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

 
Business Associations Outline
Fall 2013
Thomas Lee Hazen
       I.            Background & Introduction
a.       General Proposition – Corporate, partnership, and agency law are state law
b.      Publicly held company – stock publicly traded on stock exchange
c.       Closely held company – few shareholders (5-15); not publicly traded
d.      Limited Liability (Cargill p. 27)
                                                              i.      Liability for business is limited to your initial investment
                                                            ii.      Limits risk to your investment
e.       Type of Corporate Lawyers
                                                              i.      Planner – drafter of deal, transactional
                                                            ii.      Litigator
    II.            Introduction to Agency Law
a.       Agency law important because corporate person in the eyes of the law
                                                              i.      Not statutory
b.      Only way a corporation, LLC, or partnership can act is through an agent
c.       Definition: Agency is the fiduciary relation which results from the manifestation of consent by one person [the principal] to another [the agent] that the [agent] shall act on [the principal’s] behalf and subject to [the principal’s] control, and consent by the [agent] to act. Rest of Agency § 1(1).
d.      Agency Overview
                                                              i.      Fiduciary (most contractual obligations are not)
                                                            ii.      Not limited to contractual relationships, doesn’t have to be verbal
                                                          iii.      Bilateral – requires consent of both principal and agent
                                                          iv.      Agent authority not unlimited to act on behalf of principal
1.      Any employee is an agent (i.e., bagger at Harris Teeter)
                                                            v.      Gay Jenson Farms Co. v. Cargill (p. 27)
1.      Limited liability case
2.      A loan is a type of limited liability investment if you are the lender
a.       Unlike agency and common law general partnership, a loan is limited liability
3.      Here, more than loan, Principal-Agent relationship
a.       Degree of Control
                                                                                                                                      i.      Right of first refusal by Cargill
                                                                                                                                    ii.      Cargill dealt in day-to-day activities of WG&S/micromanaged
1.      Salaries/other expenditures
2.      WG&S had to obtain Cargill’s consent to invest, mortgage, borrow
                                                                                                                                  iii.      This alone would not be enough to make a P-A relationship
b.      Holding Out
                                                                                                                                      i.      Cargill’s allowed Warren to use its name (business forms, etc)
                                                                                                                                    ii.      Big one, but not enough alone to be P-A relationship
                                                                                                                                  iii.      Creates apparent authority – P allowing A to use its name
c.       Agent Acting for the Benefit of the Principal (strategic investment)
                                                                                                                                      i.      WG&S sent 90% of product to Cargill (90% for Cargill’s benefit)
4.      Contrast with Martin
a.       No day-to-day control
b.      A lot of the same things, but different decision
c.       Good case of a lawyer drafting a document, but not good enough/conservative enough
e.       Fiduciary Obligations
                                                              i.      Duty of Care
1.      Don’t be negligent
                                                            ii.      Duty of Loyalty
1.      Key Rules
a.       Unless otherwise agreed (implicit or explicit), an agent is under a duty to act solely for the benefit of the principal. (Duty of Undivided Loyalty)
b.      Unless otherwise agreed, an agent may not deal with the principal as an adverse party (conflict of interest).
                                                                                                                                      i.      Conflict of interest has to at least be disclosed.
c.       Unless otherwise agreed, an agent who makes a profit while working for a principal is under a duty to give that profit to the principal.
                                                                                                                                      i.      Corollary of rule is basis for the laws against insider trading
1.      Use of confidential information. An agent who acquires confidential information in the course of his employment or in violation of his duties has a duty . . . to account for any profits made by the use of such information, although this does not harm the principal. . . . So, if [a corporate officer] has ‘inside’ information that the corporation is about to purchase or sell securities, or to declare or to pass a dividend, profits made by him in stock transactions undertaken because of his knowledge are held in constructive trust for the principal. Rest. Agency 2d, § 388, Comment C.
2.      Insider Trading
a.       Unless otherwise agreed, an agent who makes a profit while working for a principal is under a duty to give that profit to the principal
                                                          iii.      Duty of Good Faith
1.      Included in duty of care and duty of loyalty, not enough to view as 3rd independent duty
f.       Authority
                                                              i.      Actual Authority: dependent on conversations, agreements, history between the principal and agent
1.      Express Actual Authority
a.       Job description
b.      Bylaws
c.       Contract
2.      Implied Actual Authority
a.       Ex: Job duty to make deposit, nothing about driving car to bank, court would imply authority to drive car to make deposit
                                                            ii.      Apparent Authority: runs from principal to third party
1.      Does not require reliance by third party
2.      Ex: Employee of company with title as director of human resources has both implied and apparent authority
a.       Apparent and implied authority to hire and fire employees
                                                          iii.      Principal is liable if there is any type of authority
                                                          iv.      Agent cannot create its own authority
                                                            v.      Ratification
1.      A principal can after-the-fact ratify an unauthorized act
2.      Ratification relates back, adoption does not
                                                          vi.      When agent acts within authority he is generally not personally liable
1.      Ex: signing a K in a representative capacity
g.      Vicarious Liability
                                                              i.      Principal liable for actions of agent that are within agent’s authority
                                                            ii.      Butler v. McDonald’s (p.39)
1.      Action for negligence of McDonald’s and franchisee for door shattering
2.      Franchise is not an agency relationship
a.       Can be made clear in agreement between franchisor and franchisee
3.      Apparent authority is a question of fact
a.       McDonald’s could avoid apparent authority by having sign outside that says independently owned and operated
                                                                                                                                      i.      Without sign, let jury decide whether there is apparent authority
b.      Difficult to predict
 III.            Partnership Law (General Partnerships)
a.       What is a partnership?
                                                              i.      UPA §§ 6, 7; RUPA §§ 101(6), 202(c)
                                                            ii.      Common law, supplemented by statute
                                                          iii.      Definition: an association of two or more persons to carry on as co-owners of a business for profit
                                                          iv.      Doesn’t require a K
                                                            v.      Default method of doing business
                                                          vi.      Only form that exists at common law
                                                        vii.      Unless a specific term is specified, a partnership is terminable at will
                                                      viii.      Two Consequences
1.      Each partner is jointly and severally liable for the operations of the business
2.      Each partner is an agent of the business
                                                          ix.      Martin v. Peyton (p. 44)
1.      Court found lenders were not co-partners in the business (could have gone other way)
2.      Possible Partnership—Features
a.       Control (day-to-day, right of entry, veto power over certain transactions (had to approve additional loans)
b.      Lenders had option to become partners
                                                                                                                                      i.      Convertible bond – convert debt investment into equity investment
1.      Court holds still loan, this type of control needed because high-risk loan
c.       Profit Sharing
                                                                                                                                      i.      Generally prima facie evidence of partnership
                                                                                                                                    ii.      But here, profit sharing was a timing mechanism for repayment of the loan (lender not going to get more than loan plus interest, still fixed amount)
1.      Normally a loan is a fixed return (fixed amount + fixed interest rate)
a.       Debt is a fixed return
b.      Equity stock is NOT a fixed return
                                                                                                                                  iii.      Lease as profit sharing (percentage lease) is generally not a presumption of partnership
3.      Lender would have limited liability, partner would be jointly and severally liable
4.      In a situation where money is loaned, it is good to have a Formalized Agreement, so that the court can look and see that the protection of the loan is the primary goal, together with the desire to avoid being involved in the business.
5.      Distinguish from Cargill
a.       High-risk business: higher the risk, the more control that is reasonable
b.      Peyton had power to become partner but declined the opportunity to exert the power
                                                            x.      Joint Tena

of process
                                                          iv.      Partnership is generally not a taxable entity, whereas corporations are taxable entities
1.      Partners taxed on their share even if it is not distributed to them
                                                            v.      RUPA – partnership is an entity
e.       Partnership Liabilities/Finances & Duties
                                                              i.      Equal voting rights if no agreement, whereas corporation each has voting rights equal to share of ownership
                                                            ii.      Partnership is not a taxable entity (taxes paid by partners on their pro rata share)
                                                          iii.      Profits distributed per capita by default statute unless otherwise provided in agreement
1.      UPA § 18(e) – after liquidation each partner gets per capita share not how much they put in
a.       Losses and profits are allocated in same manner
                                                          iv.      Partners are jointly and severally liable for partnership
1.      Each partner can be liable for the whole
2.      If partners allocate loss, plaintiff could still sue A for whole, A would have to sue B for contribution (A would have to K around it and likely disclose to B to not be liable to third party)
a.       Allocation only internal
f.       Partnership Dissolution and Dissociation
                                                              i.      UPA §§ 29, 31; RUPA §§ 601, 701, 801
                                                            ii.      Definition: end of the entity or the aggregate
                                                          iii.      Partnerships don’t have continuity of existence, need a Continuation Agreement in place before dissolution
                                                          iv.      Partnership automatically dissolves when certain events happen (UPA § 31)
1.      Termination of the definite term or particular undertaking specified in the agreement
2.      Express will of any partner when no definite term or particular undertaking is specified
3.      Express will of all the partners who have not assigned their interests or suffered them to be charged for their separate debts, either before or after the termination of any specified term or particular undertaking
4.      Expulsion of any partner from the business
5.      Event that makes it unlawful for the business of the partnership to be carried on or for the members to carry it on in partnership
6.      Death of any partner
7.      Bankruptcy of any partner or the partnership
8.      Decree of court
                                                            v.      RUPA partnership, LLC, LP
1.      Same events in UPA § 31 may cause dissociation, but does not dissolve entity
                                                          vi.      NO CONCEPT OF DISSOCIAITON IN CORPORATE WORLD
1.      Corporations can still be dissolved by vote and other methods
                                                        vii.      Page v. Page (p. 67)
1.      No partnership agreement (partnership at will)
2.      50-50 partnership, equal contribution
3.      Page1 opened up another company that loaned partnership money on a demand note, Page1 called note, partnership didn’t have enough assets so had to liquidate
a.       Freeze-Out: moving forward with a deal without the other partnership
4.      Page1 owed Page2 a punctilio o honor most sensitive—not fair for Page1 to take Page2’s money to start and then kick him out when business is profitable
a.       Power to dissolve, but not the right to dissolve here
b.      Partnership obligations can transcend what is in the K
                                                      viii.      Three stages:
1.      Dissolution
2.      Winding Up
3.      Termination
 IV.            Limited Partnerships, Limited Liability Partnerships, & Limited Liability Companies
a.       Business Trusts
                                                              i.      Owners are beneficiaries
1.      As beneficiaries of a trust they are not jointly and severally liable for the obligations/activities of the trust
                                                            ii.      If tried in NC, then partnership, but if in Massachusetts, business trusts are recognized at common law as an unincorporated form for doing business.
1.      Other states allow business trusts by statute, such as Delaware
                                                          iii.      Real estate investment trust (REIT); several tax advantages