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Business Associations/Corporations
University of Mississippi School of Law
Czarnetzky, John M.

 
OPEN BOOK EXAM, bring whatever you want!!!!!!!!!!
 
no less than 5 close to 10 short essays
 
johnmc@olemiss.edu
 
tues-frid he is here just about all day, out on fri at 2/3pm. If you need to see him just drop him an email
 
will emphasize model business corporation act. on exam assume that all jurisdictions have ineacted RMBCA….ohterwise he would say answer this question under delaware law
 
skp first 83 pages. Begin our study with agency.
 
business organizations, business entities
Increasing variety of business forms
 
 
 
Corporations And Other Business Associations
 
 
I.              Agency – an agreement that does not have to be supported by consideration. Agency relationships are terminable at-will UNLESS they are supported by consideration from the AGENT. Principals are responsible for acts of agents when done within the scope of the agency. AGENT has a fiduciary duty to his principal in other words an AGENT must put the corporation’s interest above his own.  Courts will examine the relationship between the parties to determine whether a fiduciary duty exists. To determine the relationship of the parties courts will apply the control test which considers who is controlling the activities or services being rendered to determine the relationship of the parties or examine the parties tax returns.
a.       Any agent that violates their fiduciary duty can be held liable to the principal. Where agents enter into conflicts and profit, they must return ALL profits to principal. Even when termination date is known, agent owes principal duty until the end.
b.      Competition w/ principal – Agent can begin to logistically arrange for future competition with principal while employed as long as no conflicts emerge. After termination, a former employee may compete w/ former employer, the only restraint being on use of confidential information and trade secrets.
c.       Trade Secrets – Customer lists are not considered trade secrets if info is found in published sources or info ascertainable by other legal means. No effort to guard info disqualifies info as trade secret.
d.      Independent Contractor is only responsible for final product and manages his own work, whereas agent is directed by principal. Independent contractors owe no special loyalty to the principal unless mutually agreed to.
e.       Limits on discharging agent – Tortuous discharge against public policy only exists to protect whistle-blowing, refusing to commit crimes, etc. If agent reasonable relies on assurances, as well as principal’s policy, employment may not be terminated for no or bad cause.
 
                                                              i.      Non-compete agreement may be consideration in exchange for guaranteed employment. Agreement must be reasonable in time and scope.
                                                            ii.      An at-will employee who acquires shares in the corp. he works for does not acquire any special rights against discharge.
                                                          iii.      In a closely held corp., the nature of the employment of a shareholder may create a reasonable expectation by the employee-owner that his employment is not terminable at will.
f.       Agent authority – Principal can give authority to agent expressly or impliedly.
                                                              i.      Actual authority – occurs when the principal manifest his consent directly to his agent which can be either expressly or implicitly. The principal is bound by the agent’s authorized actions, even if the party with whom the agent deals with is unaware that the agent has actual authority.
1.      Binding co-partners – if partner has apparent authority, he can bind the partnership unless he had no actual authority and third party was informed. Third parties have no affirmative duty to investigate whether partner (or any agent) has actual authority.
2.      Liability – If a partner doesn’t have actual authority, even though he might think he does, and binds the partnership, he will be liable to the other partners.
                                                            ii.      Apparent authority – occurs when the principal manifests his consent directly to the third party who is dealing with the agent.  A third party will only be able to bind the principal if the third party reasonably believes that the agent was authorized. (Principal bears risk for agent’s actions b/c principal in the better position to monitor the agent’s actions.) 
 
1.      Blackburn v. Witter- company did not give employers authority to defraud its customers. Company employee gets window to invest in fraudulent stock certificates. When the widow inquired about the certificates, employer assured her that everything was okay. Company earned brokerage fees from transaction. Court held that company could not receive fees and not assume liability for its agent’s actions.
 
II.    Forms of Organizations – Three forms of business organizations are: (1) Partnership (2) Limited Liability Companies (LLCs); and (3) Corporations. Choosing a form of organization usually comes down to choosing between a partnership and a corporation.
 
a.       Partnership form superior where (1) simplicity and inexpensiveness of creating and operating the enterprise is important (as where the enterprise is very small and not very profitable); and (2) tax advantages are significant, such as avoiding double taxation and/or sheltering other income.
 
b.      Corporate form superior where (1) owners find it important to limit liability (2) where transferability of interests is important (3) where centralized management important as where there is a large number of owners who cannot all be active in the business and where (4) continuity of existence in face of withdrawal or death of an owner, is significant.
 
c.       Limited Liability Companies (LLC’s) are superior where an enterprise is small and the members want limited liability only for the amount of his or her capital contribution, even if the member actively participates in the business; (2) tax advantages are significant, such as avoiding double taxation and/or sheltering other income.
 
III.Limited Liability Corporations – is statutory created and require a filing with state. LLC is a hybrid of partnership and corporations.
 
a.       LLC is similar to partnership; (1) limited liability; (2) member withdrawal can result in dissolution (normally parties agree to this rule not in the default rules); (3) all members have equal ability to affect decision; (4) judge can re-characterize the relationship based on parties intent.
 
b.      LLC similar to a corporation; (1) Centralized management; (2) continuity; (3) limited liability.
 
 
IV.Partnership: –. No need for any formal act to form a partnership; just need two or more persons to run a business together as co-owners for profit. Default is equal sharing of the profits and a commensurate share of the losses. By contract, loss risk share can be different from the profit share. [Partners can exit at any time, but this dissolves the partnership. A new partnership may take its place seamlessly.] Co-partners are agents of one another and owe each other a fiduciary duty. Partnership provides pass-through tax treatment—in the eyes of the IRS the partnership doesn’t exist.
 
a.       General partnership is default form. General partners have unlimited joint and several liability.
 
b.      Joint ventures are partnerships for a limited purpose and limited time.
 
c.       Limited partnership can only exist where there is (1) at least one general partner who bears unlimited liability; (2) a written agreement among the partners; and (3) a formal document is filed with state officials. Limited partners are not liable for debts of partnership beyond the amount they have contributed as long as they have limited control over management.
 
d.      Creation of partnership – Partnership may or may not exist despite what parties call each other and their relationship. All that matters is whether there was an intent by the parties to do the things that created a partnership: jointly own a venture for profit and agree to share the profits and the losses. Other factors that the court will consider when determining whether a partnership exist is the (1) sharing of profits, (2) sharing of control, (3) sharing of losses, and (4) contribution of capital. § 202 of UPA.
 
e.       Partner’s fiduciary duties – Partner owes to the partnership and other partners the duty of loyalty and duty of care. § 404 (b)
 
                                                              i.      Duty of loyalty-
 
1.      Partner accountable to partners for any business that is done within the conduct or winding up of the partnership.
 
2.      Partner cannot do not business with a person or entity that has and adverse interest to partnership during the conduct or winding up of the partnership.
 
 
3.      Partner cannot compete with co-partners in the area of the partnership business during conduct or the winding up of the partnership.
 
                                                            ii.      Duty of care –
 
1.      Partners can only be sued for engaging grossly negligent or reckless conduct, intentional misconduct, or a knowing violation of the law during the conduct and winding up of the partnership.
 
f.       Partner’s Rights and Duties to Information – recognizes partner’s right to formal accounting. § 403.
 
g.      Allocation of decision-making authority – Partners have an equal right to management and conduct of the partnership absence some contractual agreement. When partners reach an impasse the partners can seek the court to make an equitable decision or dissolve the partnership. § 401
 
h.      Responsibility for the Unauthorized Contractual Acts of General Partner – The actions of a partner in the ordinary course of business of the partnership binds the partnership unless the partner had no authority to act for the partnership in the particular matter and the person dealing with the partner knew or should have known that partner lacked authority. § 301
 
i.        Partnership’s Liability for Partners’ Actionable Conduct – to be liable for partner’s bad acts, they have to have been done in the course of the partnership’s business. If so, partners are all joint and severally liable.
 
j.        Dissociation and dissolution – When a partner leaves a partnership, this triggers a winding down/settling of accounts and ultimate dissolution and termination of the partnership once all accounts are settled. Partners can be still liable during the winding up period for acts that occurred before the winding up of the partnership. Under the new RUPA, a partnership exists beyond the partners (more like a corp.). § 801, § 802.
 
k.      Settling Accounts – Where losses are not mentioned in a partnership agreement, they are assumed to be equally shared by partners. Exception is when one contributed money and the other labor, then they each lose just his type of capital. Projects completed during winding down period belong to the partnership. § 807(a)(b).
l.        Forced liquidation – Under UPA, unless there is a partnership agreement or a subsequent agreement on the matter, a partner that withdraws non-wrongfully has the right to force a sale and be paid his share in cash. Under RUPA, there is no forced sale, the partnership can continue, and the withdrawing (dissociating) partner simply gets his share of the larger of either (1) the value of the partnership as a going concern, or (2) its liquidation value (a “full accounting”). [Note: UPA auctioning is better b/c better approximates true value of partnership.]                                                               i.      Wrongful dissociation – against K, if before time under set-time K, debtor in bankruptcy, judicial determination, etc. A partner has the power to dissolve at will, but this power like any other power held by a fiduciary, must be exercised in good faith. So, although a partner can terminate at-will, he can’t do so simply to defraud or freeze-out his partner. § 602 (b)A partner who wrongfully dissociates is liable to the partnership and to other partners for damages caused by the dissociation. The liability is in addition to any other obligation of the partner to the partnership or to the other partners.
 
                                                           

s as imperfect proxies for asset substitution. Western Rock – guy owned all of corp. that was blasting, was informed of danger, could have gotten insurance, and decided against it b/c of ltd. liability. He became undercapitalized at moment of decision and veil can be pieced. Contra. Arrow Bar where they didn’t actively seek asset substitution. They didn’t dominate the corp. and followed formalities, etc.The control that the parent corp. must exercise over the a subsidiary so as to warrant piercing of the veil is more than mere majority control (or even complete ownership), but complete domination of policy and business practice in respect to the transaction attacked to the extent that it pretty much was acting in its place.
 
f.       Capitalization – Law might require an amount of capital to remain in the firm (par value). Can’t declare dividends unless the corporation will remain solvent afterwards. Two test to determine insolvency. Equity test of insolvency and balance sheet test of insolvency. Illegal distribution if corp. unable to pay debts in ordinary course or the transaction would leave the corp. with fewer as assets then liabilities. As long as the valuation of capital assets is done by the board in good faith and using a reasonable accounting method, the court won’t second-guess them.
 
g.      Corporate Structure- includes Shareholders, Board of Directors, and Officers.
 
                                                              i.      Shareholders: shareholders act principally by: (1) electing and removing directors; (2) approving or disapproving fundamental or non-ordinary changes (e.g. mergers, sale of assets, amendments to AOI, dissolution of the corporation, and statutory share exchanges).
 
1.      Shareholder action – Three ways: 1) annual meeting, 2) special meeting, 3) written consent. A special meeting can be called by the board and whoever else the charter says can do it. Anything that can be done at a meeting can be done without a meeting as long as you get the written consent but it must unanimous. But, for policy reasons of deliberation, there must always be an annual meeting to elect board members.
 
a.       Meetings: § 7.02(a) requires corporation to hold annual meeting. Corporations may also hold a “special meeting.” The board may call special meeting, or any one authorized by the bylaws, or 10% of the shareholders.
 
2.      Quorum: For a vote of shareholders’ meeting to be effective, there must be a quorum present. Usually, this must be a majority of the outstanding share. However, the % required for a quorum may be reduced if provided in the articles or bylaws.
 
a.       Breaking quorum: once quorum is present, the quorum is deemed to exist for the rest of the meeting, even if shareholders leave.
 
3.      Methods of Voting: a shareholder may vote his shares in person or by proxy. A proxy is a document whereby the shareholder, shareholder’s agent, or shareholders attorney in fact appoints someone to cast his vote for one or more specified actions. MBCA §7.22
 
a.       Voting trusts: Voting trusts = situation where shareholder(s) voluntarily grants someone else called a trustee the power to vote their shares.
                                                                                                                                    1.      However, it is illegal to buy/bribe votes
 
b.      Voting agreements: contract with two or more shareholders to vote their shares in a particular manner
 
4.      Vote Required: Once a quorum is present, the MBCA provides that the shareholder will be deemed to have approved of the proposed action only if a majority of the shares to be cast or in favor of the proposed action.
 
a.       Record date: is a moment in time where the shareowner has the right to vote even if they don’t own the share when the vote comes. Record date is normally set from 60 days to 10 days before. You need plurality of the votes cast to win unless otherwise stated in articles, etc. Supermajorities exist to protect minorities, but precisely because they disenfranchise the majority, they musty be clear an unambiguous.
b.      Minority rule: § 7.25 treats abstentions like votes not cast.
 
c.       Written consent: most states allow shareholders to act by unanimous written consent.
 
 
                                                            ii.      The Board of Directors: directors “manage” the affairs of the corporation. (1) Shareholders can’t give orders: Shareholders cannot order the board of directors to take any particular action. (2) Supervisory role: The board does not operate the corporation day to day. Instead, the board appoints officers, and supervises the manner in which the officers conduct the day-to-day affairs. The decisions of the BOD are protected by the business judgment rule unless the BOD has a conflict of interest.
 
1.      Election of BOD: members of the BOD are elected by shareholders.
 
Preconditions for a valid vote: Stockholder vote to elect