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This 23 page Study Guide was uploaded by Emma betito on Sunday November 22, 2015. The Study Guide belongs to BSL 304 at University of Miami taught by Professor Karen Turner in Summer 2015. Since its upload, it has received 84 views. For similar materials see Corporate Law in General at University of Miami.
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Date Created: 11/22/15
CHAPTER 32 Limited Partnerships and Limited liability companies 11/4/2015 1:44:00 AM I. Limited partnerships: A partnership formed two or more persons under the laws of a state, that has 1 or more General Partners and 1 or more Limited Partners A. RULPA i. Anything you do not address on the agreement is governed by RULPA B. Investment component i. General partners have the expertise, and then you have all the limited partners, which are really the investors most times. C. Different from General Partnership i. Creature of statute: means something that does not exist until you file a statement of limited partnership 1. Must file “certificate of limited partnership in substantial compliance with state statute” 2. In general partnership, (KEYTRONICS CASE), you do not need to file any papers in order to have a partnership ii. Two classes of Partnership 1. General partners a. Unlimited liability (personally liable) and b. Unlimited right to manage and control and c. Are Agents of the partnership 2. Limited partners a. Limited liability: limited to the capital contribution. The most they can lose is what they put in. No personal liability. b. Cannot participate in “management an control” c. They can vote on some things d. Not agents of partnership D. Taxation- same as general partnership- pass through taxation. E. Formation i. File a “certificate of limited partnership” must contain 1. The name a. It cannot include one of the limited partners names unless i. One of the general partners share the name ii. It was the name of the partnership at the time you joined b. It must indicate that it say “Limited Partnership” i. Depending on the state it could be “LP” or “Limited” c. Cannot be deceptively similar 2. Name and address of registered agent and general partners a. Limited partners should not be listed 3. Term a. Unlike general partnership, there is not a –at-will 4. Must be updated ii. “Defective formation”- if no certification filed or if the certification does not substantially comply 1. Limited partnership is treated as General Partnership unless that limited partner believes in good faith that he/she was a Limited Partnership, and then they immediately a. Withdraws and renounces profits OR b. Cures defects by filing amended certificate that substantially complies. F. Contributions i. Limited Partnership signed promise to contribute $ is enforceable. 1. If they don’t contribute it, the partnership can enforce the promise. G. Rights of Partners i. Management and control rights 1. General partners have those right but limited partners don’t have those rights II. Limited Liability Company A. Governing Law i. State statute ii. Creature of statute B. Operating Agreements i. Very important to document because anything you don’t address, is government by state statute and you might not like it. C. Rights of Members i. Transferrable interests- economic interest 1. Ex: right to receive profits (based on % of capital contribution), right to receive distributions ii. Non transferrable interests- management interest, right to information, right to vote, 1. Right to management a. Member managed vs. Manager managed i. Unless indicated otherwise or unless there is a manager, each member has equal control and management ii. Any member can bind the LLC, if it is member managed iii. If it is manager managed, only the manager can bind the LLC iv. Sometimes manager is member. Does not change anything Case Taghipour v Jerez: A manager managed LLC, with a member as manager, so the manager has complete authority of binding the LLC. However, the members said that the manager must have the approval of every member before entering a contract. The manager entered into a contract of $25,000. He defaulted so the bank sued. Did he have the authority? Yes, because there was apparent authority. So who was liable? o 2. Right to vote a. Partnership model vs Corporate model i. Corporate model: if I put 75% capital contribution, you have 75% of management control ii. Partnership model: no matter how much you contribute, everyone has same control iii. If it is manager managed, however, the manager is the one that has the control. (this does not apply) 3. Right to Information 4. Right to sue iii. Case: Apply the Law: Rustin. Member of LLC was going through a divorce. He had to transfer his ownership to the ex wife. The other members did not inform her or treated her like a member. She sued. The court said that the only thing that transferred over to her was economic interest. Right to manage, right to vote, right to information, and right to sue, is not transferrable. D. Duties i. Manager managed 1. Managers a. Have duty of care b. Fiduciary duty 2. Members a. Do not have duty of care b. Do not have fiduciary duty c. Because they are not entering into contract, so they are practically simply investors. ii. Member Managed 1. Members have duty of care and fiduciary duty E. Liabilities i. Members are not personally liable for the debts of the LLC unless: 1. Personal guarantee a. “If the LLC does not have sufficient assets, I will take care of it” 2. Liable for own tort 3. contracts entered without actual authority Case Estate of Countryman v Farmers co-op. ass’n: Explosion because of propane gas and people sued Double Circle LLC, Farmland and Keota (two members of Double Circle LLC). Keota Is a member, and provides a variety of farm products and services to area farmers. Keota is not liable as a member of an LLC, but Keota is liable IF HE COMMITED HIS OWN TORT. So now, if they can prove that Keota was negligent and/or committed a tort in the process of providing a variety of farmer products. F. Dissociation, Dissolution, and Winding up i. Dissolution 1. Term expires 2. Unanimous written consent 3. Court order. ii. Dissociation 1. File notice of termination 2. Send notice to third parties iii. Winding up 1. Distribution of Assets a. Creditors get paid first i. If there is not enough money to pay the creditors, it does not matter. ii. Ex: the LLC owes 1,000,000, all assets are liquidated and get 500,000. They pay the 500,000 towards 1,000,000. The other 500,000 gets forgotten G. Profit Maximization vs. Corporation Citizenship i. Profit maximization: shareholder 1. CSR might be good for bottom line 2. Lack of expertise a. Each company should just do what they are good at ii. Corporation citizenship: stakeholder Chapter 33 Corporations 11/4/2015 1:44:00 AM I. Corps are Creatures of Status a. Legal entity (can sue/be sued, own property) b. “Artificial Persons”- give them rights in various areas i. Constitutional rights 1. Right to freedom of speech 2. Due process a. Personal jurisdiction (can only be sued in states where they are incorporated, do business, and/or have sufficient contacts); if dispute arises, can be resolved by binding arbitration 3. Religion a. Hobby Lobby corp. example: did not want to pay for birth control; law to provide insurance for contraceptive contradicted another law related to religion…could not be compelled to provide birth control (court agreed) 4. No inherent right to incorporate 5. Governing law a. RMBCA i. “Internal Affairs Doctrine” 1. All disputes are dictated by laws of state in which you incorporate 2. Delaware wanted to attract corps…statutes are corporate-friendly; “court of chancery” II. Characteristics of Corps a. Limited Liability (biggest advantage! Not personally liable for acts/torts of corp.) i. Exceptions: 1. Own tort 2. Personal guaranty 3. “piercing the corporate veil” (passing through “corp.” and holding individuals liable) b. Access to Greater Resources c. Perpetual Existence i. Lives on even when a shareholder leaves ii. Existence of corp. does not depend on status of individuals (death, leaving, etc.) d. Centralized Management i. separation of ownership and management 1. owned by shareholders and managed by managers) a. Negative: SH have no control b. Positive: allows for expertise from managers e. Free Transferability of Ownership i. Unless it is a closely held corporation f. Double Taxation g. S. Corp: corp. in a lot of ways but with some limitations (limit on number of shareholders, no non-citizens…; single taxation) III. Classification of corporations a. Profits vs Non Profit b. Public or Private c. Publicly held or privately held d. Professional corporation e. Domestic or Foreign or Alien i. Domestic: formed in that state ii. Foreign: not formed in that state 1. Must have a certificate of foreign corporation a. Not required for interstate business i. Moving company. Driving through b. Required for intrastate business i. Like Harold lang iii. Alien: formed in another country iv. Case Harold Lang Jewelers, Inc v Johnson: HL Jewelers sued Johnson for owing 160,000$ plus interest for jewelry sold to them. Land Jewelry is a Florida corporation, and Johnson is a North Carolina formed corporation. Because Land Jewelry did not have a foreign corporation certificate, he did not have the right to sue in North Carolina, so he lost. f. Sub Chapter S Corporation: i. Single taxation, where SH pay taxes, but corporation does not ii. Requirements 1. US Corporation 2. No more than 100 SH 3. Corp, LLC, Partnership cannot be SH 4. SH must be US citizen or resident 5. It cannot have more than 1 class of stock 6. No more than 25% of corporation’s income can be “passive income”, which is regular income coming in without any extra effort IV. Formation of Corporation a. Promoter i. The one who forms the corporation, files the necessary documents, finds investors and enters into contract 1. Recruits investors a. Promoters solicits “subscriptions”, offer to purchase stocks b. Pre incorporation i. Under RNBA, the offers are irrevocable for 6 months, so they cannot take it back unless subscription agreement provides otherwise or all subscribers unanimously agree. 2. Enter and Negotiate into contracts a. This is called a Pre incorporation contract b. If corporation is never formed, promoter is personally liable c. If corporation is formed i. Not liable unless it explicitly ratifies (making it officially valid) the contract ii. Promoter remains personally liable unless 1. Novation: releasing the promoter 2. Pre incorporation contract states that the promoter is not rd 3. 3 party knew that the corporation was not in existence and explicitly or implicitly agreed to look only to corporation d. Case Coopers and Lybrand v Fox: Fox hired accounting firm C&L. Fox told C&L it was for his company that he was in the process of forming. He did not pay C&L for all the work he did, so C&L sued. Trial court ruled for Fox, but appellate court reversed the judgment because Fox was acting like the promoter, who is personally liable. b. Formalities of incorporation i. Promoter prepares and files articles of incorporation 1. Can only be amended by SH 2. Basic governing document 3. Signed by incorporators 4. Must include a. Name, show you are a corporation. INC, ex b. Address of registered agent, usually a lawyer c. Number of shares and classes of stock 5. May include a. Nature of business b. Identify initial board of directors c. Optional provisions that you want to add must be included: i. Cumulative voting ii. Preemptive rights iii. Super majority voting ii. Organization Meeting 1. Board Elected 2. By Laws are adopted a. Can be amended by board b. Very detailed document c. Will specify the time and place of board meeting, and SH meetings d. Quorums minimum amount of SH that must be present, in order to pass something e. Corporate officer titles and descriptions f. Board committees 3. Select chair 4. Appoint officers 5. Approve/ratify pre incorporation contracts 6. Approve stock certificate and authorize issuance of shares to subscribers 7. Form the committee V. Recognition/ Disregard of Corporations a. Defective incorporation i. Common law 1. Corporation de jure (in law) a. Formed in substantial compliance b. State wont dissolve, SH retain limited liability 2. Corporation de facto (in fact) a. Corporation that is created, NOT in “substantial compliance” b. Articles were not files for example c. Limited liability will only exist if i. Good faith belief and attempt to comply ii. Conducting business based on that belief d. State can dissolve 3. Neither de Jure or de Facto, no limited liability ii. Statutory approach (modern view) 1. Articles filed and accepted, you have limited liability 2. If articles were not filed, there is Limited liability IF YOU ACTED in good faith, but no LL if you a. Acted on behalf of the corporation b. Knew or had reason to know that there was no incorporation iii. Case Harris v Looney: Harris sold his corporation and his asset to J&R (three people). They signed article of incorporation, but did not file them. Harris sued for corporation debt of 50,000. All three knew there was no incorporation, but Joe was the only one who was acting on behalf of the corporation (as if the articles had been filed), so he was the only one who was personally liable. The two others were not present at the meeting, so they were not acting on behalf of the company. b. Piercing the corporate veil i. Closely held corporation (few SH) 1. Factors a. Failure to observe corporation formalities i. “Alter ego”. It is really only SHs. Have the SHs created a corporation simply to do things they were doing originally ii. SHs used the corporation to do injustice 1. Ex: 4 SH capitalize this corporation inadequately, and they crash into a 3 rdparty. 3rdparty sues for 500,000$ but they only have 5,000$. Court will make SH personally liable, because inadequate funds, or comingling money. ii. Parent subsidiary: 1. Factors a. Corporations not adequately capitalized b. Formalities of separation not observed c. Not held out as separate entities d. Fund is comingled e. Parent dominated completely 2. Case: ITL, inc v Linn, LLC: ITL was parent corporation, and had ITS and Technologies as retail subsidiaries. ITL paid their employees. When customers purchased through ITS, the money would go straight to ITL bank account because ITS and Tech were not allowed to have one. Tech and ITS did not follow formalities, since they did not have meeting and the board was the same as ITLs. Linn (landlord) entered into a contract with ITS when they had assets, before ITL took over them and controlled, and comingled. Linn sued ITS for failure to repair the premises and for unpaid rent, but a default judgment was entered (ITS did not respond). So Linn won, but ITS had no money. So Linn sued ITL for 350,000. Court said that piercing the corporate veil is allowed because 1) failure to issue stock, 2) failure of formalities 3) comingling funds, 4) alter ego VI. Corporate Powers a. Ultra Vires- Beyond Purpose b. If you used to have a purpose, and now you went away with the purpose. VII. Tort Liability a. Vicarious b. Direct: where corporation itself is negligent VIII. Crimes a. Big fine for corporation Chapter 34 11/4/2015 1:44:00 AM I. Corporate Securities A. Bonds (Debt Securities) i. Issued by board of director 1) No voting or ownership rights 2) Indenture- contract between corporation (issuer) and bond holder 3) Rated i. IG- top ten ii. Junk Bonds- everything else CASE: Metropolitan Life Insurance Company v RJR: CEO of RJR proposed a $17 million leveraged buy out, of RJR shareholder, at $75 per share. Met Life owned 300M of bonds. RJR had an obligation to pay out bonds. Met life sued RJR for breaching the indenture. They lost because the only rights that the indenture states. 4) Types of Bonds a. Secured bonds (mortgage bonds) i. Income bond 1. payment of interest conditioned on payment of corporation (depends on how company is doing, not guaranteed) ii. Participating bond (hybrid) 1. Guaranteed fixed rate (lower) 2. Additional interest based on corporate earnings iii. Convertible bond 1. Bond holder has right to convert bond to another type of security (usually stock) iv. Callable bonds 1. Corporation has right to “call” (redeem) bond prior to maturity B. Stocks (Equity Securities) a. Ownership Rights i. Participate in control ii. Participate in earnings iii. Participate in residual assets b. Board of Director issues shares c. Preemptive Rights i. Opt In vs Opt Out. Allow existing shares to buy 1. RMBA FL 2. Does not apply to a. Shares issued to compensate directors, officers, or employees b. Shares issued within 6 months of incorporation d. Restrictions on transferability i. Articles of incorporation must provide 1. Prominently displayed on stock certificate 2. “right of first refusal” e. Consideration for shares i. Board of Director sets and decides ii. Par Value vs No Par Stock 1. Par value is simply the face value of the stock. a. Par Value i. Board can issue the stock for any amount NOT LESS than par value, or face value ii. Consideration received is “stated capital” to the extent of par value and is “capital surplus” for any consideration in excess of par value iii. Because of this, a corporation is going to set a very minimum par value. iv. Example: $1 par value sold. Sold at shareholder for $5. So 1$ is referred to as stated capital, and 4$ is referred to as capital surplus. Even though shareholders paid 5$, they are only truly entitled to 1$ if the company needs to pay them back b. No Par Stock i. Any amount set by the Board of director, where the entire amount is stated capital iii. Treasury stock 1. Corporate rebuys shares from shareholder 2. Once bought back, it is treated as non dividend shares, (no right to vote or manage, etc) why is this good a. Because that SH is getting money. b. Concern is that they can do that to the detriment of creditors iv. Payment for shares 1. If paid with services property, the board will put a value on it. a. Example: I transfer a property to the company, and they give me shares. If the property was actually half the price that the company bought it for, it is not important if they already paid the shares. f. Classes of stocks (Common stock vs Preferred Stocks) i. A corporation has to have at least one class of stock, with an unlimited right to vote (COMMON STOCK), and one class of stock entitled to receive net assets upon distribution (meaning after creditors have been paid) (PREFERRED STOCK), ii. Common stock 1. if there is only one class of stock, with no preferences 2. primary right is the right to vote a. elect director to run the company b. vote for fundamental changed iii. Preferred stock 1. Has preference over common stock a. Dividend preferences and Preferences upon dissolution, Particularly with the division of assets i. Fixed dividend for set period of times. 1. makes a lot of money, they don’t get more than the fixed dividend Disadvantage: if the corporation starts doing really well, they don’t get more money ii. Can be cumulative vs. non cumulative vs cumulative to the extent earned 1. Common does not receive anything until the preferred gets their. a. Cumulative i. If they don’t pay, it carried over to the next period. So now they owe double. It accumulates for whatever reason the board did not pay. b. Non cumulative i. If they don’t pay, it does not carry over or accumulate c. Cumulative to the extent earned i. If the board does not pay BECAUSE THEY DID NOT HAVE, it does not accumulate. For whatever other reason, it accumulates. iii. Liquidation Preference iv. No Right to Vote, unlike common. g. Stock Options i. Stock warrants 1. Longer life h. Board’s power to Declare Dividends and make Distribution i. Dividends: sum of money paid ii. Distribution: the way that money goes out from corporation- boards can make two kinds of distribution 1. Redemption a. When the Shareholder wants out, they have to first offer it to the other SH, or to the corporation, before offering it to a third party. b. Redemption is when the corporation buys back the share, then it becomes treasury stock and is an unpurchased share. 2. Acquisition a. When the corporation itself becomes a SH and buys their own shares. iii. Limitation 1. Dividends and distribution cannot be paid unless the corporation passes the: a. Equity insolvency test and i. Distribution cannot be made if they are insolvent at the time, or will become insolvent if the distribution were to be made. ii. Do they have sufficient income to pay their debts as they come due. b. Balance sheet test i. If at the time of the payment, Does the corporations assets exceeds, or is lower than its outstanding liability? ii. As a result of the distribution, if the assets are less then the outstanding liabilities, then they cannot do it. 1. Preferred dividends are included in the liabilities. Case: Cox Enterprises, Inc v Pension Benefit Guaranty Corporation: Cox is a minority SH, and closely held (so not publicly traded), and they had a lot of shares ($130M worth). Cox sued the Board of Directors for violating their fiduciary duties. They wanted out basically; they wanted their money. Florida has a provision that says that if SH files for dissolution, the corporation has the power to say no, and say they want to repurchase their shares. Because they could not get into an agreement, the court issued a “repurchase order”, where the corporation will repurchase COX shares, at $129M, on a certain day. In between the time that the court ruled, and the day they were supposed to pay, the value of the corporation went down. COX said that the Limitation tests should be applied on the date of the judgment when decision that COX should be paid. The court said that the limitations must be measured on the date that the payments were supposed to be made. iv. If the Directors lie, or were not acting in good faith, they are personally liable to do what? v. Shareholder is not required to repay if they acted in good faith and the corporation was actually solvent when it was made. 1. For example, if board declares dividends with insufficient funds. The SH do not have to pay back, as long as they acted in good faith, and if the corporation was solvent when distribution was made. vi. Is Board required to declare dividends? 1. Generally no Case Dodge v Ford Moto Co: Defendant corporation was the dominant manufacturer of cars when this case was initiated. At one point, the cars were sold for $900, but the price was slowly lowered to $440 – and finally, Defendant lowered the price to $360. The head of Defendant corporation, Henry Ford, admitted that the price negatively impacted short-term profits, but Ford defends his decision altruistically, saying that his ambition is to spread the benefits of the industrialized society with as many people as possible. Further, he contends that he has paid out substantial dividends to the shareholders ensuring that they have made a considerable profit, and should be happy with whatever return they get from this point forward. Instead of using the money to pay dividends, Ford decided to put the money into expanding the corporation. Ford had to pay because they cant withhold arbitrarily
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