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Business Associations
Rutgers University, Newark School of Law
Dennis, Donna I.

 
Business Associations Dennis Fall 2013



1)      Partnerships
a)      Formation
i)        Uniform Partnership Act (UPA) – §6(1) – still used in NY
(1)    Defines partnership as “an association of two or more persons to carry on as co-owners a business for profit”
ii)       Partnership requires the following 5 elements:
(1)    Agreement to associate
(a)    Only an agreement is required, not a formal contract
(b)   Subjective intent of parties nto relevant
(2)    Two or more persons
(a)    Includes companies, not only people
(3)    Business, not just investment
(a)    Both people must intend to run a business – not just investment
(4)    Anticipation of profits
(a)    Must be established for profit, but does not have to end up being profitable (as inevitably some companies are not)
(5)    Co-ownership
(a)    Profit sharing
(i)      Loss sharing is not a consideration under the UPA
(b)   Joint Control
(i)      May agree to vest control to individual partner or “exec. committee”
(ii)    Fine line between “lender controls” and “partnership controls”
(iii)   Mere “negative control” not enough
iii)     The UPA is a default rule, only comes into play without an express agreement to the contrary
iv)     Revised Uniform Partnership Act (RUPA)
(1)    1997 – § 202(a)
(a)    “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”
v)      Today, most people choose limited liability companies, as to not be liable for all of a company’s issues
(1)    Sometimes encounter partnerships when two parties create an informal agreement which meets the requirements of a partnership
vi)     Fenwick v. Unemployment Compensation Commission (NJ 1945) – parties entered into an agreement which referred to them as partners, but all of the management responsibilities stayed with one of the parties
(1)    Court looked at the following factors to determine partnership: intention (financial reasons for Chesire); share in profits (existed here); obligation to share in losses (did not exist here); ownership and control of property (Fenwick reserved control); power in administration (Chesire excluded); conduct of partners to third parties (income tax returns, no registration of trade name as partnership though); rights upon dissolution (did not change here)
(2)    Court says no partnership – sharing of profits often proves partnership, but not when profits are played as wages as an employee
vii)   Martin v. Peyton (NY 1927) – Defendants found not to be partners of firm, simply investors
(1)    They were to receive 40% of profits, advised of business conduct, and veto power of highly speculative investments
(2)    Did not have any managing power though and explicitly refused to be partners/co-owners
b)      Fiduciary Duty
i)        Partners owe each other “the duty of the finest loyalty”
(1)    The interests of partners must come before individual interests
(2)    Managing partners carry even more responsibility because they have control
ii)       Partnership Opportunity
(1)    If an opportunity arises, a partner has a duty not to compete with the partnership unless there is consent following disclosure
(2)    Opportunity must have come via the partnership business to be subject to the duty
iii)     General Standards of Partner’s Conduct – § 404(b)
(1)    To account to the partnership and hold as trustee any property, profit, or benefit derived in the conduct and winding up of the partnership business/use of partnership property, including appropriation of partnership opportunity
(2)    To not deal with the partnership in the conduct or winding up of the partnership business as (or on behalf of) a party with an interest adverse to the partnership
(3)    Do not compete with the partnership business before dissolution
iv)     The loyalty is imposed because of the potential for serious harm
(1)    The sharing of losses creates liability among all
v)      Meinhard v. Salmon (NY 1928) – Defendant had a duty to disclose a real estate opportunity
(1)    P and D were co-adventurers in a previous real estate venture, but D was the manager of the property – D was then presented with a new opportunity and did not tell P
(2)    Court holds that co-adventurers hold the same duty of the finest loyalty to each other as co-partners
(a)    D is also held to a higher standard of disclosure because he was the manager
(3)    Dissent believes that the interests of the two parties ended with the ending of the first lease
c)       Partnership Property
i)        Partners have equal rights of possession for partnership purpose
ii)       An individual partner has no interest in the property or asset – it is part of the partnership
iii)     Partner’s interest is only a portion of the net value or deficit of the asset
iv)     Partners can use the property, but do not realize the value of the property held by the partnership
v)      Putnam v. Shoaf (Tenn. 1981) – Interest in property of partnership no longer vests with party that transferred interest
(1)    Putnam sold her interest in the partnership to Shoaf
(2)    When the company realized it had a loss the Shoaf’s tried to say that Putnam should share in that loss because it occurred while she was a partner
(3)    Court says that a partner does not own any specific property of the partnership, therefore, cannot retain any rights to the partnership after conveyed to someone else
vi)     Default RUPA and UPA rule: a person can become a partner only by unanimous consent of all other partners
(1)    Partners can transfer economic rights (things such as share of profits) to others without the consent of the other partners, but things such as management rights (decision making rights) cannot be transferred without consent of all other partners (explicit consent)
(2)    It is much harder to transfer partnership rights than it is to transfer shares of stocks in corporations
d)      Partner’s Authority/Liability
i)        Unless otherwise agreed upon, “all partners have equal rights in the management and conduct of the partnership business” – UPA § 18(e)
ii)       Any differences as to ordinary matters connected with the partnership may be decided by a majority of the partners – UPA § 18(h)
iii)     Extraordinary business requires a unanimous decision of all partners
iv)     Actions contrary to the partnership agreement also require unanimous consent
v)      National Biscuit Company v. Stroud (NC 1959) – When a partner ordered more bread for the partnership, even without the consent of the other, the partnership entity was liable for the costs of the order.
e)      Partnership Profit/L

vii)   A.P. Smith Mfg. Co. v. Barlow (NJ 1953) – Corp. gave $1,500 to Princeton Univ.  and P brought action to stop gift
(1)    Court rules that corp. can give money so long as does not exceed statutory maximum of 1% of capital and surplus, and institution receiving money does not own more than 10% of corp.’s stock
(a)    Courts usually defer to corp. in determining if charity is beneficial to corp.
(2)    Charity increased good will of company – public policy
(3)    Corp. argues that you cannot retroactively apply the law – Court rejects this idea fully
viii)  Donations by Corporations
(1)    Corporations can give to charity as long as some relationship to business – a lot of lieu in determining this
(2)    NY Bus. Corp. Law § 202(a)(12) – corporation may “make donations, irrespective of corporate benefit, for the public welfare or for community fund, hospital, charitable, educational, scientific, civic or similar purposes, and in time of war or other national emergency in aid thereof.”
(a)    No corporate benefit requirement
(3)    Insulation from Attack of Donation:
(a)    Full disclosure of material facts
(b)   Informed decision making vote by group that does not have a conflict of interest
(4)    Del. Corp. Law § 122 – “Every corporation created under this chapter shall have the power to . . . (9) Make donation for the public welfare or for charitable, scientific or educational purpose and in time of war or other national emergency in aid thereof”
(a)    Courts are very tolerant of BOD judgment in these matters
(5)    California – corporations can make donations regardless of corporate benefit
(6)    Pennsylvania – permits consideration of stakeholders and shareholders when deciding charitable donations
(7)    BOD can give donations that will contribute to the protection of the corp. interests
(a)    Broad discretion given
(b)   No donations to pet charities
(8)    Some CEOs make donations just to show other CEOs that they give to others
ix)     Shlensky v. Wrigley (Ill. 1968) – Cubs had not installed lights because owner thought it would be detrimental to neighborhood (even though all of major ball clubs had them) – P argued that Cubs were losing money by not having night games
(1)    Court did not overturn decision not to install lights – says business decision will not be overturned just because D can make a reasonable case that policy chosen was not the wisest
(2)    “The authority of the directors in the conduct of the business of the corporation must be regarded as absolute when they act within the law, and the court is without authority to substitute its judgment for that of the directors.” – Toebelman v. Missouri-Kansas Pipe Line Co.