting or about distributing dividends, if there's any issue about the internal affairs of that business incorporated in Delaware, then it doesn't really matter in which state the litigation is initiated. That state is going to apply Delaware law, the law of the state of incorporation, law of the state of incorporation, in resolving disputes with respect to internal affairs.
- I'll cover both Delaware law and the Model Business Corporation Act, the MBCA, in this lecture.
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Federal Securities Law 11 results (showing 5 best matches)
- Let's talk about federal securities laws. Well, let me restate that. Next, I'm gonna talk about federal securities laws, and you ought to listen only if your professor cover the federal securities laws to some extent in your basic business associations class. About half of the professors do, half don't. If you're in the half that does, listen up. Generally, corporate law, the state statutory law, looking to the state in which the corporation's incorporated, but there are a couple of significant federal laws that might have been touched on in your business associations class, the 1933 Act and the 1934 Act.
- And that's to be contrasted with the O'Hagan case. O'H-A-G-A-N. Now, the O'Hagan case established something called the misappropriation theory, misappropriation theory. There what happened was a lawyer learned that his law firm was working on an important corporate transaction. And so relying on this material inside information, he went out and bought stock. And the court concluded that that lawyer violated 10B5, that he did indeed breach a fiduciary duty. He was not an officer or director of the corporation, but he breached a fiduciary duty by misappropriating information that belonged to the corporation or his law firm, that he breached...he had a fiduciary duty to his law firm, and his law firm had a fiduciary duty to his client. And he breached that fiduciary duty by misappropriating the information. 10B5. Watch for that on your exam.
- Well, that's awfully abstract. I think I can make that make a lot more sense to you with a simple example. Let's assume that Curly is a director. And on January 10th, Curly buys a hundred shares at 10. You with me? He bought a hundred shares at $10. Now, on April 4th, he sells 60 of those shares at $8. He bought a hundred shares at $10, sold 60 shares at $8. He's a loser. But then on May 5th, he bought 50 shares at $5. What we do in 16B is a match game, a match game. Can we find a sale that is higher than a buy? Sure. He sold 60 shares at $8. He bought 50 shares at $5. One more time, he sold 60 shares at $8. He bought 50 shares at $5. With respect to 50 shares then, he bought it $3 less than he sold it. And so we say under those facts, there's 150 of 16B liability.
- Now, if you were to look at everything that happened, Curly was a loser. Hee ended up buying a hundred at 10. But that's not how we play the 16B game. It's an arbitrary rule that is designed to discourage speculative trading, short-swing trading. And so the answer would be 150. And I'll put those numbers in the notes that will be available to you, if you had trouble doing the math with me. What was most likely covered with respect to federal securities laws is Rule 10B5.
- Now, 16B only applies to officers, directors, and 10% shareholders, shareholders that own at least 10% of the outstanding stock of publicly-traded companies. And what 16B is all about is preventing speculation by these pivotal figures, officers, directors, and 10% shareholders because speculation buying and selling frequently of people who are sort of on the inside leads to investors' suspicion and distrust. And so 16B has a purely objective standard or an objective rule that is to discourage the speculation, what is called short-swing trading. And what it's all about is focusing on six-month periods. It's the six-month period rule. And you're looking at six months by six months. Was there a sale by an officer, director, 10% shareholder, a sale at a higher price than a buy in that six-month period?
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Duty of Loyalty 8 results (showing 5 best matches)
- Now, remember, in Meinhard against Salmon, the opportunity to develop the land was found to be a corporate opportunity, or a business opportunity, because of the role of the business in learning of the opportunity and the similarity between the opportunity and the business operations. We can get that same problem in a corporate context, and if you do, and you probably covered this in class, most casebooks cover both the Delaware law on usurping a corporate opportunity and the American Law Institute Principles.
- Now, the American Law Institute Principles differ from Meinhard against Salmon in concluding that it's a corporate opportunity if either your role in the business played a role in your learning of the opportunity, or if the opportunity was similar to already existing business operations. Meinhard against Salmon required both. The American Law Institute Principles require either.
- You probably covered not only the American Law Institute Principles, but the leading Delaware case, the Guth case. Now Guth first says that it's facts specific as to whether it's a corporate opportunity, and that one of the important facts is the financial ability of the business to take advantage of the opportunity. That's irrelevant under ALI. ALI expressly says that's irrelevant. That's important under Delaware. And indeed, if the corporation does not have the financial ability to take advantage of the opportunity, it does not need to be disclosed. It does not need to be disclosed.
- So, let's shift from duty of care to talking about duty of loyalty. Now, once again, there's nothing in the Delaware statute about duty of loyalty. There is a provision in the Model Business Corporation Act, 8.30(a)(2), in a manner he believes to be in the best interest of the corporation. But let me get more basic than that.
- The American Law Institute Principles say that if it is a corporate opportunity, it must always, must always, always, always, be disclosed to the corporation, and the director can pursue it only if, after disclosure, the corporation rejects that opportunity. Finally, under the American Law Institute Principles, the financial ability of the firm is irrelevant.
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Operating a Business as a Corporation 5 results
- Now, when I talked with you about partnership, liability for the debts of the business, very important part of partnership law, remember? Partners are personally liable for the debts of a business' structures of partnership. One of the benefits of structuring a business as a corporation and not a partnership, one of the big benefits of structuring a business as a corporation is that the general rule is, "Shareholders are not personally liable for the debts of the business by reason of there being shareholders." And that's in the Delaware Corporate Code, that's in the Model Business Corporation Act, that's the statutory corporation law of every state.
- That every state also recognizes a case law concept that creates an exception and that case law concept is called piercing the corporate veil. Creditors of a corporation unable to collect from the corporation regularly attempt to collect the business debts, debts owed by this business structured as a corporation from the shareholders by invoking a concept called piercing the corporate veil. And piercing the corporate veil is a part of the case law of every state. Now, these cases tend to be fact-specific.
- Now, the mere fact that there is a single shareholder and it is possible, yes, to have a corporation with a single shareholder, that fact is not determined, that is not thought to be relevant, in terms of determining whether a shareholder is liable for the debts of the business, whether to pierce the corporate veil. The factors that most of the cases refer to, first, the failure to observe corporate formalities, election of directors, shareholders meetings, that kind of thing, second undercapitalization, failure of shareholders to invest an appropriate amount in the business in light of likely liabilities of the business, and most importantly, what is called the alter-ego theory, facts that suggest that this shareholder defendant, this shareholder being sued to pay the debts of the corporation, this shareholder defendant, failed to treat the corporation as if it was a separate legal entity. More specifically, this shareholder treated corporate cash as if it was their cash, this...
- And there's a related theory that's been adopted by some states that your professor may have covered. And so, if your professor covered something called enterprise liability, listen up. Here's what enterprise liability is all about. It's a fact pattern in which the same person, the same person owns several different corporations, in law.
- As long as we're doing vocabulary review, you remember the term parent-subsidiary? It is possible for a corporation to be a shareholder of another corporation. After all, a corporation is in the eyes of the law person. Acme Corporation can be a shareholder of Baker Corporation. And if Acme Corporation is a sole shareholder of Baker Corporation, or is the controlling shareholder of Baker Corporation, we would call Acme the parent company, and we would call Baker the subsidiary. Parent-subsidiary, brother-sister, see the difference? Piercing the corporate veil, that's the legal theory by which the owner or an owner of a corporation is held personally liable. Enterprise liability, that's the theory in which a related corporation is held liable.
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Statutes, Case Law and Contracts 5 results
- Now, before we get into the various forms of business associations, each of the forms of business associations that we're going to be studying, partnerships, corporations, limited partnerships, limited liability companies, are governed by statute, governed by state statutes, and typically, by some sort of model or uniform statute. In addition to the statutes, we're going to be looking at some case law interpreting the statutes and some case law that creates separate common law concepts and duties.
- But what you need to be especially mindful of is in answering business associations questions, we look not only at statutes, we look not only at case law, but we look at the contracts of the owners of the business. Contracts, really important.
- But here's where person becomes helpful. We need to sort of think in terms of lifecycle of a business, much the same way as we think of a lifecycle of a person. We're going to talk about formation of businesses, kind of like the birth. We're going to talk about operating businesses, kind of like the life of persons. We're going to talk about growth of businesses, and then the end game, which is kind of like death.
- I also think that it's helpful to think of these various business structures, partnerships, corporations, limited partnerships, limited liability companies, to think of them as persons, persons in a civil procedures sense, that they can be plaintiffs, they can be defendants, as relative and diversity cases. While you may use the word person in civil procedure, or in con law, or in politics, in referring to corporations, we're going to be referring to them more often than not as entities.
- But before we talk about the various forms of business associations, or business structures.
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Limited Liability Company 7 results (showing 5 best matches)
- The final form of business structure we need to talk about is limited liability companies. Like a limited partnership, limited liability companies offer the best of both worlds - single tax and no liability of members. Most new businesses are limited liability companies, but this is a relatively new form of business associations. In most states, the law of LLCs are 20 years or less. And so, there are no leading cases. Most professors spend very little time on limited liability companies. In part, because there are no cases, no leading cases. And in part, because the statutes vary from state to state. There have been efforts to promulgate uniform LLC laws, it just hasn't worked. Okay.
- With that sort of disclaimer, what do you need to know? Once again, we need to know how to form the business. Once again, we know that we need to file a document in the state in which the business is created. And so, once again, just like corporations, LLPs, we file. And it can be filed at any state, even though all the business activity is in California, you can create a Delaware LLC. And Delaware, just as in corporations, seems to be capturing the market in LLC. Now, what's filed is sometimes referred to in some states is a Certificate of Formation. In other states, it's an Articles of Organization. But once again, what's really important, what's really important is a document that's not filed, the operating agreement.
- If First Bank makes a loan to LMC LLC, and the business LMC LLC is unable to pay back the loan made to it, the bank will not be able to recover from either the members of that LLC or the manager of that LLC. General rule, neither the members, nor the managers have personal liability for the debts of the business. Now, that's subject to a limited exception. Subject to a limited exception, just as when I talked with you about corporations, we encounter the concept of piercing the corporate veil. There are piercing the corporate veil cases with respect to LLC. So, case was pretty much the same, no general rules tends to be fact-specific. If anything, the difference between LLC piercing the veil cases, incorporation piercing the veil cases is that in the corporation law cases, greater emphasis is placed on whether you have observed business formalities. Now, general rule, the decision-makers, if the decision-maker is a manager, the decision-makers members, whoever is the decision-maker...
- Now, the owners of a limited liability company, an LLC, are called members. Members. Instead of calling them partners, instead of calling them shareholders the owners of an LLC are members. Now, an LLC can be run by the members, kind of like a partnership with partners running the partnership. We would call such an LLC member-managed. But alternatively, you can create an LLC and select someone to run the LLC, to manage the LLC, manager. And so, we can either have a member-managed LLC or a manager-managed LLC. Now, if it is a member-managed LLC, then the members are agents of the business. If it is a manager-managed LLC, then the manager is the agent of the business. But whether it is member-managed or manager-managed, neither the manager nor the members are personally liable for the debts of the business.
- With respect to LLCs, dissociation is pretty much left to the operating agreement. Indeed, big thing with respect to LLCs is the operating agreement. If you read any of the cases, if you had any cases assigned to you that are LLC cases, then undoubtedly the cases emphasize the extent to which state LLC law is secondary to the language in the operating agreement. And so, if you encounter an LLC question on your exam, an essay question about LLCs, look for facts with respect to what the operating agreement says other than what is contained in the operating agreement.
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Agency 11 results (showing 5 best matches)
- So one more time. It's a consensual relationship. It depends on the agreement of the principal and the agent. And the agent is agreeing to act on the principal's behalf. The principal is agreeing the agent can act on their behalf. The agent is further agreeing to act subject to the control of the principal. It is a relationship. It is not a business structure. It's a relationship. The third and most important of the five things you need to know about agency is the relevance of agency law to liability on a contract.
- So that's the first of our five questions about agency. First of the five things you need to know, where does agency law come from? It comes from a common law restatement, especially influential. Second, when does an agency relationship exist? Well, it's a consensual relationship. It depends on the consent of a person called the principal and that's an AL principle in a person called the agent. The agent is agreeing to act on behalf of the principal. The principal is agreeing that the agent can act on their behalf. The agent is also agreeing to act subject to the control of the principal.
- Okay, let's get started with agency and the five things that you need to know about agency. Five things you need to know about agency. First, where does agency law come from? It's common law. Now, this is an area of common law in which the restatement is especially influential. There have been three different versions of the restatement of agency. Most professors cover restatement of agency third and that's what I'm gonna focus on. Happily, if your professor covered the restatement of agency second, it's pretty much the same, just a couple of vocabulary differences.
- Authority is based on facts before the agreement. Ratification is based on facts after the agreement. And we're looking for two critical facts in order to find ratification, in order to find the principal liable on a contract the agent entered into. The first fact that we are looking for is the principal's taking the benefits from the contract, the principal taking the benefits. The second fact we are looking for is the principal knows the material terms of the agreement between the agent and the third party. When we have those two post-agreement facts, we say the principal is liable on this contract by reason of ratification.
- Now, where there is a contract between the agent and the third party, there's also a question that can be asked about the agent's liability on that contract. A contract between A and T, and the question is, is A liable on this contract that they made with T? And the key to answering the question of whether the agent is themselves liable on the contract they made with the third party, the key fact is disclosure. Did the agent at the time of the contract disclose two things, number one that she was acting or they were acting on behalf of someone else, that they were indeed an agent, and number two they must also disclose the principal. If both of those facts have been disclosed, then even though the parties to the contract are A and T, A is not liable because A has disclosed the agency and the principal. Now, if A has disclosed neither, then A is liable on the contract. If A has only made a partial disclosure, A has disclosed that A is an agent but has not disclosed the principal,...
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Close Corporation 5 results
- Now, if the defendant majority can establish a legitimate business purpose, then it becomes incumbent on the plaintiff minority shareholder to establish that that legitimate business purpose could be accomplished in a less oppressive way. So, if your professor covered the Donahue case and the Wilkes case, I think it's really important for you to know those two cases to use in a possible essay question on close corporations.
- Now, the Donahue case was followed by the Wilkes case, W-I-L-K-E-S. There, we had a corporation with four shareholders that owned and operated a nursing home. Three of the four shareholders were employed by the nursing home. The fourth shareholder had been employed by the nursing home but had been dismissed and sued the nursing home. Now, in the Wilkes case, this nursing home case, the Massachusetts court stepped back from the broad dicta in the Donahue case and said that a minority shareholder in a close corporation does not have a right to have a job, that it's okay for the close corporation to dismiss that minority shareholder from a paid job if there is a legitimate purpose and if there is no less oppressive way of accomplishing that business purpose. And so after the Wilkes case, law in Massachusetts is that when a minority shareholder is complaining about actions of the majority, maybe not employing them, maybe not paying dividends. Then after the minority shareholder has made...
- The final corporations topic is close corporations. Now, I'm trying to say C-L-O-S-E, not C-L-O-S-E-D, not C-L-O-T-H-E-S. Close, close corporation. Now, there's no statutory definition of close corporation. The primary characteristics, limited number of shareholders, and no market for the shares. But let's think about that as you might need to encounter it on an exam. Look for a fact pattern in which the facts tell you who the shareholders are. And it's just a handful of people. Typically on an exam question, it will be three or four people. Now, we've talked, I've talked about four concepts that are applicable only when we're talking about a corporation with relatively few shareholders and no market for the shares. And those four concepts are first piercing the corporate veil. Every single reported case on piercing the corporate veil is a close corporation.
- .... Remember, that's a writing entered into by all of the shareholders that either eliminates the board of directors or limits the authority of an existing board of directors. But in addition to those four concepts, what you need to watch for in a fact pattern that is a close corporation, corporation with relatively few shareholders is oppressive behavior by the majority owners against minority owners. Somebody is doing something that is kind of tacky, for example, corporation is only paying salaries to the holders of the majority group or the corporation is only redeeming shares from the majority group or corporation is not paying any kind of dividends. When you encounter one of those fact patterns, you look to Massachusetts just as Delaware is the important state when we talk about major corporations. Massachusetts Case Law is what is most important when we're talking about rights of the minority shareholders in close corporations. You probably have been asked to read a couple...
- ...Rodd family member. A minority shareholder went over an employee, Donahue wanted the corporation to buy back her stock as well. Corporation refused it. The Massachusetts Supreme Court said that she must have an equal opportunity. A minority shareholder in a close corporation must have an equal opportunity to sell back their stock. Now, this is different for the partnership concept of dissociation. I'm not saying the Donahue case didn't say that a minority shareholder in a close corporation can compel the corporation to buy back their stock. That's not it at all. It's a much more limited rule that if, and only if the corporation is buying back the stock of a member of the control group, then, and only then a minority shareholder must have an equal opportunity, must have an equal opportunity to sell back their stock. Now, Donahue, the Donahue case, the first Massachusetts case on close corporations and it has very broad dicta. It suggests that close corporations are like...
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Corporations 4 results
- But shareholders are not the most important person on a Business Associations exam. The most important people on Business Association exams are the Board of Directors, who, in theory, are elected by the shareholders. Shareholders elect directors, and we know that directors appoint officers. Talk about some other people, promoters and incorporaters, but basically, the exam is going to be about directors.
- A corporation involves multiple pieces of paper. In partnerships, we simply had a partnership agreement, and the partnership agreement didn't even have to be in writing, and the partnership agreement was not a part of any public record. There's no filings with the state. It's a part of partnership law, it's a big part of corporate law.
- But in corporate law, law of corporations, we're looking at several documents, primarily the Articles of Incorporation, which Delaware, in its statute, calls a Certificate of Incorporation. So, Articles of Incorporation in most states, Certificate of Incorporation in Delaware. Corporations are all supposed to have bylaws. I'll also be talking with you about shareholder agreements and things like proxies.
- The two most obvious, tax treatment, which shouldn't be on your exam, but, unless a corporation qualifies as something called a subchapter S corporation, corporation are in essence taxed twice. Earnings of a corporation are taxed twice. They're taxed to the corporation and they're taxed to the shareholders when the earnings are distributed to the shareholders.
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Operating a Business as a Partnership 6 results (showing 5 best matches)
- We've gotten LMC. It's a partnership. It's a business association. Let's talk about operating this business. The first question with respect to operating the business is who is liable for the debts of a business? Almost certain to be on your exam. Now, the partnership itself is, of course, liable for its debts. Partners are agents of the partnership. Partnership is a principal and each of the partners is an agent. Partners make contracts on behalf of the partnership, commit torts, making the partnership liable. Since the partnership is a separate legal entity, it's liable for its debts. As I told you before, one of the most important aspects of structuring a business as a partnership is that the owners, the partners, are personally liable, jointly and severally, liable for the debts of a partnership. But guys, on your exam, you're going to need no more than that. You're going to need to know the procedural obstacles, the procedural obstacles to creditors of a business that is a...
- The second factor is the similarity between this new opportunity and what the partnership was already doing. The language of the court, the relation between the business conducted and the opportunity. This was a very similar opportunity. There was a third factor. I think it's less important, but you need to know it. The third factor mentioned was that Salmon was the managing co-adventurer. But again, remember if this case came up today, it would be decided under partnership law. Now, the partnership law of most states, that would be RUPA. More specifically, that would be RUPA 409(b)(1)(c), taking a partnership opportunity, appropriation of a partnership opportunity. But if you were writing an essay about this today, what else would you discuss other than 409? If you were doing RUPA, you discuss 105. You discuss the partnership agreement. Is there anything in the partnership agreement eliminating or limiting the duty of loyalty?
- Here's what has to happen. Creditors of the business must obtain a judgment against the partnership itself, but they also must obtain a judgment against the partner. Not only that, but it's necessary to first attempt to collect the judgment from the partnership. Only if a creditor of the business has been unable to collect his judgment against the partnership. Only if it's been unable to collect its debts from the partnership, can it then attempt to collect from the partners individually. Now, one of the thing about liability, sometimes what happens is a business gets established as a partnership and then later new partners get added. The LMC partnership is created in 2020. In 2022, they decide that Shimp [SP] should also become a partner. If Shimp becomes a partner in 2022, that new partner that was added in 2022 is liable only for debts that were incurred after Shimp became a partner. And so, if the LMC partnership entered into a tenure lease in 2021, Shimp is not liable for rent....
- And you see in 105(d)(3)(a) with respect to duty of loyalty, that if not manifestly unreasonable, the duty of loyalty can be altered or even eliminated if not manifestly unreasonable. That's 105(d)(3)(a). Then in 105(d)(3)(c), we see that we can eliminate liability, duty of care, for gross negligence and recklessness. That can be eliminated. So, we can severely limit the duty of care. But then finally, 105(d)(3)(e), as in Edward, tells us that this contractual duty of good faith and fair dealing cannot be eliminated. In addition to the two statutory provisions, in addition to 409 and 105 of RUPA, you need to know Meinhard against Salmon. Virtually, every case book includes Meinhard against Salmon. And virtually every business associations class professor makes Meinhard against Salmon the most important case covered all semester.
- Starting with 409. 409(a) tells us partners owe duties to both the partnership and their fellow partners. And 409(a) tells us that duty is a duty of loyalty and duty of care. More about that in a minute, but that's all you see in 409(a). Duties were owed to the partnership and to follow partners. And it's duty of loyalty, duty of care. 409(b) tells us, if you breach the duty of loyalty to a partnership in three primary ways... This is what you need to know about duty of loyalty that a partner owes to the partnership and to their fellow partner. First, by taking property tangible or intangible that belongs to the partnership. Second, by entering into what is called a conflicting transaction. That's a transaction where the partnership is on one side of the transaction and a partner or some group that a partner has an interest in is on the other side of the transaction. So, a partner is in a sense on both sides of the deal. We have a conflict. And the third most obvious situation of...
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Duty of Care 7 results (showing 5 best matches)
- Duty of care case law. Let's start with case law on director decision making. Almost every case book has Shlensky against Wrigley. That's a challenge to a board of directors' decision that the Chicago Cubs not play night baseball. The lawsuit was brought against directors alleging a breach of their duty of care with respect to decision making, making bad decisions. The court ruled for the defendant. The court established something called the business judgment rule that generally a court will not review the merits, the substance of a board of director decision, great deference to the business judgment of the directors with three exceptions, conflict of interest, fraud, illegality.
- Well, Smith against Van Gorkom said... Now there's another limitation on the business judgment rule. The business judgment rule only applies if it was an informed decision. And so that two hours or less than two hours that was spent, of course that's not an informed decision. Now in determining whether a decision is an informed decision, the court said the test that is used is gross negligence and the board of directors of Trans Union was grossly negligent. And shortly after Smith against Van Gorkom, Delaware adopted 102(b)(7), a real important provision 102(b)(7).
- But then you probably followed that case up with Smith against Van Gorkom, there the challenge was not to the substance of the decision but rather the decision-making process. The fact pattern was that Trans Union board of directors spent less than two hours deliberating on a new to them proposal that Trans Union merge with a Pritzker entity. And the court found the board breached its duty of care, in that case, added yet another limitation to the business judgment rule. Remember from Shlensky, deference to the business judgment of the directors, unless conflict of interest, fraud, illegality.
- But while that's the aspirational standard and an objective test, person in like position reasonably believe, the standard for liability is different. You've got to be careful about this. If your professor covered the MBCA, your professor is looking that you're recognizing the difference between 8.30, which is an objective test, and 8.31(a)(2), standard of liability, which is a subjective test. The director believed reasonably appropriate. Now, Delaware on the other hand does not have any statutory language about duties of directors. In Delaware, it's all case law, but that Delaware case law is so important that everybody studies it and that states that have the MBCA applied. And so if your professor covered the MBCA, your essay answer ought to cover both the MBCA statutory provision and the Delaware case law.
- In 102(b)(7) of the Delaware code says that a Delaware corporation in its articles can eliminate the duty of care so that the board of directors cannot be held liable for breach of a duty of care. There is no such duty if the articles so provide. And for most major Delaware corporations, the articles so provide. Now the Model Business Corporation Act soon followed and 2.02 (b)(4) of the Model Business Corporation Act also empowers corporations in their articles to eliminate duty of care.
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Where Partnership Law Comes From 2 results
- Now I've referred to partnership statutes. And again, remember when we're talking about major forms of business associations, partnerships, corporations, limited liability companies, we're looking to state statutes. In partnership in particular, we're looking at the uniform statutes. Virtually every state has a partnership statute modeled after one of two uniform laws, either the Uniform Partnership Act, which was first promulgated in 1914, and is typically referred to as UPA or UPA. And more commonly, most states today have partnership statutes that are based on the Revised Uniform Partnership Act 1997, RUPA, 1997. Now, which law governs a particular partnership depends on where the partnership has its principal office. If the LMC partnership has its principal office in a state or in the Commonwealth of Virginia, then you look to the partnership statute in the Commonwealth of Virginia, which is a RUPA state.
- The partnership law comes not only from the partnership statute but it comes from the partnership agreement, remember I told you that before. Look at the fact pattern for information about agreements among the owners, especially important when we talk about partnerships and limited liability companies, the role of agreements. Section 105 of RUPA tells us the impact of partnership agreements. RUPA 105(a) tells us that if the dispute is between two partners or among partners, if the dispute is between the partner and the partnership, look to the partnership agreement first. If there's anything in the partnership agreement that affects this dispute between partners or between the partners in a partnership, the agreement controls, the statute it's just the default, it's where you look to if there's nothing in the agreement. But if, on the other hand, it's a dispute between someone who is not a partner, a third party suing a partner of the partnership, the partnership agreement is...
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Sole Proprietorship 4 results
- What does that mean? Well, the law then does not treat that business as separate from its owner. Even though Larry David calls this business Latte Larry, has a trade name, may well have a separate bank account for Latte Larry, but if Latte Larry, the business, incurs debts. Say the negligence of an employee at Latte Larry causes a fire, which causes an entire shopping center to burn down, the persons injured by that fire are able to recover not simply from whatever bank account has been established for Latte Larry, but they can look to all of the various assets of Larry David.
- Sole proprietorship. Its what most businesses are, not heavily tested on Business Association's exams. At most, you’re getting an exam that's got some multiple-choice questions, you might have a mutiple choice question about that.
- Most businesses are sole proprietorships. A sole proprietorship is not a legal entity. It is not a person. If Larry David opens a coffee shop and calls it Latte Larry, and Larry David does not incorporate, does not set up an LLC, then that's a sole proprietorship. Any business that has one owner and is not a corporation, is not a Limited Liability company, it is a sole proprietorship.
- Let me get sole proprietorships out of the way. My guess is that you're not going to get a question on sole proprietorships on your exam. At most, if your professor is giving true/false or multiple choice exams, you might get a multiple choice question that calls upon you to distinguish a sole proprietorship from a corporation or from a partnership. Okay, what do we need to know about sole proprietorships. Let's get that out of the way.
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Limited Partnership 10 results (showing 5 best matches)
- Limited liability partnerships, LLPs, are typically used by groups of professionals like law firms, medical practices, accounting firms. In a limited liability partnership, everyone is a general partner, everyone is a general partner, and no general partner has liability for the debts of the partnership. So one more time. LPs, limited partnerships, they have limited partners and general partners. General partners are liable for the debts of the business, limited partners are not. In a limited liability partnership, an LLP, everyone is a general partner. Fact patterns are gonna give it away. If it's a hedge fund, if it's some sort of investment vehicle, and besides that, the name has to include limited partnership, you're gonna know it's a limited partnership. LLPs, a law firm, a group of accountants, a group of physicians, it's kind of thing that shows up on multiple-choice exams if your professor covered LPs and LLPs.
- Now, with respect to dissociation in partnerships, all partners always have the power to dissociate. Limited partnership statutes vary from state to state as to whether there is a power to dissociate. So you don't need to know anything about that unless your professor took the time to cover the rule in the state in which your law school is located.
- Now, at one time, there was a body of case law supporting the proposition that if, and only if, limited partners participated in the control of the business, then, and only then, would limited partners be liable. But through the years, limited partnership statutes have eroded, if not almost completely eliminated, the possibility of limited partners being held personally liable for the debts of the business. Virtually all limited partnership statutes create what are called safe harbors, list things that limited partners can do without being deemed to be participating in the control.
- Now, in order to start a limited partnership, you're gonna have to file a document with the state. Every form of business association other than a partnership is dependent on filing a document with the state, making it a part of the public record. And here, the document is typically called a Certificate of Limited Partnership.
- Well, now, we move from closed corporations to limited partnerships. Not every business association's teacher covers limited partnerships. And so if your professor did not cover limited partnerships, now, you can fast forward over to the part of this lecture that covers limited liability companies. Now, a limited partnership is a business structure that has general partners and limited partners. No like a partnership, it's not a taxable entity, but unlike a partnership, its owners, the limited partners, are not liable for the debts of the business.
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Starting a Corporation 4 results
- Now, we know that a corporation, in order to exist, there needs to be...for the existence of a corporation, there needs to be articles of incorporation filed. But sometimes people starting a business don't want to incur the cost of incorporating until they are certain that they can find the right business location, find the right employees, whatever. So sometimes there are pre-incorporation contracts. Now, the people that enter into contracts on behalf of a business not yet formed, people who enter into contracts on behalf of a corporation not yet incorporated, those people are called promoters. And even if the agreements they enter into don't include their names but instead the name of this corporation that doesn't yet exist, no matter how that agreement identifies the parties, the promoters are personally liable.
- Now, there's one other kind of agreement that might be entered into before incorporation. Well, it's a misnomer to call it an agreement, it's actually an offer. It's described or it's labeled pre-incorporation subscription agreements. They're called pre-incorporation subscription agreements but they're not really agreements, they are offers to buy stock in the corporation when it's formed. So what's a pre-incorporation subscription agreement? If you see that phrase on a multiple-choice exam, a pre-incorporation subscription agreement is an offer buy stock in a corporation not yet formed. The rule that you need to know with respect to pre-incorporation subscription agreements is unless the pre-incorporation subscription agreement otherwise provides, which it never does on an exam, which it never does on an exam, then it is irrevocable, it is irrevocable for six months.
- The promoters are personally liable on pre-incorporation contracts. There's not an agency relationship between the promoter and the corporation because the corporation doesn't exist yet. You can't have an agency relationship without a principal, and there's no principal. And so we know what pre-incorporation contracts are and we know that the promoter is liable. And even after the corporation is formed, the corporation is not liable unless it, after being fully informed, adopts the contract. And even then, the promoter also remains personally liable until the other party to the contract agrees to release the promoter.
- The articles also might tell us that this corporation is authorized to issue different categories of stock called different classes of stock. For example, you have a class of stock that is voting in a class of stock that is non-voting, you have a class of stock that has greater economic rights than other classes of stock. How do you know whether there are classes of stock? That's information in the articles. And the articles might also tell us that the stock or at least one or more of the classes of stock is what is called par value stock. Par value, whether stock has a par value depends on the information in the articles. Par value. Par value is the minimum issuance price. If LCM Corporation in its articles provides for a $2 par stock, that's the minimum issuance price. If LCM is issuing 10 shares of $2 par stock to Moe, Moe must pay at least $20, 10 times the $2 par value, but that's the minimum issuance price.
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Duty of Good Faith and Fair Dealing 4 results
- It may well be that your professor covered not only duty of care and duty of loyalty, but covered something called good faith in fair dealing. Now good faith in fair dealing is mentioned in both the Model Business Corporation Act and in Delaware. But the law with respect to good faith in fair dealing is at best unsettled and it consists primarily of dictum.
- If you studied shareholder derivative actions, then you know that there are some procedural obstacles. That in order to bring a shareholder derivative action, the shareholder must have been a shareholder as of the time of the alleged wrong as well as being a shareholder today. And consistent with this notion that directors make the decisions, including decisions whether to sue, before initiating a shareholder derivative action, an eligible shareholder must first make a demand, make a demand on the board of directors to bring the lawsuit. Now the Model Business Corporation Act says such a demand is always required.
- Under Delaware law, if you studied it, you realize that there is an exception that swallowed up the rule. The Delaware recognizes an exception that the need to make a demand is excused if such a demand is futile. And typically in Delaware and derivative actions, shareholders do not make a demand alleging that such a demand is futile. Now inevitably, in shareholder derivative actions, if such an action is initiated inevitably, the corporation is gonna file a motion to dismiss.
- But who makes the decisions for a corporation? It's a board of directors. Board of directors make decisions for corporation, board of directors decides whether to sue. Board of directors are not gonna decide to sue themselves, not even decide to sue one of their fellow directors in all likelihood. And so we have this procedural device called a shareholder derivative action, a shareholder derivative action. And that is the shareholder suing on behalf of the corporation. It is the corporation that is the injured party, it is the corporation to whom the defendant owed a duty that has been breached, it is the corporation that is gonna receive any judgment if the litigation is successful. But the litigation is initiated by a shareholder.
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Financial Statements 4 results
- ..., let's assume that a business bought a machine for $1,000 and that machine is gonna be used over a five-year period. In the income statement, you wouldn't take into account the $1,000 that was paid for this machine, you would take into account the pro-rata, $200 in this instance, since the machine has a useful life of five years and it was bought for $1,000. Now, the information in an income statement for a particular year can easily be manipulated. For example, if you're trying to drive up income in the income statement, then you go to a customer who typically has issued [inaudible 00:02:28] each year saying, "I'll give you a special price if you make a three-year commitment right now." And so it's information, but it might be imperfect information. What's really important is seeing the difference between income statements and something called cash flow statements. Now, cash flow statement is like income statements or it's like the video. It's a movie of a year in the life...
- The third financial document is you need to be aware of if your professor covered this stuff and is giving a multiple-choice exam is a balance sheet. A balance sheet, unlike a cash flow statement, unlike an income statement is not a review of business activities over a year, but it's sort of a snapshot, a financial status as of the moment. It's called a balance sheet because on one side of the balance, say the left side of the balance, we have all of the assets. On the other side, say the right side of the balance, we have the debts. Generally, the assets and the debts are not gonna be equal. They're not gonna balance. If the debts are less than the assets, then we say there is a positive value and we call that equity. And so if we have assets worth 1,000 and debts that are worth 800, in order to balance off, we say there is 200 available to the owners, there is 200 of equity.
- Let me talk for a few minutes about financial statements. That may well be that your professor didn't cover financial statements in your business associations class, in which case you fast forward. Again, it's not gonna hurt my feelings. But if your professor covered financial statements, and if your professor is giving an exam that is in part multiple-choice, you probably ought to listen. Refresh your recollection about the three kinds of financial statements.
- But let's go back to this machine that we bought for $1,000. It has a useful life. That would be $1,000 expense, $1,000 out in the cash flow statement. And so we've got income statements that show all earnings, including rights to payments, all costs including unpaid costs. And that's to be compared with the cash flow statement, cash that came in, cash that came out. And once again, it's easy to see how you could manipulate a cash flow statement, right? Sold some goods on credit? You wanna build up your cash flow statement and look good for this year? You go to that customer and say, "You owe us $10,000. If you pay now, we'll cut it down to six." That's gonna increase the cash flow. It's gonna look good this year. It can have a negative effect on future years.
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- Well, in addition to running a business as a partnership, sometimes we're going to need to grow a business that is a partnership. Now, typically, to grow a business, you're going to need new investors, and new investors in a partnership are new partners.
- Remember there's one other thing we need to know about adding new partners, and that's the liability exposure of a new partner. Remember, if Shemp becomes a new partner in 2022, Shemp is only liable for debts the business incurs, debts that arise, not become payable, debts that arise after he has become a partner.
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- Just as a business with one owner, that is not a corporation, not a limited liability company is going to be a sole proprietorship, listen up, a business with two or more owners that is not a corporation and not a limited liability company, is always a partnership. It's, sort of, a default form of business association. If you have two or more owners, you're not anything else, then you're always going to be a partnership.
- Okay. Let's start talking about business associations, about the various forms of business structures. Let's start with partnerships. And let's start with the general attributes of a partnership.
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Whether a Corporation Exists 4 results
- The articles of incorporation typically contain a limited amount of information because it's a public record available to the public. It's gonna set out the name of the corporation, which cannot be deceptively similar to any other business name. It's going to identify someone who is called the registered agent. That's the person on whom official papers are to be served. More important, it is to set out the purpose of this corporation. In the real world, corporations in their articles have very, very general purposes, typically a phrase such as "engaged in any lawful activity." But on exams corporations often have in their articles, a very specific limited purpose to sell burritos.
- Again, the existence of a corporation depends upon filing the articles of incorporation, in most states, filing a certificate of incorporation, if you're talking about Delaware. With a state, people starting a corporation, have a choice, they have a choice as to which state they're going to incorporate in. You can have a business that is located in New York. All of its owners are in New York, all of its operations are in New York, but the owners of this business decide they're gonna form a corporation. They decide that they want to incorporate in Delaware.
- Now in earlier times, there was a doctrine called the de facto corporation doctrine. In earlier times, there were problems of articles getting lost in the mail and people starting a business believing that a corporation existed when in fact no corporation existed because the articles got lost in the mail, not a real problem. Did they? Nonetheless, your professor may have covered that de facto corporation doctrine. If so, watch for a possible multiple-choice question about the de facto corporation doctrine. And perhaps if your professor covered the de facto corporation doctrine, your professor may also have covered corporation by estoppel. That's a fact pattern in which if someone treats a business entity as if it is a corporation, that person is estopped from challenging its status as a corporation.
- And so a business can be incorporated in any state. If it's in Delaware, what is filed is called a certificate of incorporation. In any other state or most other states it's called articles of incorporation. Now, the person who files the articles, who files the certificate is called the incorporator. And that's essentially the only role that an incorporator plays. An incorporator is the least significant person. Again, the incorporator is simply the person that files the articles of incorporation.
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- Now, when we talk about the end-game for a business structured as a partnership, the end of LMC Partnership, that's dissolution. That's dissolution. Now, the partners can agree on dissolution in a way provided in the partnership agreement. That's called voluntary dissolution. Or, you can have involuntary dissolution, a judicial proceeding. Now, here again, it becomes important to know whether it is a partnership at will or a partnership for a term. Because if it is a partnership at will, LMC Partnership, it's a partnership at will, and Larry dissociates, then Larry can also demand that the partnership dissolve. And a partnership at will, a dissociating partner can demand dissolution.
- Now, dissolution is not the end of the partnership business, it's sort of the beginning of the end. It's sort of the beginning of the end. The partnership continues after any event of dissolution for the limited purpose of winding up. What that means is it finishes work in process, liquidates its property, turns its property into cash, it's assets into cash, distributes that cash to creditors. And creditors must be paid in full before partners get anything. Creditors must be paid in full before partners get anything. And if the liquidation of the partnership assets does not produce enough to pay off all the partnership creditors, the partners are personally liable for the debts of a partnership.
- But we've got these partnership accounts, remember? And let's assume that if we look at Larry's account, there's $100 in Larry's account. That means, Larry, put in $100 more than he's gotten back. If this ends right now, Larry is going to lose $100. But Mo's a lot worse. Let's assume that Mo's account has a $200 balance. Don't do anything more. Larry's going to lose $100 and Mo's going to lose $200. But Curly, son of a gun, his partnership account balance is just $30. If we don't do anything else, Curly is just going to lose $30. But the deal was losses ought to be shared equally well. We've got a total of $330 shortfall, $100 short on Larry, $200 short on Mo, $30 on Curly, $330 shortfall.
- But they agreed losses were going to be shared equally. Losses were going to be shared equally. That's what they agreed to, share losses equally. Well, don't you see if Curly pays Mo $80, then $30 plus the $80 he just paid, Curly will have lost $110. And Mo will not have lost $200, he'll just lose $120. And then if Larry pays Mo $10, son of a gun, it worked out, everybody lost $110. And on that high note, let's stop our coverage of partnerships and move on to talk about corporations.
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- Next, let's talk about decision-making in a business structured as a corporation. Let's start with the decision-making of shareholders. Shareholders make decisions by voting. If you get a question about shareholder voting, there are three possible issues, who votes, when do they vote, and how do they vote? Let's talk about who. And when we talk about who gets to vote, we need to know the phrase "record shareholder as of record date." A corporation is supposed to keep track of who owns its stock, identify those people who are shareholders of record shown in the records of the corporation. Now, before a shareholder vote, typically a corporation is going to send notice to shareholders and information about the matters that shareholders are going to vote on. But to whom are these notices to be sent? Because if it's a corporation of any size and substance, there might be a turnover in the ownership of stock.
- So, Larry would have a total of 500 shares, 5 times 100. Mo would have a total of 250, Curly would have a total of 245, and that's total votes. And each of them could allocate their votes in any way they choose. And so, for example, Mo could choose to aggregate his entire 250 votes and vote for a single person with 250 votes. The goal of cumulative voting, the goal of cumulative voting is to maximize the possibility of shareholders that have a minority interest to have representation on the board of directors. Now, again, cumulative voting only exists if the articles so provide and is only relevant, is only relevant with respect to election or removal of directors. So, talking about management of a business structured as a corporation, shareholders vote. We know who votes, we know when they vote, we know how they vote.
- And so, we have this concept of record owner as of record date. In advance of a meeting at which the shareholders are to vote, the corporation sets a record date, and the only people who can vote at that meeting then are the shareholders of record as of the record date. And so, for example, let's assume that the LCM Corporation is going to have a shareholder meeting on June 20th and sets a record date of June 1st. So, the only people who can vote are the people who are shareholders of record on June 1st. Well, Larry was a shareholder of record on June 1st, but he sold his shares to Shimp on June 9th. Even though Shimp is the actual shareholder at the time of the vote, Larry gets the vote at the shareholder meeting on June 20th, because he was the record shareholder as of the record date, which I posited as being June 1st.
- ...you, there are three possible questions with respect to shareholder voting. Who gets to vote? Record shareholder as of the record date, unless there's a proxy, unless there's a shareholder voting agreement, unless there is a voting trust. Second of the three questions is when. Most importantly, election of directors, removal of directors, but also on something called fundamental corporate changes, fundamental corporate changes. Articles of incorporation can be amended, but only with both board of director approval and shareholder vote. It's a fundamental corporate change. Later, I'll talk with you about three other fundamental corporate changes, dissolution, merger, sale of assets, but let's save that for later. So, when, most importantly, election or removal of directors. Now, how do shareholders vote? Well, we don't count noses. It's not number of people, number of shares. If Mo has 10 shares of voting stock and Curly only has 1, Mo has 10 votes, and Curly only has 1. It's...
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End Game for Corporations 3 results
- And so dissolution not is question-worthy, put it that way, in a corporation as it is in a partnership. But nonetheless, you need to know that dissolution is a fundamental corporate change. And so in order for the business to itself decide that it needs to dissolve, you need to have, first, a board of directors vote and then, second, shareholder approval. It's a fundamental corporate change. Now, on dissolution, just like in a partnership, there's a winding-up, liquidation. Creditors must be paid in full before shareholders get anything. If there's anything left over after paying all of the creditors in full, you need to look at the Articles, classes of stock. Sometimes, there's a class of stock that has a liquidation preference.
- But let's start at the beginning. In the beginning, in a merger it's typically the officers, more often than not, CEO of each of the two corporations negotiates the terms of a merger and enter into a merger agreement that's conditioned on approval of the board of directors of each corporation and shareholders. And so you have officers negotiate. They come up with the terms. The board of directors of each corporation, the surviving corporation, and the disappearing corporation...the board of directors of each of the two must approve the merger agreement, and the shareholders of the disappearing corporation must approve the merger because, after all, there's nothing more fundamental than disappearing.
- It's kinda misleading. It's a lot more than a right of appraisal. It is a right to force the corporation to buy your shares at an amount based on the value of the corporation. The court is to appraise the corporation and to pay the shareholder accordingly. And the only shareholder that has the dissenting shareholder right of appraisal are shareholders of the disappearing corporation, the shareholders of the disappearing corporation who assert those rights before the vote, vote against, and then reassert their rights.
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Who Really Pays? 3 results
- Now, who really pays? Well, in corporations of any size and substance, there's inevitably going to be D and O, director and officer insurance. There's no statutory restriction on corporations buying, paying for director and officer liability insurance, simply a matter of contract law. Not likely to be an exam question, maybe a true/false or multiple choice question. Yes, corporations can, without restriction, but D and O insurance.
- Okay. That's duties. Duty of a director. Sure to see that on an exam as a question. Need to know duty of care, duty of loyalty, that the duty of care can be eliminated by statute. The duty of loyalty can not.
- Now, on the other hand, there are prohibited indemnifications. Remember, a lot of this litigation, if not almost all of the litigation against directors, shareholder derivative suits. What happens in a shareholder derivative suit? If it's successful, any judgment goes to the corporation. Well, it wouldn't make any sense to have judgment go to the corporation, and then the corporation indemnify. And so, if it is a shareholder derivative suit, no indemnification, prohibited for, judgments, settlements. And if the allegation is duty of loyalty, where the defendant director has personally profited, then there's no indemnification for attorneys' fees in such cases.
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Partners Making Money 4 results
- Well, let's move from the business to talking about the owners. People become owners of a business to make money. How do partners make money? Well, RUPA in 401(j) says partners don't get salaries. But what do we know about 401(j)? What do we know about the statutory rule that partners cannot get paid salaries? That's a default rule. Let's look to the Partnership Agreement. If the partners have agreed that they can get salaries, if the partners have agreed that they can get salaries, then Partnership Agreement controls. Same kind of thing with respect to distributions, sharing the profits. RUPA says profits have to be shared equally. If there are three partners, each partner gets a third of the profits. Well, sometimes somebody has done more work than somebody else, somebody has made a bigger investment than somebody else. And so that statutory rule in 401(a) about profits being shared equally, that's just the default rule. Whatever is in the Partnership Agreement is gonna control.
- We need to know the general consequences of dissociation. And these are the consequences, whether it's wrongful or not, a partner who dissociates has no further management rights. And so if Curly dissociates on July 13th, 2020, he ceases to have any management rights on July 13th, 2020, and his personal liability is limited to obligations incurred before July 13th, 2020. Now, he remains liable, he remains liable on debts that were incurred before July 13th, 2020, but he has no liability for debts incurred after July 13th, 2020. And he has no further duties after July 13th, 2020. Unless there is some sort of covenant not to compete, he is free to compete.
- Number one. If Larry sells his transferable interest to me, Larry retains his voting rights. I don't get any vote, I don't have any say. Second, probably more important and less obvious, if Larry sells his transferable interest to me, Larry, and not me, Larry remains personally liable for the debts of the partnership. Larry, who has sold his transferable interest, remains personally liable for the debts of the partnership, personally liable even for debts that are incurred after he has sold his transferable interest. Transferrable interest. You covered it in class, it's almost sure to be on the exam.
- The last piece of partners making money is what I call the endgame for a partner, a partner withdrawing from the partnership. RUPA calls this dissociation. Dissociation. And again, not every professor covers dissociation, but if your professor covered dissociation, strong possibility, if not probability of this showing up on your exam. So, we need to understand dissociation. It's the endgame for a partner. A partner ceasing to become a partner, withdrawing is a term that is sometimes used. Buyout is a term that's sometimes used, but if you get an essay question, better use the term dissociate and better tell your professor in your essay answer that a partner always, always, always has the power to withdraw, always has the ability to withdraw. Always has the power to withdraw. Might not have a right to withdraw. It might be wrongful, but there can always be withdrawal, there can always be dissociation.
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Whether a Partnership Exists 4 results
- And so, in class you may well have studied the classic case of Martin against Peyton, P-E-Y-T-O-N, in which the court concluded that a lender who had a right to share in the profits was not a partner, because they did not participate in the actual control of the business.
- Strong possibility for a partnership question is the question of whether a partnership exists. It's not always clear whether a partnership exists. Creation of a partnership does not require any filing with the state. Indeed, there's nothing that can be filed anywhere to establish the existence of a partnership. The existence of a partnership simply depends upon whether you have two or more persons that are co-owners of a business. And so, we can have situations in which there's a partnership that was, perhaps, unintended, that the parties themselves were unaware that they were creating a partnership.
- Again, the key phrase in the statute as to whether partnership exists is co-owners, co-owners. What makes people co-owners of a business? Two factors, two factors. First, sharing of profits. That's the more important factor, sharing of profits. But that's not the only factor. That's not the only factor. Sometimes there can be a sharing of profits without people being co-owners. Sometimes an employee, as part of their employment package, gets a share of the profits. Sometimes a lender reduces the interest rate, doesn't charge any interest, and instead gets a share of the profits. And so you can have lenders or employees who share in the profits who aren't partners. They're not co-owners, because to be a co-owner means not only that you share in the profits, but you share in the management, that you have a voice in the management. You have a right to control.
- Now, questions about the existence of a partnership arise in two different ways. First, you have creditors suing D, alleging that D is a partner of the LMC Partnership. And D is saying, "No, I'm not a partner." Now, why are the creditors asserting that D is a partner? Because if D is a partner, D is liable for the deaths of the LMC partnership. So sometimes the fact pattern is such that D is arguing that the are not a partner. Or, sometimes you have a fact pattern in which P is contending they are a partner and suing the other partners. Why is P contending that they are a partner? Because if P is a partner, then P has an ownership interest in the business, which, of course, has some possible value.
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Board of Directors 2 results
- All power is in the board of directors or under the authority of the board of directors, and the directors, as part of their fiduciary duty, cannot bind themselves in advance by agreements among themselves. That's the general rule. That's subject to an exception set out in the Model Business Corporation Act 7.32. 7.32 of the MBCA is called Shareholder Agreement. It's to be distinguished from a 7.31 Shareholder Voting Agreement. This is not necessarily an agreement about simply how a couple of shareholders are gonna vote. This is a much more important topic of management of the corporation.
- Now, let's assume that Larry, Moe, and Curly enter into a 7.32 Shareholder Agreement. In order for that to be legally effective, they must be all of the shareholders at the time of the agreement. What if one of them later sells their shares to Shemp? And Shemp doesn't like the shareholder voting agreement, he doesn't like the shareholder agreement. Shemp disagrees with it. What can Shemp do? Well, not really much, not really much. If Shemp can establish that he had no notice of this 7.32 agreement at the time he bought his shares, there was nothing on the shares or anything else to give him reason to know that there was a 7.32 agreement, a later purchaser can rescind, cancel, get his money back, but the 7.32 agreement remains effective. In theory, again, unless there's a 7.32 agreement, the authorities and the board of directors, and that's what your question is gonna be about, your questions are gonna be about primarily focusing on the board of directors.
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- Now, the decision-makers typically are in theory, the board of directors. In actuality they may be the officers. If there's a 7.32 agreement, it can be the shareholders. But on the exam, watch for questions about duties of the directors, duties of the directors. Now, with respect to duties of directors, we've got three duties that we need to be aware of, and prepared to write essay questions on exams. If you get essay questions on your exam, you're going to have one or more essay questions about the duties of directors. More specifically, about the duty of care, or about the duty of loyalty, or the duty of good faith. So let's talk about each of those three duties starting with duty of care.
- Now in reality, the board of directors appoints officers, the officers hire employees. And it's those officers that are actually doing the day-to-day work, making the decisions on behalf of the cooperation. Now an officer like the other employees of a corporation are agents of a corporation. The officers are agents of a corporation. Remember, agents owe their princials duty of loyalty and duty of care. Let me use that as a transition to talk about the duties of the decision-makers in a corporation.
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Owners Making Money 2 results
- Next, we need to cover dividends and other distributions. This is where shareholders are taking money out of the corporation, either in terms of the corporation paying the shareholders dividends or the corporation buying back some, if not all, of the shareholders stock. Now, we've got two questions with respect to dividends and other distributions. Who gets to decide and who gets the money? First, who gets to decide? Answer is always the board of directors unless there's a 7.32 agreement. Now, there is a limitation on the discretion of the board of directors with respect to paying out dividends. And that is, if the corporation must retain enough money to pay its creditors. And that's in MBCA 6.40 because, after all, creditors must be paid in full. And so, if paying dividends would leave a corporation in a position or would not be able to pay its debts, then there is that restriction on dividends. But otherwise, it's board of director discretion.
- ...to have different classes of stock. And one class can have greater dividend rights than another. There are three vocabulary terms that you need to know with respect to dividends. You need to know the term preferred, the term participating, and the term cumulative. Whether a class of stock is preferred, or preferred and participating, or preferred, participating and cumulative depends on the articles of incorporation. Now, what preferred means, you have articles of incorporation that say, "Class A has a $2 dividend preference." What that means is that each share of Class A stock with that $2 dividend preference must receive a dividend of $2 before other shareholders get anything. Preferred simply though means paid first. The board of directors could allocate a huge sum of money. So that after Class A shares get $2 a share each as their dividend preference, there's a whole lot left over to be shared among the other shareholders, the common, so to speak. And so it may well be...
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- Publication Date: June 2nd, 2020
- Subject: Business Organizations
- Series: Law School Legends Audio Series
- Type: Audio Lectures
- Description: With Law School Legends, students preparing for exams get a recognized law school professor explaining an entire subject in one clear, concise lecture. In these audio CDs, Professor David Epstein explains the important business associations concepts, the relationship among those concepts, and how you can use the concepts to answer any question your professor might ask on your exam.