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

 BUSINESS ASSOCIATIONS

I. GENERAL POLICY THEMES

A. Respective Role of Shareholders (“SH”) and Stakeholders (“STKH”) in Corporate Governance – SH primacy vs. STKH engagement

1. Who are STKHs?

i. employees
ii. customers
iii. suppliers
iv. distributors
v. localities (governments and communities)

B. Role of Democracy in Corporate Governance

1. Make Board of Directors (“BD”) more representative/diverse

2. Give SH a meaningful vote and perhaps role on the BD

3. Give STKH a role in corporate governance

C. Federalism

1. Competition between State and Federal governments to regulate corps


II. GENERAL PARTNERSHIPS

A. Governing Law – in some states the two Acts run concurrently

1. Uniform Partnership Act (1914)

i. A partnership is:

a. An association of 2 or more persons to carry on as co-owners of a business for profit

2. Revised Uniform Partnership Act (1997)

i. A partnership is:

a. the association of 2 or more persons to carry on as co-owners in a business for profit forms a partnership whether or not the persons intend to form a partnership


3. Definitions:

i. “persons” can be a corporation

ii. “business” distinguished from investment

iii. “co-owners” are those who have:

a. Profit sharing

b. Joint control

iv. “intent” will be determined by considering all the elements of the relation between the “partners”

4. This is a conjunctive test.

B. Nature of General Partnerships

1. Case Law defining:  Fenwick (p. 92)

Beauty shop where worker and owner agree to profit split. Court rules that losses don’t need to be split, but here finds that P lacked any control over business and sees this as the key to whether there was a partnership.

2. Governance: Partnerships are democratic in nature: there is equality among partners and one partner = one vote. Thus there is joint control.

i. Agreements can change the equality of partners, but absent an agreement the structure is democratic UPA 18(e)

ii. Disagreements will be decided by majority vote in ordinary matters, extraordinary matters require unanimity UPA 18(h)

3. Authority and Liability: Each partner is an agent of all other partners and can bind the partnership, either by transacting business as agreed by the partners (actual authority) or by appearing in the eyes of 3d parties to carry on partnership business (apparent authority). Partner acts must be within the scope of the business. Partners are individually and severally liable for torts.

i. National Biscuit (p. 142) 2 partners in a grocery business, had falling out and D notified Nat’l Biscuit that he would no longer accept deliveries of bread to store. Other partner ordered more bread and D refused to pay for it after the partnership dissolved and was winding up. Held: absent an agreement, partners liable for the actions of other partners within the scope of the partnership business unless a majority decision is not followed by a minority of partners (ie: stalemate with only two partners). Here, only 2 partners.

ii. Acts must be within the scope of the business.

iii. A creditor of an individual partner may not attach the partnership’s assets. He must get a judgment against the individual partner.

4. Profits: Partners share in the profits of the business. There is no need to agree to share losses. Profit sharing alone = partnership. In absence of an agreement, loses are shared in same proportion as profits (UPA 18(a))

i. Kovacik (p. 179) P asked D to provide labor for a kitchen remodeling business for which P was the capital investor and kept all records. Went bad and P sues to recover half of the losses from D. Held: a party who contributes only his services and no capital is not liable for the venture’s losses. Logic is that where the venture sustains losses each loses what he contributed.

ii. 401(b) off the RUPA (comment) cites and rejects Kovacik. Partners are equally liable for losses whether they contribute capital or not.

5. Fiduciary Duties: Partners have an unassailable duty of loyalty and care to one another. They must put the interests of the partnership above their own.

i. Meinhard v. Salmon (p. 111) D and P were partners in a real estate development venture. D was offered an adjoining property and failed to notify P. Cardozo’s opinion suggests that the duty of loyalty was so strong as to require D to not only notify P of the business opportunity, but tak

e BD (“Business Judgment Rule”), but the decision to withhold dividends with the purpose of benefiting the interests of those other than SH’s is not OK. Dividends must be paid.

a. Interesting that Ford is held out as anything but a ruthless competitor. Dodge was, after all, a direct competitor to Ford.

b. It may well be that Ford was trying to punish the minority SH’s of the C. If so, Ford is breaching his duty of loyalty to the minority.

ii. A.P. Smith v. Barlow (1953) (p. 270) C gave a gift of $1,500 to Princeton U. P (Barlow, a SH) challenged. D argued that gift had long-term benefits to the C (flow of educated future employees, favorable environment) and that the public expected C’s to make social contributions. Held: wealth has shifted from individuals to C’s and they have social obligations. Gifts to universities are within the decision-making power of the C. Contributions can help promote C objectives.

iii. Sclensky v. Wrigley (1968) (p. 281) P sues to force Chicago Cubs to install lights at Wrigley Field because of the prospect of greater profit from night baseball. D (Mr. Wrigley) refuses because he believes that night games will have a bad effect on the neighborhood surrounding the park and because he believes baseball to be a daytime sport. Held: P cannot bring a derivative suit where there is no allegation of fraud, illegality or conflict of interest. The Business Judgment Rule will not be disturbed. C’s are not obligated to follow the decisions made by others (P had pointed to fact other teams played night games at home).

iv. The Rule Today:

a. In general, a C’s reasonable belief that a contribution would aid the public welfare and also aid the C in some way is OK and is covered by the…

b. Business Judgment Rule (“BJR”) is the presumption that D’s actions were made in good faith, on an informed basis and with the honest belief that action is in the best interests of the C. This comes out of the 1984 Delaware case Aronson v. Lewis.