CORPORATIONS OUTLINE-FREEMAN
CHAPTER 1-INTRODUCTION
The Subject in General
2 categories of business form:
1. Corporations-consists of shareholders (owners), board (manage), and officers (implement decisions of directors). Person may act as all three.
2. Unincorporated associations (proprietorships, partnerships, LLC).
Closely held (few owners) vs. publicly held.
The Statutes
UPA (partnerships), ULLCA (LLC), MBCA (Corporations)
The Role of Agency Law in Business Associations
Restatement of the Law Third-Agency
§1.01-Agency defined-The fiduciary relationship that arises when on person manifests assent to another that the agent shall act on the principal’s behalf and subject to their control, and the agent manifests assent.
§1.02-Parties labeling and popular usage not controlling-An agency relationship arises only when elements in §1.01 are satisfied.
§1.04(5)-Notice-A person has notice of a fact if the person knows the fact, has reason to know, has received an effective notification of the fact, or should know the fact to fulfill a duty owed to another.
§2.01-Actual Authority-Person acts with this when, at the time of taking action that has legal consequences for the principal, the agent reasonably believes in accordance with the principal’s manifestations to the agent, that the principal wishes the agent to so act.
§2.02 Scope of Actual Authority-
§2.03-Apparent Authority-Power held by an agent to affect a principal’s legal relations with 3rd parties when a 3rd party reasonably believes the actor has authority to act on behalf of the principal and that belief is traceable to the principal’s manifestation.
§2.04-Respondeat Superior
§2.05-Estoppel to Deny Existence of Agency Relationship
Agency Law is not statutoryà Common Law
Important, because businesses typically act through agents.
Note the Divided Highway:
Authority vs. Power
Principle-Agent Relationship Master-Servant Relationship
Deals with contractual matters, misrepresentation, Solves problems by agents who commit torts
And defamation (verbal Deals) 1. Torts with physical activity
Actual Authority (Express and Implied) Pà A 2. Have to show Master-servant relationship
Apparent Authority Pà T (Third Party) 3. Scope-Tort must have been in scope of
Need not be verbal; can be implied employment
4. Use of force must not be unexpected
Introduction to Business Forms
Proprietorship-Personally liable on all business obligations; If corp. or LLC if formed later, then still personally liable for activity before formation.
General Partnership-Joint and several liability and personal liability. (Oral may be sufficient to establish).
Limited Liability Partnership-General partnership with limited liability for partners. Not personally liable, unless personally responsible.
Limited Partnership-Limited partner has limited liability; General has full.
ULPA §303-Limited is not liable unless he transacts with persons who believe that the limited partner is a general partner.
Limited Partnership with a Corporate General Partner
Limited Liability Limited Partnership
Limited Liability Companies
Corporation-Disadvantages-Federal income tax and mandatory procedural requirements.
Nexus-of-contracts theory-Contractarians that model the firm not as a single entity, but as an aggregate of various inputs acting together with goal of producing goods.
Contrast with concept that a corporation is an entity created by the state.
CHAPTER 2-THE PARTNERSHIP
The Need for a Written Agreement
UPA (1914) §6-Partnership Defined-(1)-Association of 2 or more persons to carry on as co-owners a business for profit. *******
Do not need writing for partnership, but recommended-In absence of, UPA governs-
Advantages to having a written agreement: *****
Avoid future disagreements.
Readily provable in court.
Focus on potential trouble spots in relationship.
Divide tax burdens
UPA contemplates how business to be divided upon death of partner. Best if agreed on outcome in advance.
If you desire to lend property, best to specify.
Also may be best to comply with Statute of Frauds (Gano v. Jamil)-Unenforceable K between 2 attorneys because it was oral.
Protects lawyer for full disclosure.
In absence of writing, the relationship will be governed by applicable partnership statutes.
§18 of UPA provides rules if no express agreement; Anything expressly agreed supersedes §18:
§18(a)-Profits/losses split equally.
(b)-Partner must indemnify every partner for payments made and personal liabilities incurred by him.
(c)-partner who makes payment beyond agreed capital is entitled to interest.
(d) interest only calculated when repayment should be made.
(e) All partners have equal rights in mgt. And conduct of business,
(f)-Surviving partner entitled to compensation for his services in winding up (Richert)
(g)-Cannot become partner unless have full consent of all partners.
(h)-Majority vote for everyday business matters. If matter is departure of everyday business, then requires unanimous consent.
§21 imposes fiduciary duty-Cannot be changed by contract.
§40-Rules for Distribution-1. Creditors. 2. Partners other than capital and profits. 3. Partner’s capital, and 4. Partner’s profits.
Sharing of Profits and Losses (§18(a) of UPA)
-Absent of agreement-to be shared equally.
-Partnership Liability changed in §305-307 in UPA 1997:
§306(c)-reverses individual responsibility if partnership is LLP.
§306(a)-Makes all liability joint and several. Join (§15(b))-required joinder of all partners ad Defendants. J+S permits suit to be brought against one or more of the partners without suing them all.
§307(d)-Creditor first required to satisfy debt from partnership assets before personal.
§307(a)(b)(c)-Naming of partnerships and partners in lawsuits.
Note 2.2 of the Rules of Professional Responsibilityà Intermediary.
Richert v. Handly-No agreement in writing, and thus the provisions of §18(a) + §18(f) control. P purchased timber; D was to log it. Share equally in profits or losses.
See Freeman Handout next page.
§18, also §13-15 important. *****
§40 is huge. ****
Pg. 40 Note 3
Law Firm Partnerships
-Different compensation factors in firms; Keep in mind that in real partnership, all income derived from the law practice first would go to the firm, and then divided among the members.
The Traditional Law Firm of the 1960’s-General partnership-Malpractice not a major concern-small/male, and fairly specialized.
The Transition Today-Competition for associates increased-Salaries increased, and so did # of law school students, along with admission standard. Firms expanded. Income partners v. equity partners. Classes of partners developed (of counsel), part-time partnerships created, malpractice insurance.
The Economics of Law Firms in the 21st Century-As economy improved, mergers occurred-salaries increased for associates. “Gunderson Effect”-occurred by hiring at high rates. Economy went down, and so did firms.
Retirement Policies in Law Firms-Of counsel is dying out.
Bane v. Ferguson-Retired partner suing under both statutory and common law principles against firm for acts of negligent that caused firm to dissolve, and terminate his retirement. Suit not deliberate-based on Negligence. Suit based on §9(3)(c)-but that only protects partners, which Bane had ceased being. No fiduciary duty owed; Court states that there is no duty to former partners. Tort law not imposed on managers .
§9(3)(c)-Unless authorized by the other partners or unless they have abandoned the business, one or more but less than all the partners have no authority to : (c)-Do any other act which would make it impossible to carry on the ordinary business of a partnership.
Limited Liability Partnerships (LLP’s)-§306(c) (UPA 1997)
Management
National Biscuit Co. V. Stroud-Actual Authority case-General Partnership; One continued to buy bread after other expressly told them to stop. Court quotes UPA §18(h)-Partner had equal rights in management and conduct. Partner cannot restrict other partner. If Partner does something that is normal for the partnership, then it binds the partnership unless he has no authority, and the 3rd party knows that.
§9(1)-Every partner is an agent, and agency law applies.
Look for binding power. If A has express authority, B is liable.
Majority vote required for changing normal business. Unanimous if major change.
If there is no authority and the 3rd party knows it, then the partnership is not bound.
Smith v. Dixon-Apparent Authority Case-Managing partner signed a contract for partnership, which was in dispute. Court deemed that Smith was acting within the scope of his authority as managing partner. A partnership is bound by the acts of a partner when he acts within the scope or apparent scope of his authority.
Inherent Agency Power-1. General agent-continuity of serve. 2. Doing what is normal. 3. Innocent 3rd party involved. If all three elements met, law will protect innocent 3rd P.
In determining apparent scope of authority-May look at past transactions indicating a custom or course of dealing peculiar to the partnership.
§9(1) Test-Action binds as long as in ordinary course of business, UNLESS no actual authority and 3rd Party knew this. *** §9(1) ****
Note that you can have actual and apparent authority together; They’re not exclusive.
In terms of normality in §9(1), two ways to win: 1. Normal for this partnership; 2. Normal for this type of partnership in the community.
Burns v. Gonzales- (Note Case)-Interprets §9(1)-Normal for partnerships-Look to what’s normal for partnerships in community or what is normal for this partnership in particular, regardless of what others do.
Rouse v. Pollard-Scope of Employment-Law firm, where one partner acting outside of his scope of employment stole money-Are other partner’s liable? Partners are not liable for actions of other partners if the actions of the partner are outside the scope of their employment.
Today, firm would probably be liable. See §13-§14 of UPA.
Roach v. Mead-Scope of Employment-Mead borrowed $ and did not repay client. Partner liable. If 3rd person reasonably believes that the services he has requested of a member of a partnership is taken as part of the partnership business, the partnership should be bound for a breach of trust incident to that employment, even though those engaged in the practice of that business would regard as unusual performance of such services by that partnership.
Same case as Rouse, but different outcome.
Model Rules of Professional Conduct 1.8-regulates Client-attorney business transactions.
§17 UPA)-Liability of incoming partner-New partner only obligated for obligations of partnership after he joined the partnership.
Duties of Partners to Each Other
Meinhard v. Salmon-Fiduciary case-not fraud-Co-Adventurers in 20 year contract. S did not tell M about lease extension. S was managing coadventurer. Fiduciary duty owed.
§4-Agency law applies. §9(1)-Partner is agent of partnership and fiduciary duty exists. §21-fiduciary duty is not waivable. §21 viewed as being broad.
IF you see Meinhard cited in majority-D probably lost.
Factors in determining whether an opportunity is an entity opportunity: 1. Where (same land), 2. When is the opportunity presented (During venture), 3. Person’s role (S was managing).
Right to account afforded to partners §22-Softens common law rule which only permitted accounting upon dissolution and winding up. This occurs in Meinhard suits.
SC law on accounting as a mandatory requirement in partnerships or joint ventures.
Fiduciary obligations are unwavable.
NOTE §22 on Fiduciary obligations. ****
Joint venture-when it is carrying out one shot deal. Differs from Partnership in that Partnership is ongoing. In all other respects, they are similar.
Partnership Property
§24-Extent of Property Rights of a Partner-The Property rights of a partner are 1. His rights in specific partnership property, 2. His interest in the partnership, and 3, his right to participate in the management.
§25-Cannot assign your rights in specific partnership property.
§26-A partner’s interest in the partnership is his share of the profits and surplus, and the same is personal property
§28-charging order-It divests a partner of money interest but then the person has no other rights. There is thus incentive on part of other partners to make a deal with a creditor to keep the outsiders away.
Note §26-creditors can go after this.
§40(I)+(j)-Jingle rule-for priority of payment-individual creditors have priority with regard to individual property and partnership creditors have priority with regard to partnership property.
Can assign your debt, but they do not become a partner.
Cannot assign your partnership seat,
tional return. Amount is included directly on persons income tax return.
C Corporations-If distributions made, then double taxation occurs.
S Corporation-Requires affirmative election by corporation; Only differs in tax (only once). Qualifications: 1. Not more than 75 individuals, 2. May not have shareholders who are nonresident aliens and may not have issued more than one class of stock.
Business Tax Planning Strategies-Taxes are certain, Minimize taxes, and concentrate on marginal rate, and in selecting the form of business, the total tax liabilities of different forms must be taken into account.
Accumulation/Bail Out-When personal marginal tax rate is high, and corporate tax rate is lower, keep accumulated earnings in the business (No dividends or profits), then dissolve business and declare income as capital gains.
Zeroing Out-Reduce taxable income of corporation and increase taxable income of shareholder by the amount of the deductible payments. Accomplished through setting up retirement plans, deduct expenses, and only taxed on net income. Salaries, bonuses, lease property to business and pay yourself rent on property-business doesn’t pay tax on income going to these items because they are expenses.
-Tax strategies soon changed with Reform Act in 1986.
Limited Partnerships with Corporate General Partners
ULPA (1976)-Adopted by several states:
§303(a)-Limited partner not liable for obligations unless general partner (which can be accomplished if he participates in the control of the business). If limited participates, then he is liable only to persons who transact business with limited partnership believing on the limited’s conduct that he is a general. (b) Provides what does not constitute participating in business. (d)-A Limited Partner who knowingly permits his name to be used in the name of the limited partnership is liable to creditors who extend credit without actual knowledge that the limited partner is not a general partner. ****
§304-Person who makes contribution who believes he is limited in good faith, is not general provided he takes active steps to amend mistake upon learning.
Limited Partners have no power to withdraw before the expiration of the term of a limited partnership
§ 602-General may withdraw anytime through written notice to other partners, but if withdrawal violates agreement, then may be liable for damages.
§603-Limited may withdraw any time or as specified in writing. If not specified in writing, then they may withdraw on six months of notice to the limited partnership.
Limited Liability Entities as Sole General Partners
A corporate general partner differs from individual: 1. Corp. is subject to control of someone else, 2. Easy to control transfers of managerial authority to 3rd persons when individual involved, 3. Corp. may be acceptable with small assets, 4. Even if Corp. is reasonable capitalized, assets may be bled off, and increase liability to limited, and 5. Conflicts of fiduciary duties when a corp. is general.
In Re USACAFES, L.P. Litigation-Rare case where DL allowed Piercing. Corp. was general partner. Breach of fiduciary duty at issue. Directors and officers of a corporate trustee are certainly under a duty to the beneficiaries not to convert to their own use property of the trust administered by the Corp.
Withdrawal of general causes dissolution. General may however assign his interest , but only upon unanimous consent of all partners.
-Master Limited Partnerships-Large partnerships that are widely held and whose ownership interests are frequently traded. Revenue Act of 1987 caused some of these to be taxed as corporations (Kitner Regulations decided this).
Check the Box-Basic Principles:
1. Entity is classified as Corp if it is created under such a statute. 2. When filing first tax form, an entity not classified as corp. can elect either partnership or corp. 3. Entity with one member, either taxed as corp, or nothing. 4. If entity wants to change classification, it cannot change back without permission from Commissioner.
21st Century Limited Partnerships-Leverage Buyout Companies, Venture Capital Firms and Family Limited Partnerships
RERULPA-New statute-provides that general partners are not liable for debts of the limited partnership unless they expressly agree to assume liability. Thus LLLP is default rule.
Leverage Buyout-Company collects $ from investors and combines those funds with $ borrowed from financial institutions to buy controlling interests in operating companies.
Venture Capital limited partnerships-Professionally managed pools of capital that invest their money in equity securities of closely-held companies at early and medium stages.
In Re Spree.com Corp.-Issue is wrongful disclosure of information to reporter-Agreement contained confidentiality clause. P had previously embarked on fund solicitation program, and thus already disclosed its financial condition to prospective investors-case dismissed.
Family Limited Partnerships-Created by affluent people primarily to minimize gift and estate taxes upon the distribution of wealth to relatives.
