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Business Associations
University of North Carolina School of Law
Hazen, Thomas Lee

Thomas Lee Hazen Business Associations Fall 2013
Table of Contents
Table of Contents. 1
Business Enterprises. 28
Agency Law.. 29
4)      Types of Authority (only P creates authority) 29
Partnership Law.. 30
Limited Entities. 32
Corporate Formation. 33
3)      Promoter Liability. 33
5)      Dissolution. 34
6)      Defective Incorporation. 34
Corporate Finance. 35
Piercing the Veil 37
7)      Equitable Subordination, aka “Deep Rock Doctrine”. 38
See also mergers where take assets but not liabilities. 38
Corporate Management 38
2)      Governing documents. 38
3)      Ultra Vires Doctrine [CL required corp to confine business to activities stated in charter which had to be stated with specificity] 38
e)      Corporate Gifts. 39
Board of Directors. 39
2)     Election of Board. 39
3)      Removal of Board Members. 40
4)      Compensation. 40
5)      Quorum Requirements. 40
7)      Board Committees §8.25. 40
8)      Informational Rights. 41
Officers. 41
Corporate Democracy: Shareholders. 42
5)      Voting Rights. 42
8)      Shareholder Meetings. 43
9)      S/h Inspection Rights. 44
10)        Proxy Contests= a struggle for control of a public companyàmanagement competes with non-management group (insurgents) to obtain enough proxies from s/hs to elect a majority of the board. 44
i)       At CL vote buying = illegal per se. 45
ii)      Schreiber CL policy is outdated–>allowed loan to s/h in exchange for vote. 45
(1)         Modern view on vote buying= look at the substance of the transaction and its object to determine if it will DEFRAUD or DISENFRANCHISE s/hs unfairly. 45
11)        S/h Lawsuits. 45
Board v. Shareholders Comparison Chart 46
Duties within a Corporation. 47
1)      Duty of Care (+ causation) 47
c)      Good faith. 47
d)     Business Judgment Rule (defense) 47
2)      Duty of Loyalty. 48
c)      Conflict of Interest 48
e)      Duty Not to Compete. 49
f)      Executive Compensation. 49
Closely Held Corporations. 52
5)      Voting Agreements (all these issues apply just the same to LLP, LLC, LP) 52
6)      Voting & Quorum Requirements for Control 53
7)      S/h Agreements & Director Discretion. 54
8)      Restriction on transfers. 54
Controlling Shareholders. 55
7)      Sale of Control 56
Federal Securities Laws. 57
a)      Registration. 57
SEC Proxy Regulation. 57
Shareholder Proxy Proposals. 59
Fraud Claims under Federal Securities Laws Intro. 60
6)      Litigation Reform… 60
7)      Projections. 60
Elements. 61
Insider Trading at Common Law.. 63
Insider Trading under §16 of 1934 Act 64
3)      Reporting requirements under 16(a) 64
5)      Short Swing Profits under 16(b) 65
Insider Trading as 10b-5 Securities Fraud. 66
4)     Disclose or Abstain Rule. 66
5)     Misappropriation. 66
7)     Tippee Liability. 68
9)     Use vs. Possession Test 68
Corporate Combination Intro. 69
Types of Mergers. 71
General procedure. 71
Consolidation. 71
Sale of Assets Transaction. 71
Corporate Division. 72
Appraisal Rights. 73
6)      Challenging Fairness of Mergers. 74
Takeover Battles: Board Duties. 75
Williams Act 76
Agency; Principal/
RSA §1
1.     Fiduciary Relationship which results from the
2.     manifestation of consent by the P to the A that the A shall act on P’s behalf, and
3.     the consent by the agent to so act.
Principal- the one whom the action is to be taken
Agent- the one who is to act
Agency Authority
Actual Authority-created by words or conduct from P to A
Ø  Express Actual Authority- expressed from P to A
Ø  Implied Actual Authority- do what is reasonably necessary to get the job done.
Apparent Authority- manifestations by P to 3P, attributable to P known to 3P and must lead 3P to reasonably A is P’s A.
Liability Based on Agency
Liability of Principal to 3P for transation conducted by an agent can be based on:
1.     agent was authorized
2.     agent was apparently authorized
3.     agent had pwr arising from the agency relation and not dependent upon authority or apparent authority.
Liability of Agent to 3P for Contracts
Principal Disclosed- Agent does not become party to K
Principal Partially disclosed- Unless otherwise agreed, A is party to the K.
Principal Undisclosed- A purporting to act on his own account but actually for P, is a party to the K.
Principal Known to be nonexistent or incompetent- unless otherwise agreed, A is party to contract
Liability of Principal to 3P for Contracts
Liability of a P to a 3P for transactions conducted by an agent may be based on the act that:
1.     The agent was authorized
2.     the agent was apparently authorized
3.     The agent had power arising from the agency relation not dependant on authority or apparent authority (inherent)
Partially Disclosed Principal
(1). If the 3P has notice that the A is acting for the principal and knows of P’s identity- A is acting for a disclosed P.
(2).  If the 3P knows that the A is acting for the P but doesn’t know who the P is, A is acting for a partially disclosed P.
(3).  If the 3P has no notice that the A is acting for the P- the one for whom A acts is an undisclosed P.
UPA §6(1)
RUPA §202(a)
A partnership is an association of two or more persons to carry on as co-owners of a business for profit.
RUPA  (entity theory)
RUPA §201(a)
A partnership is an entity distinct from its partners
UPA (aggregate theory)
Partnership is not a separate legal person, but is an aggregate of its partners.
UPA & RUPA as a default Provision
UPA §18
RUPA §103
The rights and duties of the partners in a partnership are governed by the rules of UPA subject to an agreement.
The general rule is that relations among partners are governed by the partnership agreement.  To the extent that partners fail to agree, RUPA provides the default rule
UPA §8
RUPA §§203, 204
1.     All property brought into the partnership or subsequently acquired by purchase
2.     Property acquired with partnership funds
3.     Real property acquired in partnership name.  Title can only be conveyed in partnership name.
4.     conveyance to the partnership- subject to contrary intent.
Property acquired by the partnership is property of the partnership and not the partners individually.
Property is partnership property if acquired in the mane of:
1.     the partnership;
2.     one or more partners with an indication that the property belongs to the partnership.
3.     by transfer in the name of the partnership or to partners in their capacity as partners for the partnership.
4.     Property is presumed  to be pship property if purchased with partnership assets, even though not acquired in the name of the partnership.
Comment §204: Ultimately it is the intent of the partners that controls whether property belongs to the partnership
UPA §18(h)
RUPA § 401(j)
 Any difference arising as to ordinary matters with the partnership may be decided by a majority of the partners.
Any act that is contrary to any agreement between the partners must be decided by all (unanimous) partners.
Any difference arising as to ordinary matters may be decided by a majority of the partners.
An act outside the ordinary course of business and an amendment to the partnership agreement requires consent of all the partners.
RUPA §103(b)(10)
The partnership agreement may not restrict the rights of third parties.
RUPA §201
RUPA §305
RUPA §307
RUPA 401(c)
The partnership is a legal person, an entity and can be sued.
A pship is liable for loss or injury for act of partner acting with in the ordinary course of business of the pship or with authority of pship.
A pship may sue or be sued in the name of the pship.
§307(c)- a judgment may not be satisfied from a partner’s assets unless there is also a judgment against the partner.  The only place you can look is partnership assets.
§307 (d)- a judgment creditor cannot levy execution against the assets of the partner to satisfy a judgment based on a claim against the partnership, unless the partner is personally liable.
Ø  Liability is imposed on the partner by law or contract independent of the existence of a partnership.
Ø  §307(d)(4)- if partnership assets are insufficient, can levy against the partner. 
RUPA says that you cannot go after the partner’s assets unless you have exhausted the assets of the partnership.
The partnership shall reimburse a partner for payments made and indemnify a partner for liabilities incurred in the normal course of business.
RUPA §§306 & 307
UPA §15
Partners are jointly and severally liable for all obligations of the partnership.
§306(b)- A partner admitted to the partnership is not personally liable for obligation incurred prior to admission.
Partners are jointly liable in contract.
Partners are jointly & severally liable in tort.
RUPA §401(i)
RUPA §306(b)
UPA §18(g)
A person may become a partner only with the consent of all the partners unless the pship agreement provides otherwise.
A new partner is not liable for debts incurred prior to admission.
No person can become a member of a partnership without the consent of all the partners.
RUPA §401(b)
UPA §18(a)
RUPA §807
Each partner is entitled to an equal share of the partnership profits and is chargeable with a share of partnership losses.
You cannot distribute to partners before creditors are paid first
RUPA  §502
UPA §26
The only  transfer

nanimous vote of the other partners if:
a.     it is unlawful to carry on business w/that ptner.
b.     Partner transfers all transferable interest
3.     Judicial determination that partner has engaged in conduct that hurts partnership.
4.     Partner violates partnership agreement by material breach.
The obligation of good faith and fair dealing under §404(d) does not require prior notice, specification of cause, or an opportunity to be heard (Boatch v. Butler & Binion). 
Cannot expel in bad faith or for personal gain.
A situation in which a person who owns a majority interest in a business acts to compel a minority owner of the business to sell or otherwise give up her interest.
Page v. Page- Traynor says that you have a right to walk in at-will partnerships however you can not dissolve a partnership to gain the benefits of the business for yourself unless you fully compensate co-partners for their share of the prospective business opportunity.
Articles of Incorporation
MBCA §2.02
DE §102
§2.02(a): Mandatory Requirements:
1.     Corporate name
2.     The # of shares the corp is authorized to issue
3.     the street address of the corp’s initial registered office; and the name of official registered agent
4.     the name and address of each incorporator
§2.02 (b): Permissive Requirements:
1.     names and address of individual directors
2.     a par value for authorized shares of stock
3.     defining limiting and regulating the powers of the board and shareholders
4.     liability issues.
§102(a): Mandatory Requirements
1.     The name of the corporation (must include one of the following words: association, company, corporation, club, foundation, incorporated, institute, society, union, syndicate, or limited).
2.     The address of corp and name of registered agent.
3.     The nature of the business or purpose to be conducted or promoted.
4.     The total number of stock the corp has authority to issue and the par value of each of such shares, or a statement that the shares will be without par value.  If it the corp is to authorize more than one class of stock, the total number for each class and which shares are to be without par value, and which have par value and the value for each class.
5.     The name and address of each incorporator.
6.     If the powers of the incorporators are terminated upon filing certificate of incorporation,  the names and address of those who will serve as board of directors until the shareholders vote at first annual meeting.
§102(b): Permissive requirements
If the articles and bylaws are in conflict, the articles win!
MBCA §2.06
DE §109
§2.06(a): A corporation MUST adopt bylaws.
§2.06(b): The bylaws may contain any provision for managing the business and regulating the affairs of the corporation as long as it is not inconsistent with the law or articles of incorporation.
MBCA §2.04
A promoter acts on behalf of a corporation not yet formed.
A promoter purporting to act as or on behalf of a corporation knowing that there was no incorporation, is jointly and severally liable.
Promoters still remain liable under a contract until novation.
Issuing Stock
MBCA §6.03
Ø A corporation’s sale of it’s own stock is an issuance.
Ø The articles of incorporation determine the number of shares a corporation has legal authority to issue- authorized shares.
Ø The shares that are actually issued are referred to as outstanding shares.
Issuance rules only apply when a corporation sells stock, not an individual shareholder selling stock.
Par Value-  the minimum price for which a corporation can issue its shares.  It is not applicable when an individual sells shares.
Stated Capital- includes at least the aggregate par value of all issued shares of par value stock.
Capital Surplus- funds received for issuance in excess of par value.