Business Associations – Donna Dennis – Fall 2010
KLEIN, RAMSEYER & BAINBRIDGE, BUSINESS ASSOCIATIONS (7TH ED. 2009)
I. Three policy themes
a. What role should corporations play in society (Foreign and Domestic) and what role do they play?
b. What role should democracy play in corporate governance?
i. Should BODs be more representative of the public (as opposed to wealthy white males)
c. Role of federalism. Tension between state and federal government regulation. Who should be responsible for what? In reference to the Dodd-Frank bill and the financial crisis.
i. See CTS case
a. Partnership formation:
i. Two statutory formulations, but they are 95% the same. States will use one or the other. Courts tend to apply them equally to case law in regards to the intent of the parties to enter into a partnership.
ii. Uniform Partnership Act (UPA) (1914) § 6(1)
1. A partnership is an association [1. voluntary agreement, not K, to associate] a. Don’t have to say you are partners to have a partnership
b. need objective evidence of this, but subjective evidence may be enough depending on how the rest of the factors come out
2. Of two or more persons [2. at least two “persons”] a. Person means an actual person or a business entity
3. To carry on
4. As co-owners [5. profit sharing and joint control] a. Joint control includes factors such as the right to inspect the books, fire people, right to veto any type of business.
b. Does not include the administration of a loan (See Martin v. Peyton where the PL was a lender and creditor).
5. A business [3. must be an ongoing business, not just an investment] a. Must look at each person’s relationship to the business. The person can’t just have an investment to be a partner.
6. For profit [4. anticipation of profit (doesn’t have to actually generate a profit)] a. In the absence of another agreement the profit share and control shall be equal among the partners.
a. All 5 elements must be met
b. Does not explicitly outline a fiduciary duty
iii. Revised Uniform Partnership Act (RUPA) (1997) § 202(a)
1. 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.
a. Makes explicit that there are fiduciary duties for partnerships as opposed to the UPA
b. 36 states use this including NJ, CA
iv. General partners are personally liable (unlimited) for the debts of the partnership. Most suits where the partnership denies that a person is a partner is when the person is owed money by the partnership.
v. Fenwick v. Unemployment Compensation Commission (Partners Compared With Employees)
1. Employee wanted a raise from $15/week. The company couldn’t do that but instead gave her 20% of profits. Her role as a hairdresser didn’t change, but she was called a partner.
2. The question was whether she was an employee or a partner.
3. The court found that she was an employee. The court said that sharing in profits is but one factor. She had no other management control over the company and otherwise acted as an employee.
vi. Martin v. Peyton (Partners Compared With Lenders)
b. Fiduciary Duty
i. Same fiduciary duties that are owed to partners in a partnership are owed to people in joint ventures.
ii. Imposed because partners have the ability to inflict serious financial harm on one another because they are joint and severally liable and because they are personally liable.
1. For example a partner who doesn’t have much worth could take large risks without the knowledge of the partner with more worth, but Partner B would be responsible for the risk.
iii. Meinhard v. Salmon
1. Brief Fact Summary: Salmon and Meinhard entered into a joint venture that centered around a twenty-year lease for the premises known as the Hotel Bristol at the northwest corner of Forty-second Street and Fifth Avenue in Manhattan. Before the lease ended, a third party approached Salmon about a new lease. Salmon entered into the new lease with the third-party and did not tell Meinhard. Meinhard sued for breach of duty of loyalty.
2. Rule of Law and Holding: “Joint adventurers, like copartners, owe to one another, while the enterprise continues, the duty of the finest loyalty.” A partner has a duty to disclose an opportunity to his partner(s) if the opportunity arises out of the partnership. The Court held in this case that opportunity did arise out of the partnership and thus Salmon had a duty to disclose the opportunity to Meinhard.
c. Partnership Property
i. Putnam v. Shoaf
1. Case about trying to transfer partnership interest. Putnam and Charlton each had 50% and Putnam transferred her 50% to Shoaf.
2. Putnam wants proceeds from cause of action initiated when she was the owner, but was settled after she sold it. She argues that she only sold the items listed in the quit claim deed.
a. She only had the right to convey the profits and the surplus not the property of the partnership.
3. Court found that she did intend to transfer her rights to profits (or losses) to the Shoafs and therefore had no claim.
4. Note: See page 134 bottom paragraph UPA (RUPA is almost identical).
d. Partnership Authority/Liability
i. National Biscuit Company v. Stroud
1. Page 140. 2 provisions
2. Brief Fact Summary. Defendant partner, C.N. Stroud, refused to pay Plaintiff, National Biscuit Co., for bread deliveries that the second Defendant-partner, Earl Freeman, authorized while Stroud specifically attempted to disclaim responsibility.Synopsis of Rule of Law. Each partner has an equal right to the management of the business and any business performed under the scope of the partnership can only be contravened by a majority of the partners.Facts. Stroud and Freeman decided to dissolve their business February 25, 1956. Several months prior to February 25, Stroud informed Plaintiff that he was not going to be held liable for any deliveries made by Plaintiff. Plaintiff still made deliveries to the business through Freeman’s consent. After the business dissolved, Stroud agreed to liquidate the business’ assets and discharge the debts, and Stroud ended up losing his own personal money in the process. Stroud disputed the money owed to Plaintiff because he specifically requested that Plaintiff not make any deliveries or else he would not be liable.Issue. The issue is whether Stroud can be held liable for the deliveries that Freeman consented to but Stroud declined.
3. Held. Stroud can be held liable for the deliveries. Partners are jointly and severally liable for the actions of the partnership. Freeman’s conduct in allowing the deliveries was within the scope of the business and he has a right to make these decisions unless a majority of the partners vote to deny him of these rights. Since Stroud is only one half of the partnership, and not a majority, he is unable to prevent Freeman from exercising his rights.Discussion. Stroud could have avoided the char
ow much validity does this have today, putting shareholder interest first?
2. Artificial Entity Theory (corp as creation of state àpublic welfare primacy)
a. Promote welfare of the public. May align with shareholder interests, but maybe not
b. See Liggett v. Lee
3. Real Entity (Separate Entity) Theory (corp as a separate entity controlled by managers à director primacy)
a. See: Business Judgment Rule
i. A presumption that in making a business decisions that the directors of a company acted on an informed basis, in good faith and in the honest belief that the action taken was in the best interest of the company. _____v. Lewis (Del Sup. Ct.)
ii. Not outcome determinative. We give the directors a lot of discretion to make decisions they think are appropriate
iii. Narrow framing of the definition of Corporation à Director and officer duties to shareholders
iv. Stakeholder: Creditors, employees, stock/bond holders, local communities, government, environment, suppliers
v. Questions to answer:
1. What benefits and costs do corps impose on society?
2. How should corps be regulated and in whose interests?
3. Where should the locus of regulatory power reside? State courts, legislator or federal courts, legislators.
vi. Dodge v. Ford Motor Co.
1. Ford as majority/dominant shareholder (58%) of Ford Motor Co. and Dodge brothers had a minority stake (10% each) in the company.
a. Majority shareholders have a duty to treat minority shareholders fairly.
i. Distinction in this case is that the duty was one way because Dodge didn’t have any management responsibility, they were only shareholders.
2. Ford increased the function of the car, while lowering prices to consumers, and had soaring profits
3. Ford made decision to stop paying special dividends (which were normally paid when the company did well) and to invest the extra capital in improvements (i.e. iron smelting machine) to the company.
i. regular dividends were still paid
ii. Dodge motors was created in 1913 and this action was brought in 1916. Ford probably wanted to limit the Dodge’s income. He also didn’t want to buy their shares for $35M.
4. Dodge brothers sue on 2 counts
a. Get payment of dividends