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, subjective intent is not relevant] 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 benefit. No one else.
8. Rights of Parties on Dissolution. On dissolution, Cheshire’s status will be the same as if she quit.
a. The burden of establishing a partnership is on the one who alleges it.
b. Partners compared with Employees
i. Fenwick v. Unemployment Compensation Commission
1. Element 1 – Voluntary Association – Yes
2. Element 2 – Is there at least Two People – Yes
3. Element 3 – It is a Business – Yes
4. Element 4 – Is profit anticipated – Yes
5. Element 5 – Is there co-ownership
6. Some profit sharing – Yes
7. Sharing of Loses – No. Court made a big deal about this but LOSS SHARING IS NOT RELEVANT in a partnership
8. Is there Joint Control – No. Cheshire never had power….therefore NO PARTNERSHIP
c. Partners Compared with Lenders (Formation by Conduct not Intent)
i. Martin v. Peyton (NY 1927) p.97
1. P is a creditor who says D is a partner. D is a lender who says they are not liable
2. D lent monies to KN&K with certain strings attached – Did the strings make them a partner?
3. Did it meet the elements above for a Partnership?
a. Share of profits – YES. Creates a presumption that there is a partnership (RUPA Section 202) but not dispositive.
b. D says merely compensation for loan.
4. If they were partners in a business they would be personally liable to the full extent of their personal wealth, not merely the extent of their initial investments. This cannot be contracted away.
5. Risk of liability would have been avoided if KNK had been organized as a corp. LLC or LLP not available at this time
6. NO PARTNERSHIP: The absence of an explicit partnership agreement does not preclude the creation of a partnership. Even though they renounced any intention to be partners in the agreement, court still must ask whether they “carried on as co-owners a business for profit.” HOWEVER, although this smells like a partnership, Cardozo pushes edge in this case to protect/encourage investors from being liable for losses
7. Main issue was joint control – as trustee payton had complete control to collect interest, exchange securities and collect principal if KKN sells.
c. Fiduciary duty
i. Duties partners owe to each other – the duties of one partner to all others are based on a fiduciary relationship. A partner owes certain duties of care and loyalty. Highest standards of honor.
1. A partner is not in violation of his duty by acting in his own interest, so long as it is not to the detriment of the other partners.
a. RUPA Section 404(b)(1) P. 111 – requires both disclosure and sharing of the opportunity.
i. As Long as they are in a partnership, you have to disclose an opportunity that comes to you individually in your role as a partner and you also have to share in the profits from any deals that you did.
ii. If above case was decided under 404 it would not be sufficient for him to disclose the deal going through but he has to hold the opportunity as a trustee for the partnership or venture.
iii. Follow 404, not previous case, but know Meinard b/c it is an important case.
nam’s estate or if the Shoafs should get it.
a. If she intended to convey her interest in the partnership to the Shoaf’s then the ½ should go to them.
i. She didn’t have a right to convey her right in the gin, that is the property of the partnership.
ii. She can assign her interest in the partnership – real interest is her share of the profits and surplus
iii. She can convey her economic stream from the partnership not the actual property.
iv. Once she transfers her interest in the partnership she cannot claim lost profits simply b/c they are higher than she anticipated.
3. Rule – A partner cannot own a specific interest b/c partnership property gives the right to use the entire property or interest. Pieces of it cannot be contracted away. Partners do not own the individual property or pieces of the partnership.
a. conveyance of partnership property held in the name of the partnership is made in the name of the partnership and not as a conveyance of the individual interests of the partners.
e. Partners authority/liability
i. Equal Rights – all partners have equal rights in management (even if sharing of profits is unequal).
1. UPA 18(e) – P. 140 in the absence of an agreement to the contrary, all partners have equal rights in the management and conduct of the partnership business.
2. UPA 18 (h) – any difference arising as to the ordinary matters connected with the partnership business may be decided by a majority of the partners; but no act in contravention of any agreement b/w the partners may be done rightfully without the consent of all of the partners.
a. Whenever you have an equal number of partners you have this case of deadlock . There will be no majority vote that will be effective to deprive either partners of authority to act for the partnership.
i. decisions must be agreed upon unanimously. Extraordinary
ii. decisions are decided by majority rule. Ordinary
ii. 4 take aways points on partnership authority:
1. Agent of Partnership – Every partner is an agent of the partnership and can exercise agency power unless they’re otherwise not allowed by agreement. The act of every partner, for apparently carrying on in the usual way the business of the partnership of which he is a member, binds the partnership. UPA § 301(1); National Biscuit Company v. Stroud
2. apparent authority – if third party thinks person has authority to bind partnership, they bind partners even if from the perspective of other partners, they had no real authority to act. (This rule benefits third parties.
a. Three defenses:
i. Partner was not acting within the scope of partnership business. UPA§ 301(2).
ii. Third party had actual knowledge that partner has no authority. If no actual knowledge, law is going to side with creditor. UPA § 301(1).
iii. UPA § 303(a)(2) – Allows partners to file a Statement of Partnership Authority that limits the ability of any partner to act. If this is on file, partners are going to be exempt from liability.
3. You need authorization from all the partners to be able to do these things:
a. Put the partnership property in trust to satisfy creditors
Dispose of the “good-will” of the business…huh again? (Black’s suggests that a business is more than just the sum of its assets, and “goodwill” is that