Economic and Legal Aspects of the Firm1. Basic Concepts and Terminology

a. Sole Proprietorshipi. Sole proprietor (i.e. Owner) has all responsibilities and liabilities

ii. Pass-Through tax entity – taxed to individual as no entity existsiii. Owner is residual claimant

2. Organizing the Firma. As corporate planner, think about what parties should anticipate prior to contracting;

i. pre-dispute expectations - think about what is best for your client on both sides (i.e. withdrawing partner or remaining partner)

ii. recommend governance structures that de-emphasize judicial processb. Determining Risk – Risk-Free v. Risk-Neutral v. Risk Preferringc. Transaction Cost Factors

i. Opportunism – whether individuals will act self-interestedly in business decisions;d. Discrete Contracting v. Relational Contracting

i. Discrete – anticipation of disputes and outline all contingencies in contract through negotiationsii. Rational – parties build governance structure that will allow problems to be solved as they arise

e. Rules to Understand as Corporate Lawyeri. Standard Form Rules – rules provided by employment, corporate (Corp), partnership (P/S),

and LLC lawsii. Default Rules & How Default Rules Differ

iii. What makes the default rules efficient or inefficient for particular Corpiv. What rules are immutablev. Whether immutable rules will serve interests of particular Corp

3. The Firm and the Law of Agencya. Principal and Agent Introduction

i. Owner -> Principalii. Employee -> Agent

iii. Existence -> Terminable At-Will1. Substantial Power of P over A

b. Fiduciary Duties of Agent (Implied)i. Total Candor

ii. Account for All Profits flowing from information received as Aiii. Must not use or disclose trade secretsiv. May not carry on competing business

c. Community Counseling Service, Inc. v. Reillyi. Facts: CCS sought accounting from former E’ee (Reilly) prior to termination of employment.

Reilly filed for recovery of salary and commission payments unpaid after fired. Prior to termination, Reilly conducted campaign for former client of CCS and received fees. Client did not know Reilly left employment of CCS, thus before termination, Reilly formed intent to engage client on his own account, entered into CCS agreements on his own account, and without substantial hiatus b/w termination of employment from CCS and activity w/ new clientele.

ii. Rule of Law:1. Non-Compete Rule – Former E’ee after termination may compete with former E’er

BUT MAY NOT use confidential information or trade secrets obtained in former employment.

iii. Analysis: Until the E’ee severs his relationship, he must prefer the interests of his E’er, and may not solicit business for himself; now may he withhold information from E’er in promotion and protection of interests

iv. Conclusion: Duty of Candor and Duty of Loyalty (exist until termination)d. Hamburger v. Hamburger

i. Facts: David (son of Joseph), Joseph, and Ted worked for Corp. Corp was owned by Joseph and Ted. David, working for Corp, built Corp from 300 to 700 clients and increased profits over many years. Ted attempted to fire David, and things deteriorated b/w parties from there. David formed company w/ Robert, one of Corp’s suppliers of wire, called NEBW. David resigned, incorporated NEBW, hired former Corp bookkeeper, and former Corp truck driver. David then solicited Ace’s customers, many of which switched from Corp to NEBW. Ted sued for wrongful appropriation of Corp customers by former E’ee.

ii. Rule of Law:

1. Entitlement of E’ee – Former E’ee is entitled to use general knowledge, experience, memory, and skill (and remembered information) in establishing new Co

iii. Analysis: No breach of fiduciary duty b/c customer Lists are not trade secretes b/c readily available information

iv. Conclusion: No breach of fiduciary duty & Should have forced to David into Non-Compete Agreement

1. Non-Compete Agreements – Must be:a. Reasonable as to geographic limitation;b. Reasonable as to durational limitation; andc. Nature of E’er’s risk from competition.

i. i.e. cannot limit former E’ee for opening barber shop when E’er is mechanical engineering Corp

d. Balancing of legitimate interests of E’er w/ those of E’eee. Foley v. Interactive Data Corp. – Limits on Right to Discharge At-Will E’ee

i. Facts: Foley seeks damages for wrongful discharge after former E’er (Chase Bank) fired him after he reported to Chase Bank E’ee that new CEO (Kuhne) was under investigation for criminal charges. Once Kuhne employed, Foley fired for “performance issues.”

ii. Rule of Law: 1. Agency Duty – E’ee is an Agent and is required to disclose to Principal all relevant

information relevant to agency relationshipiii. Analysis:

1. When duty to disclose serves ONLY PRIVATE INTERESTS, THEN public policy not justifiable protection for release of Agent.

2. No Breach of Good Faith and Fair Dealing – limited to contract rather than tort remediesiv. Conclusion: No Breach of Fiduciary Duty or Wrongful Discharge b/c employment was merely at-

will and in private environmentf. Exceptions to At-Will Employment Doctrine

i. Discharges in violation of public policy;ii. Discharges in violation of handbooks, which constitute unilateral contract; and

iii. Discharges in violation of covenant of Good Faith and Fair Dealing4. Actual Authority and Apparent Authority

a. Actual Authorityi. May be express or implied (based upon conduct of principal)

1. Express-If P directly manifests consent to A, then A has authority2. Implied-If A done multiple times and P never complained, P may be bound b/c impliedly

permitted A to act in such a mannerii. Actual Authority – A’s actions effectively bind P:

1. even if party w/ whom A is dealing is unaware that A has actual authority; and 2. even if unusual for A to have authority.

b. Apparent Authority (Ostensible Authority)i. May be express or implied

ii. Apparent Authority – P MAY ONLY be bound IF third party reasonably believes A was authorized.

c. Inherent Authority – arises from mere employment as P’s Ai. i.e. if reasonable for A to act in such a manner, then we permit

d. Blackburn v. Witteri. Facts: Blackburn selected Long, E’ee of W&C, to be investment advisor after Blackburn’s husband

passed. Long ceased employment under W&C, became representative of W&C, and continued to act as financial counselor until discharged in 1958. In 1957, Long invested Blackburn’s money in non-existent Corp, provided promissory notes and receipts to Blackburn not written on W&C stationary, and checks were directly payable to W&C and stock directly issued by W&C. Blackburn sues W&C on theory of apparent authority.

ii. Rule of Law:1. Restatement Law of Agency 261: Apparent Authority – P who places A in a position

enabling A to commit fraud, even when A has no such authority, subjects P to liability to 3rd party against whom such fraud is conducted

a. P will be bound by A’s actions ONLY IF 3rd party has:i. Acted in good faith; and

ii. Parted w/ value or incurred liability based upon good faith

iii. Analysis: Long had past of alcohol and substance abuse known to W&C, did nothing to advise Blackburn of dangers, and W&C permitted Long to be in position to defraud customers, then W&C should be liable.

iv. Conclusion: W&C liable for damages to Blackburn via theory of apparent authority, and Blackburn acted w/ ordinary care in accepting Long’s advice.

e. Sennott v. Rodman & Renshawi. Facts: Sennott sued R&R under vicarious liability for fraudulent securities manipulations of Jordan,

son of William (who was partner in R&R). In 1958, Jordan’s registration w/ National Association of Securities Dealers revoked for deceptive practices. Jordan told Sennot he could open investment portfolio at R&R for him, and that Jordan could purchase shares of CorpA at special price b/c of William’s relationship w/ R&R. Sennott had Jordan invest in stock options that never existed, placing each check from Sennott in personal account, using money to pay personal losses, and receipts were handwritten by Jordan.

ii. Rule of Law: Sennott must demonstrate that knowledge of the false representations to Sennott by Jordan were within the scope of R&R and therefore may be imputed to R&R.

iii. Analysis: No apparent authority existed b/w Sennott and William, Sennott agreed to keep arrangement secret from William, refusal to cooperate w/ R&R personnel, and only mistake here was misplaced reliance on Jordan, a previous E’ee of R&R.

iv. Conclusion: R&R not liable for fraudulent actions of former E’ee w/ absolutely no apparent authority relationship to R&R

Partnerships1. Introduction

a. UPA 202 – Partnership Defined i. The association of two or more persons;

ii. To carry on as co-owners;iii. Of business for-profit;iv. Regardless of intent to form partnership.

b. Byker v. Mannesi. Facts: Byker and Mannes agreed to engage in ongoing business enterprise to furnish capital, labor,

and skill to such enterprise, to raise investment funds, and to share equally in profits and losses of enterprise.

ii. Rule of Law: UPA 202iii. Analysis: Whether parties intentionally acted as co-owners of business for-profit, and NOT whether

they intended to create P/S iv. Conclusion: Focus is NOT on subjective intent of parties

c. Creation of Partnershipi. Requires mere manifestation of consent

ii. DOES NOT require written agreement or governmental filingd. Hyanksy v. Vietri

i. Facts: Hyanksy and Vietri agreed to purchase and develop land under Agreement stating “A Partnership is hereby formed b/w partners.” Hyansky brings action to recover unpaid capital contribution when P/S initiated, and Vietri claims mere investor.

ii. Rule of Law:1. Rule of Determination of Existence of P/S: The entire P/S Agreement and all attendant

circumstances must be considerediii. Analysis: Since analysis cannot be solely determined by P/S Agreement, Court looked to Hyansky

treated assets as personal assets, took all losses for tax purposes, and identified P/S as Corp, thus Motion SJ denied

iv. Conclusion: Motion for SJ denied b/c issue of fact exists as to whether P/S created by and b/w Hyansky and Vietri

e. Liability, P/S Governance, and Dissolutioni. Liability - Under CL, partners of General P/S jointly and severally liable for all obligations of P/S

ii. Dissolution – ONLY upon termination and liquidationiii. Governance

1. Ordinary Decisions – require majority vote2. Extraordinary Decisions – require unanimity 3. Each Partner is an Agent of the Firm

f. Joint Venture Distinguishedi. Same as P/S except for specific period of time (i.e. more limited in scope and duration)

ii. Existence of JV:1. Intent to enter JV;2. Agreement, express or implied, amongst members;3. Common purpose to be carried out;4. Joint pecuniary interest in that purpose;5. Equal right to voice direction and control of JV (equal management decisions amongst

members); and6. Right to share in profits and DUTY to share in losses.

g. UPA 401(b) - Profits and Lossesi. Partner entitled to share in profits and losses equally (i.e. if silent as to losses, then shared

equally as profits)ii. UPA 807(b) – in winding up process, profits and losses resulting from liquidation of P/S assets

must be credited to respective accounts, and any remaining losses shall require additional contributions from partners w/ deficit in P/S capital account

h. Duty to Share Losses when Labor is Capital Contributioni. Whether Partner is E’EE or Partner:

1. If compensation based upon profits, more closely resembles partner;2. If person has liability for firm debts, investment in firm, or ownership of firm assets, more

closely resembles partner; and

3. If right to engage in management decisions, ability to assign work and direct activities of E’ee’s, and ability to act for firm, more closely resembles partner.

ii. Kovacik v. Reed1. Facts: Kovacik acquired contract from Sears and offered to Reed to share in profits equally

if Reed contributed ALL labor. When Kovacik had loss from contract, sought recovery from Reed.

2. Rule of Law: Unless O/W agreed, presumed that partners intend to share equally in profits and losses

3. Conclusion: When individual contributes labor as capital contribution, MAY NOT be held liable for losses b/c investor loses money investment while laborer invests labor and receives no return, thus losing ipso facto (i.e. each loses capital)

i. UPA 103(b) – Immutable P/S Characteristicsi. P/S Agreement MAY NOT:

1. (2) – unreasonably restrict right of access to books and records under 403(b)2. (3) – eliminate the DUTY OF LOYALTY under 404(b) or 603(b)(3);

a. BUT P/S Agreement MAY identify specific activities that do not violate duty of loyalty if manifestly reasonable; and

b. All partners or majority (as specified in P/S Agreement) MAY authorize, AFTER FULL DISCLOSURE OF MATERIAL FACTS (i.e. CLEANSING), a specific act or transaction that would o/w violate duty of loyalty.

3. (4) – unreasonably reduce DUTY OF CARE4. (5) – eliminate obligation of GOOD FAITH & FAIR DEALING (standards may be

specified if not manifestly unreasonable)5. LOOK TO 6-10

j. UPA 404(d) – Duty of Good Faith and Fair Dealing2. The Partner as Fiduciary

a. Duty of Loyalty i. UPA 404(b)(1-3)

1. (1) – to account to P/S for any property, profit, or benefit derived by partner in conduct and winding up of P/S business, including appropriation of P/S OPPORTUNITY;

2. (2) – refrain from acting w/ adverse interest to P/S; and3. (3) – refrain from competing w/ P/S prior to dissolution of P/S

ii. Meinhard v. Salmon1. Facts: Meinhard and Salmon entered into JV leasing premises from Gerry. Upon

upcoming renewal of lease, Gerry offered lease to Salmon and excluded Meinhard.2. Rule of Law:

a. Cardozo on Duty of Loyalty – “duty of the finest loyalty owed…not honesty alone, but the punctilio of an honor the most sensitive is the standard of behavior”

3. Analysis: Since Salmon excluded Meinhard from any chance to compete or from any chance to enjoy opportunity, which had come to Salmon via his relationship as Joint Venturer w/ Meinhard, Salmon had duty to disclose opportunity presented (especially since Salmon was sole manager)

4. Conclusion: Cardozo imposed constructive trust upon Salmon for benefit of Meinhard b/c meinhard reasonably expected Salmon as managing co-venturer to be approached w/ reasonable candor a new lease agreement arising from the old lease agreement

b. Self-Dealingi. Vigneau v. Storch Engineers

1. Facts: Vigneau, employed by Storch, entered into JV w/ Merluzzo. Then, JV contracted w/ Storch, and JV received discounts. Vigneau NEVER disclosed relationship to JV w/ Storch during negotiations; rather, Merluzzo acted on behalf of JV. Vigneau sued to recover partnership interest in Storch.

2. Rule of Law: a. General Rule – fiduciary MAY NOT engage in self-dealing; rather, partner is

obligated to disclose true accounts and full information affecting P/Sb. Effect of Failure to Disclose – it is of no consequence that breach of duty of

loyalty resulted and is not determinative of damages; BUT, breach of duty of loyalty is insufficient to deprive partner of his partnership interest

c. Compensation in Breach of Duty of Loyalty – Courts SPLIT on whether to permit recovery of compensation when breach of duty of loyalty when services properly and competently performed during breach.

3. Conclusion: Vigneau entitled to value of vested P/S interest and compensation earned during properly performed services. Storch entitled to damages for breach of fiduciary duties and profits derived from breach of fiduciary duties.

c. Absolute Discretioni. Covalt v. High

1. Issue: Whether High breached fiduciary duty when High refuses to raise rent despite fair market value of rental property

2. Rule of Law: a. RE: UPA 401(f) – neither partner has right to impose his will or decision

concerning operation of P/S business, and the fact that a decision will benefit P/S does not require acceptance by all partners

b. Equal Partners & Disagreement – when rights of two partners are equal and cannot come to consensus on decision, the ONLY course of action is DISSOLUTION

3. Conclusion: No recovery for mere disagreement; rather, dissolution is proper vehicle for remedy

ii. Starr v. Fordham1. Facts: Starr joined Fordham’s firm under promise that he would not be fired for lack of

“rainmaking” ability. P/S Agreement provided that profits would be divided in accordance w/ P/S interests. Fordham withdrew after firm did not divvy up profits accordingly, and initiated suit to recover such amount.

2. Rule of Law:a. Implied covenant of Good Faith and Fair Dealing in every contract; and Court has

discretion to determine if share of profits divided fairly and equitably3. Conclusion: Partners were self-dealing b/c since they failed to distribute profits

accordingly, they increased their shares and were thusly self-dealing; therefore, they violated duty of GF&FD

d. Duty of Carei. UPA 404(c) – Duty of Care

1. Limited to refraining from engaging in grossly negligent or reckless conduct, intentional misconduct, or knowing violation of law

ii. Purpose – necessary to protect rights of limited partners, who have no managerial control or powers, from abuse by general partner

iii. Ferguson v. Williams1. Facts: Business venture failed, and Williams brought suit claiming breach of duty of care

for negligent investments.2. Rule of Law:

a. Mere negligence is not sufficient to create liability for breach of duty of care.3. Conclusion: Mere bad business judgment w/o reckless or intentional misconduct is

protected and not a breach of fiduciary duty of care.e. Other Duties and Rights of Partners

i. UPA 405 – Right to an Accounting (to enforce fiduciary duties or contractual rights)1. Determines relative rights and duties of partners2. At CL, ONLY available upon dissolution

ii. UPA 403 – Full and Complete Furnishment Re P/S Affairsiii. UPA 401(f) – each partner has equal rights of managementiv. UPA 401 (j) – ordinary matters decided by majority; extraordinary by unanimous vote of partners

(unless O/W agreed by P/S Agreement)v. UPA 301 – each partner is an agent of P/S for purpose of business (i.e. for carrying on in the

ordinary course of the business; unless 3rd party knew partner had no authority to carry on in such manner AND partner in fact was not granted such authority or was restricted)

vi. UPA 306 – partner liability (all jointly and severally liable)1. UPA 305 –P/S liable for loss or injury caused to 3rd party by partner during ordinary course

of business or while acting w/ authority of P/S3. Dissolution and Dissociation

a. Basic Framework of Dissolution and Dissociation

i. Dissociation1. UPA 601 – Dissociation occurs if:

a. (1) Notice of Withdrawal of Partner;b. (2) Event agreed upon in P/S Agreement;c. Partner’s Expulsion by:

i. (3) P/S Agreement; or ii. (4)Unanimous vote if unlawful to carry on business w/ partner, there

has been transfer of all partner’s transferable interest, or partner that is a P/S has been dissolved and wound up.

d. (5) Judicial Determination – If:i. Partner engaged in wrongful conduct adversely or materially

affecting P/S; ii. Partner willfully or persistently committed material breach of P/S

Agreement or Duty owed to partners under 404; oriii. It is not reasonably practicable to carry on P/S w/ partner.

e. (7)(i) Death of Partner2. If 601 Dissociation occurs, then 701 Buyout is applicable; O/W, 801 Dissolution rules on

Winding Up and Liquidation applicableii. Buyout

1. UPA 701 – Buyout if partner is dissociated w/o dissolution and winding up of business.

a. (b) – Buyout Price is amount distributable is greater of if liquidation had occurred under 807 or value based on sale of entire business w/o dissociated partner and P/S was wound up

iii. Dissolution1. UPA 801 – Dissolution of P/S occurs and MUST BE wound up if:

a. P/S is at-will AND partner gives express notice of withdrawal;b. P/S is for definite term; and

i. w/I 90 days of death of partner, at least half of remaining partners wish to wind up P/S;

ii. All partners wish to wind up P/S; oriii. Term expires or is completed;

c. An event agreed upon resulting in winding up; d. Event causing all or substantially all of the P/S to be considered unlawful if

continued;e. Judicial Determination that:

i. Economic purpose of P/S is unreasonably frustrated;ii. Partner has engaged in conduct relating to P/S business making in

not reasonably practicable to carry on business w/ partner; oriii. It is not o/w reasonably practicable to carry on business in

conformity w/ P/S Agreement; orf. Judicial Determination renders it equitable to wind up (SEE STATUTE)

iv. Winding Up1. UPA 802 – If winding up occurs via 801 dissolution, then:

a. P/S continues only for purpose of winding up affairs and terminates ONLY UPON completion of winding up.

b. Any time after dissolution and before completion of winding up, non-wrongfully dissociating partner may waive right to have P/S wound up and terminated

i. Partner released from further liability; andii. P/S continues as dissolution never occurred.

v. Settling of Accounts1. 401 (a); (b); (d); (h) – partner’s capital account2. 807(a) & (b) – Liquidation process

vi. McCormick v. Brevig1. Facts: Joan and Clark were 50/50 partners of P/S; Joan sought dissolution and winding up

of P/S b/c of conduct permitting judicial determination of dissolution. Court ordered buyout but Joan requests liquidation, which is mandated by judicial determination under 801(5)(b).

2. Rule of Law:a. Winding Up – Assets of P/S must be applied to discharge obligations to creditors

(including partners who are creditors). Any surplus must be applied to pay, in cash, net amount distributable to partners in accordance w/ their positive capital accounts. Profits and losses must be charged or credited to partner’s capital accounts.

i. Exception – Nicholes v. Hunt:1. Hunt operated SP and allowed Nicholes to join, SP became

GP, and Court granted property to Hunt.2. Reason: Since Hunt designed, had special knowledge of, and

manufactured devices, he should be permitted to take back such property, which had resulted in profit for significant time prior to formation of P/S.

3. Analysis: Since purpose of liquidation is to reduce P/S assets to cash , pay creditors, and distribute partner’s value of interests, it only makes sense to have liquidation under judicial determination requiring dissolution.

4. Conclusion: Liquidation must occur for winding up.vii. Disotell v. Stiltner – rejected McCormick b/c mandating liquidation resulted in economic waste,

whereas 701 buyout avoided costs of appointing a receiver and conducting a sale; PLUS 701 Buyout provided fair value for P/S interest

1. Is this truly the same remedy? SPLITviii. UPA 603 – Upon Dissociation of Partner, Partner’s:

1. Right to participate in management terminates;2. Duty of Loyalty and Duty of Care continue ONLY W/R/T matters arising before

dissociation (lingering liability) UNLESS partner participates in winding up of business.b. Wrongful Dissociation

i. UPA 602(b) – Dissociation is wrongful if:1. Partner is in breach of express provision of P/S Agreement;2. P/S is for a DEFINITE TERM and before termination of term:

a. Partner withdraws (Unless withdrawal occurs w/I 90 days of death of partner or (6)-(10) of 601); or

b. Partner expelled by judicial determination; or c. Partner expelled by becoming debtor in bankruptcy; ord. Partner is expelled.

ii. Wrongful dissociation CANNOT occur in At-Will P/Siii. Drashner v. Sorenson

1. Facts: Drashner violated terms of P/S Agreement by requesting more income than permissible; arrested for reckless driving; spent large amounts of time at bars; and made it impossible to carry on P/S. Court concluded that Drashner NOT entitled to value of GOOD WILL of P/S upon wrongful dissociation of him as partner.

2. Rule of Law:a. When wrongful dissociation occurs via violation of P/S Agreement, non-

wrongfully dissociating partners MAY continue P/S upon tender of value of P/S interest to wrongfully dissociating partner LESS damages caused by wrongful dissociation PLUS indemnify him against all present and future liabilities

3. Conclusion: Court did not err in finding Dreshner’s conduct resulted in wrongful dissociation

a. Date of Dissolution – Determined by Court & Important to determine liabilities and distributions to parties

c. Dissolution at-Willi. UPA 801(1) – If At-Will Dissolution, leads to 807 Liquidation

ii. Page v. Page1. Facts: PL and DEF entered into oral P/S. P/S primary creditor was Corp owned by PL.

After P/S suffered $62,000 in losses, it began to recognize profits. PL wished to dissolve and liquidate P/S; DEF denied b/c of profitability.

2. Rule of Law:a. Partnership may be dissolved by express will of any partner when no particular

term or undertaking specified.

b. When evidence permits, P/S Agreement may impliedly determine term to be “reasonable time to repay loans or until certain sum of money earned.” (Owen v. Cohen)

3. Analysis: Partner still bound to act in highest good faith; may not use adverse pressure to freeze-out partner and appropriate a business for personal use; dissolve a P/S w/o adequately compensating partner for prospective business opportunity and interest. If Partner acts in bad faith, dissolution would be wrongful and thusly would be liable to co-partner for P/S interest and any usurped business opportunity.

4. Conclusion: The objective as interpreted from the P/S Agreement should be followed when silent as to term or undertaking of P/S; but when oral agreement and no such evidence, no implied term can be imposed.

iii. Cude v. Couch – where Couch owned building in which Cude and Couch operated Laundromat P/S, Couch initiated dissolution of P/S assets, sold at auction, Couch purchased through undisclosed agent, and Cude initiated action; Court said assets were most beneficial to Couch and mere fact does not imply breach of fiduciary duty.

d. Expulsion of Unwanted Partnersi. UPA 601(3) – Expulsion in agreement w/ P/S Agreement

1. If wrongful expulsion, 801(1); if permitted expulsion, 701 Buyoutii. Bohatch v. Butler & Binion

1. Facts: Bohatch believed McDondald was overbilling Pennzoil for legal services, so he told E’ee. E’ee told Pennzoil rep, and rep claimed that billing was satisfactory. Firm told Bohatch she should begin looking for employment elsewhere, so she did. She was fired, and she now sues for breach of fiduciary duty and breach of contract.

2. Rule of Law:a. Fiduciary Duty – obligation of loyalty to the joint concern and of the utmost good

faith, fairness, and honesty in their dealings w/ each other w/r/t matters pertaining to enterprise.

b. Expulsion – permitted when for legitimate business purposes and in good faith; or

i. To resolve a fundamental schismc. Fundamental P/S Principle – partners MAY choose w/ whom they wish to be

associated.3. Analysis: Accusations of overbilling a client might have serious consequences upon strains

in P/S relationships, thus affecting personal confidence and trust w/I work environment.4. Conclusion: Firm DID NOT breach fiduciary duty when expelling Bohatch for reporting

suspected overbilling practices of partner.5. Dissent: Professional Duty and Responsibility to Report; and Retaliatory Practices by

Firme. Preventing Opportunistic Withdrawal

i. Meehan and Shaughnessy – Withdrawing Law Partners1. Facts: Meehan and Boyle were withdrawing partners at Firm; but before withdrawal, they:

a. Affirmatively denied withdrawing from Firm to partners;b. Gave only 1/3 of required notice to Firm of withdrawal;c. Secretly, solicited clients prior to withdrawal w/o providing Firm fair opportunity

to compete; andd. Misrepresented departure, such that clients misunderstood that Firm and M&B

were competing.2. Rule of Law:

a. Winding Up – Although Statute provides default rule, it also allows for P/S to design own methods

b. Competing w/ P/S – dissociating partner MAY PLAN to compete, but still owes fiduciary duties.

c. Duty to Disclose – Partner has an obligation to render ON DEMAND true and full information affecting P/S

d. Duty of Utmost Good Faith and Loyalty3. Analysis: Meehan violated duty to disclose when he affirmatively denied withdrawing

from P/S when confronted by partner; rather, he had a duty to answer in the affirmative. Furthermore, M&B violated duty of utmost good faith and loyalty when they sent one-

sided statements of withdraw to clients not offering Firm competitive opportunity to retain clients, and the pre-emptive character and tactics (i.e. secretiveness) caused such violations.

4. Conclusion: a. Remedy – Firm entitled to recover ONLY amounts flowing from breach of

dutyb. Retaining of Vested Interest – M&B do not forfeit rights to P/S profits by

simply breaching P/S Agreementc. Compensation of Dissociating Partners – Partners may be required to forfeit

compensation IF payments were in excess of value to E’er (HERE they were not)

d. Burden Shifting – Once P/S establishes partner engaging in self-dealing, partner must prove either:

i. Actions were intrinsically fair; or ii. No harm resulted to P/S.

e. Constructive Trust – created in which Firm will receive % of profits from cases unfairly removed by M&B

ii. What does not constitute breach of fiduciary duty?1. Solicitation of partner to make a joint move to new firm;2. Orchestration of new firm agreement or agreement to transfer; 3. BUT sneaky or malicious tactics DO violate fiduciary duty.

4. Partners as Agentsa. Apparent v. Inherent Authority

i. UPA 301 – Partner as Agent of P/S1. Each partner is an Agent of P/S for purposes of P/S business;2. Any act for carrying on in ordinary course of business binds the P/S UNLESS:

a. Partner had no authority to act for P/S in particular way; ANDb. 3rd party KNEW or SHOULD HAVE KNOWN partner lacked such

authority.3. When act is not in ordinary course of business, then ONLY BINDING IF act

authorized by partners.ii. UPA – 303 – Statement of P/S Authority

iii. UPA – 306 – All partners jointly and severally liable1. Including any wrongful acts or omissions by another partner

iv. Implied Authority – Authority may be implied by mere position as general manager b/c of authority associated w/ title name

v. PA Properties Inc. v. BS Moss Criterion Center Corp1. Facts: 2. Rule of Law:

a. Undisclosed Agency Law – In general, Agent for an Undisclosed Principal authorized to conduct transactions subjects Principal to liability for acts done on Principal’s behalf by agent.

i. Undisclosed principal WILL NOT be liable for acts by Agent intended to be wholly for own account

b. General Agent – one authorized to conduct a series of transactions involving a continuity of service.

3. Analysis: If Agent were hired to purchase horses for Principal, but P told A not to purchase anymore and A did so anyway, 1 for A and 1 for P, THEN P would be liable for 1 horse purchased in ordinary course of business despite express demand not to purchase more, BUT P would not be liable for 1 horse purchased for A on his personal account.

vi. General Agency Presumptions1. JV – Since JV intended for limited duration and merging of assets, NOT REASONABLE

to assume venturers are general managers.2. GP – Since GP usually involves COMPLETE MERGING of interests and assets, it IS

REASONABLE to assume partners are general managers, and thus, are granted general agent authority.

b. Partnership Authority and the LLPi. LLP Protection

1. Partner in registered LLP is not individually liable for debts and obligations arising from errors, omissions, negligence, incompetence, or malfeasance committed in course of P/S business by a partner.

a. Exception – if partner directly involved or had written notice of specific conduct, partner may be liable.

2. General P/S Law Governs LLP’s3. However, every partner is an Agent of P/S for purposes of business; and acts committed in

usual course of business binds the P/S unless Agent has no authority AND 3rd party knows or should know Agent lacks such authority.

4. Generally Recognized Duties Associated w/ Title of E’ee May Create Authority when NOT Expressly Granted

ii. Termination of LLP (UPA LAW)1. LLP DOES NOT terminate upon dissolution, BUT continues until winding up of P/S

affairs is completed.a. THUS partner may still bind P/S by an act appropriate for winding up or

completing unfinished transactions2. To prevent continued liability, P/S should publish in newspaper in general circulation the

fact of dissolution.3. Ex.’s: Contingency fee agreements & fees from pending cases prior to dissolution were

P/S property; medical malpractice suit pending prior to dissolution MAY bind P/S following complete dissolution b/c it was pending during dissolution and winding up process.

Corporate Form and Role of Shareholders, Directors, and Officers1. Corporate Form Introduction

a. Corporate Formationi. MBCA – 2.01 – 2.06

ii. DEL – 101-102; 106-1091. Articles of Incorporation Requirements:

a. Name of Corp (including Inc., Corp., etc.)b. Registered Agent and Office (for service of process)c. Capital Structure (classes of authorized shares, number of shares, and respective

duties and responsibilities of each class of shareholder)i. Common Shares – shares that combine residual claimant status and

voting rightsii. Preferred Shares – maybe dividend or liquidation preference over

common S/H’s (more like debtor)1. Often carries less financial gain in association w/ profits of

Corp; BUT receive priority upon liquidationd. Purpose and Powers of the Corp (i.e. “any lawful business”)e. Optional Provisions (i.e. voting provisions (majority v. supermajority); duties of

Board of Directors)b. Directors, Shareholders, and Officers

i. Directors – policy decisions (BJR protection)1. Duty of Directors (MBCA 8.01 + DEL 141)

a. Manage business and affairs of Corp subject to limits in Art. Of Org.;b. Major risks to which Corp may be exposed;c. Performance and compensation of senior officers;d. Policies and practices to foster Corp compliance w/ law;e. Prepare Corp financial statements; andf. Effectiveness of Board’s Internal Controls.

2. Board of Directors MUST consist of more than one member (MBCA 8.03 + DEL 141)a. Subject to amendment by Art. Of Org. or Bylaws

3. Amendment to Articles – MUST BE initiated by BODii. Officers – execute policies and provide day-to-day management (DEL 8.41)

1. Officers ARE Agents of Corp (Principal)2. Corporate Secretary (MBCA 8.60 + DEL 142)

a. Keeps and verifies corporate records3. Positions and Terms MUST BE specified in Bylaws (DEL 142(b))

iii. S/H – Provide capital & Elect directors1. Power to Elect Directors (DEL 2112. Amend Certificate of Incorporation (DEL 2423. Mergers (DEL 251-2584. Sale of Corp Assets (DEL 2715. Dissolution (DEL 2756. Amend Bylaws (MBCA 10.20 + DEL 109)

a. Limitation: S/H’s MAY NOT amend Bylaws to make ordinary business decisions or establish Corp policies

iv. Corporation – separate entity (majority – Corp is a person)1. Default – Perpetual Existence

2. Voting Rights and Annual Meetingsa. Cumulative Voting (MBCA 7.28 + DEL 214)

i. Grants greater power to minority S/H by allowing him to place all votes for single candidate;ii. Number of Votes of S/H = Total number of Shares of S/H * Number of Director Positions to be

Fillediii. Formula: In order to elect (X = number of candidates) X, S/H MUST HAVE MORE THAN

1. SX / (D+1)2. If Bill owns 15 of 100 shares and Bill wants to elect Jane; other S/H’s do not want

Jane; there are nine spots on BOD; THEN:a. Under Straight Line Voting, Bill may cast 15 votes to each Director, Jane will

receive only 15 from Bill, while all other Directors will receive 85 votes, thus Jane cannot be elected.

b. Under Cumulative Voting, Bill may cast 15 votes * 9 Spots to be Filled = 135 Votes; ONLY 765 votes remain (85*9), thus Jane will be elected b/c other S/H’s cannot divide votes to prevent Jane from being elected.

c. If Bill wants to elect two members, he must have:i. (100 x 2) / (9+1) = 20 shares

ii. 100 = total number of sharesiii. 2 = number of desired elected membersiv. 9 = number of board spots to be filledv. 20 = number of shares required to appoint two directors

b. Straight Line Voting = Default Rulec. Dual Class Voting Scheme

i. When Corp creates different classes of stock w/ varying voting rights (i.e. 10 votes per share for Class A and 1/sh for Class B)

d. Staggered Electionsi. (MBCA 8.06 + DEL 141(d))

ii. Staggered Board – allows for election of two or three groups of directors to serve for term respective to divisive scheme

1. i.e. if two groups of directors, each director serves for two yearsa. if 11 members (5 & 6), then five new members elected in year 1 and six new

members in year 2.e. Annual Meetings

i. MBCA 7.03(a) + DEL 211(c)ii. Special S/H Meetings

1. MBCA 7.02 – when 10% or more of S/H’s desire meeting2. DEL – NO S/H INITIATED MEETINGS

iii. Action by Written Consent1. MBCA – ONLY BY UNANIMOUS CONSENT2. DEL – ONLY BY MAJORITY

f. Hoschett v. TSI International Software, Ltd.i. Facts: Hoschett seeks order requiring:

1. Annual Meeting via DEL 2112. To Make Publicly Available Corporate Stock List - DEL 219

ii. Rule of Law:1. DEL 211(b) – Annual meeting shall be held to elect Directors on a date and time

designated in bylaws. Any other business may be transacted too.a. DEL 211(c) – permits Court to order meetingb. DEL 228(a) – any action required to be brought before annual or special meeting

may be taken w/o prior notice and w/o a vote IF consent in writing acquired by majority of S/H’s

iii. Analysis: Annual Meeting provides:1. Forum to bring matters before S/H body; and2. S/H’s would lose one of few rights as S/H if Corp could escape meeting.

iv. Conclusion: Court orders TSI to hold annual meeting, and DEL 228 does not allow TSI to escape obligation of annual meeting.

g. Problem 3-2:i. Amendment of Art. Of Org. – must be initiated by directors

1. MBCA 10.03ii. Amendment of Bylaws – issue to be changed MUST BE non-managerial

1. Art. Of Org. MAY remove this power from S/H’s2. MBCA 10.20(a)

3. Removing Directorsa. Common Law Removal – only for good causeb. MBCA 8.08 – Removal by Shareholders

i. Unless O/W specified by Art. Of Org., S/H’s may remove one or more directors with or without cause by majority vote.

ii. If cumulative voting, S/H’s cannot remove director IF votes cast against removal would have been sufficient to elect that director.

iii. If director elected by particular class of voters, only that class may remove by majority (not even majority of other class(es))

c. DEL 141(k) – Removal by Shareholdersi. Unless O/W specified in Art. Of Org., Any director may be removed with or without cause by

majority vote of S/H’sii. If cumulative voting, S/H’s cannot remove director IF votes cast against removal would have been

sufficient to elect that director.iii. If staggered elections (DEL 141(d)), THEN ONLY FOR CAUSEiv. S/H majority MAY remove PROTECTED DIRECTOR ONLY FOR CAUSEv. PLUS majority vote by S/H MAY amend ability to remove Director from staggered board

without cause AND/OR remove cumulative voting.d. Removal for Cause requirements:

i. Service of specific charges;ii. Adequate notice; and

iii. Full opportunity of meeting the accusation before S/H’s.e. Adlerstein v. Wertheimer

i. Facts: Adlerstein is CEO and Chairman of Corp; he made $500,000 loan to Corp, received 75% voting power and 21% equity. Corp continued to experience rough times. Adlerstein: accused of sexual harassment; not communicating w/ creditors; accruing substantial accounts payable; vendors were refusing to make shipments; and did not have sufficient cash flow to meet E’ee payroll expenses. Adlerstein was allegedly removed from board “for cause” by directors, and directors replaced w/ new investor Reich. However, actions taken at meeting were void.

ii. Rule of Law:1. Minimum standards of fairness – BOD must conduct affairs in manner consistent with

good faith and fair dealing fiduciary dutyiii. Analysis:

1. Since Adlerstein had contractual right as majority S/H to remove directors, he was fully entitled to opportunity to prevent issuance of new class of stock that would remove his voting power.

2. VGS, Inc. v. Castier – when 2/3 board approved merger but disadvantaged member not given proper notice and disadvantaged member could have prevented the merger, breach of duty of loyalty for having secretly effected the transaction (failing to act in good faith)

3. In fact, two directors could not even hold a meeting w/o approval of Adlerstein, as controlling S/H, or at least proper notice

4. Koch v. Stearn – concluded that when 4-person board w/ 2-S/H’s (w/ right to appoint and remove two directors) and 1 S/H not provided notice as to purpose of meeting (which was to remove him as CEO), breach of fiduciary duty because directors DID NOT provide S/H w/ adequate notice to protect himself (thus constituting unfair advantage)

iv. Conclusion: Adlerstein was disadvantaged by directors, not provided sufficient notice, and unfairly kept out of Corp affairs, such that breach of duty of loyalty and good faith by directors AGAINST Adlerstein

4. Governance in Publicly Held Corporationsa. Services provided by Securities Markets:

i. Valuationii. Liquidity

iii. Monitoring of managersb. Efficient Market Hypothesis

i. Weakest - cannot predict trading strategy based upon past prices; rather, current market is unbiased and already takes into account all relevant factors.

ii. Semi-strong – insider information will allow to beat marketiii. Strong – everything, including insider information, already incorporated in market price

c. Noise Trader – somebody trading on extraneous information (not related whatsoever)d. Institutional Investors (i.e. mutual funds, hedge funds, pension funds, banks, etc.)

i. Relational Investors – purchase stock to seek long-term and influential rel. w/ Corpii. Social Investors – priority to social needs when determining investments

iii. Value Investors – actively seek influential role in management of Corp for purpose of increasing value of shares

1. Causes concerns from BOD b/c investors attempt to influence decisions (i.e. S/H activism)2. Leading Parties in Activism – public pension funds & labor organizations

3. Corporate Pension Plans – reluctant to be activist b/c directors want to remain directors, and activism will cause want to remove director as interfering w/ Corp management

e. Proxy Votingi. Proxy – agreement appointing a “proxy” to act on behalf of S/H (i.e. proxy is usually a simple

mailed card w/ voting options), so S/H need not be present at actual S/H meetingii. Federal Disclosure Obligations:

1. Issuing Securities2. Proxy Solicitations (requires disclosure ONLY where state law requires or permits S/H’s to

act)3. Tender Offers4. Insider Trading5. Periodic Reporting (annual (10-K), quarterly (10-Q), and immediate (8-K))

a. Federal Disclosure required IF: equity securities held by 500 or more S/H’s AND Corp has $10M or more in assets

iii. Proxy Statement Requirements:1. Time, date, and place of meeting to which proxy relates;2. Revocability of the proxy;3. Solicitor’s identity and source of funds;4. Identity and basic information about candidates for director;5. Annual report on Corp should accompany proxy;6. Rule 14(a)(5) – governs type style and size (i.e. readability)

a. Statements shall be divided into groups according to subject matterb. Each group shall have appropriate heading;c. When amounts at hand, should be tabulated.

7. Rule 14(a)(4) – Regulates S/H Rolea. Must provide boxes w/ respect to each matter covered;b. Must be presented w/ options to approve, disapprove, or abstain;c. Must provide method by which S/H may withhold vote.

8. Rule 14(a)(9) – prohibits making false or misleading statements in connection w/ proxy solicitation

iv. Shareholder Power w/ Proxies1. Rule 14(a)(7) – S/H Access to S/H Information & Corp Assistance

a. If S/H permitted to submit proposal, Corp may provide:i. List of S/H and addresses for purpose of mailing proxy solicitations; or

ii. Solicit the proxy on behalf of the S/H.b. PR: Corp want to mail b/c gives them benefit of timing

2. Rule 14(a)(8) – Shareholder Proposals - qualifying S/H may require Corp to include S/H proposal and an accompanying statement in proxy materials

a. Qualifying S/H – if at time proposal submitted, S/H owns 1% or $2,000 in market value of Corp stock for at least one year, and stock is owned continuously through proxy issuance

b. Only one proposal per meeting & MAY NOT exceed 500 wordsc. Rule 14(a)(8)(i) - HOWEVER, IF proposal relates to operations which account

for: i. (1&2) Violation of State Law

ii. (5) Economic Irrelevance Exclusion - less than 5% of Corp total assets at end of fiscal year;

iii. less than 5% of net earnings and sales in recent fiscal year; ANDiv. (7) Ordinary Business Exclusion - is not otherwise related to Corp’s

business;v. THEN, proposal need NOT be issued.

d. Lovenheim v. Iroquoisi. Facts: Lovenheim brought action regarding method in which Iroqouis

slaughtered sheep for foie gras, which represented only 1% of Corp sales, thus sought Economic Irrelevance.

ii. Analysis & Conclusion: Since policy questions significant enough, Economic Irrelevance may be trumped when significantly related to business (i.e. social policy exception) b/c Corp could receive bad attention and realize significant sales losses b/c of social policy.

v. Review of Shareholder Powers:1. Elect and Remove Directors;2. Approve Mergers;3. Approve Fundamental Changes Approved and Issued by BOD;4. Amend Bylaws (if AOI permit)

5. Shareholder Proposals (Above) & Bylawsa. Bylaws

i. MBCA 2.06 + DEL 109(b) – S/H’s MAY NOT limit the authority of the BOD by adding or amending procedures

1. May add when relating to business of Corp; conduct of affairs; and rights and powers of S/H’s, officers, and directors (if not inconsistent w/ law or AOI)

ii. MBCA 10.20 – Directors may amend or repeal bylaws UNLESS granted power to S/H’s in whole or in part or AOI expressly states o/w

iii. DEL 109(a) – power to amend, adopt, repeal bylaws is vested in S/H’s, BUT Directors MAY BE vested w/ CONCURRENT authority

b. CA Inc. v. AFSCME Pension Plani. Facts: AFSCME submitted proposed bylaw for inclusion in proxy solicitations, which shall cause

Corp to reimburse S/H’s for reasonable expenses incurred in electing directors. BOD denied b/c BJR.

ii. Rule of Law:1. If Corp has divested power to amend, adopt, or repeal bylaws upon BOD, this SHALL

NOT DIVEST S/H’s of their concurrent powers.a. BOD and S/H’s MAY concurrently and independently have such powers to adopt

amend, and repeal bylaws.2. HOWEVER, S/H’s statutory bylaw-powers are NOT COEXTENSIVE w/ BOD’s

concurrent power, and IS LIMITED BY 141(a) broad management discretion granted to BOD (Business Judgment Rule)

3. Purely PROCEDURAL BYLAWS DO NOT encroach upon BOD authority; and depending upon purpose, partly substantive and partly procedural MAY NOT encroach upon BOD authority either.

iii. Analysis: Since DEL 102(b) states that anything limiting the broad 141-power of the BOD MUST BE contained w/I Certificate of Incorporation AND since the bylaw would affect SUBSTANTIVE decision-making of the BOD on deciding the most effective manner to distribute corporate funds, THEN the proposed bylaw is limiting the BOD management powers. THEREFORE, bylaw not permitted.

1. Part I: Affirmed that the bylaw IS NOT improper subject matter for S/H action merely b/c it would require expenditure of corporate funds (b/c it enhances electoral process and facilitates nomination of directors).

2. Part II: Bylaw AS IS is improper b/c it restricts their fiduciary duties b/c they would be vitiated of their management power in determining whether reimbursement would be appropriate at all, which would be a necessity when people look to make frivolous use of corporate funds.

iv. Conclusion: The bylaw AS IS is improper, but amending the bylaw to provide BOD with sufficient management power in reimbursement process would make it permissible.

1. DEL 112 – Bylaw may include: proxy may be required to include S/H nominated individuals

2. DEL 113 – Bylaw may include: corporation MAY provide for reimbursement of electoral expenses in connection w/ election of directors

c. Kistefos v. Trico Marine Services, Inc.i. Facts: Proposal at Issue – a person shall be ineligible to serve as director if such person fails to

receive a number of votes required to be elected as director, and vacancy shall be deemed to exist on BOD

1. Current Bylaws – provided that incumbent director that failed to receive plurality of votes can continue to serve as a “holdover director” until successor elected

ii. Analysis: No ruling b/c Trico could not prevent a valid bylaw proposal before it has been voted upon and approved by majority of S/H’s; thus, until S/H’s adopt the proposal, Trico cannot deny the permissibility of adopting such a proposal

6. Access to Corporate Recordsa. MBCA 16.01 – Corporate Records

i. (a) Corp must keep minutes of all meetings of S/H’s and BODii. (e) Corp shall keep the following at Principal Office:

1. AOI and all amendments2. Bylaws and all amendments 3. Resolutions adopted by BOD regarding creation of one or more classes of stock (w/

respective rights, preferences, and limitations of stock)4. Minutes of all S/H meetings, and Records of actions taken by S/H’s outside of

meetings5. All written communications to S/H + financial statements furnished to S/H’s w/I past

three years6. List of names and business addresses of Corp BOD and Officers; and7. Most recent annual report to Secretary of State.

b. MBCA 16.02 + DEL 220 – Inspection of Records by S/H’si. S/H entitled to inspect and copy records during regular business hours at Corp Principal

Office IF S/H gives written notice w/I five business days of demand (DEL requires documentary evidence of ownership of stock)

ii. MBCA 16.02(d) – S/H may inspect and copy records ONLY IF:1. Demand made in good faith and for proper purpose;2. Demand describes w/ reasonable particularity purpose and intended records for

inspection; and3. Records must be directly related to purpose.4. (e) This right of inspection MAY NOT be abolished or limited in anyway

iii. DEL 220(b) – Proper Purpose1. S/H MUST have purpose reasonably related to interest as a S/H

a. Saito v. McKesson – access to all documents in Corp’s possession, custody and control, that are necessary to satisfy proper purpose.

c. Other Provisions:i. MBCA 16.04 – Court ordered inspection

ii. DEL 219 – List of S/H and Penalty for failure to produced. Conservative Caucus v. Chevron

i. Facts: CC sought access to S/H list to inform S/H’s about Chevron’s ongoing operations in Angola during Communist regime. Chevron denied stocklist.

ii. Analysis: Since CC promised to only contact S/H’s via mail, this could hardly amount to harassment and therefore, stocklist granted.

iii. Conclusion: Although motivation not proper purpose germane to economic interest as S/H, Court realized that such business relations in international community could in fact economically impact S/H’s stock value.

e. City of Westland Police & Fire Retirement System v. Axcelis Tech, Inc.i. Facts: Allegations against Corp for Breach of FD to City:

1. Rebuffed attempts by Acquirer to negotiate two above-FMV settlements;2. Retained three Directors despite refusal by S/H’s to support them; and3. Selling Corp’s most important asset at below FMV price.

ii. Rule of Law:1. Credible Basis of Standard – In order to prove Proper Purpose for acces to records,

must demonstrate CBS, which is the lowest possible burden of proof (i.e. rise above MERE suspicion and allegations)

a. Credible Basis – from which Court MAY infer mismanagement, waste, or wrongdoing may have occurred.

iii. Analysis:1. Retention of BOD despite approval is NOT justification for breach of DOL2. Confidentiality agreement is NOT justification either

a. Very reasonable for Corp to enter negotiation when settlements are expected to be explored (i.e. protect Corp records)

iv. Conclusion: Merely pointing out poor business decisions WILL NOT satisfy justification for access to records.

f. Compaq Computer Corp. v. Horton – determined that S/H had right to inspect and copy Corp records when wanting to communicate and inform S/H’s of pending S/H suit (i.e. sufficient Proper Purpose exhibited)

g. Not Proper Purpose

i. Obtain S/H list to bring pressure on 3rd party Corpii. Institute harassing or annoying litigation

1. Hint: Look to when S/H purchased stock in relation to demandiii. Satisfying idle curiosityiv. HOWEVER, secondary purpose will not prevent access if Primary Purpose legit

Fiduciary Duties and Business Judgment Rule1. Introduction2. Duty of Loyalty

a. Corporate Opportunity Doctrinei. ALI 5.05 – Corporate Opportunity

1. Director or Officer MAY NOT take advantage of Corp Opp UNLESS:a. Director/Officer FIRST offers opp. to Corp;b. Opp. rejected by Corp; andc. Either:

i. Rejection by disinterested directors;ii. Rejection is fair to Corp; or

iii. S/H rejects opp. and DOES NOT constitute waste.2. Opportunity – Any opp. to engage in bus. activity of which Dir/Off becomes aware of:

a. In connection w/ performance as Dir/Off and reasonable belief that opp. is intended for Corp; or

b. Through use of Corp information or property and Dir/Off reasonably believes that Corp would be interested.

3. Waste – such great deal that to pass on opp. would be against reasonable person of sound judgment; OR expenditure of Corp assets such that no consideration is received AND no rational business purpose

4. Ratification of Defective Disclosure – Good faith BUT defective disclosure MAY BE CURED IF original rejection of Corp Opp. is ratified by party initially approving rejection of the Corp Opp.

ii. MBCA 8.70 – Business Opportunities (8.62; 8.63; 1.43; 8.60(5))1. Director taking advantage of Bus. Opp. MAY NOT breach DOL IF before becoming

obligated to respect the opp., he brings it to attention of Corp, and:a. Qualified directors DISCLAIM Corp interest in Bus. Opp. and satisfy 8.62;

orb. S/H’s DISCLAIM Corp interest in Bus. Opp. and satisfy 8.63.

2. MBCA 8.62 – Director’s action is effective IF:a. (a) Transaction authorized by affirmative vote of majority (but no fewer than

two) of qualified directors AFTER required disclosure of ALL information not already known by such directors, and:

i. Qualified directors deliberated and voted outside presence of or w/o participation by non-qualified directors; and

ii. If by committee, committee composed of qualified directors on BOD; or members were appointed by majority vote of qualified directors on BOD.

3. MBCA 8.63 – S/H’s action effective IF:a. Majority of votes cast by qualified S/H’s are in favor of action AFTER notice

to S/H’s of action to be taken, notice of conflicting interest, and full disclosure to extent of information unknown to them regarding the conflict of interest.

4. MBCA 1.43 – If Bus. Opp. is conflicting interest transaction IF there exists a MATERIAL REL. b/w conflicting director and 3rd party OR IF party is CONFLICTING DIRECTOR.

a. Material Relationship – familial, financial, professional, employment, or any relationship reasonably expected would impair objectivity of director’s judgment.

iii. DEL 122(17) – Specific Powers Re Corporate Opportunity1. Every Corp under DEL law MAY renounce (in Cert. of Inc. or by action of BOD)

ANY interest in or expectancy of being offered a Corporate Opportunity or Class of Corp Opp.’s presented to the Corporation or 1 or more of its officers, directors, or S/H’s.

iv. Northeast Harbor v. Harris (ALI Approach)1. Facts: Nancy, CEO of NH, contacted by Sum b/c of her status as CEO to purchase property

for NH. She immediately agreed to purchase land in her personal name w/o disclosing intentions to BOD. She then attempted to purchase Property #2 for herself, and disclosed her desire to purchase property she realized through fruits of her personal labor. When she

decided to develop land on Property #1 & #2, BOD brought suit for breach of fiduciary duty.

2. Rule of Law: a. Guth Test: If Dir/Off presented w/ Bus. Opp. which Corp is financially able to

undertake, and it would be reasonably expected to undertake b/c the nature of the bus. opp. is in the Line of the Corp’s Business, THEN Dir/Off MAY NOT seize opportunity.

b. Fairness Test (Durfee): Whether it is UNFAIR for Dir to take advantage of opportunity for personal gain (facts & circumst.)

c. Adopted ALI (Maine) 3. Application & Conclusion: Both properties were Corp Opportunities

v. Broz v. Cellular Information Systems, Inc. (DEL Approach)1. DEL Rule:

a. Corp Officer/Director MAY NOT take business opportunity IF:i. Corp is financially able to exploit the opportunity;

ii. The opportunity is w/I Corp’s line of business;iii. Corp has an interest or expectancy in the opportunity; andiv. By taking opportunity, Director/Officer is placed in position

inimicable (hostile) to his duties to Corp.b. Corp Officer/Director MAY take business opportunity IF:

i. Opportunity is presented in individual capacity and NOT corporate capacity;

ii. The opportunity is NOT essential to the Corp;iii. Corp holds no interest or expectancy in the opportunity; andiv. Director/Officer HAS NOT wrongfully employed resources of Corp

in pursuit or exploration of opportunity.c. NO ONE FACTOR IS DISPOSITIVE

2. Analysis:a. Director became aware of opportunity in Individual Capacity;b. Director DID NOT misuse Corp funds to pursue/explore opp.;c. Offeror DID NOT consider giving opportunity to Corp.; andd. Corp was not financially capable of taking opportunity.

3. Conclusion: No usurpation of Corp Opportunity by Directorvi. Standalone Defenses: Katz Corp. v. TH Canty & Co.

1. Financial Inability to Take Advantage of Corp Opportunity 2. Adequate Disclosure of Corporate Opportunity3. Conduct HAS NOT Harmed the Corp

b. Conflicting Interest Transactionsi. Note: Difference b/w Conflicting Interest & Business Opportunity

1. Conflicting Interest – usually involves Corp K2. Business Opportunity – usually involves opportunity presented to DEF Director AND NOT

a Corp Kii. Common Law

1. Globe Woolen Co. v. Utica Gas & Electric Co.a. Facts: Globe sues Utica for specific performance of electric contract. Maynard is

CEO and Director of Globe, and he is on BOD of Utica. Because of Maynard’s influence, Utica E’ee negotiated great deal suggested and approved by Maynard, and when sent to BOD for approval, Maynard remained quiet. As a result, Utica realized $60,000 loss and sought rescission of K

b. Rule of Law:i. Duty of Constant and Unqualified Fidelity – dominating influence may

be exerted in more than just voting1. Fiduciary MAY NOT rid himself of duty to warn and to

denounce if oppression is apparent to practiced, visible eye.c. Analysis: Although Maynard attempted to “cleanse” the approval, he did so

unsuccessfully b/c he dominated E’ee and took advantage of position by not fully informing BOD of the horrible deal (i.e. faith by the BOD in his loyalty disarmed suspicion of wrongdoing).

d. Conclusion: refusal to vote DOES NOT nullify influence and predominance exerted upon transaction as fiduciary

2. Sinclair Oil Corp. v. Leviena. Facts: Sinclair owned 97% of SIN (Sub) and nominates all directors to BOD of

SIN; Sinclair wholly owns SINC (Sub). Minority S/H of SIN brings suit b/c of breach of fiduciary duties in that SIN has not enforced contracts w/ SINC, which would increase value of S/H interest. S/H also contends self-dealing by releasing massive dividends to S/H’s.

b. Rule of Law:i. No Self-Dealing when subsidiary receives same as parent

1. Self-Dealing – occurs when Parent Corp, by domination over Subsidiary Corp, acts in such a way that P receives something to exclusion of S AND to detriment of minority S/H’s of S.

2. Excessiveness of payment alone WILL NOT demonstrate Self-Dealing b/c P&S receive same

3. BUT if two classes of stock, and Corp only declares dividends on one class to exclusion of other, this MAY constitute self-dealing

4. Therefore, BJR is appropriate defenseii. When self-dealing, use Intrinsic Fairness Standard

1. Action taken was intrinsically unfair to S/H’sc. Analysis: Sinclair could not demonstrate that allowing SINC to remain in default

on K obligations to SIN was intrinsically fair, thus self-dealing existed.3. Entire Fairness Standard – Shifting of Burden

a. Initial Burden – party standing on both sides of transaction must show approval of transaction by:

i. Independent committee of directors; orii. Informed majority of minority shareholders.

iii. (i.e. Cleansing of transaction)b. TBC

4. Business Judgment Rule: Court WILL NOT interfere w/ judgment of the BOD UNLESS there is a showing of gross and palpable overreaching; rather, there is a presumption that the BOD in making the business decision acted on an informed basis, in good faith and in honest belief that the action taken was in the best interests of the company.

iii. DEL 144 – Interested Directors1. No conflicting interest transaction shall be void or voidable solely for reason of the

conflict IF the transaction is:a. Authorized by majority of disinterested directors;b. Approved in good faith by S/H’s; orc. Is Fair.

2. Requirement of Complete Candor and Fair Dealinga. Must disclose ALL MATERIAL FACTS

iv. MBCA 8.61 – SAME AS DEL1. EXCEPT SAFE HARBOR RULE: If BOD action complies w/:

a. Good Faith Standard; andb. In a manner reasonably believed to be in BEST INTERESTS of Corp

2. MBCA 8.60(6) – Faira. Transaction as a whole is beneficial to Corp; andb. Fair in comparison to how arm’s length transaction would appear.

3. MBCA 8.60 – Conflicting Interesta. Interest a director of the Corporation has respecting a transaction to be

effected by the Corp if:i. Director knows at the time of commitment that he or a related

person is a party to the transaction or has a beneficial financial interest or so closely linked to the transaction that interest would be reasonably expected to exert influence over the director’s judgment.

v. Director Self-Compensation1. DEL 141(h) + 1572. MBCA 6.24 + 8.11

c. Backdating – dating an agreement at a prior date to increase stock option value when exercised (i.e. manipulation of stock option date to purchase stock at significantly lower price)

d. Director Self-Compensationi. Directors have wide discretion to make decisions about executive compensation such that it does not

constitute waste or is overall unconscionable. ii. Stock Option:

1. Plan must involve an identifiable benefit to the corporation; and2. Value of options must bear some reasonable relationship to the value of the benefit passing

to the corporation. 3. Indemnification

a. DEL 145(c) – Requires corporation to indemnify officers and directors following successful suit on the merits or otherwise in any defense of any action, suit, or proceeding relating in any way to the service o the officer or director.

i. May even require indemnification on partial success.b. MBCA 8.52 – requires indemnification ONLY IF wholly successful on merits or otherwise.

Closely Held Corporations

1. Limitations to Majority Discretiona. McQuade v. Stoneham

i. Facts: McQuade invested in Corp under promise that X would use his majority power to appoint and retain McQuade as director at specified salary. When McQuade not appointed he brought suit under breach of shareholder agreement.

ii. Rule:1. Such a fixed agreement abrogated the judgment of the directors b/c ensured placement on

the board could produce bad faith and improper motives without threat of removal, and it is the shareholder’s power to appoint directors (may not usurp shareholder power by contract)

b. Clark v. Dodgei. Facts: Clark owned 25% and Dodge owned 75%. They entered into agreement that Clark would be

retained as general manager and director. After falling out, Clark sought to protect his position.ii. Rule:

1. Where directors are sole shareholders, there seems to be no objection to enforcing an agreement between them to vote for certain people as officers.

iii. Conclusion: Respective rights of shareholders may be fixed contractually by shareholder agreement, and may only be abrogated when in best interests of the corporation.

c. MBCA 7.32 & DEL 350-354i. DEL 342 – no more than 30 shareholders

ii. DEL 351 – may abolish board and move all power to shareholder leveliii. General Rules for Shareholder Agreements:

1. MBCA 7.32(b)a. In articles of incorporation or bylaws;b. Written agreement;c. By ALL shareholders; and d. Effective up to ten years unless o/w stated.

2. DEL 342/350a. Close Corporation filing under 342;b. Certificate of incorporation states status as close corporation;c. Written agreement; andd. By holders of majority of shares.

d. Zion v. Kurtzi. Facts: Agreement stated that Kurtz would not enter into any agreement without consent of Zion.

Kurtz in fact did not notify Zion per the agreement, so Zion brought suit. Corp forgot to file as close corporation.

ii. Conclusion: Court held that agreement should be upheld b/c if they had complied with the close corporation statutes, then the agreement would have been enforceable. Also found that nobody was harmed b/c only Kurtz and Zion were shareholders, and if agreement no enforced, would allow Kurtz more power than Zion wished to permit.

e. Blunt v. Tafti. Facts: Corp owned by Blounts, Tafts, and McGowans w/ 41%, 41%, and 18% respectively. Blount

wanted to approve bylaw stating that unanimous approval was required before relatives of shareholders could be employed. Bylaw passed requiring unanimous approval, but Article 4 of bylaws requires majority approval to amend bylaws, which they do.

ii. Conclusion: Unless contrary to public policy, if a shareholder’s agreement is made as part of the bylaws, it will be subject to amendments as provided therein, or if no provisions governing amendments, then as stated statutorily.

2. Fiduciary Duty a. Zidell v. Zidell

i. Facts: Emery, Arnold, and Jack were sole shareholders in Corp, owning 37.5%, 37.5% and 25% respectively. Emery was CEO, and Jay, Emery’s son, bought all shares of Jack when Jack left, effectively giving Emery and Jay majority power. Arnold quit when Corp failed to give bigger dividends. After Arnold quit, Corp increased salaries and bonuses, effectively diminishing value of dividends.

ii. Analysis: Declaration of dividends is business judgment of directors, and no breach of duty if decision made in good faith and reflects a legitimate business purpose. Plaintiff must show failure to declare dividend amounted to fraud, bad faith, or abuse of discretion. When plaintiff leaves

voluntarily, he is not forced out, and since he has received a modest return, no violation of fiduciary duty, especially where all shareholders are receiving same distributions.

1. Bad Faith Factors:a. Intense hostility of controlling S/H against minority;b. high salaries or bonuses; c. exclusion of minority from employment; andd. desire of controlling shareholder to acquire minority cheaply.

b. Donahue v. Rodd Electrotype Co.i. Facts: Harry and Joseph owned close corporation with 80% and 20% respectively. Harry began

gifting his children shares of Corp over a period of time. Joseph learned that Corp repurchased remaining shares from Harry without offering same tender offer to Joseph. Brought action for breach of fiduciary duty owed to minority shareholder by not presenting equal opportunity.

ii. Rule:1. As contrasted with a partnership form, the minority in a close corporation is subject to

freeze-out by majority when minority may not easily reacquire capital investment, thus forcing minority to sell at depressed value.

2. Therefore, shareholders in a close corporation owe one another substantially the same fiduciary duty as in the operation of a partnership, that being the utmost good faith and finest loyalty (duty of loyalty under Meinhard and Salmon).

a. The controlling group may not utilize control to obtain special advantaged and disproportionate benefits, and thus must offer each shareholder the same opportunity as offered to the controlling shareholder.

iii. Analysis: essentially, unfair dealing (how the process was negotiated and whether opportunity offered to all shareholders)

1. Cannot use corporate funds in a way that benefits controlling shareholders to the exclusion of the minority shareholders.

iv. Conclusion: Plaintiff entitled to equal treatment of controlling shareholders when majority is attempting to freeze out minority shareholder.

c. Wilkes v. Springside Nursing Homei. Facts: Wilkes and A+B decided to create Close Corp, and they agreed upon incorporation tht each

would be a director, and each would participate actively in management and decision making. A and Wilkes began fighting, and Wilkes was not re-elected as a director or an officer of the Corp. Wilkes continued responsibilities to Corp in same satisfactory manner and competence.

ii. Rule:1. Balancing Test: Must weigh legitimate business purpose against the practicability of a

less harmful alternative (places limitation on Donahue), thus even if legitimate business purpose, defendant may still argue less harmful alternative

iii. Conclusion: Where Wilkes continued to perform in same satisfactory manner and majority freezes out minority, then it is clear that they are trying to unlawfully pressure Wilkes into selling and thus resulting in violation of the utmost duty of good faith and loyalty.

d. Direct v. Derivative Suiti. Direct

1. Directly harms complaining shareholder in a way separate and distinct from injury to the corporation

a. Examples:i. Shareholder Voting Rights;

ii. Preemptive Rights;iii. Right to Inspect Books.

ii. Derivative 1. Action harming shareholder indirectly by reducing value of proportional shares of

corporate ownership, and thus brought on behalf of the corporationiii. Close Corporation Treatment

1. May treat an action arising from derivative claims as direct action if doing so will not:a. Unfairly expose corporation to a multiplicity of actions;b. Materially prejudice the interest of creditors in the corporation; orc. Interfere with a fair distribution of recovery amongst all interested persons.

3. Threat of Dissolutiona. MBCA 14.30 & 14.34

i. MBCA 14.30

1. Shareholder may order judicial dissolution if:a. Management deadlocked and irreparable injury b/c unable to conduct business

affairs;b. Illegal, oppressive, or fraudulent conduct by controlling shareholders;c. S/H deadlocked in director election; ord. Corporate assets mismanaged or misapplied such that constitutes waste.

ii. MBCA 14.341. If Shareholder brings 14.30 action, other shareholders may elect to purchase complaining

shareholder’s shares at fair valuea. Way to get around dissolution; andb. Complaining S/H need not assent if controlling shareholders elect to do so and at

fair value.b. In re Kemp & Beatley

i. Rule:1. Oppressive conduct:

a. When controlling shareholder conduct substantially defeats reasonable expectations that (objectively viewed, were both reasonable under the circumstances, and were central to petitioner’s decision to join the venture; or

b. Burdensome, harsh, or wrongful conduct; lack of probity and fair dealing (close to bad faith and fraudulent conduct standards) (Gimpel v. Bolstein)

4. Shareholder Repurchase Agreementsa. Shareholder Repurchase Agreement:

i. Generally enforceable even if price is substantially lower than fair value of to-be acquired shares UNLESS compelling equitable reason not to enforce.

b. Concord Auto Auction v. Rustini. Rule:

1. An agreement to repurchase shares will be upheld even if value to be received is substantially smaller, especially when all parties could have conformed to the agreement and revalued stock merely by meeting and doing so.

2. Absent fraud, mistake as to time of agreement, duress, or undue influence, stock repurchase agreement will be enforced.

c. Gallagher v. Lamberti. Rule:

1. A minority shareholder who contractually agrees to share repurchase agreement upon termination of employment acquires no right from the corporation or majority shareholders against at-will discharge (thus maintaining distinction between those duties owed to an employee and those owed to a shareholder)

d. Pedro v. Pedro

Operations of the LLC1. Introduction

a. Members - Share ratably in firm profits as residual claimantsb. Member Managed LLC

i. Resembles general P/S in that members collectively manage business and affairs of LLCii. Members owe fiduciary and contractual duties to LLC in carrying out management

c. Manager Managed LLCi. Members have no management authority or fiduciary responsibilities

ii. Only managers have such responsibilitiesd. Constitutional Documents:

i. Articles of Organization; andii. Operating Agreement

e. Liability – neither managers nor members are personally liable f. Benefits of Delaware LLC Law

i. Greater opportunity to reduce duty of loyalty; andii. Waive right to petition court for dissolution.

g. Elf Atochem North America v. Jaffarii. Rule:

1. Purpose of Del LLCA is to provide parties the greatest discretion in drafting operating agreements and furnishing provisions when silent.

2. Only where agreement is inconsistent with mandatory statutory provisions will the member’s agreement be invalidated.

2. Planning for LLCa. Operating Agreement Elements:

i. Basic economic and management arrangements;ii. Rules an processes to determine changes in relationships;

iii. What rights exist to invested capital.b. Olson v. Halvorsen:

i. Rule:

Equity Cushion and Piercing the Veil

1. Equity Cushion: Distributions and Capital Requirementsa. Minimum Capitalization Requirement & Consideration for Shares

i. MBCA 6.21 – Board of Directors may accept cash, intangible or tangible property, and anything it deems to be of value to the corporation in exchange for stock so long as it determines that consideration received is adequate in exchange for stock amount.

ii. DEL 153 – Shares of stock may be issued for consideration not having value less than par value of shares issued; shares may be issued without regard to par value of articles of incorporation so provide

1. Will only be contested if par value so far higher than value of considerationiii. DEL 152 – Directors may authorize exchange of stock or cash, tangible or intangible property, or

anything of value to the corporation as directors deem necessary.iv. Capital Requirement (DEL 154)

1. Capital need only be equal in value to aggregate par value of issued stock2. If no par value determined, then par value equals value of consideration exchanged in

return for issued stockb. Limitations on Distributions

i. MBCA 6.40 – Board may make a distribution to shareholders if permitted in articles of incorporation unless:

1. Corporation unable to pay debts as they become due in ordinary course of business; or2. Corporation’s total assets are less than the sum of total liabilities plus amount needed to

satisfy preferential rights upon dissolution of corporation.ii. DEL 170 – Directors may declare dividends on capital stock from either:

1. Surplus; or2. If no surplus, from net profits.3. No dividend may be declared if capital has of corporation has decreased in value below the

value of the issued capital stock until deficiency repaired. iii. DEL 244 – Reducing Capital

1. Reducing or eliminating shares of capital stock; authorizing repurchase or redemption of currently issued shares; or conversion or exchange of outstanding shares of stock.

Hostile Acquisitions

1. Introductiona. Four Hypotheses for Takeovers:

i. Disciplinary – Assets not optimally utilized, thus wishing to pay premium price in order to receive majority and implement new management scheme

ii. Synergy – Assets could increase in value if combined with assets of acquiring corporation, such that independent of each other they are worth significantly less

iii. Empire Building – Mere maximization of size to increase power and compensation over market and competing firms

iv. Exploitation – Acquire shares of corporation when market depressed to gain leverage in management operations of corporation

b. Definitionsi. Acquiring Corporation – Bidder/Raider

ii. Bust Up Takeover – Purchase and sell of piecesiii. Junk Bond – bonds with high risk and therefore high interest rateiv. White Knight – second bidder friendly to management of target corporation

1. White Squire – when only acquiring large block of target corporation’s stockv. Abrs/Arbitragers – seek to profit from short term purchases and sales of stock

vi. Front end Loaded Tender Offer – When consideration in the tender offer is worth more than the consideration in the second-step of the merger (i.e. typically notes or bonds)

vii. Greenmail – where target repurchases shares from raider at a premium in order for raider to go awayviii. Poison Pill

1. When the board issues rights to all shareholders by notes or preferred stock, which has little value and cannot be exercised unless a certain percentage of the corporation is bought, at which point shareholders may exchange for high yielding stock or debt, thus making purchase less attractive to possible raiders

ix. Staggered Board Amendment – would only allow raider to elect one-third of the board within the first year of the takeover, thus limiting the raider’s actions within year one

x. Supermajority Amendment – merely raises vote percentage required before merger may be approved, thus forcing raider to take up to 90% or more of board before completing merger