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Business Associations/Corporations
University of Pennsylvania School of Law
Bratton, William Wilson

I. Agency
Agency is like K without consideration.
– Actual = Principal Assents
o Express
o Implied
§ Incidental
– Apparent = Principal gives a third party reason to believes that he, the principal, assents.
– Inherent =
o Principal does not assent; agent’s unauthorized conduct is foreseeable; third party is reasonable
– Also, Ratification of unauthorized conduct, ex post.
o Authority by acquiescence = series of ratifications.
– Termination at will
– Disclosure
o Disclosed Principal – agent informs 3d party that he is acting as an agent for principal
§ Agents enter into agreements on behalf of principal—principal liable, agent is not
Fiduciary Duty
– Restatement 2nd 387 – agent has a duty to act solely for the benefit of principal
– 388 – Agent must turn over the profit made in connection with the agency
– 389 – Agent must not act as an adverse party (even if the principal is not harmed)
– Principal & Agent can opt out by process—”unless otherwise agreed”
– Self-Interest Disclosure requirement
Agency Costs – agent will self deal; principal knows that, incurs “bonding costs”; argument for fiduciary duties? Minimize costs
II. Selection of Forms of Enterprise
UPA Sec. 6, 7
An association of co-owners for profit. Can be formed at will, no formality necessary, equal profit distribution regardless of contribution – that gets taken care of at dissolution.
– Partners if: profit sharing & right to share in control (you have control even if you stipulate a managing partner, see Martin v. Peyton). Loss Sharing does NOT imply partnership.
Management & Control
UPA Sec. 9, 11, 12, 13, 14, 18, 19, 20, 21
If there is no Partnership Agreement follow the default rules:
– UPA 18(e),(h) : “Equal rights in management”; majority rules; unanimity for act in contravention of Partnership Agreement
o Economic interests does not correspond to voting rights
– UPA 18(h) – Voting on
o Extraordinary – 100% (Amend Partnership Agreement; Admit New Partners)
o Ordinary – Majority Rule
– UPA 9 – partners are general agents, have apparent authority, unless
o 3d party has knowledge that partner is acting without authority
– UPA 9(3) – a non-exclusive list of what partners cannot do.
o See Northmon v. Milford Plaza (p.58) (where partners can interfere with another partner’s activities not in the ordinary course of business) .
– RUPA – if partner is within zone of apparent authority, a contract is upset only if 3rd party has actual knowledge the partner is acting without authority. See RNR Investments v. People’s First.
– Raising Capital: Debt—can borrow w/ partners liable; New Equity—new partners
– Periodic Proceeds: If A, B & C contribute 90%, 5% and 5%, respectively, each gets 1/3 of profits
o To avoid GL, agree on a salary for partners who work
– Losses-18(a) : K, L each contribute 10, M nothing, partnership loses 6—M owes 2 to each, K & L
– Tax: flow through

– UPA 18(g): consent of all partners is necessary—to sell your partnership interest with all rights intact is in effect to admit a new partner; a partnership interest is not “freely transferable”
– UPA 27: un-consented transferee gets transferor’s cash rights only
Sec. 13, 14, 15, 17, 36(1)
– UPA 15: Unlimited personal
o Joint & Several for Tort
o Joint for Contracts—have to server all partners
– RUPA: Everything is Joint & Several and you can sue in partnership name
o First levy against partnership assets before going after the partners
– UPA 18(b): indemnification – a right of a deep-pocket partner to get contributions from others for the money he put up to pay a partnership’s debt
– UPA 63: Foreclosure on the partnership interest = dissolution, if the partnership is at will
o Individual partner’s bankruptcy also is a dissolving event
Dissolution / Duration
Sec. 29, 30, 31, 32, 33, 38
– UPA33: default—at will. To block at will dissolution, put in a term or a “particular undertaking”
o At dissolution, the partnership is over, but it exists with regard to old obligations.
o Dissolution leads to winding up—perform all old contracts, but enter no new ones
– If some partners want to buy out the remaining business, they can if the other(s) agree(s) to sell
– RUPA: implied buy-out right, but don’t rely—draft a “Continuation Agreement”
– Dissolution in contravention of partnership agreement is a problem b/c paying out the capital is a major pain
– UPA 38(2)(b), (c): remaining Ps can pay the value of the interest or put up a bond and indemnify departing P.
– If PA is silent then only for good cause
– UPA31(1)(d): if PA provides for expulsion—must be bona fide, which may include without cause but on a vote by other partners
– UPA32: Wrongful Expulsion— If bad faith or predatory purpose then expelled partner can sue for judicial dissolution
Limited Partnerships
Key Provisions: RULPA 101(1),(7); 201; 302; 303
– Management and Control
– GP is managing partner & general agent
– LP’s have right to share in profits and vote on fundamental matters, e.g. acts of contravention, admission of new GP, agreement amendments, etc. See Stat. Supp. 281-82.
o LP’s are not agents
– Money (Periodic Proceeds): on the basis of value
– Money (Raising Capital): GP is liable for debt, LP’s not liable, new equity means new GP or LP, public trading with flow-through tax treatment for oil/gas/timber/RE Master Limited Partnership, (REIT’s.)
– Transferability
o GP – same as partnership
o LP – ULPA 702: economic interests assignabl—other rights are not (or unanimous consent is required if LPA so allows)
§ The LP agreement can allow the right of substitution to avoid this default rule.
– Liability
o GP is personally liable
o RULPA 303: LP is not personally liable if does not participate in control of management.
§ 303(b) defines what qualifies as participation (Consulting is not participation)
§ If a LP is participating in control the third party has transacted with the LP reasonably believing based on the LP’s conduct that LP is a GP
– Duration
o GP – same as P’ship.
o Limited Partner –The inves

ary for publicly traded corps.
Lawyers Duties Once Drafted:
– File the Charter with the Sec. of State. (A service will do this for you)
– Sign the document – consent in lieu of a meeting, which accepts the bylaws and appoints the board of directors
– Enter this document, the bylaws and the charter into the corporation’s minute book
– Stage the first meeting of the Board of Directors
o Draft an Agenda
o Draft Resolutions
o Issue Corporate stock (need a corp. kit – Google it and buy one)
o Establish a bank account – the secretary of the corp. will have to accept the one-sided resolutions from the bank
o Register the business with the state – provide address from service of process
o Appoint officers of the corporation

On a merger with a corporation in Delaware and a corporation from another state, the Internal Affairs Doctrine and the Constitution require the application of Delaware law.

Organizational Problems
Pre-Incorporation Transactions by Promoters
– “Promoter” makes a contract in the name of a corporation that has not yet been organized
– Two possible results
o (1) Contract between third party and promoter
o (2) Offer by third party to corporation once it is organized
§ Matter of parties’ intent
§ Resolve doubts to hold promoter liable
– Planning
o Bind promoter by name subject to novation if corporation later accepts contract
§ What’s a “novation”? Corporation will step into promoter’s shoes and the promoter will be off the hook.
§ Corporation cannot be bound to a K when the C does not exist.
o If the promoter resists being personally liable – the promoter promises to present contract to board of directors and use best efforts to secure adoption
Defective Incorporation
– Suppose you get the address wrong on the charter?
o (1) Are all the contracts void or voidable on the grounds that the C doesn’t exist?
o (2) Do the shareholders lose their limited liability?
– De jure – Glitch but substantial compliance
o State AG quo warranto proceeding fails despite the glitch
§ Wrong address
§ No seal
§ Directory/mandatory
§ Quo warranto = state proceeding to test the validity of corporate status
– De facto – No substantial compliance but principals maintain limited liability in the face of a third party lawsuit
o Cantor: unexplained hold up in filing charter; parties, including lessor, enter into lease thinking the corporation had been formed
o De facto not a defense in a quo warranto proceeding