BA Outline Grade 94

8/2/2019 BA Outline Grade 94

1/79

1

BUSINESS ASSOCIATIONS OUTLINE WELLS [ELH]

Grade - 94

Agencyo Definition

A fiduciary relationship that arises when one person manifests assent to another person that theagent shall act on the principals behalf and subject to the principals control and the agent

manifests assent or otherwise consents so to act

Requires two people Principal

o Hiring entityo Disclosed

Third party knows that the agent is acting for a principal and who thatprincipal is

o Undisclosed Third party doesnt know that the agent is acting for a principal

o Unidentified Third party knows that the agent is acting for a principal but doesnt know

who the principal is

Agento Hired persono Co-agents

Share the same principalo Dual Agent

Acts on behalf of more than one principal (joint principals) for the sametransaction

Fiduciary relationship Fiduciaryfaithful, look out for other persons interests rather than your own

o If it comes down to something that is good for me and something that is good foryou I am supposed to do whats good for you

Limitso Illegal actionso General harmful actions

One person asks another person to act for her and the other person consents to act Consent can be manifested through actions or words

The principal has some control over the agento Actual Authority

Agent reasonably believes that the principal wishes the agent to act as he is

Interpretation is reasonable if:o Reflects a meaning that principal would giveo In the absence of a known meaning, if a reasonable person in agents position would

interpret the manifestations in light of the context

Scope Designated or implied by principals manifestations and acts necessary or incidental to

achieving principals objectives at the time the action was taken

o Apparent Authority


2/79

2

Power held by agent to affect principals legal relations with third parties when third partyreasonably believes actor has authority to act on behalf of principal and that belief is traceable to

the principals manifestation

o Straight forward regular old agents Employer-employee relationship Employer has a great deal of control over basically every aspect fo the conditions of the

employment

Employees are fiduciaries of the employerso Independent Contractor

Lawyer-client relationship Client has a certain degree of control over the lawyer Client is the principal, lawyer is the agent Client is not liable for the lawyers behavior as a normal principal would be Other independent contractors

Doctors, plumbers, repair people Engage them for a certain task, contractual relationship, some control over what they do, but the

contractor has a lot of control over how they do it

They are engaged in their own business, not within your businesso Issues

Fiduciary relationship Partners are fiduciaries to one another Employees are fiduciaries to partnerships and corporations Officers and directors owe fiduciary duties to their corporations

Is the employer (principal) responsible for what the agent does? Respondeat superior

o Principal is liable for torts committed by agent while acting in the scope of theiremployment

o Agent is also responsible for their own negligenceo Focus on the principal because the principal usually has the money

What if the agent violated company rules when they committed the tort?o Employer is still responsibleo They are getting a social goodif youre going to use other people in your business

then you have to be responsible for what they do in the course of your use of them

o Business may be in a better position to insure against this can pass that cost alongto their customers through the price of their goods

o If the employee commits a crime then the employer may not be responsible Contract issues

Employee does something that injures the employer An employee who is going to sign a contract on behalf of the company may have to get an

ok from the board of directors

What if the employee does not get the ok?o Authority is the issue need to know if the employee has the authority to sign the

contract on their own Estoppel to deny existence of agency relationship

Person that has not manifested that an actor has agency power is liable to third party who isjustifiably induced to make a detrimental change in position b/c transaction is believed to be

on persons account if:

o Person intentionally or carelessly caused such belief ORo Having notice and that it might induce others to change their positions, the person

did not take reasonable steps to notify them of the facts

Estoppel of undisclosed principal


3/79


4/79

4

Unlimited personal liability Limited life

o Cannot last forevero Partnerships are fragile death, bankruptcy, departure of a partner could all end a

partnership

Broad agent authorityo Partners have the authority to conduct any business within the scope of the

partnerships business

At least two owners Liquid capital

o Partnership is obligated to pay you off and you can demand to have your money gowith you

You are guaranteed your interest in the partnership Interest sold without registration

o No regulatory hurdleso Cannot defraud someone or mislead them but you dont have any formal process of

having to reveal all the material facts

Any of the partners can appear in court for the partnership a lawyer is not needed Default form for businesses that are owned by more than one person

Two or more persons create a co-owned business without any explicit agreement about theirrelationship

Open to personal liability of all partners for all partnership debts Unlimited personal liability If business cannot pay its debts of any sort, creditors can take from you anything you have

that is not judgment proof

Most people do not want this risk Partner may dissolve it at any time simply by a statement of his or her express will UPA 31 Settling accounts after

If there is nothing left to pay to a creditor and youre sharing losses equally, then you haveto kick in the money to share the losses equally

o Each party will have the same loss so then non-capital contributing partner will haveto pay the capital contributing partner half of his loss

Definition UPA 6 Two or more people Co-owners Business for profit

Prima Facie Case of Partnership UPA 7 Receipt by a person of a share of profits is prima facie evidence he is a partner in business

o Do not have to have received profits yet just have to have agreement to receiveprofits

Can rebut prima facie case if received in payment of: Debt Wages Rent Annuity Interest on a loan For the sale of property

Difference between partnership and joint venturers Very similar to a general partnership Uses the same general partnership rules


5/79

5

Not partners in a general sense because havent put their businesses together Very limited scope partnershiptheyre just going to do this one thing together For the purpose of that one thing well treat their relationship as a general partnership

Written Partnership Agreements May avoid future disagreements over what arrangement actually was In the absence of a written agreement, the relationship between the partners will be

governed by the provisions of the applicable state partnership statute

Can clearly identify which property is contributed and which is loaned critical to protectthe partners interest in the loaned property

Sharing of Profits and Losses Default all partners have equal rights UPA 18

o Share equally in the profitso Share in the losses as you share in the profits

Profits of a business may be divided by agreemento Flat percentage basis

Percentages for each partner may be specified in the partnership agreement May also issue partnership units to determine the ratio by dividing the

number of units owned by that partner by the total number of units

outstanding (kind of like shares)

If new partners are added, dilution of existing interests occursautomatically without a need to amend the partnership agreement Also gives the ability

o Fixed weekly or monthly salary May be treated as a cost and subtracted before the profit is computed Also may be considered an advance to be credited against amount partner

is otherwise entitled to after division of profit

o Percentage basis Percentages recomputed each year on the basis of average amount invested

in business

Percentages recomputed each year on the basis of total income, sales orbillings by each partner, time devoted to the business, or some other factor

o For large partnerships Fixed percentage applied against perhaps 80% of the income Committee of senior partners will allocate remaining 20% among the junior

partners for incentive compensation on the basis of productivity, billing or

some other factor

o Intentionally silent on division of profits Each year partners can work out division of profits by agreement on a

mutual acceptable basis

Two viewso Where one party contributes money and the other contributes services, then in the

event of a loss each would lose his own capital one his money and the other his

laboro In such a situation, parties have, by their agreement to share equally in profits,

agreed that the value of their contributions the money on one hand and the labor

on the other were likewise equal

Upon loss of both money and labor, the parties have shared equally in thelosses

Management default rulesNabisco v. Stroud Partnership is the principal in an agency relationship

o Partners are agents of the partnership


6/79

6

o Agents must carry out the business of principal In deciding what the partnership will do, the majority rules or you need consent of all

partners UPA 9

o Majority for an ordinary business decisiono Need consent of all partners for extraordinary decisions UPA 18

Addition of a partner is extraordinary The act of a partner binds a partnership unless partner has no authority and the person hes

dealing with knows he has no authority UPA 9

o Authority taken away by majority decision All partners start with actual authority to conduct the ordinary business of the partnership

UPA 9

o If there is a tie in a vote between the partners on whether to take away theauthority of a partner, the tie goes to whoever is attempting to exercise ordinary

business authority

o When a partnership is not in the business of real estate, selling a major asset is anextraordinary situation and is not ordinary business of the partnership

o Many partnership agreement contain a recitation of the business to be carried ono When in the ordinary course of business a partner commits a wrong it is chargeable

to the partnership UPA 13

o Where one partner, by fraudulent promises made in a transaction within the scopeof the partnership business, obtains money from a third person and misappropriates

it, the other partners are liableRouse v. Pollard UPA 14

o If the transaction is outside the partnership business, the other partners are notliable and they are not bound by a statement of the partner who conducts such

transaction that he is acting on behalf of the firm

If a third party reasonably believes that the service he seeks is within theordinary course of business of the profession even if it is unusual for that

partnership, the partnership should be held liable

Actual authority v. apparent authoritySmith v. Dixono Actual authority

Any partner who wants to engage in ordinary business starts with actualauthority

In an extraordinary business, the partner does not start with any actualauthority at all

History of situation may give him actual authorityo If in the history of the partnership, one partner always

did extraordinary business then he may have actual

authority

An agent must gain actual authority directly from the principal Principal tells the agent you have the authority to do X (express

authority)

Principal tells the agent you have the authority to do X and thatimplies there is also authority to do Y and Z (other things that areincident to do X) (express authority and implied authority0

Principal has allowed the agent to do this sort of thing time andagain (implied authority)

o Apparent authority Look at it from the view of the third party Does it reasonably appear to the third party that the partner had the

authority to participate in this transaction?

Look at the manifestations (behavior) of the principal


7/79

7

Third parties do not have to investigate in order to determine authority butthey probably should investigate to determine if the person has authority

There may still be apparent authority if a third party is not aware the actualauthority of a partner has been removed

To determine apparent authority, recourse may frequently be hadto past transactions indicating a custom or course of dealing

peculiar to the firm in question

Giving a title to someone in the company suggests a scope ofauthority

Having a car with the business name on it Having samples of the product to give out No apparent authority just because agent tells third party that he

has the authority to do the business must come from the principal

An agreement about profit share does not affect the authority a partner has in managemento For this to happen there would have to be an agreement that one of the partners

would have a separate voice

Duties of Partners to Each OtherMeinhard v. Salmon UPA 21 IF YOU HEAR THE WORD PUNCTILIA

o Defendant always loseso

Defendant accused of breach of duty did not meet the very high bar set for him

Partners owe each other a fiduciary duty loyalty, faithfulnesso Sensitive to morals and feelings of other partyo Look out for the other person first and yourself second, if at allo Old standard - Analogy between a partner in business and a partner in marriage

Partners ought to take care of one another like spouses shouldo Now much more like a business relationship

Not allowed to:o Appropriate an opportunity for oneself in secrecy and silence

When an opportunity comes in the door and is placed in the agents la, thatwas valuable information (property), for a business can make a difference

between profit and loss

Cannot be kept by one partner and not share with another To determine if it is a partnership opportunity look at whether it came in

the door b/c of the business or whether it was the partner alone who

brought it in?

Geographic factoro The farther away you get from the business then the

easier it will be to say it is the partner who brought it

in

Broad fiduciary duties under the statute may be modified by an express agreement amongthe partners

Partnership Property If you use partnership money to buy something, it is partnership property What if a partner takes partnership money without consent and gambles with it UPA 21,

22

o If the partner wins he has to share it with the partnershipo If the partner loses the partnership does not take on the debt

A partner only has a personal property interest in the partnership Partners are co-owners in partnership property UPA 25

o Rights as a co-owner cannot be assigned to someone else


8/79

8

As profits accrue, partner has a right to be paid his proportion, on the winding up ofbusiness, after the obligations due third persons have been met, he has a right to be paid in

cash his share of what remains of the partnership property

o This interest can be assigned in whole or fractional part Charging order

o Relationship between creditor, debtor and partnership as follows: Charging order may enjoin the members of the partnership from making

further disbursements of any kind to the debtor partner

Charging order may formally require the members of the partnership to payto the creditor any amounts which it would otherwise pay to the debtorpartner

Appointment of a receiver is not indispensable to the collection of the claimout of the debtor partners share

Appointed only where he has some useful function to serve, such asmaintenance of lawsuit, conduct or sale or representation of

computing creditors of debtor partner

Debtors interest should be sold if, and only if, the court is convinced thatthe creditors claim will not be satisfied with reasonable expedition by the

less drastic process of diverting the debtors income from the partnership to

the payment of the debt

Where the partnership or a partner is insolvento Jingle rule for priority of payment

Individual creditors have priority with regard to individual property Partnership creditors have priority with regard to partnership property

Execution of a leaseo Name of the partnership as the lessee and have all partners signing for the

partnership

Partnership Accounting Net worth

o Value of all the stuff you own minus the value of all the stuff you owe Assets what you own Liabilities what you owe

o A-L=NWo A=L+NW

Accounting (balance) sheeto Left side assets

Cash should be able to accurately figure this out Marketable securities (cash equivalent)

Accounts receivable money that is owed to you b/c of the sales of yourbusiness

Inventory shelf pricehow much you paid for what youre selling Fixturesanything that will transfer with the real estate b/c its fixed to the

land, includes improvements to the property that you have made How much you paid to put fixtures in This is a really soft number b/c the real value of this is not going to

be what you paid for itpulling out the stuff and selling it youd

probably take a big hit

Vehicles bought by the company Tax-related depreciation allowed by tax laws to depreciate some

of your assets


9/79


10/79

10

o If there is a loss investor can use the business as a tax shelter, takes away fromtheir total income

Capital accounto Partners accounting of what theyve put in and got out of this businesso Partner with a negative capital account must pay the partnership that amount

Restrictive Covenant Limit the professionals right to practice anywhere and access clients anywhere You cannot practice _______ within 50 miles of the partnership You bring someone into the partnership, train them and give them access to all of your tools

o Dont want them to go out and open another practice in the area and take awaysome of your business

To determine if valido What is necessary to protect this business?o What kind of information or training is this person taking with them?o Must be reasonable in distance, in time and in scope

Scope the kind of business Distance will vary depending on where you are (city, rural area, etc.)

City distance is much smaller than for a rural area Time periods up to 5 years have been regularly upheld

For lawyers void as a matter of public policy

o Lawyers made this rule as part of professional ethics upheld by Supreme Court For doctors allowed with limitations

Addition of a new partner Does not dissolve the partnership and create a new one Does not create the rights of dissolution

o Ex: cannot request the winding up of the partnership Inadvertent Partnerships

Might enter into a business relationship that looks very close to a partnership, they willdisclaim being in a partnership

o Statements that no partnership is intended are not conclusiveMartin v. Peytono Intentions are drawn from your actions

If you represent someone as a partner, putting his name on the door, etc. UPA 16o Makes you a partner for all the bad reasons but none of the good reasons

Unless you can prove that you are not a partner but this would be difficulto Holding out must be relied upon by the third party

This only applies if a third party is attempting to prove there is a partnership partnershipby estoppelSmith v. Kelley

o Liable to any third party who has relied on the representation This is not the case when a person is trying to prove they are a partner

o Must prove an agreement to be partners in that case Partnership by estoppel

o Even a reference by one business associate to another as a partner can cause apartnership by estoppel if a third party relies on that representation

All partners are jointly and severally personally liable for all debts RUPA 306 If joint liability you have to join all parties in the action Several liability then you can sue some of them, just one of them or all of them This means you can choose several since you could do either Partner that signs a lease with the partnership and then leaves the partnership is still liable

for performance under that lease8182 Maryland Ass v. Sheehan


11/79

11

o Partners that did not sign the lease and left the partnership before the failure toperform under the lease occurred are not liable

o Only the partners that signed the lease or are partners at the time of the failure toperform are liable UPA 17

Let your partners know you are leaving the partnership before you start giving non-confidential information to another partnership that youre going to Gibs v. Breed, Abbott

and Morgan

o Anything you know about yourself and your own circumstance is ok to revealo Already public information is ok to revealo Client list, if not publicly known, is dangerous territoryo Talking to associates and staff

Asking them to come to the new partnership with you Depends on notice should tell the rest of the partnership

Shouldnt have an unfair advantage in negotiation over thosepeoples futures

Dissolution UPA 31 In partnership, unless something in the writing makes it a more formal process, all it takes is

for one of the partners to say I quit

Death of a partner is another way to dissolve a partnership UPA 31(d)(4)o

If you insure both partners lives, when they die, insurance proceeds go towardstheir part of the business

o If representative of estate of deceased partner so chooses, she can call for theliquidation of the partnership assets, debts paid and share of each partner paid to

him in cash

Departing partner can ask for their share of the value of the businesso Have to liquidate the business or sell it UPA 37

Alternatively, departing partner could instead choose to allow the business to continue andclaim as a creditor the value of his interest upon dissolution of the partnership (subordinate

to other creditors) UPA 42

o Means he is unaffected by later changes in the value of the partnership determinewhat is owed to departing partner now and pay it later

o Until he is fully paid, the departing partner is entitled to profits since his assets arebeing used in the conduct of business

Unless specified in the partnership agreement, it is the departing partners choice whetherto wind up the business or elect to share in profits

Options for provisions in the partnership agreement to prevent thiso Buy out

Partnership agreement could state that anytime a partner departs theyhave the right to be bought out (paid off)

Would not let them force the liquidation of the business If the business is so valuable that you dont have the money to buy out the

partner youre back into having to wind up the business

o Orderly buy out We will pay you over time We will pay X% first year, X% second year, etc. In the meantime, you will allow us to continue business until you are paid

off

Partnership is what owes thisno excuse for the partners to say we dontowe anything

If the partnership cannot pay that money they will be forced intoliquidation


12/79

12

o Orderly buy out over time using best efforts to pay on time Often times kills the business Period of winding up leads to termination of the partnership

o This can be changed by the partnership agreemento Often will say that partnership is not to be wound up and terminated but is to be

continued by the remaining partners with the interest of the withdrawing partner

being paid off in cash on some basis

When there is a partnership for a term certain, the court will not allow a partner to breaksuch contract and dissolve the partnership unless the other partner is not performing on hisobligationCollins v. Lewis

o Wrongful dissolution UPA 32 A partner who engaged in wrongful conduct may be removed by judicial

order and whose financial rights thereafter are reduced by the loss suffered

by his wrongful conduct

o An expulsion must be bona fide If something affects the trust and personal confidence among partners, the

partner who is no longer trusted may be expelledBohatch v. Butler and

Binion

Under Sarbanes-Oxley Act this does not include a partner nottrusted for whistleblowing

When determining the value of the partnership, the market value should be used, not thebook valueCauble v. Handler

Settling accounts UPA 40o Order of payment

Third party creditors (non-partner creditors) Banks, govt, etc. Subject to agreement with the third party creditor

Partners other than for capital and profits (partner creditors) Partners that lend money to their partnership Other than those is debt

Partners in respect to capital Investment

Partners in respect to profitso In order to create any limited liability organization youre going to have to file somethingo Limited Liability Partnership

General partnership in all respects except that by statute the partners have no personal liability forobligations that exceed the assets of the general partnership

Assets they have invested in partnership remain at risk East to convert a GP to an LLP

Must complete a few steps, like filing with Sec of State and file an annual report RUPA1001, 1003

Exception Partners in an LLP have full personal liability for claims arising from their own misconduct

o Ex: misrepresentation, fraud, fraudulent transfers, and breach of a duty of full andfair disclosure

When signing a contract for the partnership, if partners are going to sign the document the contractmust be specific in respect to the liability of the partners

Any ambiguity would probably go against the partners Setting accounts after dissolution


13/79

13

Partners do not have to personally pay losses, the creditors can only get the money from thebusiness

o Unless the creditor has made you sign a personal guarantee Signed away limited liability for that debt

o Anytime a partner uses his name for the business he should put LLP afterwards toput the creditors on notice that you are not a general partnership

Same with LLC and corporationso Partners do not owe anyone for the losses of the business, even another partner

unless you contract differentlyo Limited Partnership

Uniform Limited Partnership Act Applicable Provisions

o 303o 304o 602o 603

Kind of like a GP Two kinds of partners

At least one general partnero General control to run the businesso Open to liabilityo Can incorporate this position

At least one limited partnero Limited investment, limited control, limited liability

Have to file a certificate of limited partnership to form Capital contributing limited partner could lose his shield of limited liability and inadvertently

become a general partner with full liability for all partnership obligations

If limited partner participates in the control of the business, he is liable only to persons whotransact business with the limited partnership reasonably believing based upon the limited

partners conduct that the limited partner is a general partner

A limited partner who knowingly permits his name to be used in the name of the limitedpartnership is liable to creditors who extend credit to the limited partnership without actual

knowledge that the limited partner is not a general partner

Use of a corporation as the sole general partner of a limited partnership Permitted individuals and entities to be a limited partner even though they are also officers,

directors, or shareholders of the corporate general partner

If the corporate general partner has nominal assets, the limited partnership becomes a defacto limited liability entity that is similar to a corporation

Can be publicly or closely held A limited liability company can be substituted for the corporation If board of directors of corporate general partner have a duty to manage the property of the

limited partnership then the other parties who have a claim to that property should have

the ability to go after them

o Board of directors owe the limited partners a fiduciary dutyo Limited Liability Limited Partnership

LP that gives the general partner limited liability Limited partnership with both general and limited partners but the general partners have the

protection of the LLP election

Used narrowlyo Taxation


14/79

14

Tax Table Each tax table says if you have taxable income of up to a certain amount you must pay this

much money of tax

Corporateo Ex: $80,000 tax equals $13,750 + 34% of $5,000

What is the marginal tax rate of this corporation34% $13,750 comes from 15% of $50,000 and 25% of the next $25,000

Individual No partnership tax table partners taxed for partnership business as individuals

Marginal Tax Rate Percentage taxed over the low end of the tax bracket youre in When it goes up the more money youre making its progressive When the marginal tax rate goes down the more money youre making its regressive

Average Tax Rate Taxes paid divided by taxable income Averages the 15% of $50,000 and 25% of the next $25,000 and 34% of the next $5,000

Basis Amount you paid for property that you bought for investment purposes

Stepped up Basis Property acquired by inheritance, generally the fair market value of the assets on the deathof the decedent

Adjusted Basis Basis of the property plus capital improvements made by the seller, commissions originally

paid by the seller, legal costs for defending or perfecting title minus returns of capital,

particularly depreciation claimed as tax deduction, depletion, deducted casualty losses,

insurance reimbursements and the like

Amount Realized Amount you sold it for minus selling expenses

Conduit or pass-through taxation Must put their income from the partnership on their own returns

Flows through to individual partners Only one tax level entity is not taxed Even if you do not receive any of the profits from the partnership individually you are taxed

as if you did

o Will work out a deal where partnership pays out taxable income attributable to thepartners to cover the tax bill

Attempt to minimize taxable income (year end planning) spend the money so that you arent taxedon it

If you are going to be making money you might spend some money on the business beforethe end of the tax year rather than have some big business tax bill

Will reduce the ultimate tax bill Check the Box

An entity will be classified as a corporation for tax purposes if created under a statute thatdescribes or refers to the entity as incorporated as a corporation, body corporate or body

politic or a s joint-stock company or joint stock association

o Taxed as a C Corporation or an S Corporation Not classified as a corporation and has at least two members can elect to be classified for

tax purposes either as corporation or as a partnership by making election at the time it files

its first tax return


15/79

15

o If entity does not formally elect to be taxed as a corporation it will be taxed as apartnership

Entity that has only one member may elect to be taxed as a corporation or it will be taxed asa nothing

If entity elects to change classification, may not change its classification back within 5 yearswithout permission of Commissioner

Limited Liability Companyo Uniform Limited Liability Company Act

Adopts more partnership concepts than most existing state LLC statuteso Applicable Provisions

101 103 105 106 112 202 203 301 303 404 405

o Overview Business organization that takes the best from both corporation and partnership Choice between centralized or decentralized management ULLCA 404

Member managed LLCo Managed more like a general partnershipo Members are very much like partners

Manager managed LLCo Managed more like a corporation or limited partnershipo Managers have principal fiduciary responsibilities

Just have to put it in the operating agreement and articles of organization No requirements for internal procedures

Forced check-the-box taxation Choose between pass-through taxation or entity taxation Certain entities not eligible for this taxation and must be taxed as corporation

o Entities organized under a federal or state statute that refers to the entity as acorporation or as incorporated

o Certain foreign entities that are specifically listed in the regulations as per secorporations

o Business entities that are taxable as corporations under other provisions of theInternal Revenue Code, such as publicly-traded firms, real estate mortgage

investments conduits and regulated investment corporations

Removed any incentive to organize a Subchapter S corporation rather than as an LLC Liability ULLCA 303

Limited personal liability Can contract not to have it

Life Perpetual life Can contract not to have it

Agency


16/79

16

Broad agent authority Can contract not to have it

Ownership As few as one owners

Capital withdrawal You can have it either way Generally it will be an illiquid situation

Interest Securities

o Not perfectly clear on this question Filing

Required Annual registration and fees

Must be represented by a lawyer in courtPoore v. Fox Hollow Enterprises Dissolution

Partnership principles Fictional Entity

Cannot suffer mental anguish and distresso Members can suffer mental anguish

Can sue for reputational damageo Formation

Filing Articles of Organization in a govtal office Name of the LLC must contain words or abbreviations indicating that entity is an LLC ULLCA 105

Must be distinguishable on the records of the Sec of state from the name of other registeredbusiness names, name reserved or a fictitious name for a foreign company authorized to

transact business in the state

You can reserve your name in advance ULLCA 106o Will check it with other names that have been reserved and registered with other

business names

o You have 120 days before you have to file anything to create the LLC

Register you have filed your articles of organization with the Sec of State Principal reason to register is so that foreign organizations (from other states) can come into

the state and register their name even if theyre not actually doing business here but they

might want to do so later

Must maintain a registered office and registered agent for service of process Foreign LLC must obtain a certificate of authority to transact business in another state Can be formed for any lawful purpose ULLCA 112

o Articles of Organization ULLCA 203 Affirmative election to be manager-managed must be made here

In state statutes usually affirmative election to be member-managed must be madeo Operating Agreement ULLCA 103

May be oral Basically just a contract between all the members of the LLC agreeing on how the LLC will work Governs the internal relationships of the LLC Operating agreement controls over the articles of organization in case of conflict May not eliminate the implied contractual covenant of good faith and fair dealing

When a seller intentionally misrepresents a fact embodied in a contract, that is, when aseller lies public policy will not permit a contractual provision to limit the remedy of the

buyer to a capped damage claim -Abry Partners V LP v. F & W Acquisition LLC

o Membership


17/79


18/79

18

o Fiduciary duties on controlling shareholders who act in a way that the court perceives as unfair to minorityinterests

Corporationo General incorporation statutes anyone who wants to create a corporation can pay a fee, file a document

and report back every year

Model Business Corporation Acto Applicable Provisions

2.01 2.02 2.03 2.04 2.05 4.01 6.01 6.03 6.20 6.21 6.22 6.25 6.26 6.30 6.31 6.40 7.01 7.02 7.04 7.20 shareholder list 7.22 proxies 7.25 quorum 7.28 cumulative/straight voting 7.30 voting trust 7.31 voting agreement 7.32 7.40 7.41 7.42 7.43 7.44 7.45 7.46 8.01 8.04 classification of shareholder 8.05 election of directors 8.06 staggered board 8.20 8.21 8.24 8.25 8.30 8.31 8.33


19/79


20/79

20

Hundreds or thousands of owners Mostly incorporated in Delaware The law of the place where the corporation was incorporated applies Corporation has shares that are traded on public securities markets subject to federal

regulation

o Disadvantages in two areas Federal income taxation Mandatory procedural requirements that may increase the cost of operation

o Corporate existence begins upon the filing of articles of incorporation Results in the creation of a new legal entity, a fictitious person with sole responsibility for its own

obligations

Provides limited liability for all investors and participants whether active or passive MBCA 6.22 (forshareholder liability)

o Where to incorporate Business confined to one state incorporate in that state Business across many states Delaware Internal Affairs Doctrine MBCA 15.05

All questions having to do with corporation law are going to be answered by the law of thestate in which you are incorporated

Delaware is most attractive for publicly traded corporations while closely held corporations tend toincorporate locally

Delaware Race of the lax (race to the bottom)

o Law is so liberal that it allows corporations and managers to do whatever they want Judiciary has most expertise when it comes to deciding questions of corporation law

o Corporations do not like legal risk Two tests on whether Delaware law is good or bad

o Tobins Q Compare the book value of the company with its market value

How is it using the assets and the debt that it has If the book value is higher than the market value then its not doing

so well

Delaware companies do better managers are using the assets of thecompany and the debts of the company wisely

o Comparative share prices Delaware companies tend to be more valuable

Just because you are a Delaware company you will be making more money from using yourshareholders investments than if you were in another state

Because under the law of Delaware managers have more freedom to take the risks theythink are necessary without being challenged by the shareholders

o Battle is often between the management and the shareholders Which group should have more say in the fundamental questions of running

the company All the states say that the corporation shall be managed by the

board of directors

If management gets certain things wrong (breaches duties, wastesassets) then the shareholders can step in and vote them out, sue

them, etc.

Delaware is more skewed toward management control and limitedshareholder voice


21/79

21

o Managers have more freedom of movement and lessthreat from shareholders

o Shareholders are like mushrooms kept in the darkand fed a lot of manure

o What if there is bad management? Sell your stock there will be a market if its publicly traded If more shareholders sell then the stock price will drop lower and lower If the company is successful then more people will buy stock and the price

will go up Takeover

I could buy the company, kick bad managers out, put in newmanagers and make money

Managers know this they cannot run the company into theground, must keep value of company up or else they will be

replaced

There is a market out there that keeps the managers consideringbest interest of company

If you want to buy a company you buy the stock for the companyo All you have to do is buy a majority of the stock to take

over the company How to change your state of incorporationDole Food Company Inc, Proxy Statement

You incorporate a subsidiary in the state you want to change to (just send in the filingpapers and money)

o Subsidiary basically has nothingo Vote to merge the original company into the subsidiaryo Must get shareholder approval

Proxy process MBCA 7.22 Must send out to all of its shareholders to vote for or against the

proposal and the proxy statement describes what is being voted on

and all of the material information the shareholder would want to

have

o Shareholders are like sheep tend to do whatmanagement suggests they should do

Allows you to change the law your corporation is bound byo Federal Regulation

Securities law Stocks and bonds are the classic securities Regulates companies who buy and sell stock (pretty much everyone) In a publicly held situation it has even more control Requires meaningful and effective ways to vote, anti-fraud provisions to protect the

shareholders, takeovers are federally regulated

Securities Act of 1933 Truth in Securities Acto Designed to attempt to insure that there is honesty in the process of buying and

selling securities

Dont want lies and omissions Securities Exchange Act of 1934

o Covered a lot of groundo Created the oversight of the national exchangeso Created the FTC which became SECo Covered securities fraud of all sortso Proxy regulation


22/79

22

o All new publicly traded companies must be registered with the SECo Must file a quarterly report with the SEC all actions and other important things

sums everything up

Documents available to anyone in the world CEOs, directors, accountants, etc. all personally liable for the inaccuracy of

the reports

o Initial public offering (IPO) First offering of securities to the public

o All sale of stock must be registered Subject to exemptions

Private placemento Selling a lot of stock but only to a few people

Local offeringo Selling a lot of stock but only selling it in one stateo Will still have to register with the state

Regulation deed Executive Personnel ExemptionSEC v. Ralston Purina Co.

o Do they have access to the kind and extent ofinformation would exist in a registration statement? If

no, then does not applyo Employees are not sophisticated, dont know what

questions to ask and not in the position to ask them

o Do the prospective purchasers need the kind ofprotection a registration statement provides?

o Applies to all securities Big one that gets lost is an investment contract

Investment of money in a common enterprise with the expectationof profit derived solely from the efforts of other people Howie

o Common enterpriseSmith v. Gross Vertical commonality More normal common enterprise is a corporation Anytime a bunch of people invest in one thing and

pool their resources its a horizontal enterprise

If you dont realize something is an investment contract then badthings happen

o Buyer gets money back no questions asked if you dontregister the investment contract

If you get it wrong and someone alleges it was intentional thenprison could happen

o Any time it is a security and violate registration when there is no exemption theinvestor will get their money back

Two theorieso Sunshine Theory

You can prevent a lot of crime and misbehavior if you force people to act inthe open, when youre out in the light (sunshine)

Reveal all of your secrets if youre going to sell securities All information available to public Sale and offering has to be completely transparent Will make it easier to hold people liable and well hold you liable if you dont

do it out in the open

Disclosure-based disclose all facts


23/79

23

o Efficient Market Theory States securities commissioner will look at offering prospectus and decide

for state if this is a good or bad investment if a bad investment the

offering would not be allowed in that state

Merit review or merit offering Proposed at federal level and rejected

Assume that markets are efficient If you pump all the information about a security into the market

place then the market will set a reasonable and fair price If there is bad information then people wont want to buy it and the

price will be depressed

If its good then people will want to buy it and price will go upo Disclosure under sunshine theory will help to create an efficient market by

informing the public

Sarbanes-Oxley Act Responsibility is to go up the ladder when you discover a company you are representing is

doing something illegal

Report the matter to the appropriate person in the company and you observe whetheranything is done about it

o

If you dont get a satisfactory response then you go another step up the laddero If no one listens then you go to the board b/c the president and general counsel

have refused to correct the behavior

o If the board doesnt listen then you withdraw from representation Any time stock is offered there must be either a registration of that offer with the SEC or an

exemption of registration

Even if there is exemption sellers must make full disclosures about the stock or else it issecurities fraud

o Three core documents Articles of Incorporation Bylaws Shareholder Agreement

o Pre-incorporation Transactions Are the owners likely to start acting as a corporation before they create the corporation?

If yes, there is some chance, then you should form the corporation sooner rather than later(do not allow pre-incorporation documents)

If there is no chance then you should wait until after you have gone over the documents Shares of the future corporation can be sold pre-incorporation

Subscription agreements MBCA 6.20o I promise to buy the stock when the company is incorporated if it is incorporated in

the next 6 months

o Standing offer for up to 6 months Can bind people to do other things like serve on the board pre-incorporation as well Promoters

People involved in organizing a businesso Finding investors

Fiduciary dutieso To other promoters

Like you entered into a partnership with each other and your business ispromoting a business

o If you are acting for the company you cannot get a secret profit off of somethingyou bought for the company


24/79

24

o If you bought it for yourself before you became a promoter and you are going to selit to the company you could sell it for a profit

o Cannot buy property at inflated price which is worth less If shareholder is upset about this she will have action against promoter b/c

promoter took something from the stock that is more than youre allowed

Promoter defense no fraud or deception b/c we knew exactly what wewere doing, we were the only owners of the company at the time

Pre-incorporation contracts MBCA 2.04 If it is a contract there must be parties on both sides of the contract argument is that thepromoter is liable signed the contract as the ownerStanley J. How and Assoc. Inc. v. Boss Novation

o New contract in which all the parties agree that they will give up their rights underthe first contract in exchange for what they receive under the new contract

o New contract, new signatures, new corporation signs Adoption

o Corporation adopts the contract, architect agrees, corporation accepts benefits ofcontract and leads architect to believe corporation is liable for the contract

Ratificationo Corporation can only ratify events or contracts that occurred while the corporation

was in existence Did the other party intend to only look to the corporation for payment or did he also look to

the promoter for payment?

Only liable if knew there was no incorporation but represented that there was joint andseverally liable

o Knowing actual or constructive knowledge So easy to find out whether or not you have a corporation in place, if you

havent talked to secretary of state and you dont have the paper in your

hands then you should assume you dont have a corporation in place

If you know you dont have a corporation you cannot have a de factocorporation b/c not acting in good faith (see pg. 26)

Corporation by estoppel might exist but there is amisrepresentation and that could cause a problem

Should not allow a person to take advantage of corporation byestoppel if they knew there was no corporation

Three types of equitable corporationsRobertson v. Levyo De jure (legal) corporation

A corporation that has filed its articles and the articles have been acceptedo De facto corporation

Was there an incorporation statute allowing incorporation in this situation? Must be able to show you attempted to create the corporation

Took some steps created articles and sent them off If gave the articles to the lawyer and the lawyer did not file them

then it is not an attempt to file Have to use the corporate name in the transaction Must all happen in good faith

o Corporation by estoppelCranson v. IBM When the plaintiff made a representation to make a contract with the

corporation and that they will only look to the corporation for payment

then the plaintiff is estopped to the deny the corporation

Test Equitable estoppel situation


25/79

25

o Representationo Need someone to rely reasonably on that

representation

o Reliance to their detrimento Person making representation is estopped to deny its

truth

o Formation Corporation comes into being at the time of filing MBCA 2.03 Incorporator

Must be a natural person in some states but MBCA allows business entities as well Person that files the Articles of Incorporation No further function past the filing might hold other roles also

Articles of Incorporation MBCA 2.02 Purpose clause

o A narrow purpose clause is not required but may be necessary if you want toprevent the business from getting involved in anything else

o Ultra vires Beyond the powers Entity that took that action did not have the legal power to do that

Only people who can bring the action are the shareholders by saying thatmy corporation is doing something it is not authorized to do

All predicated on a narrow purposes clause Modern articles have no purposes clause at all and if you do not have one

you are entitled to enter into any lawful business

Almost impossible to do anything that is ultra vires Exceptions to the general rule

o Charitable giving There is a limit to charitable giving can go beyond

powers if they give away too much money (beyond

money to reasonably use it in any business sense

like tax deductions)

Go to the corporations articles is there a purposes clause? If not then very little that is ultra vires If it has a narrow purposes clause there are a lot more things that

are ultra vires

Name MBCA 4.01o Must be distinguishable upon the records of the secretary of state from other

corporate names

o Requires a determination whether the proposed name constituted unfaircompetition with existing corporations

Confusion in an absolute or linguistic senseo Corporation may generally conduct business under an assumed or fictitious name to

the same extent that an individual mayo Fictitious name

Businesses, corporations and others occasionally use names that are nottheir formal business names

Like the name on the sign might not be the real name of thebusiness

If thats the case, youre operating a business under a fictitiousbusiness name and youre supposed to file a document with your


26/79

26

local county to tell them that your formal name is doing business as

your fictitious name and here are the owners

Purpose if you have a problem with the business then you can find outfrom a govt source who owns the business and what the name of the

corporation really is

Protecting your directors from liability MBCA 2.02(b)o In immunity (raincoat provision)

Can put in provision in your articles that eliminates liability of managers tocorporation or shareholders

Breach of duties in most ways certain fiduciary duties cannot ever bebreached

o In indemnification Put this provision in your articles Corporation will pay for directors damages in a suit

o Insurance Directors and officers insurance Insurance policy on directors so the company does not have to foot the bill

if there are suits like this

Can limit the duration of the corporation Must be registered place of business and a registered agent authorized to accept service of

important documents

o Your registered agent will preferably be an attorney who will be able to take thesethings seriously

Must authorize one or more classes of shares that have unlimited voting rights, one or moreclasses of shares that will receive net assets of corporation upon dissolution MBCA 6.01

o These do not have to be the same set of shares, you can have multiple sets of sharesthat do all of that

o Beyond that youre free to design shares as you pleaseo Amending to authorize more shares

Must give the initial shareholders more shares Ex: initially 1000 shares, amend articles to authorize 10 million shares, will

initially convert those shares into 1 million shares, conversion ratio will be1000 to 1

o Must have some outstanding MBCA 6.03 Election of Preemptive Rights MBCA 6.30

o When the corporation offers shares they must offer them to all existingshareholders first and they must offer them proportionately

o If there are three existing shareholders that offer 1/3 of the shares and the proposalof the corporation is that they will offer 300 new shares, then they must offer 1/3 of

the new shares to the 1/3 shareholders first

o Gives them the opportunity to preserve their interesto Opt in provision

You have to choose to have this by putting it in the articleso Not likely in a publicly held company because there are so many shareholders

Would require communicating with every shareholder with that type ofstock

Creates an expensive layer of communication and complicationo Exceptions MBCA 6.30(b)

If share is sold for something other than money If share is sold to repay a past debt


27/79

27

If there is a flaw in the process of the sale such as coercion or fraud then thewhole offering is flawed

Bylaws Internal set of operating rules for the corporation Number of directors

o Required to have at least oneo Issues about insurance if lawyer is director

Dont be a director in the corporation if you are the lawyer for thecorporation

o Tie-breaker directors are not a good idea if they are brought in solely to be a tie-breaker

They have all the power in the situationo If only two directors instead of bringing in a tie-breaker they should just act as

partners

o If you have fewer than 50 shareholders you can agree to eliminate the board ofdirectors

Issue if only two shareholders and 50/50 split then will just have to agree,if a 51/49 split then the person with the 51% interest makes all the decisions

Need to have an annual meeting with the date set MBCA 7.01

Board meeting dates Vacancies

o Ex: 5 directors and all are shareholders, one dies now 4 directors and a vacancyo How do you fill the vacancy? Who will make that decision? Shareholder or board?

Can choose in the bylaws Shareholder agreement

What happens when a shareholder departs the companyo Getting Started

Organizational meeting MBCA 2.05 Determine who the initial directors will be and who they will name as officers Bring in some capital sell the stock

o If you have a partnership already in existence before you incorporate, will transferinterest from partnership and will use it as consideration for stock in company that

will be valued

Put a notice in the local paper of general circulation where your registered office is within aday of filing the corporation

o Notice that you are not a limited liability companyo Publish for two weeks runningo Newspapers like this b/c legal notices are a source of incomeo If you dont do it theres no penalty

There doesnt have to be an organizational meeting lawyer draws up minutes and the people thatwere supposed to be there will consent to those minutes same effect

o Business is conducted in the corporations name Corporation itself enters into contracts, borrows money, sued and may be sued in its own name and

otherwise conducts business much as though if it were a real person

Assets are subject to seizure by corporate creditors and the shares of stock of the corporation aresubject to seizure by personal creditors of the partners

Signature lines Signature line should have name of corporation underneath it and the state the corporation

was incorporated in and then a byline with the name of the signator there and the title of

the signator

Anything that departs from this is dangerous


28/79

28

o If you dont put By: Signator and just put signators name the signator will be heldliable as well as the corporation

o If you put By: Signator (personal) Corporation liable, signator is not liable b/c By: holds more weight than

(personal)

o Authorized Signature under Signators name with no By: Signed as an individual could mean authorized signature of himself,

corporation and signator both liable

o Three tiers Shareholders who are traditionally viewed as the ultimate owners of the enterprise The board of directors, composed of the managers of the corporations affairs

Board of directors chooses who to fire and hire in a close corporation The officers who act for the corporation to implement the decisions of the directors A single individual may simultaneously act as an officer, a director and a shareholder

o Fiduciary duties Shareholders have no fiduciary duties

They are meant to be selfish Those who are running the company have fiduciary duties owed to the company and

indirectly that means to the shareholders

o Liability Limited liability for those involved in a corporation Shareholder may be liable if the shareholder agrees through some kind of contractual promise (such

as articles of incorporation) to be liable

Generally speaking, a corporation would not voluntarily have this provision No personal liability for losses suffered by creditors for ineffective management of the business Personal Liability MBCA 6.22

If you commit a tort could be liable If you sign a contract could be liable Liable for the consideration you were supposed to pay for your shares MBCA 6.22

Corporate Veil Equitable, judge made doctrine Can the owners of those corporations and occasionally those that act for it in some sort of

way be liable for its contract and tort debts?

Purposeso Prevent fraudo Achieve equality

There are reasons to ignore the corporation (disregard it) and pierce the veil List of factors that courts look at when theyre trying to decide whether to pierce the veil

o Fraud Misrepresentation (which is an element of fraud)

o UndercapitalizationBaatz v. Arrow Bar What capital would be reasonably needed to pay the debts the corporation

would expect to have Also think about what kind of problems may happen and how much money

would need to be dealt with

Ex: a company that operates a swimming pool someone coulddrown a company should buy insurance to prepare for this

company that neither has insurance nor enough cash to deal with a

suit, this could be a situation of undercapitalization

Insurance can be used to suggest that you are not undercapitalized for tortliability but not for contract liabilityRadaszewski v. Telecom Corp.


29/79

29

Should have $1 of equity for $10 of outside debt Should have $1 of equity for every $3 or $4 of inside debt This is still pretty thin

o Corporate formalities Board and stockholder meetings as required by statute Proper order of payment of bills Corporate records If dont observe corporate formalities then weighs in favor of piercing the

corporate veilo Comingling (of assets)Dewitt Truck Brokers v. Flemming Fruit Co.

Relates to formalities Occurs when you treat corporation funds as if theyre your personal funds

(or vice versa)

o Instrumentality and alter-ego doctrines Agency concepts In a close corporation, the shareholders are entitled to run the show, but it

must be done in an appropriate way

The shareholders should be running the show for the benefit of thecorporation and do whats in the best interest of the company

Parent-subsidiary situationo Parent company is the shareholder of the subsidiary

Wholly owned subsidiary parent is the only shareholder If not then there is a parent corporation and there are some other

shareholders out there that hold stock in the subsidiary company

o When there is a wholly owned subsidiary (corporation owns 100% of the stock ofthe subsidiary) and the parent corporation does not put a lot of money into the

subsidiary, to pierce the corporate veil and get any money out of it you would have

to pierce the veil of the parent corporation as well as long as the subsidiary is not

undercapitalizedBartle v. Home Owners

o How do you hold the parent company liable for the subsidiaries? Shareholders will choose the board of directors shareholder is the parent

company As the only shareholder, the parent will elect all of the directors If you are a smart parent company you will pick people that you

think will best serve the interest of not only the subsidiary but also

the parent company

Creates a potential conflict of interest If you were one of those directors, you are a significant employee of

the parent company and youre elected to be on the subsidiary

company board

o Youre going to be potentially thinking what is in thebest interest of the subsidiary but at the same time

you will say youre here b/c the parent company putyou here, should think about their best interest as well

Situation where subsidiary has contract with the parento Parent is not performing on the contracto Somebody might say that subsidiary needs to sue the

parent, but another person may say that theyre sitting

there b/c parent put them there

When a wholly owned subsidiary has a board that was completely electedby the parent corporation a plaintiff could argue:


30/79

30

Controlo Complete dominationo Control must have been used to commit the wrongo Proximate cause of injury

Alter-ego Instrumentality This parent is operating this subsidiary as an agent for the parent

o Just playing out the parents business with no mind ofits own

o Should not be respected as a separate business Must prove parent and subsidiary are the same economic entity

Fletcher v. Atex Inc.

o Did the subsidiary board of directors act on its own? Look at board records and minutes Interlocking directors when some of the people

on the subsidiary board sit on the parent board as

well

o Did the subsidiary file its own tax returns? Not a significant factor

Subsidiaries and parents will often consolidate theirtax returns and file one return for the whole

enterprise

o Did subsidiary have its own employees andmanagement that were responsible for day-to-day

business?

o Cash management system When money comes into the subsidiary where does

it go? Does it go to the parent company?

If it comes from the parent company it lookssuspicious but is not a problem

There are corporate economies that can be had ifthey aggregate all of the financial affairs in one spotfor the corporate family

Parent becomes a bank for all of the subsidiaries Money is specifically accounted for whose is

whose and they always know where it is and what

they have but the parent is maintaining the account

o Not easymust prove that subsidiary doesnt makeany decisions without contacting the parent company

first

o Can translate this to a close corporation situation Company is owned by one shareholder that is not

the parent company but instead is a person Corporation created in your name Were you making decisions for yourself or were you

making decisions based on business of corporation

Comingling is the big problem Did you have meetings? Did you keep records?

Whether parent and subsidiary have an unhealthy relationship if wefind out the subsidiary never has enough money to operate

individually


31/79

31

o Undercapitalization Parent left the subsidiary unable to conduct its

business responsibly and fairness would suggest

you can pierce the corporate veil of the parent

company

o When a company is owned by one shareholder and the corporation is created in theshareholders name

Were you making decisions for yourself or were you making decisions basedon the business of the corporation?

Comingling is the big problem Did you have meetings, did you keep records?

Not legitimate unemployment if you have control over your ownemploymentyoure self-employedyou can call the shots of when youll

work or be laid off

Enterprise Liability Related companiescan you pierce one companys veil to get to anothers or can you throw

them all into a group and pierce them all?

o Must show undercapitalization in all the subsidiaries McCloskey v. Carlton not successful

oTaxi cab case example in class

Scott Brothers v. Warren successfulo Corporation loaned money to P at time when company was insolvento Continued to draw salaries after company was insolvento Ran 3 companies as one unit using same booking and trade name and didnt tell

creditors there were three different companies

o Sold assets for lump sum figure and didnt allocate proceeds to the three companies aggregated them

Reverse Veil PierceCargill Inc. v. Hedge Very unusual concept People who could ordinarily say there is a legitimate corporation and Im a shareholder are

now saying please disregard that I have a corporation and treat me as an individual

Homestead Exemptiono Allows occupants of the actual homestead who basically might lose it to exempt the

homestead itself from judgment

o If its under a corporation they have no standing under the Homestead Exemption its not their house, its the corporations house

o Courts will often let disregard the corporation and get the exemption b/c courtsympathizes with farm problems

o Equity principle Statutory Veil Pierce

When corporation commits certain kinds of acts (e.g. polluting) its owners can be liable forcleaning that up

o Particularly environmental law (e.g. CERCLA)o Super funds environmental cleanups

If you are an owner or an operator of an environmental disaster (big orlittle) something that requires clean up, youre obligated to clean it up, if

you dont clean it up the govt can step in and clean it up for you and send

you the bill

If you can show a parent company or related enterprise had control orinfluence on the site you can hold that person liable also no need to pierce

the veil


32/79

32

Deep Rock DoctrinePepper v. Litton Type of bankruptcy notion Can take the money that went to the owner and force it back into the company to be paid to

third party creditors

Not piercing the veil They think there is a principal here where his claim should be subordinate to or at least not

higher priority than third party creditors

Only have to give back the money that was paid out v. piercing where the owner will have topay what the third party creditors are owed with no limit

Successor Liability MBCA 14.07 Successor when a company takes over the operations of, is running the business of

another company that is no longer in business

Two ways to create a successor companyo Shareholders decide they no longer want to own the company and they sell all their

stock to a third party

In that case the company is the same, its not really a successor company Same company but has changed ownership Nothing changes with creditors and liabilities same legal entity

o Third party approaches company about buying the assets of the company MBCA14.07

Creates her own company and uses the assets she purchased to put in hernew company

The other company dissolves Claim can be made against old dissolved company and may have to pay that

claim on a prorated basis (depends on how many shares you had in the

original company)

Would not have to pay any more than you received from the company Reconstitute the company and assets received from it and pay the debt

from that

Most states hold not liable unless some things are true Nissen Corp. v. Millero Agreement to assume liabilities express or impliedo If successor company just merged the first company into it (first company still in

existence in a sense) then everything comes with it

o If successor is just a reincarnation of the first company First company seems to disappear and dissolve but the same people are in

the second company and attempt to ignore liabilities of the first company

Unfair to allow them to create a new corporation to get rid of theliabilities of the first company

o Continuity of enterprise Business remains the same but ownership and management involved in it

do not, there is no liability

What if the new owner is the only change that paid fair price for thecompany

Policyo Different company not responsible for the behavior that came before ito If successor company has to pay the judgment, he is innocent of any problems she

didnt create that, she just bought the assets and as long as she paid a fair price for

them then should not be liable

o People would never buy companies or assets b/c wouldnt know what liabilities theywere getting

Insurance is the answer!


33/79

33

o Capitalization In the organizational stage where we have to bring in capital to start running the business Two basic methods

Debto Borrowed so its a liabilityo Loanso Debt securities

Bonds Like stock but not People buy them and the corporation promises them that they will

receive a return on the purchase and at some date certain they will

get all their money back

Bond is securedo Bondholders will get property if not paid

Debentures Promissory note promise to pay If you cant do it then no underlying property indentured to it Junk bonds

o Promises to pay and very junior not good enough tohave a good credit rating (quality of debt is poor) andcorporation will have to pay you insane interest rates

b/c not likely to get your money back

o Where do you get it? Bank Person

Equityo Sell stock

Common Most people choose this Voting rights Dividends

o After the preferred shareso Some expectation of dividends

Liquidation rightso Youre the last one in line and if theres anything left

over youll be there to take it

Paymento Can sell common stock for cash, property or

promissory note

o Anything that would be considered considerationunder contract would be legitimate for purchasing

shares MBCA 6.21

If the shares are sold for something other than cashor a cash equivalent quorum approval of the

shareholders is required

If the voting power of the shares sold wouldcompromise more than 20% of the total voting

power then you must get approval by a quorum of

the shareholders

Preferred No control (non-voting)


34/79

34

Dividend preferenceso Fixed dividend dollar amount or percentage of the

face value of the stock

Liquidation preferenceo First in line among stockholders when the company is

liquidated

o Would not necessarily be first in line among all people(e.g. creditors)

Interested in money and a return on your money and some securityin getting it back if things dont go well but not concerned withcontrol over the company

Participatingo One you are paid your fixed dividend fully, you get to

stand in line with the common share people and act

like you have common stock

o You have a fixed dividend (can only be a certainamount) in your preferred stock so common

shareholders might get more dividends if the company

is making massive profits

oTo make it more attractive you get a first bite at thedividend apple (fixed) and youll get a second bite at

the dividend apple with the common shareholders

Cumulativeo If the company could not pay the dividends one year or

only paid part of the dividends, will get that amount

you werent paid on top of the regular amount next

year

Must get that before the common shareholders getanything

o If non-cumulative tough luckyou just dont get thatmoney

Redeemable MBCA 6.31o Redeemable at some value (usually face value) of the

stock at the option of the corporation

o You might be a content stockholder and then thecorporation comes along and says were going to buy

your stock back from you and the corporation can

force the repurchase of the stock

o Corporation will do this if the company is paying out somany dividends that the common shareholders decide

they dont want to do that anymore and will buy back

the stock

Convertibleo Convertible to common shareso Can occur in various kinds of securitieso Preferred stocks have preference and can convert to

something with lower preferences

There will be a ration 2:1 or something like that2 preferred shares to 1 common share

o Usually only convertible if not participatingo Once youve converted you cant go back


35/79

35

Other Can design your own kind of stock as long as you have:

o Must be some stock that voteso Must be some stock there upon liquidation to be

transferred the residual assets of the company, if any

Can put in your articles that dividends will only be paid under certaincircumstances

Ex: if we make X number of dollars in profits or if we only have Xamount of debt

o If the articles dont say what kind of shares the assumption will be common If you want to have two classes of shares you have to specify you want two

classes (common and preferred) in your articles

Cannot only have preferred stock if it is non-voting since some stock musthave voting rights

Thin Capital and Leverage v. Undercapitalization Leverage

o Using other peoples money to make money e.g. borrowing at 3% and investingsomewhere you will get a 10% return you keep that 7%

o If you use someone elses money you might get a bigger return on the money youput in

Not a lot of capital in the business mostly borrowed money a lot of leverage You attempt to get a higher return when you use someone elses money Whatever you dont pay in interest rates the owners keep If you put your own money in it youre not using anyone elses money to your advantage

o No leverage break Make sure youre not so thinly capitalized that someone can argue youre undercapitalized

Liquidity v. Stability Liquidity

o Can you change the interest in your company (stock) into cash easily?o Closely held corporation is not liquid

Possible interested buyers are other owners, the company itself, the publicmight be interested depending on how the company is doing but a lot of

people probably wont

o Not liquid unless company itself puts in shareholder agreement that if a shareholderwants to cash out then the company will buy back the stock if it can

This causes instability in the company Hurts the company to have to pay you off for your stock

Creates instability if theres liquidityo This doesnt happen with publicly traded stocks b/c other people are buyer, there is

a market for the company stock, and the company isnt cashing you out, other

people are taking your stock from you

Asset protection v. Outside capital Preferences If you take all the good features for you and then you want to raise money outside youre

not going to be able to attract good investors

o Outside investors wouldnt go for you being paid off before they are Control v. Outside capital

Dont have to issue the number of shares that you authorized (thats just the maximumnumber)

If youre on the board you have a right to all corporate information and you have controlover decisions made


36/79


37/79

37

You need a shareholder agreement or provisions in the articles to protect against dividends notbeing declared unless there are some special facts

If an adequate corporate surplus is available for the purpose, directors may not withhold thedeclaration of dividends in bad faith - Gottfried

A corporate surplus that is not used for dividend pay outs is not in bad faitho Could pay down debt, expand the business, hire more people, etc. with that money

Evidence of bad faitho Nuisance value

Majority thinks that minority shareholders are a pain in the neck will buythe shares back just to get rid of them This would be evidence of bad faith

o Exclusion of minority from employment Board makes the decision not to hire them This is not an illegal decision to not hire a shareholder

Ordinary decision of the board business decision of the companyand that is protected by the business judgment rule

o Will not second guess business judgments unless therewas some serious fault with the process used to make

that judgment i.e. bad faith

o Majority paying themselves excessive salarieso Not paying dividends to protect their tax status

You need pretty much all the factors to have a snow balls chance in hell to win If you have the wear with all to pay dividends you should distribute them unless you have a good

faith reason not to (floor)Dodge v. Ford Motor Co.

Not hard to have a good faith reason Can be a legitimate business judgment about the use of the money that you can defend

o E.g. reinvestment in the company, other investments, paying down debt, etc. Ceiling - Cannot pay out dividends if: - MBCA 6.40(c)

Equity insolvencyo You cant pay your debts as they come due

Balance sheet insolvencyo Would liabilities then exceed assets?

Board makes decision on whether to distribute dividends If make an unlawful distribution, board can be held liable MBCA 8.33

o Exit Strategy Valuation of Shares (This is also the ceiling amount for dividends)

Book value MBCA 6.40o Had an orderly sale of assets and paid off liabilities and divided up the money to

determine how much each share would be worth

Common share equity amount plus earned surplus divided by the number ofshares

Earned surplus is retained earningso Past profits that weve left in the company by not

distributing it

Did something with it that is now under the assetso Very low conservative priceo Usually sells for higher than book shareo Two tests to be sure that value isnt too much

Balance sheet insolvency test If you made this payment would you put yourself into balance sheet

insolvency?


38/79

38

o Take money you give to retiring shareholders andrespect the preference of the preferred shareholders

and then compare assets and liabilities

Are assets less than liabilities? Can you pay your debts as they come due after you pay out the money to

the board member?

Wont have to be able to answer this When buying back minority shareholders shares they are often times discounted compared

the majority premium (control premium)o If youre going to get control by buying the shares then youll pay a lot moreo If youre not then you will get a lot less

Buying back stock solidifies control of directors b/c there are fewer shares and they willhave a higher percentage of the company

When a minority shareholder is mad about the valuation of his shares compared to thevaluation of a majority shareholders shares, the minority shareholder will argue that the

corporation should be looked at an incorporated partnership - Donahue

o Incorporated partnership look at the corporation as a partnershipo If it were a partnership and one partner decided to leave then the partnership

would dissolve and he would have the right to take with him the value of his interest

This will often give a minority shareholder a better deal than they wouldunder valuation of shares

This will also change the fiduciary duties owed to the other owners of thecorporation

Must determine if everyone in the picture was treated fairlyo If create a market for one owners stock then must

create the same market for another owners stock

Must have a very very good business reason not to The bigger the close corporation gets, the harder it is to argue for an

incorporated partnership

Illiquidity of a minority shareholders interesto To resolve this issue at the outset

Put something in the articles In our company, any shareholder who wants to leave or be cashed

out can be cashed out and put a formula

Shareholder agreement Repurchase agreement Might have limitations on the liquidity of shares

o Time limito No cash

o Liquidity can be death to a company Especially if a majority shareholder wants to cash out If you take your interest of the company with you then the company will

often have to liquidate to pay you offo Could create an orderly exit plan so that the departing shareholder cannot take all

of the money at one time

o Company can buy life insurance on one another so then the insurance proceeds willfund the buy out of a deceased shareholder

Dividends v. Salary If company makes profits youd want dividends paid Company would rather pay you salary b/c then there isnt double taxation and it can be

deducted as a business expense


39/79

39

o Recipient only has to pay tax on salaryo Both have to pay taxes on dividends

Bonuseso As the approach to year end of tax year, the company will sit down with the

accountants and do some year end planning

o If were going to make money this year we can use it and put it back in the companyor pay it out in bonuses

o Extra salaries justified by the fact that you had a successful yearo Control and Management

Board of directors MBCA 8.01 Oversight responsibilities Can still be a passive investor and be on the board Need at least one director if youre going to have a board of directors How do you ensure you will be elected every year

o Contract for ito Could be under the shareholders agreemento Could be a stand alone contract called a voting agreement MBCA 7.31

You will use your best efforts to make sure the group of you are elected tothe board every year

Can contract to give away your voting rights these are property rights

What if you die, what would happen to your interest?o Your shares are personal property so they will pass to your estate if you dieo They end up in the hands of some relative probably

Would become a minority shareholder in the company Becomes easy to freeze someone out at that point b/c the voting agreement

wouldnt apply to them unless you specifically contracted for that

Directors appoint officers MBCA 8.40 Officers MBCA 8.41

Officers hire other agents President, CEO, etc.

Voting agreement MBCA 7.31 Use best efforts to make sure the group of you are elected to the board every year Public policy in these situationsMcQuade v. Stoneham (overruled by Galler v. Galler)

o MBCA 8.01 directors control Directors are to exercise good faith, loyalty, disinterestedness and

independence

o THE OLD LAW If there is a contract saying you have to think and act in a certainway then they have constrained their independence

Ex: if it were in the best interest to fire a director and the board wasconstrained by a voting agreement

o If all directors were part of the agreement then it must likely would be upheld Directors jobs MBCA 8.01(c)

o Not an exhaustive list LAW NOW MBCA 8.01(b) subject to an agreement authorized under MBCA 7.32

o MBCA 7.32 shareholder agreement Can eliminate the board of directors in shareholder agreement

If you vote as shareholders you will vote according to the shares youown in the company

o Different levels of voting power


40/79

40

Can keep a board and say that certain decisions will be made byboard and certain will be made by shareholders

What kinds of distributions and dividends will be made and when Who will be directors or officers for the corporation, how we will choose

them, how long they will be in office, etc.

Use of weighted voting rights Some shares worth more than others when it comes to voting rights

Director proxies Get someone else to vote for you With shareholders this is quite common in publicly held companies If I cant make it to the meeting, I can give my proxy as a director to

someone else

o This is very strange if we have rules about howdirectors as supposed to vote

Require dissolution of cor

Date post:	05-Apr-2018
Category:	Documents
Upload:	brian-goldberg
View:	221 times
Download:	0 times