Business Associations
Hazen
Fall 2015
[Introduction]
A. Common Law
i) Court decisions clarify and fill in gaps of statutes
ii) Especially pertinent re fiduciary duties of directors, officers, and controlling SHs.
B. Modern State Business Corporation Statute (MBCA)
i) State corporate law was made to deal with formalities, duties, right and obligation of the corporation
ii) Most state statutes closely follow MBCA Del and NY have their own unique statutes)
C. Federal Law
i) Purpose of regulations is to protect investors in market generally
(1) Sarbanes-Oxley Act (2002): federalizes specific aspects of corp law for public corporations
(b) Limits on corporations hiring their audit firms to do nonaudit work for corporation
(c) Rules governing composition and functions of board’s audit committee
(d) Provisions requiring forfeiture of executive pay when companies correct their financials
(e) Bars on individuals from holding corporate office if they have committed securities fraud
(f) Prohibition on companies making personal loans to their execs
(g) Mandate for companies to institute and disclose systems of internal controls
(h) SEC rules governing professional conduct of lawyers
(1) Dodd-Frank Act (2010):
(1) Compensation committees be composed entirely of independent directors
(2) SHs must have a say on exec pay
(3) Corporations must adopt clawback policies when execs profit on false financial disclosures
(4) Mandates new SEC program for employees who report securities violation to receive whistleblower bounties
(5) Authorizes SEC to pass rules giving SHs the ability (As corp expense) to nominate directors to the board
(2) Securities Act of 1933: regulating disclosure when corporation raises capital in public markets
(3) Securities Exchange Act of 1934 imposing periodic reporting requirements
[Business Organizations—Types]
A. Types:
ii) Sole Proprietorship
iii) Partnership
iv) Limited Partnership
v) Limited Liability Partnership
vi) Limited Liability Company
vii) Business Trust
viii) Corporation
B. Sole Proprietorship:
i) Single individual owns/controls the business assets and is liable for any business debts.
ii) Advantages:
(1) Control: Direct Control from owner; Simplicity: Lack of separate legal structure makes it easy to operate (no SH meetings); Expenses: Less expensive, no need to comply with fed. security laws; Taxes: Not taxed separately.
iii) Disadvantages
(1) Unlimited liability, Management (Dependent on owner), Transferability (cannot readily be sold)
C. Partnership:
i) An association of two or more persons to carry on as co-owners a business for profit
(1) Default: doesn’t require legal documentation or agreement to form GP (automatically GP if the statement is true)
(1) A profit-sharing arrangement creates a presumption of GP even if parties do not intend to be partners. UPA 7; RUPA 202(c)(3)
(2) Each individually liable for partnership obligations.
(3) Prevalent in service industries i.e. law, accounting, medicine
(1) Reason: trust must exist among participants and capital needs are not great.
(4) All states, except LA, adopted a version of Uniform Partnership Act or Revised UPA
(5) Advantages: Control (not separate from ownership); Simplicity (can conduct business in any manner the partners wish); Expenses (Less expensive than corp.); Taxes (Not taxed separately)/
(6) Disadvantages (Unlimited Liability; Transferability)
D. Limited Partnership
i) Created by statutes (not common law)
ii) Need a limited partner and general partner
(1) Limited Partners (owners)
(1) Limited partners provide capital and are liable only to the extent of their investment.
(i) limited partners can’t be involved in the day-to-day activities of the business. If you exert such control, you lose your limited liability (See Gateway Potato Sales)
1. BUT: RULPA 303b- Safe Harbors: for activities that will not expose a limited partner to unlimited liability for participating in the control of biz.
(ii) Limited partner not an agent of LP, and they are merely passive investors.
(iii) Limited partners do have voting rights to elect the general partner
(2) General Partners (Managers)
(1) There must be at least one “general partner”—meaning at least one partner who does NOT have limited liability and is central management
(i) General partners run the business and are fully liable for partnership debts.
(ii) If your general partner is a corporation, you can’t have all SHs being limited partners
(3) Termination:
(1) When a limited partner dies, it doesn’t dissolve the partnership
(i) but general partner’s death dissolves partnership
(4) Advantages: Limited Liability (only for limited partner); Separation of Ownership/Control (for limited partners); Expenses (May be structured freely)
(5) Disadvantages: Unlimited Liability for GP, Transferability, Taxed as a corp.
(1) Can be used in various contexts
(i) publicly held company
(ii) If you’re forming a business and because of the needs of the business you want to have such a separation between management and ownership
(iii) Limited Partnerships became a useful estate-planning device
(6) Nearly all state adopted Uniform Limited Partnership Act or Revised ULPA
E. LLP & LLC:
i) Becoming an LLP/LLC: Draft operating agreement, then qualify it as LLP or LLC with notice to secretary of state
ii) No limits on exercise of control like limited partnership
iii) Limited Liability Partnerships:
(1) Advantages: LL, Expenses, Taxes
(2) Disadvantages: Transferability
(3) GP can register as LLP upon majority vote of partners & upon filing of registration w/ Sec. of State.
(4) Note: Forming an LLP doesn’t wipe out your past liability when you were in a GP. Going forward, you aren’t JSL for events happening in the future
iv) Limited Liability Company:
(1) Basically a incorporated partnership
(2) Common form for start-up businesses
(3) Member-managed LLCs vs. Non-member-managed LLCs
(1) Member-managed: Members generally have management rights
(i) fiduciary duty may not be as extensive as co-partnership fiduciary duties.
(2) Non-member-managed: Unlike a partnership, membership does NOT give you management authority or rights
(4) Advantages: Limited Liability, Separation of ownership and control, expenses, taxes
(5) Disadvantages: Transferability
F. Corporation: Separate legal status that their owners
i) SHs provide capital; directors and officers manage the business.
ii) Participants not personally liable for corporation debts; only corporation is liable.
iii) All states have corp statues; most based on MBCA.
iv) Advantages: LL; Separation of management/control; transferability; perpetual life
v) Disadvantages: Double taxation, management, expenses
G. Others:
i) Joint Venture:
(1) Like GP with a defined, limited-term objective
(2) EX: 2 professors writing a textbook
ii) Business Trust (“Massachusetts Trust”)
(1) Transfer of investors’ property to a trustee who manages and controls the property for their benefit.
(1) Investors’ beneficial interest are freely transferable, and beneficiaries generally are not liable for trust debts
(2) Almost every state said no, b/c it was essentially a partnership
(i)
ty to principal: can’t compete directly with her principal on her own or as an agent of a rival company. Can misappropriate her principal’s profits, property, or business opp. Cannot breach principal’s confidence. Agent who fails to act solely for the benefit of principal is liable for the profits she earned in violation of her duties. No actual injury to principal need be shown.
(3) Third parties dealing with the agent may be bound to the principal as well (Even if identity of principal undisclosed)
(1) Exception: agent misrepresents that he is acting as such.
M. Vicarious Liability
i) Principal may be vicariously liable for the acts of the agent. Plaintiff must show agent was acting within the scope of his agency.
ii) Question of fact for the jury to determine if there was an agency relationship (Agency cases are highly factual).
(1) Butler v. McDonald’s Corp.: Franchisee (owner of McDonalds) Allowed spider crack to develop in glass door, shattered on plaintiffs hand. Owner of store is negligent; P wants to hold McDonalds Corp as a principal. (Holding: Not day-to-day control, but still much control over operations.; for jury to decide)
(1) Apparent authority: Customer (third party) may perceive that store as corporate-owned and not just franchised. Defendant’s national advertising campaign, highly visible logos throughout the restaurant and on food packaging, a requirement that the employees wear uniforms of designated color, design and other specifications, and volumes of required standards with respect to maintenance, appearance, and operation. (1:14)
(2) Could have avoided w/ sign indicating ownership
[Partnerships]
A. What is a Partnership?
i) Definition: An association of two or more persons to carry on as co-owners a business for profit
(1) Corp can be a “person”
ii) Recognized at CL and by statute
(1) Statute tells you what you have if no formal agreement
(2) No K or intention required—need only 2 or more persons associating for profit
iii) Generally, there is no limited liability shield in partnerships.
(1) However, Limited Partnership allows LL for passive investors
iv) A partnership is an agency relationship—every partner is an agent of the partnership so there is a fiduciary obligation and joint and several liability for the co-partners and the partnership itself
B. What makes a partnership?
i) All partnerships are created with hope that they will be profitable, but isn’t required for partnership
ii) Profit-Sharing: Prima facie evidence of a partnership
(1) Martin v. Payton: D gave loan to insolvent securities firm. P were creditors, claimed D and firm had actual partnership. Court ruled no partnership, lenders interest was only getting money back. Could have gone either way:
(a) Control lenders had over firm: right of entry, veto power, ability to oversee and replace management
(i) Maybe not as micromanaging as Cargill case, but still substantial control. Court said it was to protect investment
