Corporations

Notes

Rights of Shareholders

Firing of Directors

Standards of Judgment

Notes and Cases

Agency

Cases

Morris Oil v. Rainbow Oilfield Trucking

Tarnowski v. Resop

Definitions

Agent

An agent is a person that is allowed to act on behalf of another (by mutual assent between himself and the principle), but is subject to the control of the principle.

Disclosed Principle

The third party knows about the existence and identity of the principle

Unidentified Principle

The third party knows about the existence of a principle, but not his/her identity.

Undisclosed Principle

The third party thinks that the agent is the principle

Express Actual Authority

The agent has explicit instructions on what actions to take from the principle.

Implied Actual Authority

The agent implies that he/she has powers to act based on the words by the principle, relevant customs, and the relationship between the two parties.

Inherent Authority

The principle may foreseeably give the agent authority to deviate, in good faith, from the principle's instructions.

Apparent Authority

An agent has apparent authority when the principle has made the third party believe that the agent has the authority to act on his behalf. This agent can be given apparent authority if he is given a certain position within a company.

Liability

Agent to Principle

If agent took action on something he wasn't authorized to take action on and caused damages to a third party (via apparent authority) --> the agent is liable to the principle

Principle to Agent

If an agent took an action on something that he was authorized to take action on, and he is liable to the third party, then the principle as to indemnify him.

Principle to Third Party

If an agent has actual, apparent, or inherent authority to act for a principle, and a third party is caused harm through this agent, the principle is liable to the third party.

Agent to Third Party

• If the agent has actual, apparent, or inherent authority --> the agent is liable to the third party unless he discloses the principle in the transaction
• If the agent does not have authority from the principle, but claims to have it, the agent is liable.

Third Party to Principle

The third party is liable to the principle unless he knew that the third party would not have worked with him had the principle's identity had been disclosed.

General Partnership

When does a partnership exist?

UPA

• A partnership is an association of two or more persons to carry on as co-owners a business for profit.
• The sharing of profits is not in itself enough for a partnership
• Getting a share of profits is prima facie evidence of a partner (unless if the payment is wages, or return of debt, etc.

RUPA

• The association of two or more persons to carry on as co-owners a business for profit forms a partnership, whether or not the persons intend to form a partnership.
• Has similar elements to UPA:
  • The sharing of profits is not in itself enough for a partnership
  • Getting a share of profits is prima facie evidence of a partner (unless if the payment is wages, or return of debt, etc.
• Partnership turns on each partner having ultimate control (i.e. if one member is a passive owner, then there is no partnership.

Practical Approach

1. Does the person in question both veto investments and start new investments?
2. Does the person take part in the day to day operations of the business?
3. Other considerations: agreement to share profits/losses; equal investing power; etc.

Cases

Martin v. Peyton

Lupian v. Malsbenden

Basic Partnership Defaults

• Partners have equal votes no matter how much capital they put into the partnership
• Partners get equal profits and equal losses
• A majority vote is used to determine what the draw for the partners are
• Partners do not get direct interest for their capital and there is no salary
• To become a partner, need agreement of the rest of the partners
• Paid in capital is taken out at the end of the partnership and does not earn direct interest or dividends

This plays out in the UPA in the following ways:

• Profits/Losses – 18(a)
• Voting – 18(h)
• Participation – 18(e)
• Compensation – 18(g)
• Membership – 18(g)

This plays out in the RUPA:

• Profits/Losses – 401(b)
• Voting – 401(j)
• Participation – 401(f)
• Membership – 401(i)

Cases

Summers v. Dooley

Sanchez v. Saylor

Liability under Partnerships

The general rule is that there is unlimited liability for partners for debt of the partnership. However, UPA and RUPA have different rules as to the type of unlimited liability:

UPA

There is generally joint and several liability for wrongful acts done by the partners (sections 13 and 14). There is just joint liability for all other debts and obligations of the partnership. New partners are liable for debt and obligations of the partnership.

RUPA

There is generally joint and severable liability for all debts and obligations of the partnership. However, new partners are not liable for existing debt and obligations of the partnership.

Authority of Partners

UPA

There is not much protection to third parties for the UPA. UPA says that a partner has apparent authority when he is conducting business for the partnership in question. (Section 9)

RUPA

There is more protection in RUPA. RUPA says that a partner has apparent authority when the partner is conducting business in the same line of work that the partnership conducts. (Section 301).

Safe harbors

If the third party knows that there is no authority for the partner, then there is no apparent authority. However, the third party has no requirement to inquire about the authority.

Cases

RNR Investments

Northmon Investment

Partnership Interests

In general, the ability to assign partnership share of profits is allowed, but the ability to assign voting and participation rights is not allowed. The difference between RUPA and UPA is the remedy against a partner who has assigned his voting rights to another person. Under UPA, dissolution is caused by the will of those who have not assigned their interests. Under RUPA, the remaining partners can expel this transferring partner.

Cases

Rapoport v. Perry

Duty of Loyalty

Meinhard v. Salmon

Partnership Dissolution

The UPA and RUPA differ significantly.

UPA

The order in which things happen

1. Dissolution
2. winding up
3. Termination - when all partnership affairs are wound up

Dissolution can happen in the following ways: (section 31)

1. Without violation of the partnership agreement (end of the partnership term, will of any partner, etc.)
2. With violation of the agreement, with the will of any partner
3. When it becomes illegal for the partnership to continue
4. Death of any partner
5. Bankruptcy of any partner
6. Decree of court

There can be continuation by other partners if there is wrongful dissolution by one partner. Further, in the case of wrongful dissolution, the wrongful partner does not get their share of damages.

In the case of dissolution, the business can continue, but the partnership cannot continue.

RUPA

There are a number of steps:

First, dissociation:

• Dissociation occurs when in a number of ways, as shown under section 601
• Wrongful dissociation occurs in a number of ways, as show under section 602.

Second, we have to determine if the dissociation results in winding up:

• Section 801 tells us when dissociation results in termination
• According to section 701, all other dissociation results in the continuing of the business.

Third, if there is winding up, we have to figure out how the winding up and termination is done:

• This section spells out a buyout price.

Cases

Girard Bank v. Haley

Page v. Page

Creel v. Lilly

McCormick v. Brevig

Disotell v. Stiltner

Drashner v. Sorenson

Limited Partnership

A limited partnership is a partnership formed between two or more people with at least one general partner and at least one limited partner.

Liability

ULPA

The limited partner is not liable just because he is a limited partner.

RULPA

Limited partners can be held liable if they act in the same way as a general partners (if the third party reasonable believes that the LP is actually a GP based on his behavior.) There is a safe harbor that a LP can follow to make sure his liability is limited.

Differences between LP rights and GP rights

• LP can assign their entire interest if assignor gives the right or all other partners consent (RULPA section 704)
• LPs cannot dissolve a partnership (RULPA section 801)

Cases

In re USA Cafes

Gotham Partners

Corporate Form

There are essentially two sets of rules that govern a corporation:

1. Certificate of Incorporation. (section 101-102) (Section 242 allows for the amendment; it is hard to amend this, and therefore this rarely happens)
2. Bylaws. These can be amended by a majority of shareholders at any time. These can be amended by the board BEFORE issuance of stock, or after the issuance of stock if the certificate of incorporation allows it. The bylaws cannot conflict with the DGCL, and further, anything that has to be in the certificate cannot be in the bylaws.

The main statute that defines the structure and purpose of the board is section 141 of the DGCL. The main aspects of the statute are that:

1. The business and affairs of every corporation shall be managed by or under the direction of a board of directors.
2. The number of members of the board is either fixed by the certificate of incorporation or its bylaws
3. The board makes decisions by majority vote
4. A staggered board can be set up by either a bylaw or certificate of incorporation
5. The board sets its own compensation
6. A member of the board cannot be removed without cause if he is not up for election

Objective of the Corporation

The objective of the corporation is to increase the net present value of the corporation:

Cases

Dodge v. Ford Motor Co.

A.P Smith Mfg. Co.

Katz v. Oak Industries

Credit Lyonnais Bank Nederland

Director Status / Retaining Director Control

Director's Manage The Company

Charlestown Boot v. Dunsmore

People Ex Rel. Manice v. Powell

Director Entrenchment in Bad Faith

Schnell v. Chris-Craft Industries

Director Entrenchment in Good Faith

Blasius Industries, Inc. v. Atlas Corp

MM Companies Inc, v. Liquid Audio, Inc.

The final standard laid out in MM Companies, there is a three step process to determining if the director's actions are legal:

1. Can the directors show a reasonable ground for believing danger to corporate policy and effectiveness?
2. Is there a compelling justification for the affect to shareholder voting rights?
3. Were the defensive measures neither coercive or preclusive?

Limited Liability of a Corporation (Piercing the Corporate Veil)

Following Corporate Formalities

Fletcher v. Apex (alter ego theory)

Walkovszky v. Carlton (need more than just people taking advantage of the corporate form)

Undercapitalization

Minton v. Cavaney

Arnold v. Brown

Two Prong Test to Piercing

Sea-Land Services Inc. v. Pepper Source

Direct Liability

U.S. v. Bestfoods

Kinney Shoe Corp v. Polan

Shareholder Rights

Pillsbury

Seinfeld v. Verizon

Saito v. McKesson

In general, the steps in a 220 suit are as follows:

1. File the suit
2. Look to see whether there is a proper purpose to the suit. (Pillsbury)
3. Look to see if the plaintiff can show with a preponderance of evidence that such a claim is indeed true. (Seinfeld)
4. Plaintiff has to show that each category of books and records is essential to the accomplishment of the shareholders purpose of inspection. There has to be "rifled precision" as to why the records are necessary for his purpose.

Proxy Rules

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Private Right of Action

Borak

Cort v. Ash

Virginia Bankshares v. Sandberg

Elements of Private Right of Action

1. Duty to disclose
2. Materiality - TSC Indus v. Norway
3. Reliance
4. Causation
5. Harm

Duty of Loyalty

Sutherland v. Sutherland

Worldcom

Transamerica

Duty of Care

The duty of care makes sure that directors of a corporation are attentive when they make decisions.

Francis v. United Jersey Bank

Kamin v. American Express Co

Smith v. Van Gorkom

Malpiede v. Townson

Duty for Effective Internal Controls

In re Caremark Intl Inc.

Duty of Good Faith

As defined by In Re The Walt Disney Company, there are three types of bad faith claims:

1. A director consciously and intentionally disegards their responsibilities (subjective bad faith --> intent to do harm)
2. There is an intentional dereliction of duties, and a constant disregard for ones duties
3. Lack of due care (standard is gross negligence)

According to In Re The Walt Disney Company, the gross negligence claim can be thrown out because of 102(b)(7). In order to make a good faith claim, one has to show a sustained or systematic failure of duty.

However, in Miller v. ATT, the court said that acting illegally could be considered an act of bad faith.

Duty of Loyalty

The duty loyalty makes sure a director does not put his/her personal interests ahead of the corporation when dealing with corporate assets or business opportunities.

Self Dealing

The first thing to look at is what is the definition of self dealing. The DGCL states that a director cannot be liable of self dealing simply if (section 144)

1. The conflict was disclosed to the board and the transaction is authorized by the vote of majority of disinterested directors
2. The conflict is disclosed and a majority of disinterested directors approve of it
3. The transaction is fair.

Lewis v. SLE

Talbot v. James

Gantler v. Stephens

Duty to Disclose

"Complete Candor" - If you are not asking the shareholders to make a decision, you do not have to disclose. You have a duty to disclose under state law when you are asking shareholders to act. The duty to disclose comes under Section 13 of the 1934 Act. You have to meet the 1934 filing requirements but there are no state requirements except in this case.

Shell Petroleum

Sinclair

Kahn v. Lynch