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Business Associations/Corporations
University of Georgia School of Law
Rodrigues, Usha

Corporations Rodriguez Fall 2016
Pro Tips
Good transactional attorneys know the default rules and how to get out of them for client’s benefit
Must know client needs in order to shape rules to fit needs
Difference between litigation and transactional attorneys
Transactional can grow pot and make things better for all sides
Litigators fight
Two ways transactional attorneys can bring value:
Regulatory arbitrage – structure to save money
Anticipate problems and solve them
Encourage clients to plan – even if they don’t expect a problem
Areas: control, liquidity, exit plan
Put into writing
Book of business
Your clients as a lawyer
The most important part of compensation
Do not be lulled into thinking you understand business law because of business background
Need to gain ability to read and understand statutes
Being a deal lawyer is about mitigating risk
WSJ Article
Ahmed – Harvard, Goldman, Venture Capital à prison
Defrauded partners out of millions
Lack of oversight caused this
Take monitoring seriously
Choose partners wisely
Bernie Madoff
Pulled a huge ponzi scheme and people were wary of investigating because looked like a respectable guy
Chairman of national security dealers
Bottom Line = Don’t let credentials/resume distract you from fraud
Nobel Prize in economics for calculation to estimate present value of stock options
Given uncertainty in future market prices
Walgreens plans to buy Rite Aid
$9/share purchase price (48% premium)
Rite Aid Stock rose to $8.67 à market thinks this is a good purchase
Might not go through because Antitrust concerns
Walgreens stock price drops à market doesn’t like? Nobody knows
Theranos – Silicon Valley Unicorn
Valued at around $ 9 billion
Insanely high valuation
Cash cow is a blood drawing device that the FDA might not approve
Scout investor – early investor to get a seat at the table and figure out if should invest more
Ex: Sequoyah invested 50k in Uber à worth something like 50 million today
In the news:
Square IPO – price expected to be mush lower than last class of venture capital, but they had negotiated for a ratchet
Also, there is talk about possibly pushing SEC to regulate unicorn valuations to prevent fraud
Entity Overview
Partnership: single taxation
Tax only draws/compensation paid to partners
Corporation: double taxation
Tax corporate income and tax dividends received by shareholders
Limited Liability
Corporation: Yes, limited
Can only lose up to what you invested
Partnership: No, unlimited
Personally liable for all debts held by partnership
Terrifying à Avoid if possible
Bonus LLC: Yes, limited
Like a partnership but with limited liability, unless you contract out of it
Partners manage everything
Democracy – one partner, one vote (not defined by share %)
But can contract for managing partner’s vote to carry more weight
Shareholders elect directors to run corporation
Democratic republic – shareholders vote for directors to represent them
Percentage voting by straight voting or cumulative voting
Board appoints officers and oversees day to day operation
You can basically pick between partnership or corporation structure
Transferability of Interest
Default = no transferability
Free and easy transferability for public
Exchanges: NYSE, Nasdaq
Must disclose to SEC and public
Private (closely held)
Restricted – likes to “keep it in the family” – The Godfather
Exchanges: private equity companies or permitted individuals
Need to disclose to SEC and public
Hybrid and depend on the contract
Life/Exit of Partner/shareholder
If partner wants to leave à dissolves
Usually altered
Perpetual life
Can dissolve or be dissolved but goes on forever otherwise
Centralization of Agency
Decentralized agency
Centralized agency – board & directors
They organize, not incorporate
Largely a create of contract
Hybrid of corporation and partnership
1. Agency (1-12)
A Business organization = series of relationships between individuals/groups
Agency law is the building block of organizations
Development of Agency Law
1812 – Paley’s treatise
Authority of the agent is created either by deed, simple writing, parol, or mere employment, according to the capacity of the parties, or the nature of the act to be done
1839 – Story’s commentary
1888 – Mechem’s treatise
1933 – Restatement
1958 – Restatement 2d
2006 – Restatement 3d
Agency relationship created when:
Principal manifests assent to have agent act on principal’s behalf and under principal’s control
Agent manifests assent or otherwise consents so to act
A. Formation of Agency Relationship
Formation of Agency
Agent = any person authorized to act on behalf of another person, the principal
Principal and agent both manifest assent
No contract is necessary to form agency relationship
Parties need not have intent to enter into something called an agency relationship
Whether relationship is characterized as agency in an agreement in the context of the industry/popular usage is not controlling
Inward looking
Relate to relationship between principal and agent
Governed by contracts between the parties and laws of fiduciary duties
Outward looking
Relate to relationship between agent, principal, and third party
Governed by principles of attribution
Agency Costs
Agency relationship creates risk
Ex: Risk that employee will do wrong à principal = liable
Agency costs are a key component of business organizations
Common Issue: to what extent does the principal control the agent?
Nears – (Texas Ct. App. 2010)
P works for hotel and abused by boss
Issue: Is boss an agent of franchisor, HHFI?
To what extent does HHFI control boss?
Pro control facts:

treat them the same
Agents acts outside scope of power and principal agrees to be bound anyway
Ex: 12-year-old acts as doorman of apartment
Acts without authority à Owner agrees to be bound = ratification
Professor says need SSN for exam and then steals money
Law school liable?
Argument: taken exams in the past so reasonable to believe that professor acted within authority
One issue: is the belief reasonable?
Likely answer: law school liable via apparent authority
Because manifested assent for professor to act on behalf via picture on website, business card, email address, book list, etc.
Bethany Pharmaceutical v. QVC (7th Cir. 2001)
Bethany submitted a bid to sell on tv show owned by QVC
Janis, an employee working for another company, told Bethany they were selected
QVC à NTA à DCCA à employs Janis
Janis calls herself QVC project manager
This was false, but the paper sent to Bethany said that only an authorized QVC purchase order is a binding agreement
Bethany produced $100,000 worth of product as a result
Bethany sued QVC when found out was only an alternate
Illinois apparent agency elements:
Principal consents to or knowingly acquiesces in agent’s conduct
Third party has reasonable belief that agent possesses authority
Third party relied detrimentally
Court held: reasonable person would not have concluded that QVC authorized Janis as an agent
Because QVC repeatedly said purchase order was the only binding contract
Agent cannot create her own authority
3. Partnerships (29-42)
Two primary benefits = simplicity & favorable tax treatment
Uniform Partnership Act (UPA) of 1914
Original standard, adopted by 49 states
Nature of the partnership – two approaches:
Entity – partnership = separate entity/legal person
Might lead to moral hazard by partners
Aggregate – partnership = aggregation of individuals with no separate legal status
Entity approach prevails today, but aggregate was strong in C/L
UPA doesn’t take a side
Revised Uniform Partnership Act (RUPA) of 1994
Settles on entity approach:
“Partnership = entity distinct from its partners”
Partnership property belongs to entity, not partners
Does away with UPA rule that partner departure causes dissolution
Allows conversion to limited liability partnership