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Business Associations/Corporations
University of Pennsylvania School of Law
Wachter, Michael L.

 Wachter Corporations Fall 2009
A. Agency and Types of Authority (unless noted §§ are in Restatement (Third)). 2
A. Partnerships Generally. 3
B. Ongoing Operations of a Partnership. 4
C. Dissolution of Partnerships. 7
D. Limited Partnerships p. 466. 9
A. Characteristics of the Corporation. 10
B. Actually Organizing a Corporation (Delaware General Corporate Law (DGCL)). 11
C. Objective and Conduct of the Corporation. 12
A. Allocation of Power Between Shareholders and Directors. 13
B. Delaware Case Law.. 14
C. Limited Liability and Piercing the Corporate Veil16
D. Note on Monitoring Boards. 17
A. Informational Rights Under State Law (DGCL §§219, 220). 18
B. Informational Rights Under Federal Law.. 19
C. Proxy Rules (§14 p. 1861, Rule 14A p. 1989). 21
D. Three Step Analytical Approach to Filing Requirements Under Proxy Rules. 22
E. Private Actions Under Proxy Rules: Rule 14a-9 (p. 2012). 22
F. Shareholder Proposals. 24
A. The Basic Standard of Care. 25
B. Business Judgment Rule. 26
C. Monitoring and the Duty to Act Lawfully. 29
A. The Importance of the Duty of Loyalty. 30
B. Self-Interested Transactions. 30
C. Statutory Approaches to Self-Interested Transactions. 31
D. Shifting the Burden of Proof in an Interested Transaction (Chart on Next Page). 33
E. Compensation and the Doctrine of Waste. 35
F. Corporate Opportunity Doctrine. 36
G. Duties of Controlling Shareholders. 39
H. Sale of Control41
A. Insider Trading Generally (see esp. SEA §10 p. 1841, Rule 10b-5 p. 1922). 42
B. Private Actions Under Rule 10b-5. 44
C. Reliance and Causation Requirements in ’34 Act. 45
D. Insider Trading and Rule 10b-5. 47
E. Liability for Short-swing Trading Under §16(b) p. 1874 – BRIGHT LINE RULE!. 50
A. General Issues (Federal/State and Direct/Derivative). 52
B. Contemporaneous Ownership: Who Has Standing to Bring Shareholder Suit. 55
C. Demand on the Board and Termination of Derivative Actions. 56
A. Corporate Combinations Generally. 58
B. Assets Sales (Acquisitions). 59
C. Statutory Mergers: DGCL §251 (p. 632). 59
D. Availability of the Appraisal Remedy DGCL §262 (p. 641). 60
E. Short Form Mergers (DGCL §253 p. 638). 60
F. Triangular Mergers. 61
G. Tender Offers. 62
H. Revlon Duties. 65
I. Paramount Cases. 66
J. Why Do We Trust Corporations. 67
Delaware Law Review:
Plaintiff must plead particularized facts that create a reasonable doubt that:
                Directors are disinterested & independent & act in good faith
                Valid exercise of BJ (informed, rationally believed), the aranson test
                What efforts were made, or if no efforts why not efforts
Demand excused when reasonable doubt raise that majority of directors would be disinterested when considering the demand
                Ultimate facts which if true raise reasonable doubt
Direct Suits:
                Not notice pleading
                Must plead facts
                Use special care (tho we don’t really know what that is)
A. Agency and Types of Authority (unless noted §§ are in Restatement (Third))              
1.      “Agency is the fiduciary relationship that arises when one person (a “principal”) manifests assent to another person (an “agent”) that the agent shall act on the principal’s behalf and subject to the principal’s control, and the agent manifests assent or otherwise consents so to act.” (Rest. 3rd of Agency §1.01).
2.      Liability of Principal to Third Party Depends on Type of Authority Agent Had
a.       Actual Authority: “An agent acts with actual authority when, at the time of taking action that has legal consequences for the principal, the agent reasonably believes, in accordance with the principal’s manifestations to the agent, that the principal wishes the agent so to act.” (Rest. 3rd of Agency §2.01p.45)
i.        Comment “e”: whether actual authority is determined by RP standard, taking in totality of circumstances
A        Lack of authority if agent either 1) did not believe, or 2) could not have believed (PR could not believe)
ii.      §2.02 (p.48) explains that this means:         [Express vs. Implied authority (problems here)] A        Agent has actual authority to take action designated/implied in principal’s manifestations to agent as he reasonably understands them
1.       Thus the issue is agent’s belief (did he think he had authority); was his belief justified?
2.       Wachter: Comment b recognizes an agent may properly act in a way knowingly at variance with principal’s original instructions if agent:
a.      Believes circumstances have changed since original instructions
b.      If principal reconsidered the matter different instructions would have to be given
c.       It’s impractical to communicate with principal for further clarification b/f action needs to be taken
b.      Apparent Authority: “is the power held by an agent or other actor to affect a principal’s legal relations with third parties when a third party reasonably believes the actor has authority to act on behalf of the principal AND that belief is traceable to the principal’s manifestations.” (Rest. 3rd of Agency §2.03 p.59)
i.         RP would think there’s authority based on principal’s manifestations: the issue is third party’s belief
c.       Agency by Estoppel: “A person who has not made a manifestation that an actor has authority as an agent, and who is not otherwise liable as a party to a transaction purportedly done by the actor on that person’s account, is subject to liability to a third party who justifiably is induced to make a detrimental change in position because the transaction is believed to be on the person’s account if:
i.         The person intentionally or carelessly caused such belief, or
ii.       Having notice of such belief and that it might induce others to change their positions, the person did not take reasonable steps to notify them of facts (Rest. 3rd of Agency §2.05p.60)
d.      Inherent Authority: “term used in the restatement of this subject to indicate the power of an agent which is derived not from authority, apparent authority, or estoppel, but solely from the agency relation and exists for the protection of persons harmed by or dealing with a servant or other agent.” (Rest. (Second) of Agency §8A)
i.         3rd Rest. discards per §2.01 Cmt. that it’s covered by apparent authority; essentially like respondeat superior
ii.       Justified b/c it’s foreseeable to principal that agent will occasionally, even when acting in good faith and for his benefit, deviate from his instructions; also might apply after successive acts w/ auth. but last act no auth.
3.      Ratificationis the affirmance of prior act done by another (R (3rd) §4.01 p.71); effect is as if by agent w/ actual auth.
a.       Ratify by: 1) Manifesting assent that the act shall affect person’s legal relations, OR 2) conduct that justifies reasonable assumption that person so consents (implied ratification)
b.      Ratification doesn’t occur unless: act is ratifiable as per §4.03, ratifier has capacity to do so per §4.04, timely §4.05, encompasses act in its entirety §4.07
c.       Where principal retains benefits of relations w/agent and knows material facts, is held to have ratified
4.      Where Principal is Bound: Where agent has actual, apparent, or inherent authority, principal is bound to third person and agent’s authority depends on whether principal was disclosed, undisclosed, or partially disclosed (or unidentified)
a.       Disclosed principal: If principal was bound by agent’s act b/c agent had actual, apparent, or inherent authority, or because principal ratified act, agent generally isn’t bound to third person (Rest. 3rd of Agency §6.01 p. 77)
i.        Rationale is third party expected principal, not agent, to be bound and he gets what he expected
b.      Undisclosed principal: If principal was undisclosed (agent purported to act on his own behalf during transaction), general rule is he is bound even though the principal was bound himself (Rest. 3rd of Agency §6.02 p. 79)
i.        Also applies to partially disclosed/unidentified principals (§6.03 p. 80) (3rd knows princ. exists but not who)
A        Completely-controlled Corporation (agent) went bankrupt. Because Parent Corporation was undisclosed principal and bankrupt Corporation had inherent agency (it used trucking license in name of Parent Corporation) and was at all times an agent, and b/c of ratification (Parent had notice of debt and did not take steps) principal was liable. Principals are liable for agents’ contracts, even those which are unauthorized UNLESS third parties contracting with them knew they were unauthorized (Morris Oil Co. v. Rainbow Oilfield Trucking, Inc. p.2 of book, NM 1987)
c.       Agent is liable to 3rd party where s/he lacked any authority and principle isn’t bound (§6.10 p.87)
d.      Duty of Agent to act w/in Scope: Agent is liableto principal for resulting losses where s/he lacked actual authority for actions (outside scope of authority) and principal is bound and sustains loss(§8.09p.107)
e.      sBut Principle has duty to indemnify Agent for payments he made that were authorized/made necessary in executing principal’s affairs that were w/in the scope of actual authority (§8.14 p. 109)
5.      Agent’s Duty of Loyalty
a.       “An agent has a fiduciary duty to act loyally for the principal’s benefit in all matters connected with the agency relationship.”(Rest. (3rd) of Agency §8.01 p. 97)
i.         “An agent has a duty not to acquire a material benefit from a third party in connection with transactions conducted or other actions taken on behalf of the principal or otherwise through the agent’s use of the agent’s position.”(§8.02 p. 100)
A        Agent who took bribe from third party (to invest in juke boxes w/o fully investigating) and therefore made what he knew was a poor business deal from his principal with that party had to compensate him: agent who violates his duty of loyalty is liable to principal for secret profit earned as well as consequential damages (Tarnowski v. Resop p.19 MN 1952)
B        Agents can’t double-deal, also can’t act for adverse party (§8.03), compete (§8.04), or use principal’s property/confidential information for his own purposes or those of a third party (§8.05)
1.       Principal can allow agent to engage in such conduct per §8.06
ii.      Essence of duty of loyalty is it lets you participate in other people’s activities: if you trust fiduciaries than you can invest money with them (for more look to bottom of p.3 of

indemnify partners in respect of payments made and personal liabilities reasonably incurred in ordinary and proper conduct of business or for preservation of its business or property
iii.    §18(c): partners who makes extra payment or advance to partnership beyond agreed partnership capital is to be paid interest from date of payment/advanced
iv.     §18(d): this interest is only to be paid from day when repayment should be made
v.       §18(f): “No partner is entitled to remuneration for acting in the partnership business, except that a surviving partner is entitled to reasonable compensation for his service in winding up partnership affairs.”
Indemnification, Capital Accounts and Draw
e.      Capital is start-up money that, unlike loans for term, remains for duration of partnership earning no direct interest or dividends(loans have priority over paid-in capital if partnership fails)
f.        Everyone gets to look at the books at all times (UPA §119, RUPA §403) because there’s potentially unlimited liability they have a right to know what’s going on
g.       §18(a) and §401(a).(b) (p. 164) indicate partnership are to be compensated equally and §18(f) indicates there’s merely right to draw (no salaries) that all partners must agree on per §18(h)
(1)     UPA
(a)    §18. Rules Determining Rights and Duties of Partners (119): The rights and duties of the partners in relation to the partnership shall be determined, subject to any agreement between them, by the following rules:
i.         (a) Each partner shall be repaid his contributions…share equally in the profits and surplus remaining after all liability, and must contribute towards the losses…according to his share in the profits.
ii.       (b) The partnership must indemnify every partner in respect of payments made and personal liabilities reasonably incurred by him in the ordinary and proper conduct…
iii.      (c) Partner who helps finance the partnership beyond his share of capital contribution shall be paid interest from date of payment.
iv.     (d) A partner shall receive interest on the capital contribution only from the date when repayment is due.
v.       (f) NO partner is entitled to remuneration…except as for his services in winding up the partnership business.
a.       Indicates that there is no guarantee of remuneration from a partnership Þ there is merely a right of a draw (a cash distribution to partners) but all partners, as per §18(h), must agree upon it
(i)      “draws” are subtracted from the total the amount of capital of the firm +/- the amount of profit/loss the firm has made
(2)     RUPA
(a)    §401 (164). Partner’s Rights and Duties
i.         (a) Each partner is deemed to have an account…
ii.       (b) Each partner is entitled to an equal share of profits and is chargeable with a share of the partnership losses in proportion to the partner’s share of the profits.
a.       If you don’t want to share equally, you can change it by putting it into the agreement.
iii.      (c) (d) A partnership shall reimburse and indemnify a partner…if some payment becomes an obligation to the partnership, then it is a loan to the partnership to accrue interests…(e)
iv.     (h) A partner is not entitled to remuneration for services…except for services rendered in winding up the partnership.
(3)     Indemnification resolves the apparent conflict between a partner’s joint or joint and several liability.  (Partner is paid by PNRSHP)
(a)    A partner who incurs a personal liability to a 3P on behalf of the partnership becomes a creditor of the partnership. If a going partnership indemnifies the partner, all partners incur a detriment in proportion to their profit/loss shares. If the partnership is unable to unable to pay, all partners must make up the deficit.
(4)     If partners decide to sell, the partnership is worth more in reality than the money it has in the bank, greatly due to its “goodwill,” i.e. the positive relationship it has with its customers and the public.
(a)    The paid-in-capital (PIC) which the partners put in is not relevant to a distribution of profits until the partnership is dissolved; once dissolution occurs, the PIC will have to be repaid proportionally
i.         Interest is not received on the PIC
ii.       Once business is sold for profit, then all accounts will be increased by the amount.