BAR Exam - Business Organization Outline Cheat Sheet
BAR Exam - Business Organization Outline Cheat Sheet
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Date Created: 03/06/14
Business Organizations 1 Agency a Who is an agent i A principalagent relationship exists where 1 one person Principal consents that another shall act on his behalf and subject to his control and 2 the Agent consents so to act ii Three principle forms of agency 1 Principalagent 2 Masterservant 3 Employerindependent contractor iii Principle has duties to compensate reimburse indemnify and cooperate iv Agent has duties of performance accountability loyalty and notification 1 Duty of loyalty no selfdealing usurping competing misusing of confidential information or dual agency v Agency relationship ends with lapse of time mutual agreement purpose achieved or occurrence of speci ed event vi Three types of agency relationships 1 Disclosed agency occurs when the third party knows that the agent is acting for the principal and the identity of that principle 2 Undisclosed agency occurs when the third party does not know of the agency or of the principal s identity a Eg you may not know your maid works for a maid service b R2d of Agency 194 an undisclosed principal is liable for acts of an agent done on his account if usual or necessary in such transactions although forbidden by the principal c See 161 below 3 Partiallydisclosed agency or unidentified agency occurs when the agent reveals his agency status but does not disclose the identity of the principal a Eg real estate agent purchasing a home on behalf of a celeb b R2d of Agency 161 an agent for a disclosed or partially disclosed principal subjects his principal to liability for acts which accompany or are incidental to transactions which he is authorized to conduct if the third party reasonably believes the agent is authorized to do them c R2d of Agency 42 an agent purporting to make a contract for a partially disclosed principal is a party to the contract i To avoid liability he must disclose the identity of the principal see Atlantic Salmon vii Gordon v Doty P sues D car owner after car accident where D was not the driver 1 Threepart test to determine if agency exists a Manifestation of consent by a person the principal that another the agent will act for him i Yes D loaned car to coach b The acting is subject to control by the principal i Yes loan came with requirement that only coach can be the driver c The agent acknowledges the agreement i Yes the coach took the car viii A Gay Jenson Farms v Cargill D continued to loan more and more money to Warren Grain with increasing restrictions each time P sues for default on grain sale 1 A creditor who assumes control of his debtor s business may became liable as principal for acts of the debtor in connection with the business Key More control more likely to nd agency relationship Agency relationship existed in this case a D didn t just lend but lent subject to control D made recommendations had right of first refusal had right of entry onto premises b D was not merely a nancier but a paternalistic entity who made key economic decisions R2d of Agency 14 0 one who merely exercises veto power over the business acts of another does not automatically become a principal however he does so if he takes over the management of the other s business and directs what contracts may or may not be made a When is a principal liable for an agent i In contract 1 2 3 ii In tort 1 2 3 Was the perpetrator an agent Did the agent have authority a Actual i Express ii Implied b Apparent c Inherent d Estoppel e Rati cation If yes then the principle is liable Was the perpetrator an agent How much control did the principal have a Independent contractor no liability b Employee Was employee acting within the scope of employment a If yes then liability b Liability of the Principal to Third Parties in Contract i R2d 144 a principle is subject to liability upon contracts made by an agent acting within his authority 1 Multiple types of authority ii What authority does the agent have 1 2 Express arises when a principal and an agent expressly agree to enter into an agency agreement with eachother Implied actual authority which the principal intended the agent to possess implied from the relationship of the parties and includes such powers as are practically necessary to carry out the duties actually delegated depends on what agent reasonably expects a Consider the nature of the task implied authority may be necessary to implement the express authority and prior similar practices speci c conduct undertaken in the past Mill St Church V Hogan D church hires P to paint the church P hires brother to help brother seeks compensation for injury a Church liable P had 1 implied and 2 apparent authority i It was allowed in the past he needed an assistant P believed he had authority ii Brother relied on his representation Apparent authority arises when the principal creates the appearance of an agency that in actuality does not exist 5 a Not actual authority but the authority that the agent is held out by the principle as possessing b Depends on what the third party reasonably believes the agent to have based on what the principal leads the third party to believe holding out c R2d of Agency 8 exists when a principal acts in such a manner as would lead a reasonably prudent person to suppose that the agent had that authority he purports to exercise 370 Leasing i Defeat apparent authority by showing that the third party s belief was unreasonable d Agent then has the authority to do those things which are usual and proper to the conduct of the business e Can t have apparent authority if there is an undisclosed principal f Lind V Schenley Industries supervisor Kaufman promises P a raise and commission D company doesn t pay it i Kaufman had apparent authority as company spokesman 1 There was reasonable reliance by P 2 No difference between inherentapparent authority on exam g 370 Leasing v Ampex An agent has the apparent authority to do those things which are usual and proper to the conduct of the business which he is employed to conduct i Salesman had apparent authority to accept the offer 1 He was in charge of all communications with P 2 P reasonably relied he was never told that only managers or supervisors could sign contracts ii Ampex never really did anything here Inherent authority depends on what the third party reasonably believes no difference between apparent and inherent on exam a Even if the third party doesn t know the principal exists i Inherent is an expanded version of apparent authority no holding out is necessary b R2d of Agency 161 an agent for a disclosed or partially disclosed principal subjects his principal to liability for acts which accompany or are incidental to transactions which he is authorized to conduct if the third party reasonably believes the agent is authorized to do them c Watteau v Fenwick Humble manager of D s beerhouse fails to pay bills owed to P bills were for items he was not allowed to purchase i D liable for all the acts of the agent that are usually confided to an agent of that character 1 Goods supplied were ordinarily used in the business and thus within the reasonable scope of agent s authority ii D enabled Humble to hold himself out as a proprietor of the business 1 The mere act of making someone an agent is sufficient to satisfy the manifestation of authority requirement d Kidd v Thomas A Edison D gives agent power to hire singer for single event only even though industry custom was to hire for an entire tour i Reasonable for third party to believe that agent has the authority that all other agents in the industry have ii How can D protect itself 1 Standard form contract which gives agent authority to negotiate but requires principal approval for all deals e Nogales v Atlantic Rich eld agent of D ARCO enters into agreement with P which P claims ARCO breached i Inherent authority existed even if D never held out the agent as its own Rati cation authority arises when 1 a person misrepresents himself as another s agent when in fact he is not and 2 the purported principal ratifies the unauthorized act a Affirmation by a person of a prior act which did not bind him but which was done on his account R2d 82 i Ratification requires acceptance of the act s results with intent to ratify and with full knowledge of all the material circumstances b My agent didn t have the right to enter this contract but I m glad he did so I ll affirm and agree to be bound by it i Silence can be sufficient ratification can be express or implied c Must show that person knew what he was ratifying d Botticello v Stefanovicz coowner Walter tries to sell house without Mary s consent but Mary nevertheless accepts the lease money from the buyer i Mary could have ratified the actions of Walter a non agent but she didn t 1 She didn t know about the sale so she didn t know what she was ratifying 2 Also Walter never acted on her behalf as an agent would Authority by estoppel a Principal is estopped from denying agency i Reliance some negligence in letting the reliance come about b Hoddeson v Koos girl gives money to guy in suit at furniture store but he wasn t an employee i No inherent authority there was no agent in the first place ii But stores have a duty of care to protect customers from imposters e g make employees wear uniforms iii Agent s liability on the contract 1 If an agent wishes to avoid liability as a party to a contract it is the agent s duty to reveal the existence and identity of the principal If the principal is non or partially disclosed the agent is liable as a party to the contract It is the agent s responsibility to reveal the principal not the third party s responsibility to discover the existence of the principal Atlantic Salmon v Curran The agent is not liable if the principal is exposed a With partial or no disclosure the agent is liable b R2d of Agency 42 a person purporting to make a contract for a partially disclosed principal is a party to the contract i To avoid liability he must disclose the identity of the principal 3 If the agent exceeds the scope of his authority the principal is not liable unless the principal rati es the contract 4 Atlantic Salmon V Curran D agent never disclosed existence of a principal P thought it was dealing with Boston Seafood Exchange which did not exist a D liable P has no affirmative duty to seek out the identity of D s principal i Rather it is D s obligation to reveal the principal ii P s actual knowledge is the test not reasonable belief Liability of Principal to Third Parties in Tort the masteremployer is liable for the torts of his servantemployee performed within the scope of his or her authority i Two step analysis 1 Is there an agency relationship 2 Is the agent an employee or independent contractor ii Employee servant vs Independent Contractor 1 Difference is a matter of control ask what is the extent of control 2 Employee the employer has the right to control the physical conduct of the employee a Employee agrees to i Work on master s behalf and ii Be subject to the master s control ie manner in which the job is performed b Employee is not really an agent unless he has the authority to enter into contracts on the employer s behalf c Master is liable for torts of employees performed within scope of employment R2d of Agency 219 3 Independent contractor principals employ business who are not employees to perform certain tasks at their behalf a A principal is generally not liable for the tortious conduct of independent contractors b Principal has no control over the physical conduct of the IC c Two types i Agent not subject to principal s control over how results are accomplished 1 But may be subject to principal s specifications ii Nonagent operates totally independently 4 Humble Oil v Martin car rolls off ramp and injures P D oil company claims service station was operated by independent contractor a D liable nature of the contract between station and D indicates master servant relationship i Strict control and supervision over hours of operation ii Station manager had little to no business discretion b The perception of the station workers is irrelevant 5 Hoover v Sun Oil P injured in re at service station a D not liable relationship was that of independent contractor i D did not retain the right to control daytoday details of the service center s operation 1 Did not control hours of operation ii General control or in uence eg employees wore D uniforms were trained at D school and were visited weekly by D representative is insufficient 6 Murphy V Holiday Inns P slips in motel owned by D but operated by separate manager a D not liable relationship was dictated by franchise contract i D had no control over daytoday work of franchisee ii Regulatory provisions over architecture and types of furnishingsequipment is insufficient to establish agency relationship b A franchise contract does not insulate the parties from an agency relationship c When an agreement considered as a whole establishes an agency relationship the parties cannot effectively disclaim it by formal consent d What franchise contract says doesn t matter what matters is the degree of control 4 Arguello V Conoco minority Ps claim D discriminated at them at gas stations a Questions i Did an agency relationship exist ii Were the employees independent contractors iii Were the employees within the scope b No agency at Conocoowned stores so no liability c But agency relationship exists at branded stores i And employees are employees not independent contractors d And SJ should not have been granted to D because store employees were acting within the scope of employment iii Tort liability and apparent agency 1 Even if there is not enough control to establish the agency relationship the principal may still be liable for apparent agency a Apparent authority applies only to contracts apparent agency is used for torts i Both based on estoppel principles 2 R2d of Agency 267 one who represents that another is his agent and causes a third party to rely on the care or skill of such apparent agent is subject to liability for harm caused by the lack of care or skill a Can be applied to the franchisorfranchisee situation Miller i Although generally the franchisorfranchisee relationship is that of principalindependent contractor 3 Miller v McDonald s P bites into sapphire at D restaurant a D liable License Agreement required restaurant to operate consistent with the McDonald s System i Set hours of operation and described operations in considerable detail b But there is also apparent agency i P assumed D owned operated and controlled the restaurant ii Reasonably assumed D was the principal iii Relied on D s quality iv D held out restaurant as its own common image advertising signs menus iv Scope of employment 1 The master is liable for an employee s act if it was committed during the scope of employment 2 Scope of employment test applies only when it is first determined that the tortfeasor is an employee and not an independent contractor iii R2d of Agency 228 a servant s conduct is not within the scope if it is too little actuated by a purpose to serve the master Factors to consider from Arguello V Conoco Time place and purpose of the act Similarity to acts which servant is supposed to perform Whether the act is commonly performed by servants Extent of departure from normal methods Was the conduct of the same general nature or incident to that which the servant was employed to perform b Was the conduct substantially removed from the authorized time and space limits of the employment Ira S Bushey v US drunk semen opens valves and oods drydock e Employer responsible if employee s act returning to ship was part of the activity of the enterprise Manning v Grimsley P spectator sues team after hit by ball thrown by pitcher a Battery was response to heckling which was presently interfering with the employee s ability to perform his duties successfully required showing for employee assault in MA a Intentional torts involving the use of force i The principal is not liable for the intentional torts of employees that are committed outside the principal s scope of business 1 Motivation test a If the agent s motivation is to promote the principal s business the principal is liable 2 Workrelated test some jurisdictions a If the tort is committed within a work related time or place the principal is liable b Restatement 2282 provides that a servant s use of force against another is within the scope of employment if the use of force is not unexpectable by the master Clover v Snowboard Ski Resort cook injures skier but his act of skiing back to work was not a total abandonment of his employment broad interpretation of scope of employment Majestic Realty independent contractor case a But exception if activity contracted for is inherently dangerous b Or if principal hires an incompetent IC 93999 Liability for Torts of Independent Contractors Majestic Realty v Toti wrecking ball wrecks too much a Perpetrator was an independent contractor but D can be liable anyway for inherently dangerous activities b Public policy rationale plus incentive to hire good independent contractors c A principal is not liable for the negligence of the contractor during the performance of the contract unless the principal retains control over the means and manner of the work being contracted for if the principal hires an incompetent contractor or if the work contracted for constitutes a nuisance b Fiduciary Obligations of Agents i Performance ii Notification iii Accountability iv Loyalty duciary duty not to act adversely to the interests of the principal 1 Misuse of trade secrets 2 Competing with principal 3 Usurping opportunity offered to P 4 Self dealing pro ting from work as agent V Reading V Regan P soldier works for smuggler while wearing British army uniform sues for his con scated money back 1 Judgment for D 2 Position of agent was used in order to serve another principal smuggler a Duty of loyalty cannot serve two principals simultaneously 3 Position as soldier was the sole cause of his getting money vi General Automotive v Singer D employee engages in business activities in competition with P employer 1 Judgment for P D s acts were inconsistent with the duciary obligations of a faithful agent to act solely for the bene t of the master 2 D had duty to disclose all facts to P a Pro t should have belonged to P 3 If an agent violates his duty to his principal and engages in business practices for which he earns a secret pro t he must account to his principal the amount illegally received II Partnerships a An association of two or more persons carrying on a business as coowners for pro t UPA S 7 i Sharing in pro ts is prima facie evidence of a partnership 1 Partnership label can be imposed on someone 2 Other relevant elements a Intent of the parties obligation to share in losses shared ownership and control of property language in the agreement conduct towards third parties b Formation may be written or oral no formalities required i All partners have equal rights in the management and conduct of the business Sec 18e of the UPA 1 Any differences arising as to ordinary matters connected with the partnership business may be decided by a simple majority of the partners Sec 18h ii Fenwick not a partnership because they don t share in the pro ts iii Southex parties calls themselves partners in their agreement but court says no 1 No shared pro ts no equal management rights iv Martin v Peyton lending of money was not enough to establish partnership 1 No sharing of pro ts or equal control c Full personal liability for the partnership s debts 1 Unless partner had no authority or the buyer third party knew the partner had no authority 2 All partners share equally in debts unless agreement states otherwise a A partner s interest in the partnership is his share of the pro ts partners don t actually own anything ii Tort liability 1 Partnership liable for the tort of a partner employee or agent committed while the person is acting within the normal course of the partnership or with the authority of the copartners a Joint and several liability P can sue partners individually iii Contract liability 1 Partners are jointly liable for contracts and debts of the partnership a Third party must name all partners in the suit 2 Every partner is an agent of the partnership and all partners are jointly and severally liable for the acts and obligations of the partnership unless the partner has no authority to act in that particular matter and the third party knows of the restriction National Biscuit Partnership by estoppel i Young v Jones a person who represents himself to anyone as a partner in an existing partnership is personally liable to the third party 1 Didn t happen in this case 2 Must have reliance by third party Fiduciary duties between partners duty of loyalty and duty of care under Revised Uniform Partnership Act S 404a i The essence of a breach of duciary duty between partners is that one partner has advantaged himself at the expense of the partnership Day v Sidley amp Austin ii Duty of loyalty cannot be waived 1 The duty of loyalty a partner owes to the partnership and the partners is limited to 1 accounting to and holding as trustee for the partnership any property pro t or bene t derived from partnership business 2 refraining from dealing with the partnership as or on behalf of a party with interests adverse to the partnership and 3 refraining from competing with the partnership Revised UPA 404b iii Duty of care a breach of this duty is negligence 1 A partner s duty of care to the partnership and the other partners in the conducting and winding up of the partnership business is limited to refraining from engaging in grossly negligent or reckless conduct intentional misconduct or a knowing violation of the law Revised UPA 404C iv Duty to inform V Duty of obedience to the partnership agreement vi Meinhard v Salmon partners are duciaries and they do have duties to eachother vii Day v Sidley amp Austin a partnership agreement can basically go past the default rules except that it cannot get rid of all of the duciary duties viii Legal standard punctilio of honor ix Partner must include other partner in future deals that arise out of partnership x Postdissolution duties 1 Bane a partner is a duciary of his partners but not his former partners xi Grabbing and leaving 1 Meehan A duciary may plan to compete with the partnership so long as in the planning he does not otherwise violate his duties to the partnership xii Lawlis partnership duties can be altered in the partnership agreement Deadlock i National Biscuit v Stroud one partner continues to buy bread even though other partner forbade him from doing so 1 Copartner could not restrict the other so long as the conduct involved an ordinary matter connected with the partnership business 2 Bread purchases bound the partnership 3 What either partner does with a third party is binding on the partnership ii Summers V Dooley similar facts to National Biscuit different outcome one partner hires another employee against the wishes of the other 1 Not binding because a majority of the partners did not agree to the contract 2 Plus the partner s hiring of a third party was outside of the scope of the partnership agreement unlike in Biscuit where buying bread was a common aspect of the partnership iii Moren V J ax baby mangled in pizza machine 1 When is a partnership responsible for the torts of its partners a Two situations i Partner was acting in ordinary course of the partnership or ii Partner was acting with the authority of the partnership g Dissolution i When a partnership contract does not specify a term or particular undertaking the partnership may be dissolved at the will of any partner ii UPA S 8015 a partnership is dissolved on application by a partner by a judicial decree that 1 The economic purpose of the partnership is likely to be reasonably frustrated ie operating at a loss 2 Another partner has engaged in conduct relating to the partnership business that makes it not reasonably practicable to carry on the business in partnership with that partner or 3 It is not otherwise reasonably practicable to carry on the partnership business in conformity with the partnership agreement iii Other factors will terminate the partnership as a matter of law withdrawalexpulsionbankruptcydeath of a partner iv Partner can be held liable for the wrongful dissolution of the partnership eg left before expiration of term V Remaining partners have the right to continue the partnership after dissolution 1 Either continuation agreement or old partnership dissolved and new one formed vi Owen v Cohen dissolution is appropriate because the other guy forced the dissolution by inhibiting the purpose of the partnership vii Collins v Lewis mere bad blood between partners is not enough to justify dissolution 1 Opposite outcome similar facts to Owen III Limited partnerships a Partnership formed by two or more persons and are composed of general partners invest capital manage the business are personally liable and limited partners simply invest b Used for investing in projects such as real estate and movie productions c Liability limited partners are not individually liable for the obligations or conduct of the partnership beyond the amount of their capital contribution i Exception limited partners are individually liable in three situations 1 Defective formation participation in management personal guarantee d Holzman v De Escamilla a limited partner shall not become liable as a general partner unless in addition to the exercise of his rights and powers he takes part in the control of the business i Control liability here both limited partners had absolute power to withdraw partnership funds from the bank account without the knowledge or consent of the general partner 10 IV e Two types of partners i General invest capital manage the business personally liable for debts 1 Corporation may be the sole general partner shareholders are then the limited partners ii Limited invest but do not participate in management not personally liable beyond their capital contribution f Revised Uniform Limited Partnership Act RULPA uniform set of provisions for formation operation and dissolution of limited partnerships g Formation i Formal procedure requires public disclosure ii Must comply with RULPA certi cate of limited partnership must be signed by at least two people Secs 201 and 206 iii Certi cate must be kept current with amendments change in capital contributions additionrenewal of partner 1 Capital contributions may be cash property or services rendered iv Name of partnership may not include a name of a limited partner h Limited partnership agreement i Sets forth rights and duties of limited and general partners terms and conditions regarding the operation dissolution and termination terms ii May specify how pro ts and losses are allocated 1 If not speci cations RULPA mandates that pro t allocation depends on capital contribution i Admission of new partners only upon unanimous agreement of all other partners j Dissolution partnership may be dissolved i At the end of the life of the limited partnership as speci ed in the certi cate of limited partnership ii With the written consent of all general and limited partners iii Because of the withdrawal of a general partner iv With the entry of a decree of judicial dissolution k Limited partnership must wind up its affairs certi cate of cancellation must be led Distribution of assets RULPA following order of distribution i Creditors ii Partners with respect to 1 Unpaid distributions 2 Capital contributions 3 Remainder of the proceeds Limited Liability Partnership a special form of partnership where all partners are limited partners and there are no general partners a No partners have personal liability all limited b Must le articles of partnership and sometimes purchase liability insurance Corporations a Critical attributes i Legal personality ii Limited liability for shareholders iii Separation of ownership and control b Rights of shareholders i Shareholders own the corporation but they are not agents of it 1 Cannot bind the corporation to contracts ii Shareholder entitled to vote on big things election of directors fundamental transactions c Ultra vires doctrine beyond the powers d Liability for preincorporation activity i Promoter someone who purports to act as an agent of the business prior to its j 0 11 incorporation ii Liable on the contract if the articles of incorporation are not led iii Otherwise if the articles are led then the corporation becomes liable on the contract VI Limited liability of corporations a A shareholder is not personally liable except i He may become personally liable by his own acts or conduct piercing the corporate veil b Piercing the corporate veil is allowed whenever necessary to prevent fraud or to achieve equity i Whenever anyone uses control of the corporation to further his own rather than the corporations business he will be liable for the corporations acts Walkovsky c Walkovsky D owns several corporations of two cabs each each corporation has minimum insurance injured P offered two theories know em i Enterprise liability 1 Such a high degree of unity of interest between the various entities that separate existence had de facto ceased AND 2 Treating the two as separate would sanction fraud or injustice a Unsuccessful P does not allege that D was conducting business in his individual capacity ii Alter ego liability SeaLand 1 There was such a unity ofinterest and ownership that the corporation and the individual are not separate personalities AND a In SeaLand the offending corporation had been dissolved but P attempted to render individual D personally liable then reverse pierce D s other corporations i The alter egos corporations are but D s playthings all ran out of the same single office borrow money from each other ii Reverse piercing four factors 1 1 failure to maintain adequate corporate records or to comply with corporate formalities 2 the commingling of funds or assets 3 undercapitalization and 4 one corporation treating the assets of another corporation as its own b Alter ego doctrine does not work in Roman Catholic Archbishop of San Francisco v Sheffield to hold local church for breach of contract of monastery in Switzerland i No commingling of funds or use of same office no abuse of the corporate privilege c In re Silicone Gel Breast Implants factors to consider when attempting to pierce the corporate veil through alter ego i Parent and subsidiary have common directors or officers business departments consolidated nancial statements parent nances the subsidiary or caused its incorporation the parent uses the subsidiary s property as its own 2 Adherence to limited liability would sanction a fraud or injustice VII Shareholder Derivative Actions when the gravamen of the complaint is injury to the corporation not to the plaintiff individually a P does not sue for himself alone but for the class of shareholders i Whereas a direct action is brought by the shareholder in his own name the cause of action belongs to him in his individual capacity and it arose from an injury directly to the individual shareholder 12 Twopronged test to determine whether a stockholder s claim is derivative or direct DE i Who suffered the alleged harm the corporation or the suing stockholders individually ii Who would receive the bene t of any recovery or other remedy the corporation or the stockholders individually Eisenberg v Flying Tiger Line shareholder derivative action is appropriate where the corporation s actions effectively deprived the stockholders of their vote The Demand Requirement shareholder must make written demand upon directors which then must either be rejected or expired 90 days before he brings the derivative suit i When a shareholder les a derivative action heshe must show either Board rejection of hisher presuit demand or justification why demand wasn t made ii Derivative complaint must set forth with particularity the efforts of the P to secure the initiation of action by the board or the reasons for not making such an effort 1 Demand futility exception unless such a demand would be futile Marx iii Purposes 1 Relieve courts from dealing with matter of internal corporate governance 2 Provide corporate boards with reasonable protection from litigation 3 Discourage strike suits iv Grimes v Donald when is a presuit demand in a derivative suit required or excused 1 P alleges breach of duciary duty by Board in derivative claim 2 A stockholder ling a derivative suit must allege either a That the board rejected his presuit demand that the Board assert the corporation s claim or i P previously made demand of the Board which was refused ii Subject to the business judgment rule 1 So D wins b Allege with particularity why the stockholder was justified in not having made the demand i Eg reasonable doubt that the board is capable of making an independent decision v New York test Marx v Akers when is a demand futile 1 Shareholder derivative action commenced without demand made rst P s complaint dismissed 2 Demand is excused because of futility when a complaint alleges with particularity that a A majority of the board of directors is interested in the challenged transaction or i Not here only 3 directors received the bene t of the new executive compensation scheme b The board did not fully inform themselves about the challenged transaction to the extent reasonably appropriate under the circumstances or c The challenged transaction was so egregious on its face that it could not have been the product of sound business judgment Piercing the corporate veil if a shareholder dominates a corporation and uses it for improper purposes a court of equity can disregard the corporate entity and hold the shareholder personally liable for the corporation s debts and obligations Special committees i A Board may legally delegate authority to a committee of disinterested directors when the Board nds that it is tainted by the selfinterest of a majority of directors 1 An action must be dismissed if a committee of independent and disinterested 13 iii directors conducted a proper review considered a variety of factors and reached a goodfaith business judgment that the action was not in the best interest of the corporation Zapata Auerbach V Bennett D creates special litigation committee to determine whether to terminate a shareholders derivative action 1 Ct upholds the ndings of the committee under the business judgment rule a It was composed of disinterested and independent directors i Not members at the time of the alleged illegal transactions b Their work was thorough and complete i If investigation was halfhearted it would raise legitimate questions of good faith or fraud which would not be shielded by the BJ R 1 But this has not been shown by the P Zapata Corp v Maldonado should be skipped board of directors creates Independent Investigation Committee which concludes that a shareholders derivative action should be dismissed 1 A board decision to dismiss a derivative action after demand has been made and refused will be respected unless it was wrongful a But there was no demand in this case futility b Where demand is properly excused the stockholder retains the right to initiate an action 2 What is the balancing point between a stockholder s power to bring suit and the corporation s power to rid itself of detrimental litigation a This court rejects the use of the BJR b The independence of the committee was questionable and there needs to be some check on subconscious abuse c The fresh view of a judicial outsider is necessary 3 Court should apply a twostep test to the committee s motion to dismiss a derivative suit a First inquire into the independence and good faith of the committee and the bases supporting its conclusions i Factors to consider ethical commercial promotional PR employee relations scal and legal b Second apply the court s own independent business judgment i Intended to thwart instances where corporate actions meet Step 1 but do not appear to satisfy its spirit g The role and purpose of corporations i A corporation may participate in the creation and maintenance of community charitable and philanthropic funds as the directors deem appropriate and will in their judgment contribute to the protection of corporate interests AP Smith AP Smith v Barlow stockholders complain D corporation is not authorized to make gift to Princeton 1 Judgment for D gift was intra vires within the powers 2 D claims gift is a sound investment that the public expects corporations to be philanthropic that it helps obtain good will in the community and that it furthers their selfinterest by assuring a free ow of trained personnel for their employment a The corporation s salvation depends upon a sound social and economic environment b Public policy outweighs rights of stockholders c Gift was relatively small 3 Delaware Gen Corp Law 122 every corporation has the power to make donations for the public welfare 14 4 CA Corp Code 207e allows donations for the public welfare regardless of speci c corporate bene t iii Dodge V Ford D majority stockholder H Ford decides not to pay any more special dividends but to invest the money instead 1 Judgment for D BJR applies to the payment of dividends 2 Typically the practice to declare larger dividends after successful business years a Refusal by Henry seems arbitrary wants to share pro ts with the public via lower prices b D s plan would result in less pro ts and a corporation is carried on primarily for the pro t of the stockholders i The discretion of the directors is to be exercised to attain that end 3 But court is reluctant to interfere in business decision iv Shlensky v Wrigley P stockholders claim in derivative suit that D committed negligence and mismanagement by not installing lights at Wrigley Field 1 Judgment for D court defers to sound business judgment unless there is a showing of fraud illegality or con ict of interest a Effect on surrounding neighborhood and the subsequent effect on Wrigley Field s property value are both legitimate business interests to consider VIII The Limited Liability Company an unincorporated business entity that combines the most favorable general partnerships limited partnerships and corporations i An LLC is a separate legal entity that can own property sue and be sued enter into and enforce contracts and be found civilly or criminally liable ii Uniform Limited Liability Company Act ULLCA model act may or may not be adopted by state 1 Uniform laws of formation operation and dissolution iii May be taxed as a partnership 1 Corporation pays tax on pro ts and shareholders pay a second tax when those pro ts are distributed to them 2 Investors in an LLC are taxed only on pro ts iv Owners manage the business with limited liability 1 Members liable for debts and obligations only up to the extent of their capital contributions 2 Members not liable for the acts of other members as in partnerships a More like shareholders in a corporation they aren t liable for the acts of other shareholders V Members stand to lose capital contribution but their personal assets are not subject to attachment stand to lose personal assets in partnerships b Profit and loss sharing i Usually based on the value of each member s contribution different from partnership unless the operating agreement says otherwise ii ULLCA each member has right to equal share of pro ts and losses c Fiduciary duties all have duties of care and loyalty i But a nonmanager member of a managermanaged LLC owes no duciary duties ii McConnell v Hunt Sports Enterprises LLC member not liable for competing against the LLC even though competition occurred during the time of the duciary because the operating agreement explicitly allowed competition 1 Parties to an LLC may contract out of duciary duties d Formation i Formed by delivering articles of organization to the of ce of the secretary of state ii Westec v Lanham are members of an LLC personally liable for a contract where the 15 other party did not have notice that he was dealing with an LLC Yes 1 Merely ling articles of organization is not sufficient to put a third party on constructive notice of the existence of the LLC e The operating agreement i Agreement entered into among members that governs the affairs and business of the LLC ii May be amended with approval from all members unless otherwise stated in the agreement iii Elf Atochem v J affari the LLC agreement is binding on the LLC as well as the members 1 And contractual provisions directing all disputes to be resolved by arbitration in CA are valid and binding f Piercing the LLC veil i A member is not personally liable for a debt ii But the failure of an LLC to observe the usual corporate formalities relating to the exercise of its company powers is not a ground for personal liability 1 But most states allow alter ego theory for LLCs know this iii Kaycee Land and Livestock v Flahive the LLC veil can be pierced in the same way the corporate veil can 1 If members of the LLC fail to treat the LLC as a separate entity they do not enjoy immunity from individual liability for the LLC s acts that harm third parties 2 Fact driven inquiry to determine if piercing is appropriate g Dissolution i ULLCA gives member of LLC the power to disassociate from the LLC 1 LLC must then purchase the disassociated member s distributional interest ii Notice of disassociation must be filed with secretary of state iii At expiration of LLC term members may vote to continue it with a simple majority vote iv Creditors paid first surplus distributed to members in equal amounts v Articles of termination must be filed with secretary of state vi New Horizons Supply v Haack bro and sis form LLC bro has nervous breakdown and leaves LLC goes out of business and creditor files claim against sis for debts 1 LLC existed but sis failed to take necessary formal steps to shield herself from liability for the company s debts following its dissolution a Judgment for P upheld IX The Duties of Officer Directors and Others a The Duty of Care waste irrationality lack of information illegality i Look at process of decisionmaking not the substance of the decision itself ii Kamin v American Express P charges waste no claim of fraud of selfdealing 1 BJR applies court will not interfere with an informed business decision absent a showing of bad faith dishonest purpose or simple neglect of duty of care iii Smith v Van Gorkom a board s failure to inform itself before recommending a merger to the stockholders constitutes a breach of the duty of care and rebuts the assumption of the BJ R 1 A board may rely on fellow directors or experts if they are informed but blind reliance is not a shield 2 The determination of whether a business judgment is an informed one turns on whether the directors have informed themselves prior to making a business decision of all material information reasonably available to them The concept of gross negligence is the proper standard for determining whether a business judgment reached by a board of directors was an 16 b informed one 3 Board is not liable for relying on false information unless it knew that such reliance was unwarranted iv Del Gen Corp Law l02b7 in its certi cate of corporation a corporation may include a provision limiting the personal liability of a director for breach of duciary duty 1 But not for breach of duty of loyalty selfdealing or for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law v In re Walt Disney Co Derivative Litigation board was sufficiently informed about termination contract because it relied on an expert compensation committee BJR applies 1 Think who is the board relying on 2 It s the process of decisionmaking that counts here the formation of the compensation committee is sufficient to show that an informed business decision was made a Stupid decision is irrelevant 3 Law presumes that when making a business decision directors ofa corporation act on an informed basis and in good faith a BJR applies when there is no evidence of fraud bad faith or self dealing b Presumption is rebutted when P shows breach of duty of care or loyalty or had not acted in good faith i A plaintiff who fails to rebut the presumption of the business judgment rule is not entitled to any remedy unless the transaction constituted waste that is the transaction was so onesided that no businessperson of sound judgment could conclude the corporation received adequate consideration c Burden then shifts to D to show that actions were fair vi Francis v United Jersey Bank BJR does not shield D from liability because there was no business decision in the first place 1 D was simply ignorant of the goingson of her business a cursory reading of the nancial statements would have revealed the pillage but D breached duciary duty of care by remaining ignorant a In the absence of a decision P still has to prove negligence which he does Duty of Loyalty selfdealing competing with corporation secret pro ts usurping corporate opportunity i Directors and officer have a duty of loyalty not to act adversely to the interests of the corporation and to subordinate their personal interests to the interests of the shareholders and the corporation ii Directors and Managers 1 Duty of loyalty claims against directors a fully informed vote shifts the burden of proof to P to show waste 2 When transaction is questioned as selfdealing D can a Argue that the decision was fair regardless of questionable activity hard to prove b Argue that the decision was rati ed by a majority of disinterested directors or shareholders i Doesn t immunize D but merely shifts burden back to P to show waste or unfairness 3 Bayer v Beran corporation hires director s wife to sing in ad 17 a No breach of loyalty the contract was inherently fair and reasonable and the interested director did not determine pay b Burden of proving no breach of loyalty is on D c Informality in minor transactions is okay board doesn t have to take formal votes so long as everyone is informed 4 Lewis V S L amp E burdenshifting in a duty of loyalty case speci cally selfdealing don t need to know for test a A corporate transaction in which directors had an interest other than that of the corporation is voidable unless the directors can show the transaction was fair and reasonable to the corporation b P must show up at court contesting a business decision D will argue that P did not le a demand d Then D will argue business judgment rule which protects D s decision e Burden shifts back to P to show something that gets around the BJR i Eg one of the exceptions to the BJR f D will then argue that the decision was fair and reasonable to the corporation even if there was some self dealz39ng i If D can t show fair and reasonable he can still show that a majority of the shareholders accepted and approved the decision ie Rati cation g If D shows either fair and reasonable or rati cation burden shifts back to P and P must overcome it or else he loses iii Corporate opportunities 1 Broz V Cellular Information Systems a A director may not seize for himself an opportunity where Delaware test i Corporation is nancially able to take the opportunity ii The opportunity is in the corporation s line of business iii The corporation has a reasonable expectation or interest in the opportunity and iv By embracing the opportunity the selfinterest of the of cer will be brought into con ict with that of the corporation b Doesn t matter so much how one receives the opportunity although it may suggest that the opportunity wants to work with that particular corporation e g calls alleged usurper at work 2 In Re eBay GoldmanSachs gives eBay directors an opportunity to buy IPOs in exchange for eBay continuing to use GS as its investment bank a Directors usurped a corporate opportunity the IPOs are an opportunity which eBay could have paid for iv Dominant shareholders 1 A parent owes duciary duty to its subsidiary in parentsubsidiary dealings a The intrinsic fairness standard not the BJR applies 2 Duty of loyalty claims against controlling shareholders a fully informed vote shifts the burden of proofto P to show unfairness a Lower burden than for director actions waste 3 Sinclair Oil v Levien unless the dominant shareholders own 100 of a subsidiary s stock the dominant shareholders owe duties of care and loyalty to the minority shareholders a Other issues i Selfdealing dividends suck money out of Sinven and into 0 18 Sinclair 1 Rejected BJR Sinven gets the same proportion of every dividend sold ii Usurpation of corporate opportunity Sinclair limits Sinven to Venezuelan operations 1 Rejected BJR expansion is at the discretion of the parent company V Rati cation 1 A majority of all directors interested or disinterested is required for quorum 2 If disinterested directors are split then there is no rati cation a Burden shifts back to D to show fairness then back to P to show waste in order to succeed 3 Fliegler V Lawrence when looking for rati cation only count the votes of the disinterested directors then kick back to the BJR a When a majority of shareholders ratify a transaction and dissenting shareholders initiate suit the burden shifts to the dissenting shareholders to demonstrate that the terms are so unequal as to amount to a gift or waste of corporate assets 4 Wheelabrator shareholder disputes merger where directors made the decision in 3 hours alleges breach of duty of care duty to be fully informed a Directors have the duciary duty to disclose fully and fairly all material facts within its control that would have a signi cant effect upon a stockholder vote b Merger upheld even if there was a due care violation there was rati cation by a majority of disinterested directors and by the shareholders i Shareholders must vote on major issues mergers not necessarily on minor ones singing in the ad c Duty of care claims are extinguished by an informed vote c Disclosure and Fairness i Securities Act of 1933 mandates disclosure of material information and prevents fraud 1 Regulates the issuance of securities by a corporation general or limited partnership or individual primary market transactions 2 Requires registration with the SEC under Section 5 ii Securities Exchange Act of 1934 concerned with insider trading and other forms of securities fraud 1 Deals with secondary market transactions the trading rather than issuing of securities 2 Created the SEC iii What is a security 1 An investment to become an owner or debt holder of an investment scheme 2 Knowing if you are dealing with a security is important for two reasons a It tells you whether the registration requirements of the Securities Act apply to the transaction b It tells you whether you have to work within the antifraud provisions of the Acts easier to bring suit under than common law fraud 3 De ned in 21 of the Securities Act a Two broad categories of securities 19 i Speci c examples stocks notes bonds ii Catchall phrases investment contracts any instrument commonly known as a security 4 The Howie test a A contract or scheme in which P gave money i Must have legal consideration eg money b In a common enterprise To receive pro ts d From the efforts of others i Robinson v Glynn if you are too involved in the investment then the Howie test does not apply 1 Securities laws aren t designed to protect people like P he retains too much control in the investment and he s not relying on the efforts of others 5 iv Registration 1 All securities must be registered with the SEC Section 5 of Securities Act of 1933 but for exemptions a Private placement exemption i Ask how many people got the offering and how sophisticated were they ie how much information did they have Doran test 1 Number of offerees and their relationship to the issuer most critical factor 2 Number of units offered generally 25 or less 3 Size of the offering 4 Manner of the offering cannot publicly advertise must be direct request ii Doran v Petroleum Management Corp D claims private placement exemption 1 What is the sophistication of the investor Education status wealth 2 How much information was provided to the investor Proper amount is what would have been in the registration materials had the seller registered 3 Consider relationship if investor and seller are close friends or business partners court will assume that even if information was not made available the investor could have obtained it if needed b Intrastate offering exemption that permits local businesses to raise capital from local investors c Small offering d Nonissuer nonissuers do not have to file registration statements prior to reselling securities they have purchased v Rule 10b5 of Securities Exchange Act of 1934 implied right of action for manipulation or deception 1 Unlawful for any person with any security registered or not to a Employ any device or scheme to defraud b Make any untrue statement of a material fact or to omit to state a material fact c Engage in any practice which would operate as a fraud or deceit 20 upon any person Basic Inc V Levinson rumors of merger leaked to public two issues a Materiality material matters are those which an investor needs to know before he can make an intelligent and informed decision i Reasonable investor test would a reasonable investor want to know the information ii If so then corporation has a duty to be honest 1 Not a duty to disclose just a duty to be honest no comment is ne iii Materiality depends on the magnitude and probability of the event occurring b Reliance an element of a rule 10b5 cause of action may be proved by a rebuttable presumption supported by the fraudonthemarket theory i For 10b5 must show that the misrepresentation caused you to buysell the stock ii Court generally will create rebuttable presumption of reliance if there was a material misrepresentation iii Once the misrepresentation is shown rebuttal is essentially impossible Fraud on the market theory when a company makes a material misrepresentation a P can presume reliance if he can show fraud on the market ie the lie affected the market price a Does not apply where false statements are not public and do not reach the market Does P have a securities claim Is there a security Commonly known securities Statutorily de ned securities Investment contract 8 i ii iii 1 Howie test b Were the registration requirements met Actual registration ii Exemption C i i l 2 3 Private placement Interstate offering Small offering 4 Nonissuer Is there a 10b5 violation Insider trading ii Materialmisrepresentation 21
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