Business Organizations
I. Themes of Corporate Law (8/30)
a. Separation of Ownership (s/h) and Control (managers)
i. Agency Costs (9/6 Problem: Of Grapes and Winemaking)
1. Three kinds:
a. 1) Monitoring costs (supervise agent to avoid shirking),
b. 2) Bonding costs (insurance against making mistakes, bourn by the agent),
c. 3) Residual loss (reduction in welfare experience by the principal as a result of decisions of the agent)
b. Fiduciary Duties of Agents
i. Chesapeake Marine Part I
1. Director Apple given absolute veto.
2. Apple is a director, he has a duty of care and loyalty. But this only applies to his role as a director.
3. He really is a controlling shareholder because they need him to get a supermajority. Under these facts, he is probably breaching his duty of loyalty [XI(d)]
4. Applicable Del. Statutes:
a. §141(a) (403) gives the board of directors its managerial powers
b. §102(b)(2) (387) allows reorganization with ¾ approval
c. §216 (437) sets minimum quorum of 1/3 of total stockholders, and default quorum of majority of stockholders
d. §242 (453) allows the articles to be amended after the corporation receives payment for stock, by majority vote of shareholders
e. §251 (458) requires a resolution to approve a merger or consolidation
f. §271 (479) allows the sale of substantially all corporate assets, including subsidiaries, when authorized by a majority of shareholders
ii. Part II
1. Plan to create new corporation to get around Apple’s veto
2. Applicable MBCA:
a. § 3.02(5) (29) – power to dispose of assets in exchange for shares
b. § 12.02 (223) – talks about sales other than §12.01 (usual course of business)
c. § 3.02(6) (29) – A corporation can acquire interests in another entity
3. Here, the burden will be on the corporation to show that there is no self-dealing. Two problems:
a. Financial unfairness
b. Lambert initiated transaction (self-dealing)
4. Distinguish this from Schnell (47) (9/13) (where the shareholders were manipulated out of voting, entrenchment), but here the company is just trying to raise money to survive
c. Doctrine of Independent Legal Significance
i. “Validity of corporate action taken pursuant to one section is NOT dependent on its being valid under another” – Hariton v. Arco (411)
d. Introductory Cases (8/30)
i. Poison Pill: designed to prevent “coercive takeover proposal”
ii. “Coercive takeover proposal”/ “squeeze out merger”: Say we offer to buy all the shares – can we get them all? Some people don’t read their mail. Others have irrational loyalties and will not sell. In any case, the tender offeror will get the majority and bring in their own board of directors, which allows them to approve the merger (“second step merger”)
iii. Poison pills interfere with a free market; and the board of directors is selfishly interesting in entrenching itself
iv. Carmody v. Toll Bros
1. Shareholder brings derivative suit, challenging “dead hand” poison pill.
2. Court: P has 4 claims:
a. Dead hand provision restricts rights of newly-appointed directors (statutory claim)
i. DGCL § 141(d) (406) allows “staggered board” but only if the decision is made by the stockholders and contained in a bylaw. Can’t just add it in a shareholder rights plan.
b. Dead hand provision was solely for entrenchment purposes – violates duty of loyalty (they are putting their own interests above shareholders)
c. Dead hand provision is disproportionate under Unocal (there was no actual takeover offer)
v. Compare to AMP, Inc. (PA case)
1. Facts are similar, but you can have a dead hand pill in PA. The statute in PA provides that you can have a poison pill (section 33 of opinion – “is intended to validate … poison pills). Allied is making a consent solicitation (written version of proxy contest), target lowers the trigger. The pill becomes non-redeemable, non-amendable poison pill
2. Poorly reasoned opinion: just protects the home corporation
II. Corporate Formation
a. Choice of Corporate Form (152-168)
i. Internal Affairs Doctrine (9/13)
1. It is a choice of law rule. The law of the state of incorporation governs the right of shareholders to vote, receive distributions of corporate property, receive information from management… bring suit, applies to fiduciary duties of managers to shareholders
2. In contrast, the external affairs of the corporation are generally governed by the law of the place where the activities occur (i.e. labor laws and tax laws)
ii. Formation Requirements
1. MBCA §2.02 (23), DGCL §102 (384) (for corporations)
2. (Not needed for GP)
3. Articles of organization and operating agreement (LLC)
4. LLP: submit certificate: 6 Del. Ann. §1544
iii. Factors in making the Choice (9/20)
1. Taxation
a. Partnership: tax partners (partnership treated as a pass-through)
b. Corporation: double tax
i. Taxed on profits
ii. Taxed on dividends (can’t get around this by jacking up salaries to unreasonable levels)
c. LLC also avoids double tax – benefits of LL, but taxed as partners. LLC/LLP/LLLP taxed as partnership unless they “check the box.” (164)
i. Factors for decision (164)
1. Investors other income (deductions?)
2. Number of dependents each has
3. Likelihood of early losses/long-term success
4. Need to receive cash (dividends), and
5. The nature of the business
d. For example: if the business is going to be profitable, and plow profits back into the enterprise (no dividend) – corporation will save $ b/c corporate tax rate is lower than personal tax rate
e. If the business operates at a loss, a partnership (LLC) can help by giving the partners a personal deduction
2. Limited Liability
a. Corporation: liability limited to investment unless
i. Not properly formed
ii. Additional capital contributions, and
iii. When veil pierced (VI)
b. GP: all partners liable
i. Joint & Several for Torts
ii. Several for contracts
c. LP: only GP fully liable
i. LPs are limited to amount of investment (so long as they do not “participate in management”
ii. LPs can advise GP and vote on transactions
d. LLP
i. Most statutes: GP in LLP only personally liable for their wrongful act (or wrongful act of employee under their supervision)
e. LLC
i. Limited Liability for members and managers (better than LP because you can manage with limited liability)
3. Management and Control
a. Corp: Centralized (BoD)
i. Board duties: MBCA §8.01 (92), DGCL §141 (403)
ii. Close Corporations (XIV) – use shareholder agreements guaranteeing s/h a spot on the board
b. GP
i. Default: Every GP has equal power, regardless of contribution
ii. Or see partnership agreement (proportional vote or committee system)
c. LP
i. LPs can’t manage (or they risk losing liability protection)
d. LLC
i. Member/Manager Managed
tion by implication à when promoter becomes director, and the corporation accepted the benefits of the contract (doesn’t discharge promoter)
d. Ratification à confirmation/affirmance of a previous act that was done on its behalf (resolution of the board of directors) (doesn’t discharge promoter)
e. Non-recourse loans – Company will only look to the corporation when it is formed, not the promoter (discharges promoter?)
4. Agreement to discharge promoter liability:
a. Express pre-incorporation contract, OR
b. Look at the intent of the parties:
i. Did promoter sign as agent of corporation
ii. Did the seller intend to look to corporation alone for payment?
iii. Did promoter make partial performance?
iv. Was there novation? See above.
5. Promoter contracting for Services (Mary Diskette example)
a. Contract (letter) should say that he will be employed by the corporation, not her personally. “When the corporation comes into existence, you will be employed by it, and the corporation will ratify this contract.”
b. Doctrine of “corporation by estoppel” (“de facto” corporation)
i. Comes into play when people deal with a corporation that they know not to exist
ii. If the corporation tanks and George sues, Mary would argue that George knew that a corporation was not in existence, and he expected to be employed by the corporation, not Mary personally. Since all of his expectations were directed at the corporation, he should only be able to look at the corporation to relief.
c. Letter after corporation formed
i. Say “I have formed a corporation . . . to sell software.” Now, you can change the letterhead. Avoid the passive voice, which obscures the issue of agency. “On behalf of [Corp] I offer to employ you for the purpose of…” Signature line should say the name of the corporate name, and “by Mary…, CEO.” This makes it very clear that she is not signing it on her own.
6. There is no 100% fix to promoter liability (except incorporating first and then making contracts).
ii. Obligations of Attorney (9/20)
1. Entity Theory of Representation
2. “Reasonable Expectations” test (183)
a. If an attorney leads an individual or entity to believe that they are a client and the belief is reasonable under the circumstances, an attorney-client relationship will be created, whether or not the client pays the attorney any money or enters into a retainer agreement.
3. Ex: BBQ with Michael, Jessica and Bernie (9/20)
a. Can I represent all three of you? à Depends on whether or not the state follows Resse v. Danforth (177) allowing representation of corporation retroactively. If course, if the corporation fails, the lawyer would have to be considered counsel for all three
b. What is the danger of representing all three? Conflict of interest
c. Find out their goals, time horizons for investments. (Age and wealth differences suggest they might)
d. If they agree to everything, is there a reason that you can’t file the articles of incorporation? No.
e. What must you disclose? If a conflict arises, you have to withdraw, so no one member can keep secrets from any other.
