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Business Associations/Corporations
University of San Diego School of Law
Partnoy, Frank

Frank Partnoy, Rm LRC 132, M/W 2:30-4:20 p.m.
Rm 308-C, Warren Hall; 619-260-2352;; Secretary: Ina Levy (Rm 319, Warren, 260-4208)

In addition, I may assign other materials and cases available online. The website for the course is
Grading: The final exam will be an open-book essay/closed-book multiple-choice test and will count for 100% of your final grade, unless I elect the “Quiz Option,” in which case the final examination will count for 90% of your final grade.
Quiz Option: At my option, I may give 3 multiple-choice “pop” quizzes during the semester. If I elect this option, the average of your highest two quiz grades will count for 10% of your final grade.
Participation: I reserve the right to award up to 3 “push points” (added to your final grade) at my discretion.
Office Hours: Mon/Wed: 1:00pm-2:30pm; 4:20pm-5:20pm. If you wish to meet with me, but cannot attend my office hours, I am happy to arrange additional office hours.

– USD Ads during Olympics
– He loves stock options
– Use the term Moral Hazard a lot
– Residual Claim – Equity
– Fixed Claim – Debt
– Nexus of contracts
– Equity v. Debt
– Statute interpretation

8.23.04 pp. 1-12; Supp pp. 1-2. Browse If a friend told you she wanted to incorporate a business,
what would you do?
A. Overview/Themes
1. What is a corporation?
a. A corporation is a box
b. It is a separate legal entity
i. You can’t personally be sued, only the corporation
2. Agency costs and ownership vs. control
a. Lots of tension between the two
i. Owners are the shareholders vs. CEO’s and Presidents etc
ii. Agency costs come from a separation of the agency
3. Default rules
a. Like contract law
b. What would the parties have agreed to?
c. Important factors
i. Information Asymmetry
a) There is an information gap. Should we make default rules to level the playing field or should we just let the parties have at it?
ii. Transaction costs
a) Default rules help avoid transaction costs
d. Impose duties when there are opportunities for strategic behavior
A little history and perspective
4. English Practice
a. No default rules
5. Early U.S. Practice
a. Through 1900, the vast majority of companies in the US were Railroads
6. Railroads
7. The race to Delaware
a. Race is among all the states
i. Race to the top: More shareholder protections over managers???
ii. Race to the bottom: More managerial protections over shareholders.
b. Delaware had the best and most efficient default rules – Maybe
i. They have the best rules as far as the managers are concerned
8. Federal v. State
a. The trend most recently is to Federalize corporate law
b. Most default rules are state
9. Technocratic Period (WWII – 1980’s)
10. Proprietary Period (1980’s – Now)
a. The big difference between these two periods is that people are now going to jail for financial fraud
b. Takeovers are now easier
c. Stock options exist now where they didn’t before
d. In Techno, the managers and CEO’s were trusted
Advantages of Incorporating
11. Reduces Personal Liability
a. Incorporating helps separa

f a sole proprietor or partner dies, the business may automatically end or it may become involved in various legal entanglements. Corporations can have unlimited life, extending beyond the illness or death of the owners.
16. Easier Transfer of Ownership
a. Ownership of a corporation may be transferred, without substantially disrupting operations or the need for complex legal documentation, through the sale of stock.
17. Anonymity
a. Corporations can offer anonymity to its owners. For example, if you want to open an independent small business of any kind and do not want your involvement to be public knowledge, your best choice may be to incorporate. If you open as a sole proprietorship, it is hard to hide the fact that you are the owner. And as a partnership, you will most likely be required to register your name and the names of your partners with the state and/or county officials in which you are doing business.
18. Centralized Management
With a corporation’s centralized management; all decisions are made by your board of directors. Your shareholders cannot unilaterally bind your company by their acts simply because of their investment. With partnerships, each individual general partner may make binding agreements on behalf of the business that may result in serious financial difficulty to you or the partnership as a whole.