Business Associations Outline
3 Policy Themes we will encounter:
1. What role should corporations play in society?
American society? Global Society?
What is the purpose and function of corporation and who makes the decisions?
Is there a better structure we should search for?
2. What role should democracy play in corporate governments?
Should we seek to make boards of directors more representative of society?
Should we seek to give groups (employees, community members, stakeholders) who are intimately affected by a boards’ decisions some oversight of board decisions?
3. What role should federalism play in the governance of corporations?
What is the role of state v. federal power over corporations? Why does Delaware have some much power, disproportionate to its power in the federal government?
a. General information
i. Uniform Partnership Act (UPA) – The UPA has been adopted by most states, so that the provisions governing partnerships are usually a part of state statutory law, rather than common law.
ii. Revised uniform partnership act (RUPA) – adopted in 1994 and applies to all partnerships formed after its adoption in any given state.
1. Tries to make explicit what was left implicit in the older law.
2. Makes explicit that the provisions of the act are default rules, not mandatory rules….only applies where the parties have not created a contract that alters the rules.
3. Expressly states that a partnership is an entity, thus simplifying many partnership rules such as those on property ownership and litigation.
i. Hypo: A wants to start a restaurant business and needs capital.
1. First option is to borrow money from Bank in the form of a business loan. Low market risk. Bank will examine credit, collateral, and nature of the business. May be unwilling to lend to a start-up and will ask A to come back once it has acquired its own capital. Even if Bank is willing to lend, Bank will default on the loan if A misses an interest payment. A risks losing his business over a small payment.
2. Second option is to look for an individual investor, F, probably a relative, friend, or business acquaintance. On the one hand, A could structure this borrowing like a bank loan. Just like Bank, this eliminates F’s market exposure. However, this also prevents F from gaining any potential gain if the venture succeeds.
3. On the other hand, F may want to take on profits. In almost all situations, loss-sharing will accompany profit-sharing. Now, F will be concerned with A’s conduct; will make sure that the business is run properly, taxes paid, regulations met, etc. Also, conscious of own exposure to a suit of the partnership.
ii. Each state either uses UPA or RUPA
1. UPA 6(1)(1914) – A partnership is an association of two or more persons to carry on as co-owners a business for profit. All five elements must be met:
a. [(1) voluntary agreement to associate (don’t need a contract)] b. of two or more persons [(2) at least two “persons” ] c. to carry on as Co-owners[ (5) profit-sharing and joint control] d. a business [(3) must be a business, not just an investment] e. for profit [(4) anticipation of profit] – doesn’t actually have to make money.
2. RUPA 202(a) (1994, 1997) – “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.” (Don’t need a contract or subjective intent).
iii. Agreement to form a partnership – partnership is a voluntary association of two or more persons to carry on as co-owners of a business for profit. There must be an express or implied agreement in order to form a partnership. Sharing of profits is prima facie evidence of a partnership, but no such inference shall be drawn if such profits were received in payment as wages. The factors to look to in determining the existence or non-existence of a partnership are:
1. Intention of the Parties. Parties intended to form a partnership, yet this factor is not conclusive
2. Right to Share in Profits. Parties intended a share in profits, yet this factor is also not conclusive by itself.
3. Obligation to Share in Losses. This is entirely absent because the agreement specified that Cheshire would not share in losses.
4. Joint Control of Partnership Property and Business. The partners need not share joint control at all time – if the partners are given joint control and then later grant it back to their other partners the court may find control sufficient to establish a partnership. Fenwick contributed all of the capital, Cheshire contributed none, and Cheshire had no right to share in capital on dissolution.
5. Community of Power in Administration. Fenwick had exclusive control of operations and business in the Partnership Agreement, leaving Cheshire with none.
6. Language of the Agreement. Besides the labeling as partners, the Partnership Agreement does not provide Cheshire with any ordinary rights of partners.
7. Conduct of the parties Towards Third Parties. Parties hold themselves as partners only to the Commission from whom they desire a benef
ory of constitutional obligations – entirely judge made rule
iii. There are no fiduciary duties to tenants or employees
iv. Meinhard v. Salmon – Meinhard and Salmon entered a joint venture to own, improve, and operate a retail property. The two collaborated as a joint venture, with each sharing in profits and losses and with Salmon having sole management authority.
1. Is it a partnership? – Both anticipate profits, agree to associate, share in losses
a. Issue is of joint control b/c Salmon is having sole management authority. Probably not partners. Joint ventures can be like partnerships and have fiduciary duties.
2. Issue: Whether Salmon violated his fiduciary duty to Meinhard by accepting the renewal lease on behalf of his own company and not the joint venture.
3. Holding: Breach of fiduciary duty. Purpose is so that your partner does not subject you to debt that you are not aware of and then are ultimately responsible for. Duty of loyalty helps to reduce the harm suffered by partners and the cost.
4. Dissent said that they were not partners but joint adventurers so therefore not a fiduciary duty here. Claiming that a joint venture is limited in time and purpose
a. However Partnership has a controlling interest and joint adventures don’t rise to the level of partnership, but still owe each other fiduciary duty.
d. Partnership Property
i. What constitutes partnership property – all property originally brought into the partnership or subsequently acquired, by purchase or otherwise for the partnership is partnership property.
Proof of intent – where there is no clear intention expressed as to whether property is partnership property, the courts consider all of the facts related to the acquisition and ownership of the asset in question. Some of the factors considered are: 1. How title to the property is held 2. Whether partnership funds were used in the purchase of the property 3. Whether partnership funds have been used to improve the property 4. How central the property is to the partnerships purposes 5. How frequent