AGENCY

The Agency Relationship (Rest. 3d §§1.01-1.03)

A. Agency involves three parties
o Principal (i.e. boss)
o Agent (i.e. employee)
o Third Party (i.e. client)
B. Agency Relationship Defined
o Rest. 3rd §1.01: 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
principal’s control, and the agent manifests assent or otherwise consents to the act
o Elements:
a. Subject to P’s control
b. Manifestation of assent that A will act on behalf of P
c. Manifestation that A consents to act for P
o Control = Deciding factor in agency
o The right of the principal to control the method of manner or service
o Rest. 3rd § 1.01 – Comment F
a. Principal initially states what the agent shall and shall not do
b. Relationship of agency is not present unless the person on whose behalf action is
taken has the right to control the actor
o Manifestation
o Rest. 3rd §1.03: A person manifests assent or intention through written or spoken words or
other conduct
o Who has burden of proving agency? On the person who is trying to prove that an agency relationship
existed & must be proven by a fair preponderance of evidence
o Marital status is not enough alone to prove agency relationship (Botticello)
o Nor does the fact that two people owned the land jointly (Botticello)
C. Who is an Agent?
o Analysis: Do I have agency?
o “Meeting of the minds,” some form of agreement b/w P and A
o A acting on P’s behalf
o Subject to P’s control
a. Gorton v. Doty  all three elements of agency present
i. Facts: Teacher allowed coach to use her car to transport the team to a game.
Coach gets into accident. Teacher is sued.
ii. Held: Agency relationship found between teacher and coach, so teacher was
found liable
1. Teacher placed “condition” precedent to driving car  loaned the
car so long as the coach was the one who would drive it
2. Also, “cheapest cost avoider” idea
iii. Dissent: there was no on behalf of and as for subject to control of there was
no conditions precedent, it was a common sense thing that teenagers should
not be driving around. Only the coach should be driving
b. Jenson v. Cargill  totality of the circumstances = control
i. Facts: Warren operation grain elevator purchasing grain from farmers for
resale. Cargill financed and also controlled Warren by approving
expenditures, nature of withdrawals, etc. Warren goes bankrupt. Plaintiff
farmers sue both Cargill and Warren for breach of K.
ii. Held: Agency relationship found between Cargill and Warren, so that Cargill
is liable
1. Totality of the circumstances  Cargill exerted control
a. Constant recommendations to Warren
b. Right of first refusal
c. Right of entry into periodic checks and audits
Liability of PRINCIPAL to Third Parties: CONTRACT (Rest. 3d §§ 2.01-2.03, 2.06, 3.01-3.03)
D. Agent’s Authority
o Types of Authority
o Actual Authority [Rest. 3rd §2.01]
a. Actual Express
b. Actual Implied
o Apparent Authority [Rest. 3rd §2.03]
o Undisclosed Principal [Rest. 3rd. §2.06]
o Actual Authority- 2.01: An agency 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
o Elements: 3.01: Creation of Actual Authority: created by a principal’s manifestation to an
agent that, as reasonably understood by the agent, express the principal’s assent that the agent
take action on behalf of the principal
a. Objective manifestation by P
b. Reasonable interpretation of manifestation
c. Leads A to believe he has authority to act for P
i. Reasonableness = perspective of the agent
o (a) Actual Express
a. P tells A to do X. A does X. P is bound.
b. Rest. 3rd §2.01: “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”
o (b) Actual Implied
a. P tells A to do X. If, in order to do X, A must take some other step, P is bound.
b. Rest. 3rd §2.02(1): “Agent has actual authority to take action…implied in the
principal’s manifestations to the agent and acts necessary or incidental to achieving
principal’s objectives, as the agent reasonably understands the principal’s
manifestations…when the agent acts”
c. 2.02(2): An agent’s interpretation of the principal’s manifestations is reasonable if it
reflect the meaning known by the agent to be ascribed by the principal and, in the
absence of any meaning known to the agent, as a reasonable person in the agent’s
position would interpret the manifestations in light of the contact, including all
circumstances
i. Comment to 2.01-“‘Implied authority’ is often used to mean actual
authority either (1) to do what is necessary, usual, and proper to accomplish
or perform an agent’s express responsibilities or (2) to act in a manner in
which an agent believes the principal wishes the agent to act based on the
agent’s reason- able interpretation of the principal’s manifestation in light of
the principal’s objectives and other facts known to the agent.”
d. Mill Street v. Hogan
i. Facts: Church hired Bill to paint. Tells Bill to hire Petty to assist, but Bill
hires brother. Brother injured on the job. Brother sues for workers
compensation.
ii. Held: Bill had actual implied authority and apparent authority to hire brother.
iii. Implied Actual Authority:
1. Reasonable for Bill to hire brother based on prior similar practices
2. Reasonable because Bill was not clearly told who to hire
iv. Apparent Authority:
1. Brother reasonably believed that Bill had the authority to act on
behalf of Church
2. Traceable manifestation = Bill clearly needed assistance to do the
job
o Apparent Authority
o Elements:
a. P makes manifestation

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 b. Traceable manifestation reaches third-party through actor
c. Third-party reasonably believes actor has authority to act on behalf of P
o Rest. 3rd §2.03: “Power held by agent…to affect a principal’s legal relation with third parties
when a third party reasonably believes that actor has authority to act on behalf of principal
and that belief is traceable to principal’s manifestations”
a. Look at the totality of the circumstances
b. From the lens of the third party
o 3.03: Creation of Apparent Authority: created by a person’s manifestation that another has
authority to act within legal consequences for the person who makes the manifestation, when a
third party reasonably believes the actor to be authorized and the belief is traceable to the
manifestation
o Determinative question = Can third party establish “linkage” between statements of authority
by A and manifestation of assent by the P to make such statements
a. 370 Leasing Corp. v. Ampex
i. Facts: Kays was a salesman for Ampex, which manufactured and sold
computer hardware to 370. Joyce was the owner/sole employee of 370. Kays
engaged in communication with Joyce re: contract. Joyce sued for breach of
K.
ii. Held: Kays had apparent authority, so K was enforceable.
1. Manifestation = letters on Ampex letterhead confirming delivery
date, interoffice memo
2. Reasonable belief that Kays, employed as a salesman, has authority
to bind Ampex to the sale with Joyce
o TYPES OF PRINCIPLS
o Undisclosed Principal: Rest. 3rd §2.06: “Undisclosed principal is subject to liability to third
party who is justifiably induced to make a detrimental change in position by an agent
acting on P’s behalf and without actual authority if principal doesn’t take reasonable steps to
notify others of facts”
a. Situation where principal has put agent out there, but doesn't want anyone to know.
b. 6.03: Agent for Undisclosed Principal- When an agent acting with actual authority
makes a contract on behalf of an undisclosed principal,
i. 1) Unless excluded by the contract, the principal is a party to the contract;
ii. 2) The agent and the third party are parties to the contract;
iii. 3) The principal, if a party to the contract, and the third party have the same
rights, liabilities, and defenses against each other as if the principal made the
contract personally
c. Watteau v. Fenwick
i. Facts: Humble sells business to Fenwick, but still acts as manager of the pub.
Fenwick tells Humble not to buy anything but bottled water/ale. Humble still
enters K with Plaintiff to purchase cigars. Plaintiff thinks Humble is owner.
Plaintiff finds out Def is actual owner and sues for breach of K.
ii. Held: Defendant still liable despite non-involvement in transaction.
1. Humble did not have actual authority  told by Fenwick not to buy
cigars
2. Humble did not have apparent authority  Watteau thought
Humble was the principal
iii. Policy: Undisclosed principal still needs to have some sort of responsibility
for the actions of its agent
o Disclosed
a. When an agent and a third party interact, the third party has notice the agent is acting
for a principal and has notice of the principal’s identity. EX: When agent says hey I
am agent and I am working for principal and the principal is McDonalds
b. 6.01: Agent for Disclosed Principal- when an agent acting with actual or apparent
authority makes a contract on behalf of a disclosed principal,
i. 1) The principal and the third party are parties to the contract; and

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 ii. 2) The agent is not a party to the contract unless the agent and third party
agree otherwise
o Unidentified:
a. When an agent and a third party interact, the third party has notice that the agent is
acting for a principal, but does not have notice of the principal’s identity
b. 6.02: Agent for Unidentified Principal- when an agent acting with actual or
apparent authority makes a contract on behalf of an unidentified principal:
i. 1) The principal and the third party are parties to the contract; and
ii. 2) The agent is a party to the contract unless the agent and the third party
agree otherwise
o Policy of Agency  Cheapest Cost Avoider
o Pin liability on the actor who can achieve the greatest reduction of accident costs with lowest
expenditure of precaution costs
o Place liability on that individual  find/protect “deep pocket”

E. RATIFICATION: When there is no authority in P-A-T

o Ratification defined (Rest. 3rd §4.01-4.08)
o A acts without authority, but P is bound if K is ratified
o Rest. 3d. § 4.01: “affirmance of a prior act done by another, whereby the act is given effect as
if done by an agent acting without actual authority”
a. A person ratifies an act by
i. Manifesting assent that the act shall affect the person’s legal relations, or
ii. Conduct that justifies a reasonable assumption that the person so consents
b. Ratification does not occur unless
i. The act is ratifiable as stated in 4.04
ii. The person ratifying has capacity as stated in 4.04
iii. The ratification is time as stated in 4.05, and
iv. The ratification encompasses the act in its entirety as state in 4.07
o Need every ELEMENT of Rest. § 4
o ANALYSIS:
o Did agent act with authority?
o If no, did P ratify actions despite absence of authority?
a. Actor must act or purport to act as agent on person’s behalf [§4.03]
b. Ratification must be expressed in one of four ways
c. Person must have knowledge of material facts of original act in order to ratify [§4.06]
**Note: Cannot ratify K that you can’t reject; cannot ratify by sitting
o Ways to ratify:
o Express Ratification
o Implied Ratification
o Accept when you could reject
o Filing lawsuit
a. Botticello v. Stefanowicz
i. Facts: Botticello enters leasing agreement with option to buy with defendant
husband. Botticello unaware of defendant wife interest in real estate, and
wife then refused to accept agreement.
ii. Issue: Did wife agree to allow husband to act as her agent by ratifying his
conduct when she received proceeds from K?
iii. Held: Husband did not act as agent to wife and wife did not ratify husband’s
conduct without knowledge if circumstances. Walter will be held liable for
breach of contract because he conveyed the full title, when he only has
ownership for ½
1. Ratification problem* if you are going to argue D ratified contract,
you have to make sure that the other party is saying I am doing it on
behalf of the other person or use the manifestation document that
the agent was showing that he was acting on behalf (so Walter
either said or acted like he was on behalf of Mary)

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o 4.01 Ratification Defined
1. Ratification is the affirmance of a prior act done by author, whereby the act is given effect as if done by an agent
acting with actual authority
2. A person ratifies an act by
a. Manifesting assent that the act shall affect the person’s legal relations, or
b. Conduct that justifies a reasonable assumption that the person so consents
3. Ratification does not occur unless
a. The act is ratifiable as stated in 4.04
b. The person ratifying has capacity as stated in 4.04
c. The ratification is time as stated in 4.05, and
d. The ratification encompasses the act in its entirety as state in 4.07
o 4.02 Effect of Ratification
1. Subject to the exceptions in (2), ratification retroactively creates the effects of actual authority
2. Ratification is not effective:
a. In favor of a person who causes it by misrepresentation or other conduct that would make a contract
voidable
b. In favor of an agent against a principal when the principal ratifies to avoid a loss; or
c. To diminish the rights or other interests of persons, not parties to the transaction, that were required in the
subject matter prior to the ratification
o 4.04 Capacity to Ratify
1. A person may ratify an act if
a. The person existed at the time of the act, and
b. The person had capacity as defined in 3.04 at the time of ratifying
2. At a later time, a principal may avoid a ratification made earlier when the principal lacked capacity as defined in
3.04
o 4.05 Timing of Ratification: A ratification is not effective unless it protects the occurrence of circumstances that would
cause the ratification to have adverse and inequitable effects on the rights of third parties. These circumstances include:
1. Any manifestation of intention to withdraw from the transaction made by the third party;
2. Any material change in circumstances that would make it inequitable to bind the third party, unless the third party
chooses to be bound; and
3. A specific time that determines whether a third party is deprived of a right or subjected to a liability
o §4.03 -Acts that may be Ratified: A person may ratify an act if the actor acted or purported to act as an agent on the
person’s behalf
o §4.06 - Knowledge Requisite: a person is not bound by a ratification made without knowledge of material facts involved
in the original act when the person was unaware of such lack of knowledge
o What about the actual knowledge?
 4.06*** when person was unaware of such lack of knowledge- you get the check, nothing in the memo
line, you heard of the publishing company and you go ahead and cash it, but does she knows she lacks
the knowledge??? Yes lacks! She knows she lacks, we are not going to let people profit off of their
stupidity. We are going to say they know
 HYPO #2: Pam argues that she thought the check was for royalties on one of her previous books, which
ABC had published. She does not assert that she neither knew nor had reason to know that it was an
advance on her next book. Who wins?
 (Pam better argument): She might be able to say that she didn't know that it was for the current
book and not one of her past books. She can she reasonably believed that this check was for
her old book → she didn't know that there is something else other there that she needed to
investigate. But don't assume!
o 4.07 No Partial Ratification: A ratification is not effective unless it encompasses the entirety of an act, contract, or other
single transaction
o 4.08 Estoppel to Deny Ratification: If a person makes a manifestation that person has ratified another’s act and the
manifestation, as reasonably understood by a third party, induces the third party to make a detrimental change in position,
the person may be estopped to deny the ratification

F. ESTOPPEL: Person is estopped from denying agency relationship

o Estoppel Defined (Rest. 3rd §2.05) – Elements

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 o P intentionally or carelessly creates appearance of authority
o TP reasonably and in good faith relies on appearance of authority
o TP changes position in reliance on appearance of authority to TP’s detriment
a. Hoddeson v. Koos Bros.
i. Facts: Woman goes to store to buy furniture and gives who she thinks is a
salesman money. Salesman is imposter. Woman sues store for return of
payment.
ii. Held: Remanded for new trial so that Plaintiff could reconstruct estoppel
argument basically since koos bros did not have the diligence to make sure
that they were diligent in seeing who was on the floor
o Person who has not made a manifestation that actor has authority as an agent is subject to liability of
3rd party who justifiably induced to make a detrimental change in position based on reasonable belief

Liability of AGENT – CONTRACTS

G. Principal Defined
o Disclosed Principal [§6.01]
o General Rule: Agent is not party to K between third-party and principal
o Exception: Clear intent of all parties that agent will be bound to K OR agent made K without
authority
o Unidentified (partial) Principal [§6.02]
o Third party knows there is a principal, but principal is not identified
o General rule: Agent IS party to the K
o Exception: If agent agrees with third party to not be part of K
o Undisclosed Principal [§6.03]
o Agent acts with actual authority on behalf of principal (i.e. third party believes the agent has
the actual authority and perhaps is the principal)
o General rule: Agent IS party to K
o Exception: If agent or principal are contracted out of being held liable
o Principal doesn’t exist [§6.04]
a. See Atlantic Salmon
b. 6.04: Principal Does not Exists or Lacks Capacity –
i. Unless the third party agrees otherwise, a person who makes a contract with
a third party purportedly as an agent on behalf of a principal becomes a party
to the contract if the purported agent knows or has reason to know that the
purported principal does not exist or lacks capacity
ii. Rest. (Third) § 6.04, Illustration 2: “A is the president and sole shareholder
of "Marketing Designs, Inc." Wishing to do business as a wholesaler of
seafood, A makes a contract to purchase salmon from T, a fish importer. A
expressly makes the contract on behalf of "Boston International Seafood
Exchange, Inc.," believing that the name more closely identifies A with the
seafood industry. A knows that Boston International Seafood Exchange, Inc.,
does not exist. Payment for the salmon is not made as required by the
contract. A is subject to liability on the contract with T. As A knew, the
corporation on whose behalf A purportedly made the contract did not exist.”
 Atlantic Salmon

Principal Liability in Tort (§§2.04, 7.01, 7.03-7.08)

1) Start with cause of action: Breach of Contract, Tort, or Assault
2) Is there an agency relationship? D will say no, so will have to show another way of control
3) Look at level of control to establish direct liability or indirect liability (vicarious liability)
a. Start with § 7.04, is there direct liability?
b. If not, is there indirect liability? 7.07 or 7.08
i. § 7.07 – Employee acting within Scope of Employment
1. Right to control test—can be day to day or instrumentality of the harm (see Miller v.
McDonalds) AND
a. Contract- level of control of existence of agency relationship

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 b. Tort- what type of agency relationship is it 7.07 employer/employee (day to day) or
7.08 intrumentality of the harm
2. Must be within scope of employment
ii. § 7.08 If non-employment relationship OR outside scope of employment, look to what did the third
party perceive within apparent authority
4) Is there no agency relationship? If none then go to  Look at the authority between principal & agent – Actual, Apparent,
Ratification, Estoppel
5) One step further – How would the Principal or TP protect them in the future?

H. Types of Tortious Liability

o Direct Liability [§7.03(1)]
o Agent acts tortiously with actual authority, or principal ratifies agent’s tortious conduct [§7.04]
a. Typically involves employer-employee relationship
o Principal is negligent in choosing agent [§7.05]
o Principal delegates performance to agent who fails to perform [§7.06]
o Indirect (Vicarious) Liability [§7.03(2)]  just happens while doing his work
o Agent is employee acting with scope of employment [§7.07]
a. 1) An employee is subject to vicarious liability for a tort committed by its employee
acting within the scope of employment
b. 2) An employee acts within the scope of employment when performing work assigned
by the employer or engaging in a course of conduct subject to the employer’s control.
An employee’s act is not within the scope of employment when it occurs within an
independent course of conduct not intended by the employee to serve any purpose of
the employer
c. 3) For the purpose of this section,
i. a) An employee is an agent whose principal controls or has the right to
control the manner and means of the agent’s performance of work, and
ii. b) The fact that work is performed gratuitously does relieve a principal of
liability
o Agent commits tort while acting with apparent authority dealing with third party [§7.08]
a. Liable if appearance contributed or led to the harm of the TP – look at instrumentality
of the harm, did they have control
b. Apparent authority = from third party perspective
c. *Note: §7.08 (Agent acts with apparent authority) linked with §2.03 and §3.03
(Creation of apparent authority)
o 7.03(Comment b) Diff b/w Direct Liability & Vicarious Liability- Significant consequences
may follow from the distinction between direct and vicarious liability. In particular, a
principal's vicarious liability turns on whether the agent is liable. In most cases, direct liability
requires fault on the part of the principal whereas vicarious liability does not require that the
principal be at fault. The distinction may also be relevant to whether a loss is insurable.
I. “Right to Control” TEST – Sun Oil and Humble Oil
o Facts: gas station with substantial ties to an oil company; someone gets hurt and sue oil company
o TEST: Right to Control – whether Sun Oil retained the right to control the details of the daily
operations of the service station
o Humble Oil  Humble held liable based on the control he had over his employees because of
day-to-day operations control
o Sun Oil  Sun Oil not liable based on independent contractor relationship
a. Caveat: What do you think Sun Oil does if they don't like the way Barone is acting?
They can terminate
i. It seems they have indirect control. The termination and ability might have
been more little control than court let on
J. Liability to Third Parties
o Murphy v. Holiday Inns, Inc.
o Facts: Plaintiff slipped and fell at hotel franchised by Defendant Holiday Inn to third party. P
sues Holiday Inn.

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 o Holding: Despite the license agreement, Holiday Inn was not liable because it did not control
the daily operations of the hotel.
a. Contract did not establish master-servant relationship – expressly denied agency
relationship; however, contract doesn’t control agency relationship even when
expressly denied
b. Holiday Inns “given no power to” 1) control daily maintenance, 2) control current
business spending, 3) hire or fire employees, 4) set standards of productivity, etc.
c. Looked beyond contract to the conduct of the parties
o Instrumentality of the harm- D could not have controlled the AC → no evidence that the
franchisor could have controlled what happened
a. If you can make connection of harm suffered to the control of the d then you can hold
the principal liable → need evidence though
b. “Keeping your parking lot secure at night” wont be enough, but saying the particular
security company to use at night in the parking lot gets you close to it → DUNKIN
DONUTS CASE (rape of employee in the parking lot)
c. Court reasoned that the franchise agreement was “primarily designed to maintain
uniform appearance among its franchisees and uniform quality among their products
and services to protect and enhance the liability”
d. Subsequent case: P suing holiday on similar bases. D pulls out Betsey Len and says
we are not principal (Hayward v. Holiday Inn) → diff outcome
e. Old case only had license agreement, this case they submitted license agreement,
operating agreement that Holiday Inn submitted to the franchisee. It was more than a
license agreement and the operating agreement said how “to make a bed fluffy” →
this is important on how court defined day-to-day control. If it lays out how you’re
suppose to maintain your HVAC then Murphy could have shown that the day to day
was in fact controlled by holiday Inn
K. Servant vs. Independent Contractor – control distinction
o Definition of Servant
o Restatement 2nd § 220: In determining whether one acting for another is a servant or
independent contractor, the following matters of fact, among others, are considered:
a. extent of control that master may exercise according to agreement
b. one employed is in a distinct occupation or business
c. kind of occupation and if its done under direction of employer
d. skill required
e. whether employer supplies the instrumentalities, tools and place of work
f. length of time employed
g. method of payment
h. whether work is part of regular business
i. whether parties believe they are creating master-servant relationship
j. whether principal is in business
L. Tort Liability & Apparent Authority
o Miller v. McDonald’s Corp.
o Facts: Miller seeks damages from McD’s for injuries suffered when she bit stone while eating
McD’s food. 3K (owner/operator) was franchisee of McD Corp. 3K had license agreement
with McD for every aspect of operations.
o Holding: McD vicariously liable for 3K negligent food service.
a. “The kind of actual agency relationship that would make defendant vicariously liable
for 3K’s negligence requires defendant have the right to control method by which
3K performed its obligations.”
b. Rest. 3rd §7.08 – “One who represents that another is his servant…causes a third
person justifiably to rely upon the care or skill of such apparent agent is subject to
liability to the third person for harm caused by lack of care or skill of one appearing
to be agent.”
M. OVERVIEW: P Liable in tort if:
o Direct Liability. – 7.04
o Employer-Employee (control) and within scope of employment.

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 o Look to day to day control  sun oil, humble, mcdonalds, holiday inn
o Can you characterize as employee of deep pocket
o Nonemployee Agent (or Employee outside scope of employment) with apparent authority and
apparent authority permits wrongful conduct.
o Vicarious liability – 7.07 (deals with employees), 7.08 (deals with employees acting outside scope of
employment and non employee agents)
o 7.08- control over instrumentality of the harm. Do you have evidence that the principal had
control over the injury

Fiduciary Duties of AGENTS to Principals [AP]

N. Overview
o Duty of loyalty (§8.02-8.06)
o Duty of performance (8.07-8.12)
o Duty of P to A (§8.13-8.15)
O. Fiduciary Duties
o General Fiduciary Principal
o § 8.01: An agent has a fiduciary duty to act loyally for the principal’s benefit in all matters
connected with the agency relationship.
o Fiduciary- managing other peoples stuff (money, assets, lives), because of that they own a fiduciary
duty to put the interest of the other person ahead of their own
o “A person holding the character of a trustee, or a character analogous to that of a trustee, in
respect to the trust and confidence involved in it and the scrupulous good faith and candor
which it requires … [a] person having [a] duty, created by his undertaking, to act primarily for
another’s benefit in matters connected with such undertaking…a person having duties
involving good faith, trust, special confidence, and candor towards another.” → LOOK HERE
to see if a person is a fiduciary
o Fiduciary Duty- "A duty of utmost good faith, trust, confidence, and candor owed by a
fiduciary . . . to the beneficiary; a duty to act with the highest degree of honesty and loyalty
toward another person and in the best interests of the other person."
o Duty of Loyalty
o § 8.02 Material Benefit Arising Out of Position: Agent has duty not to acquire a material
benefit from 3rd party in connection with transactions conducted or other actions taken on
behalf of the principal or through agent’s use of the agent’s position.
a. Reading v. Regem
i. Facts: Soldier tries to reclaim money that he earned as a smuggler while
wearing his uniform. Defendant army fired him and took earnings. Soldier
sued, arguing Def didn’t suffer damages.
ii. Holding: Def entitled to profits regardless of damage b/c Soldier had
enriched himself through position as soldier. Uniform belongs to the crown
 see § 8.05
iii. Why was the Crown entitled to the actual money, rather than say damages
for breach of contract?
1. Very similar to unjust enrichment is breach of fiduciary duty- if you
breach it (if Fiduciary Agent breaches), even if principal cant show
loss, because the breach is so essential to the relationship, the court
will impose profits. When fiduciary gains benefit from the services,
the court puts CONSTRUCTIVE TRUST as if the Agent was
acting for Principal. Since you chose not to do it here then court
will put constructive trust
2. A constructive trust is “the formula through which the conscience
of equity finds expression. Where property has been acquired in
such circumstances that the holder of legal title may not in good
conscience retain the beneficial interest, equity converts him into a
trustee.”→ As if the agent did it for the crown in the first place
o § 8.03 Acting as or on Behalf of Adverse Party: Agent has duty not to deal with principal as
or on behalf of adverse party in transaction connected with agency relationship.

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 o § 8.04 Competition: Duty to refrain from competing with the principal and form taking action
on behalf of or otherwise assisting the principal’s competitors. Agent may take action during
agency relationship to prepare for competition following termination of agency.
o § 8.05 Use of Principal’s Property; Confidential Information: Agent has duty to (1) not use
property of principal for agent’s own purposes or those of third party, and (2) not to use or
communicate confidential information of the principal for agent’s own purposes or those of
third party.
a. Town & Country v. Newberry
i. Facts: Defs were former employees of T&C. Defs started own competing
company targeting plaintiffs customers. Plaintiffs “client list” unique trade
secret that Defs took with them.
ii. Holding: Defs breached fiduciary duty by using “confidential information”
of principal.
iii. **Note: §8.05 is not limited temporally. It is always a duty owed by the
agent to the principal.
o Duty of Performance
 § 8.06 Principal’s Consent
o 1) No breach of duty if the principal consents to the conduct, provided that
 In obtaining the principal’s consent, the agent
 Acts in good faith, discloses all material facts that the agent knows,
has reason to know, or should know would reasonably affect the
principal’s judgment unless the principal has manifested that such
facts are already known or that the principal does not wish to know
them, and
 The principal consent concerns either a specific act or transaction, or acts or
transactions of a specified type that could reasonably be expected to occur in
the ordinary course of the agency relationship.
o 2) An agent who acts for more than one principal in a transaction between or among
them has a duty
 To deal in good faith with each principal.
 To disclose to each principal
 The fact hat the agent acts for the other principal
 All other facts that the agent knows, has reason to know, or should
know would reasonably effect the principal’s judgment unless the
principal has manifested that such facts are already known by the
principal or the principal does not want to know them
 Otherwise deal fairly with each principal
o § 8.07 Duty Created by Consent: Duty to act in accordance with express and implied terms
of any contract between the agent and principal
o § 8.08 Duties of Care, Competence and Diligence: Agent has duty to act with care,
competence and diligence normally exercised by agents in similar circumstances…
o § 8.09 Duty to Act Only Within Scope of Actual Authority and to comply with Principal’s
Lawful Instructions:
a. Agent has duty to take action only within the scope of the agent’s actual authority.
b. An Agent has a duty to comply with all lawful instructions received from the
principal and persons designated by the principal concerning the agent’s actions on
behalf of the principal.
o § 8.10 Duty of Good Conduct: Agent has duty, within scope of agency relationship, to act
reasonably and to refrain from conduct that is likely to damage principal’s enterprise.
o § 8.11 Duty to Provide Information: Agent has duty to use reasonable effort to provide
principal with facts that agent knows, has reason to know, or should know when
a. (1) subject to any manifestation by principal, agent knows or has reason to know
principal would wish to have facts or facts are material to agent’s duties to principal;
and
b. (2) the facts can be provided to the principal without violating a superior duty owed
by the agent to another person.

10
 i. Rash v. JVIC
1. Facts: Rash was an agent to JVIC, and separately owned TIPS. He
made deals with both companies without fully disclosing to JVIC
even though JVIC said he should in K.
2. Holding; Rash violated fiduciary duty to JVIC (principal) to
disclose relationship with Tips.

Fiduciary Duties of PRINCIPALS to Agents [PA]

P. Duty of Loyalty
o § 8.14 Duty to Indemnify: A principal has a duty to indemnify an agent
o In accordance with the terms of any contract between then; and
o Unless otherwise agreed,
a. when the agent makes a payment
i. within the scope of the agent’s actual authority, or
ii. that is beneficial to the principal, unless the agent acts officiously in making
the payment; or
b. when the agent suffers a loss that fairly should be borne by the principal in light of
their relationship.
o § 8.15 Principal’s Duty to Deal Fairly and in Good Faith: A principal has duty to deal with the
agent fairly and in good faith, including duty to provide the agent with information about risks of
physical harm or pecuniary loss that the principal knows, has reason to know, or should know are
present in the agent’s work but unknown to the agent.
o The duty of care owed under § 8.15 is non-delegable.
o EX:Whiplash has breached a duty to Casey regardless of whether the valve was repaired in the
rail line shop by fellow coworkers of the driver or the repair work was undertaken by an
outside independent firm. Whiplash owes a duty to Casey in both cases. The employer is
subject to liability to an employee harmed by the negligence of a person to whom the employer
entrusts performance. The employer does not satisfy his duty by using care to select competent
persons. Hence, an employee can recover whether the harm is caused by the negligence of a
fellow employee or by an outside contractor.

11
 PARTNERSHIPS
Partnerships
A. Overview
i. Most unincorporated entities are general partners
ii. Partnership v. Corporation
1. Partnership
a. Not taxed; gains and losses taxed at partner level
b. Limited life
c. Open liability (partners are jointly and severally liable)
d. Interests non-transferable: if you want to sell, there are limits as to what you
can transfer. Only transfer economic interest, need consent of all partners
2. Corporation
a. Taxed; dividends not deductible and taxed at shareholder level
b. Unlimited life
c. Limited liability
d. Shares typically transferable: can get on EBAY and sell quickly
B. Default State of UPA: 103 – you can contract out of anything you see in the UPA (except for 10 things
listed in 103(b)). If not specifically in contract, then UPA default applies
C. Formation of Partnership
i. UPA (1997) § 101(6): Partner: “A partnership is an association of two or more persons to carry
on as co-owners a business for profit”
1. UPA (1997) § 101(10): Person: “Individual, corporation, business trust, estate, trust,
partnership, association, joint venture, government, governmental subdivision, agency or
instrumentality, or any other legal or commercial entity”
ii. UPA (1997) § 103 : **Non-waivable provisions**
iii. UPA (1997) § 202(c): Formation of Partnership: In determining whether a partnership is
formed, the following rules apply:
1. Joint tenancy, tenancy in common, tenancy by the entireties, joint property, common
property or part ownership does not by itself establish a partnership, even if the co-
owners share profits made by the use of the property.
2. The sharing of gross returns does not by itself establish a partnership, even if the persons
sharing them have a joint or common right or interest in property from which returns are
derived.
3. Person who receives share of profits of a business is presumed to be a partner in the
business, unless the profits were received in payment:
a. of debt by installments or otherwise
b. for services by IC or wages or other compensation to an employee
c. of rent
d. of annuity or other retirement or health benefit to beneficiary, representative, or
designee of deceased or retired partner
e. of interest or other charge on a loan, even if amount of payment varies with
profits of the business, including direct or indirect present or future ownership
of collateral, or rights to income, proceeds, or increase in value derived from
collateral; or
f. for sale of goodwill of business or other property by installments ** NOTE:
This is a rebuttable presumption **
4. **Basically if you share in the profits you are a partner, unless proven otherwise.
a. Subsection 202(c)(3): The sharing of profits is recast as a rebuttable
presumption of a partnership, a more contemporary construction, rather than as
prima facie evidence thereof.
i. The courts generally treat the presumption that it is one of the key
determinative factors in establishing partnership. Just because you
have it, doesn't mean you actually have partnership
D. Test to see if there is a partnership:  totality of circumstances. The one trying to prove partnership bears
the proof
i. Right to share profits – profit generation & must be purpose
 ii. Obligation to share losses
iii. Ownership & control of business
iv. Duration
v. Case Law
1. Fenwick v. Unemployment Comp. Fund
a. Facts: Employer Fenwick entered into agreement with employee Chesire. In K,
they referred to themselves as “partners” with 80/20 profit sharing. Agreement
was formed to potentially increase Chesire’s compensations. Unemployment
Comp Fund sued.
b. Holding: Despite agreement, Chesire was an employee, so no partnership here.
i. TEST: Factors Court looks at to determine partnership relation they
all relate to each other
1. Right to share profits
2. Obligation to share losses
3. Ownership and control of business
4. Conduct towards third parties
5. Dissolution
6. Language & Agreement
ii. Although profits were shared, Fenwick maintained all control of
business, was solely responsible for losses, and Chesire’s employment
was terminable at will.
iii. Court also considers the following factors:
1. Intent of parties- it needs to be consensual. *You don't need a
written contract, you need a meeting of the minds (similar to
agency)
2. Administration of power
2. Analysis Q.3: … A key finding of the court in the present case seems to have been that
"Fenwick continued to have complete control of the management of the business."
a. How might a lawyer draft a "partnership" agreement to make it appear that
Chesire had control consistent with the UPA, without in fact depriving Fenwick
of the dominant position that he would no doubt insist upon as a matter of
business judgment?
i. Can say that they both share control, but how do you protect Fenwick?
You can have Fenwick be ultimate decider: Say both can give their
input on decisions, if the parties cannot agree, the parties shall vote on
the matter. Then weigh Fenwick’s vote (align voting rights with
capital contribution 80/20)
ii. Sharing losses, but cabinet it that it doesn't hurt her that much. Limit
her losses to the distributions → limit her losses to her share of the
assets of the partnership
iii. Give them different titles – and they can make own decisions on the
grounds
3. Martin v. Peyton
a. Facts: PPF entered an agreement with KNK to loan $2.5 million to keep KNK
afloat. KNK made loans look like partnership agreement. Creditors of KNK
suing PPF because saying PPF is a partner of KNK and KNK did not pay
creditors.
b. Holding: No partnership, just a lending agreement
i. PPF had no independent way to make KNK do anything –
passive/indirect control through Hall (not an agent)
ii. Focus on the CONTROL over the operations of the business & PPF
had no control in KNK
iii. What about the veto rights that PPF had? Court said these were just
precautionary, and it prevalent for creditors to protect investments.
Won’t tell the borrower what they can and cannot do, but imposes
some negative covenants that will say no to some things
4. Southex v. Rhode Island Builders Assoc.
 a. Facts: SEM contracted with RIBA to produce home shows. Agreement
indicated that parties were partners.
b. Holding: No partnership.
i. Standard = “TOTALITY OF CIRCUMSTANCES” – Go through
the factor test
ii. Profit sharing- yes, (55/45)
iii. Losses- not shared, because the agreement provided that SEM would
indemnify so they would be on the hook more of the losses
iv. Ownership & Control- Southex not only entered into contracts, but
conducted business with third parties, in its on name, rather than in the
name of the putative partnership (THIS IS A CORE ELEMENT OF
INDPT CONTRACTOR, doing business in your own name)
v. Conduct- did not hold out to other parties, the parties who signed the
agreement at the time did not mean that
vi. Dissolution- silent on what would happen about dissolution,
commentators say if you cant get someone to come into a partnership,
at least say what happens when you dissolve
vii. Agreement/Co-Ownership: It was called “The Agreement not
partnership agreement,” and co-ownership: No
viii. Although profits were split, parties didn’t hold themselves as partners
to 3rd parties. K in SEM’s name (no control by RIBA). SEM was non-
agent independent contractor, who could control how to get the job
done
vi. NOTE: Partnership can be established without any written agreement, so its existence must be
assessed under the totality of the circumstances.
E. Partnership By Estoppel - UPA (1914) § 16
i. When no partnership, you may be able to establish partnership by estoppel
ii. Partnership by estoppel – 4 elements must be proven:
1. Plaintiff must establish representation, either express or implied, that one person is
partner of another, i.e. holding out of partnership
2. Marking the representation by the person sought to be charged as a partnership or with
his consent
3. Reasonable reliance in good faith by the 3rd party upon representation
4. Change of position with consequent injury by the 3rd person in reliance on the
representation
a. Young v. Jones
i. Facts: PW-Bahamas issued unqualified audit letter regarding financial
statement. Based on statements, Plt deposited $550K in bank,
transferred to Swiss America, and then disappear. PWC-Bahamas did
auditing, but Plt cannot sue b/c no jurisdiction. Plt sue PWC-U.S.
based on two theories: (1) PWC- Bahamas and U.S. were partners in
fact, OR (2) partnership by estoppel.
ii. Holding: Applying four elements, there was NO partnership in fact or
partnership by estoppel.
1. Failed to prove element (3) and (4)– detrimental reliance by
3rd party on representation of partnership.
2. Attorney found brochure that advertised both companies at
one, but brochure was not found until after the cause of action
came up.
iii. Rule: Need to have some principal-agent posturing between the parties
iii. Partnership by Estoppel vs. Partnership – Difference
1. Partnership  requires proof of consensual agreement to share profit and control
2. Partnership by estoppel  requires representation by the defendant and reliance by the
plaintiffs

F. Management Rights – Partner’s Authority  Partners Relations to Persons Outside Partnership

i. UPA (1997) § 301-- Partner Agent of Partnership:
 1. Each partner is agent of the partnership for the purpose of its business. An act of a
partner…for apparently carrying on in the ordinary course the partnership business binds
the partnership UNLESS
a. Partner had no authority to act for partnership in particular matter AND
b. Person [third party] knew or had received notification that partner lacked
authority
ii. The effect of Section 301(1) is to characterize a partner as a general managerial agent having both
actual and apparent authority co-extensive in scope with the firm's ordinary business, at least in
the absence of a contrary partnership agreement.
iii. Partner's apparent authority includes acts for carrying on in the ordinary course "business of the
kind carried on by the partnership," not just the business of the particular partnership in question.
iv. In order for the partnership to be bound by a partner's apparent authority, therefore, the third
party asserting the apparent authority theory must not have known or received a
notification that the partner lacked actual authority.
v. Statement of Partnership Authority does not serve as constructive notice to Rollo that Deirdre
lacked authority to enter into the transaction
1. Act of partner not apparently for carrying on in the ordinary course of business binds
partnership only if act authorized by other partners.1
a. Nabisco v. Stroud
i. Facts: Stroud and Freeman enter general partnership to sell groceries.
Stroud tells Nabisco he will not buy additional bread sold to business,
but Nabsico still sells/delivers bread upon Freeman’s request. Nabisco
sues partnership for payment.
ii. Holding: Freeman bound partnership for purchase, so partnership is
liable.
1. Freeman, as general partner, had authority to continue to
purchase bread (within scope of partnership business)
2. TWO person partnership – need unanimity in terms of
decision
vi. TEST: Look at status quo, i.e. normal conduct of business & buying bread for a grocery
store is normal conduct for a partner
1. Note: In stalemate, would need to dissolve partnership
 Partners Relations to Other Partners
i. UPA (1997) § 301—Each partner is an agent of the partnership for the purpose of its business
ii. UPA (1997) § 401 – Partner’s Rights and Duties
(a) Defines partnerships money account
(b) Each partner entitled to an equal share of partnership profits and is chargeable with share of
partnership losses in proportion to the partners share of profits
(c) Partnership shall reimburse partner for payments made and indemnify a partner for liabilities
incurred by partner in ordinary course of business of partnership or for preservation of its
business or property.
(d) A partnership shall reimburse a partner for an advance to the partnership beyond the amount
of capital the partner agreed to contribute.
(e) Interest on loan
(f) Each partner has equal rights in the management and conduct of the partnership business
(j) Difference arising as to matter in ordinary course of business of partnership may be decided by
majority of partners. Act outside ordinary course of business of partnership and amendment to
agreement must be undertaken with consent of all partners.
i. Summers v. Dooley
1. Facts: Summers and Dooley enter partnership agreement for trash
collection business. Summers discussed hiring another employee, Dooley

1
Covalt v. High, 675 P.2d 999, 1002 (N.M. App. 1983) (“as between the partners themselves ... an act involving the
partnership business may not be compelled by the co-partner. If the parties are evenly divided as to a business decision
affecting the partnership ... the power to exercise discretion on behalf of the partners is suspended so long as the
division continues. The rule is different, however, as to transactions between partners and third parties.”).
 refused, but Summers hired anyways. Summers sued Dooley to recover for
expense of hiring additional employee.
2. Holding: No recovery for Summers because partner continuously rejected.
Here, two person partnership – 1 “yes” + 1”no” = NO. Easy to show
deadlock, no maj.
3. Partnership matters are (absent agreement to contrary) decided by majority
vote. Here (1) not in ordinary course of business to hire third employee, (2)
no majority agreement amongst both partners. Summers did not control a
majority vote in two-person partnership.
4. Ordinary course: “The normal routine in managing a trade or business.”
[Planning  Deadlock]2

i. Partner’s Authority – Two principles

1. All partners are agents of partnership with power to bind partnership  partners & third
party
2. All partners have equal rights to participate in management of partnership  partners &
partners
ii. UPA (1997) § 403–Partners Rights & Duties re: Disclosure
(a) Keep books at its chief executive office
(b) Provide partnership, agents, and attorneys access to the books
(c) Each partner and partnership shall furnish to a partner, and to the legal representative of deceased
partner or partner under legal disability
(1) without demand, any information concerning the partnership’s business and affairs
reasonably required for the proper exercise of partner’s rights and duties under the
partnership agreement or this [Act]; and
(2) on demand, any other information concerning the partnership’s business and affairs,
except to the extent the demand or the information demanded is unreasonable or otherwise
improper under the circumstances.
i. Day v. Sidley  extent agmt derogates from statute
A. Facts: Day, senior underwriting partner of law firm, resigns after
merger based on the changes made. Day sues firm for income loss,
damage to reputation, and personal embarrassment b/c of forced
resignation.
B. Holding: Court granted Def MSJ. Day loses.
C. Rule: Partners are free to make any agreement that suits them,
without concern about niceties of partnership theory
i. Here, the contract allowed the partnership to make use of an
executive committee to make decisions
ii. What should Mr. Day have done at the time he was about to join S & A as
manager of the WA office? He could have bargained to be on exec committee,
he could have contracted for a position as sole manager, or been nominated,
could have asked for a clause that so long as he was performing in good faith,
he would serve as sole chair of WA office.

Partnership Governance & Partnership Property

A. Overview
i. Two basic rights of partners:
1. Management rights  not transferable without consent of all partners [see § 401(i)]
2. Economic Interests  transferable unilaterally
B. Partnership Property

2
How do we solve deadlock?
o Keep it in your contact from the beginning at which what happens for the loss of control can be compensated
to get that 60/40
o Can come up with arbitration agreement- arbitration or mediation provision  create a third party and say the
dispute will be submitted to party X
o Ask them to talk about what do you want to do in case this problem would happen
 i. UPA (1997) § 203 – Partnership Property: Property acquired by partnership is property of
partnership and not of partners individually
 Note: Partner is not a co-owner [see § 501]
ii. UPA (1997) § 204 – When Property is Partnership Property
1. (a) Any asset acquired in the name of:
a. Transfer directly to partnership in its own name;
b. Transfer to one or more partners acting in their capacity as partners AND the
name of partnership appears on transfer document
2. (b) If partnership not named, property is acquired by one or more partners is partnership
property IF document transferring indicates buyer was acting in his capacity as partner
3. (c) Property purchased with partnership funds is presumed to be partnership property
4. (d) Property that does not specify person’s capacity on the paper or existence of
partnership and without use of partnership’s assets, is presumed separate property, even
if used for partnership
iii. § 502: Partner’s financial interest in the partnership is personal property, so whoever is given the
person property after death is give
C. Partner’s Interest in Property
i. UPA (1997) § 501 – Partner Not Co-Owner of Partnership Property: Partner not co-owner of
partnership property and has no interest in partnership property which can be transferred, either
voluntarily or involuntarily.
ii. UPA (1997) § 502 – Partner’s Transferable Rights in Partnership: The only transferable
interest of partner is partner’s share of profits and losses (i.e. economic interests) AND partners
right to receive distributions.
iii. UPA (1997) § 503– Transfer of Partner’s Interest:
1. Transfer of transferrable interest is permissible, does not cause dissolution or
disassociation, cannot expect mgmt. materials to come once transferred,
2. (d) Upon transfer, the transferor retains the rights and duties of a partner [i.e.
management rights] other than the interest in distributions transferred.
a. Exception: UPA (1997) § 401(i) – A person may become a partner only with
the consent of all the partners.
b. Putnam v. Shoafs
i. Facts: Putnam held half-interest in partnership that she sold to the
Shoafs. After discovery of embezzlement, Putnam’s estate sues Shoafs
for Putnam’s share since misconduct happened while she was partner.
Did Putnam intend to convey all her rights to Shoafs?
ii. Holding: Yes, interests belong to Shoafs. Putnam did not personally
own specific property in partnership, which she assigned to Shoafs.
(what if you had discovered debt, then you wouldn't want that)
iii. Rule: In general, assignment or sale of partnership economic
“interest” does not make assignee partner.
D. Partnership Capital & Profits
i. Definitions
1. Capital: “Total assets of a business, especially those that help generate a profit.” 
Revenue minus expenses = net profit
2. Capital Account: Running balance reflecting each partner’s ownership equity [UPA
(1997) § 401(a)]
a. Allocation of profits increases capital account
b. Allocation of losses decreases capital account
c. Taking “draw” (distribution) decreases capital account
i. Draw = payment to you from the business
3. *Since services are not included in the definition of cash or property, the value of Expo's
services will not be reflected in Expo's capital account  can contract and say that
services reflect capital, or include it in salary
ii. Partnership Profits
1. General Rule: Profits are divided equally
a. UPA (1997) §401(b): Each partner is entitled to an equal share of the
partnership profits and is chargeable with a share of the partnership losses in
proportion to the partner’s share of the profits.
 2. Exception – UPA (1997) § 103: Partnership agreement may alter the general rule of
equal share of profits/losses
iii. Partnership Losses
1. General Rule: Losses are chargeable with a share of partnership losses
a. UPA (1997) §401(b): Each partner is entitled to an equal share of the
partnership profits and is chargeable with a share of the partnership losses in
proportion to the partner’s share of the profits.
2. Exception – UPA (1997) § 103: Partnership agreement may alter the general rule of
equal share of profits/losses
a. Ex) Partnership Agreement says profits will be divided: 90% to A and 10% to
B. Agreement silent on losses. How are losses allocated?
i. Look at §401(b) – “chargeable with share of partnership losses in
proportion to partner’s share of profits”

Fiduciary Duties in Partnership Law

A. General Fiduciary Duties -- UPA (1997) § 404(a): The only fiduciary duties partner owes to partnership
and other partners are the duty of loyalty and the duty of care.
i. Duty of Loyalty - § 404(b)
ii. Duty of Care - §404(c)
**Statutory language is very specific – “cabined in approach” **
B. UPA (1997) § 404 (b) - Duty of Loyalty:
i. Account for partnership and hold as trustee for it any property, profit, or benefit derived by the
partner in the conduct and winding up of the partnership business (i.e. dissolution) or derived
from use by the partner of partnership property, including partnership opportunity
ii. Refrain from dealing with partnership in conduct or winding up of the partnership business as or
on behalf of a party having an interest
iii. Refrain from competing with partnership in conduct of partnership business before dissolution of
partnership
1. Note: Pursuant to UPA (1997) §103(b)(3): The partnership agreement may NOT
contract out of duty of loyalty, but:
a. May identify specific categories or types of activities that don’t violate duty of
loyalty, if not manifestly unreasonable; or
b. All partners or number/percentage specified in agreement may authorize or
ratify, after full disclosure of all material facts, a specific act or transaction that
otherwise would violate duty of loyalty
i. Meinhard v. Salmon
1. Facts: Meinhard & Salmon buy 20-yr leasehold as JV.
Meinhard provided investment & Salmon managed business.
End of lease, Landlord offers property to Salmon opportunity
w/o telling Meinhard. Meinhard sues.
2. Holding: Salmon, as managing partner, owed Meinhard a
fiduciary duty to inform him of new leasing opportunity.
3. Rule: Joint venturers still hold fiduciary duty of loyalty
[§404(b)(1)]  “Only through disclosure could the
opportunity be equalized”
4. Cardozo- he didn't like the secrecy, the law hates secrecy.
Next time you don't need to bring them into the venture, but
you have to disclosed. Hey M, we got a new lease to build it
out; I wanted to let you know about it. Good luck. In the
courts minds that is what was missing.
ii. See also Sandvick v. LaCrosse (holding breach of duty of loyalty)
1. Difference between Joint Venture (one time transaction) &
Partnership (more than one time transaction)
C. UPA (1997) § 404(c) – Duty of Care: in the conduct and winding up of the partnership is limited to
refraining from engaging in grossly negligent or reckless conduct, intentional misconduct, or a knowing
violation of law
i. Note: Pursuant to UPA (1997) §103(b)(4): The partnership agreement may NOT unreasonably
reduce the duty of care under §404(c)…
 D. UPA (1997) § 404(d) – Duty of Good Faith: A partner shall not discharge duties to partnership and other
partners under this [Act] or under partnership agreement and exercise any rights consistently with the
obligation of good faith and fair dealing.
i. Meehan v. Shaughnessy
1. Facts: Two senior partners at firm decide to leave and prep while still working at the
firm. When asked about departure, they lied. Partners contacted clients on firm’s
letterhead to notify them of departure, prior to giving the firm “client list.”
2. Holding: Partners breached duty of good faith by being dishonest and secretive
a. Partners had right to leave, but breached fiduciary duty by lying and cheating
b. Evidence of bad faith = advantage oneself to the disadvantage of the
partnership (i.e. using firms property to sent client letters)
ii. Lawlis v. Kighlinger & Gray  expulsion
1. Facts: Lawlis expelled from firm after years of alcoholism. Lawlis sued firm for breach
of duty of good faith, arguing that expulsion for “predatory purpose” of increasing firms
lawyer to partner ratio
2. Holding: No breach of fiduciary duty
a. Expulsion was “bona fide” and in “good faith” – helped Lawlis through the
years with alcoholism, severance package
b. Expulsion without cause is okay as long as in good faith, no sneaky, secretive,
or other bad intentions

Partnership Dissolution
A. Definitions
i. Dissolution: termination of previously existing partnership upon the occurrence of an event
specified in the partnership
ii. Dissociation: to remove from association
iii. Partnership at will: partner can leave at any time for any reason w/o liability
iv. Partnership for term: generally don’t have right to leave until term expires, but have the power
to leave with penalty
1. Explicit term for term: duration specified in agreement
2. Implicit term for term: perhaps says “until loaned paid back”
v. Credit back- if you are purchasing business that owes you money, you don't need to put the
partnership only for the business to pay you back. You can simply credit yourself the business
owns you. Assuming business didn't have debt then whatever was used had to be credited based
on everyone’s shares.
1. When banks foreclose, they simply bid the amount of the loan and take the house and
credit that for the loan. If bank loans you 2 mil, and it's the only party at auction, the
bank can bid 2 mil, get your house, and credit the loan. They don't have to pay back or
use cash; they don't need to pay themselves they just need to pay 15% to the person –
Prentiss v. Sheffel (the partnership was divided 15%, 42.5 %, 42.5 %)
B. Process
i. Dissociation does not necessarily cause dissolution of partnership
1. Dissociation occurs upon 10 events [§ 601]
2. § 601(8)- "in the case of a partner that is a trust. " It says that dissociation occurs upon
"distribution of the trust's entire transferable interest in the partnership." Here, the trust
has distributed its entire interest in the partnership to the beneficiaries, so the trust is
dissociated.
a. A partner can dissociate rightfully or wrongfully [§ 602]
i. If wrongful, partner liable for damages [§602(c)]
b. But what exactly does section 601(1) mean when it says "express will"? Does
this require a stated expression of withdrawal or do mere actions suffice, as
long as they indicate the partner's intention to withdraw?
3. If partner’s dissociation does NOT cause dissolution  Article 7 (buyout of dissociated
partner and continuation of partnership)
4. If partner’s dissociation causes dissolution  Article 8 (dissolution and winding up of
partnership)
a. Dissolution follows dissociation in two circumstances:
 i. At-will partnership: voluntary dissociation of partner who hasn’t
already dissociated through another cause
[§ 801(1)]
ii. Partnership for term:
1. At least half of remaining partners decide to wind up business
2. Within 90 days after another partner’s dissociation by death,
under § 601(6)-(10), or wrongful dissociation under §602(b)
ii. UPA (1997) provisions on dissociation and dissolution are subject to change by the partnership
agreement
iii. *When you are thinking of dissolution problem, don't just go to Ch. 7 or 8, go to see first if there
is a partnership agreement, because if they could not contract out of a certain requirement then
they are stuck with default rules
C. Dissociation

Overview
1. Section 603(a) says that one of two things occurs when a partner dissociates from a partnership: (1) the partnership is
dissolved as specified in section 801; or (2) the dissociated partner is entitled to a buyout pursuant to section 701.

2. To determine whether dissociation results in dissolution or a section 701 buyout, we look to section 801. If one of the
events section 801 says result in dissolution, the partnership is dissolved. If nothing specified in section 801 has
happened, then the section 701 buyout applies.

3. Section 801(1) applies only to partnerships at will--it indicates certain events that can dissolve a partnership at will.
Section 801(2) applies only to partnerships for a definite term or particular undertaking--it indicates certain events that
can dissolve a partnership for a definite term or particular undertaking.

4. In addition, the following events result in the dissolution of any type of partnership:
o An event agreed to in the partnership agreement [Section 801(3)]
o An event that makes it unlawful to continue all or substantially all of the partnership's business [Section
801(4)]
o A judicial order after an application requesting dissolution filed by
o One or more of the partners [Section 801(5)]
o A transferee of a partner's transferable interest in the partnership [Section 801(6)]

i. UPA (1997) § 601: Events Causing Partner’s Dissociation **How do we know where to go
from 601**
1. Partnership having notice of partner’s express will to withdraw as partner  voluntary
dissociation
2. Event agreed to in partnership agreement as causing dissociation
3. § 601(4) Expulsion
a. Provided in partnership agreement
b. By unanimous vote of other partner’s if:
i. It is unlawful to carry on business with the expelled partner;
ii. Partner being expelled no longer has economic stake in business
because transfer of most/all of partner’s transferable interest in
partnership; or
iii. Partner being expelled is corporation/partnership that lost right to take
on new business
c. By court order if partner being expelled has engaged in wrongful conduct
4. § 601(7) Partner’s ability to participate ends, OR economic stake ends, by:
a. Partner becoming debtor in bankruptcy, OR taking other non-bankruptcy
actions which indicate insolvency
b. As individual, ability to participate in partnership ends by
i. Death
ii. Mental incompetency
c. If partner is trust/estate, economic interest in partnership ends by distribution of
partner’s transferable interest
d. End of partner who is not individual, partnership, corporation, trust, or estate
 5. On application by the partnership or another partner, the partner’s expulsion by judicial
determination because
a. (i) Wrongful conduct that adversely and materially affected the partnership
business;
b. (ii) the partner willfully or persistently committed a material breach of the
partnership agreement or of a duty owned to the partnership
c. (iii) the partner engaged in conduct relating to the partnership business which
makes it not reasonably practicable to carry on the business in partnership
i. Giles v. Giles: crazy son who got in the middle of business aspects,
and refused to participate in company issues, with lack of
communication. Communication was key in determining that its hard
to further the interests of the company. Court allows disassociation, so
Kelly is liable for existing obligations (debt), but he would be liable
for damages for wrongful conduct. But this is difficult to prove,
because the firm would have to prove how the wrongful conduct
actually damages partnership
ii. UPA (1997) § 602(b): Wrongful dissociation if:
1. Breach of express provision of partnership agreement, or
2. Before the expiration of term (in partnership for term) or completion of undertaking
a. Partner withdraws by express will, unless withdrawal follows within 90 days
after another partner’s dissociation by death, events in § 601(6)-(10)
b. Partner expelled by court order under § 601(5)
c. Partner dissociated by becoming debtor in bankruptcy, or
d. In case of partner who is not individual, trust, etc., partner is expelled because it
willfully dissolved or terminated.
3. § 602(c): Partner who wrongfully disassociates is liable to partnership and partners
for damages cause by dissociation, in addition to any other obligation
iii. UPA (1997) § 603(b): Effect of Dissociation
1. Partner right to participate in management ends
2. Partner’s duty of loyalty under §404(b)(3) ends, AND
3. Partner’s duty of loyalty under §404(b)(1) and (2) and duty of care under §404(c)
continue with regards to events occurring before partner’s dissociation, unless partner
participate in winding up (then that is involvement for after as well)
D. Article 7: Dissociation NOT resulting in “wind up”
i. Partnership can “buy out” the dissociated partner’s interest
1. UPA (1997) § 701: Purchase of Dissociated Partner’s Interest
a. If a partner is dissociated from partnership without dissolution/ wind up of
partnership business, partnership shall cause dissociated partner’s interest to be
purchased for buyout price determined to subsection (b)
b. Buyout price is amount that would have been distributable to dissociating
partner under § 807(b) if on the date of disassociation, the assets of the
partnership were sold at a price equal to the greater of the liquidation value or
the value based on the entire sale of business…
2. § 701(d): Partnership must also indemnify dissociated partner whose interest is
being purchased against all partnership liabilities
3. § 701(e): provides that, if the dissociated partner and the partnership can't agree on a
buyout price within 120 days of a demand for payment, the partnership must pay its
estimate of the buyout price. It can't wait for the dissociated partner to sue
4. § 701 (g): The payment or tender required by subsection (e) or (f) must be accompanied
by the following:
i. (1) a statement of partnership assets and liabilities as of the date of
dissociation;
ii. (2) the latest available partnership balance sheet and income statement,
if any;
iii. (3) an explanation of how the estimated amount of the payment was
calculated; and
iv. (4) written notice that the payment is in full satisfaction of the
obligation to purchase unless, within 120 days after the written notice,
 the dissociated partner commences an action to determine the buyout
price, any offsets under subsection (c), or other terms of the obligation
to purchase
ii. § 702: CONFUSED ABOUT THIS
1.
iii. § 703: Partner’s dissociation doesn’t itself discharge partner’s liability for partnership obligation
incurred before dissociation
1. § 703(b) provides that the dissociating partner is liable for post-dissolution obligations
of the partnership incurred within two years of dissociation if at the time of the
transaction:
a. (1) The other party reasonably believed the dissociated partner was still a
partner
b. (2) The other party did not have notice of the partner's dissociation
c. (3) The other party is not deemed to have knowledge under section 303(e) or
notice under section 704(c). Section 704 allows either the partnership or the
dissociating partner to file a statement of dissociation that other persons are
deemed to have notice of 90 days after it is filed.
2. § 705 says that a dissociated partner is not liable merely because the partnership
continues to use her name after dissociation. Unless there's some other reason to hold
Cheatham liable, such as section 703(b), she's not liable. Like nothing by the company
was done to show that the partner has disassociated
E. Article 8: Dissociation resulting in dissolution
i. UPA (1997) § 801: Partnership is dissolved and business must be “wound up” only upon the
following events:
1. Partnership at will – partnership having notice from partner of his express will to
withdraw as partner; usually not liable if leaving in GF
2. Partnership for definite term– (a) within 90 days of partner’s dissociation by death,
(b) express will of partners to wind up, or (c) expiration of the term or completing of
undertaking
a. Factors to determine at will vs. for term:
i. Parties enter into particular undertaking
ii. Undertaking must be accomplished within specific time
3. Event agreed to in partnership agreement resulting in windup
a. Owen v. Cohen
i. Owen and Cohen orally agreed to be partners in bowling alley
business. Owen contributed $6K to business, but disagreements arose
between parties. Owen filed for dissolution of term partnership.
ii. Held: Differences great enough to prevent business from continuing.
Partner may move for dissolution when other partner’s conduct
negatively affects the business or willfully breaches partnership
agreement. Since this was a for term agreement, the partnership could
not just terminate, but judicial dissolution was possible.
1. Note potential for wrongful dissolution if partnership at term.
Receive may be needed for orderly liquidation.
b. Unclean Doctrine- basically dissolution cases are brought in front of a court of
equity and the unclean doctrine says that you have to come clean of all negative
or bad faith, in order for the court to award you a good judgment.
c. Collins v. Lewis  Mere bad blood between partners is not enough to justify
dissolution.
i. If term, can you leave? Generally no, you don’t have the legal right to
leave, yeah you have the power but you have to leave.
ii. In the case of cafeteria, sticking a partner for a long duration, what if
the person really wants to get out, and they can’t continue to fund,
they have power to leave. But how do we calculate damages?
Damages in this context do include future profits and losses  what
would C be expected to contribute to cafeteria over the life of the term
and then present value it
 iii. If you leave, are you liable to the creditors? Yes for existing
obligations. Generally not liable for future obligations, but if for the
term and wrongful departure, damage calculation may consider future
obligations of business
4. § 4: says that a partnership is dissolved upon the occurrence of "an event that makes it
unlawful for all or substantially all of the business of the partnership to be continued
5. § 5: On application by a partner, a judicial determination that:
a. (i) the economic purpose of the partnership is likely to be unreasonably
frustrated;
i. Continued losses might show that "the economic purpose of the
partnership is likely to be unreasonably frustrated." Section 801(5)(i).
But many new businesses expect initial losses as they develop the
business. These losses are consistent with the partners' expectations
going into the business, so they don't indicate that their economic
purpose is frustrated.
b. (ii) another partner has engaged in conduct relating to the partnership business
which makes it not reasonably practicable to carry on the business in
partnership with that partner; or
c. (iii) it is not otherwise reasonably practicable to carry on the partnership
business in conformity with the partnership agreement;
ii. Power to dissolve is subject to fiduciary duties: Partner at will not bound to remain in
partnership, but cannot “freeze-out” co-partner or dissolve to gain benefits of business without
compensation to co-part
1. If partner refuses to be “bought out” court can appoint “receiver”
iii. UPA (1997) § 802: Partnership can continue after dissolution
1. For the purpose of winding up the business which, once complete, terminates
partnership
2. After dissolution but before wind up, partners can waive right to wind up and end of
partnership
a. Partnership will carry on business as if dissolution didn’t happen, AND
b. Rights of third parties arising out of reliance on dissolution may not be
adversely affected
i. Pan-Saver - continue after wrongful dissolution
1. Partnership at term where Dale wanted to leave. Partnership
agreement included provision re: dissolution by mutual
approval.
2. Held: Partner was able to continue business but entitled to
damages. Partner could retain TMs and patents in order to run
business. Dale’s interest to be paid or secured by bond. Since
it is wrongful termination, then not entitled to keep the patent.
3. Buyout minus damages = what Dale gets
ii. Prentiss – acquisition of assets in “wind up”
1. Partnership at will – two partners “freeze out” third partner
from partnership agreement. 3rd partner sues for two partners
being able to bid on judicial sale of partnership assets.
2. Held: 3rd partner not wrongfully excluded. No evidence he
was injured by judicial sale. He wasn’t forced to sell 15%
share and could have participated in judicial auction.
iv. UPA (1997) § 804: Partner’s power binds partnership after dissolution if:
1. Appropriate to wind up business, or
2. Would have bound the partnership under §301 before dissolution if other party didn’t
have notice of dissolution

NATURE OF CORPORATION
A. Corporation defined: “Entity (usually a business) having authority under law to act as a single person
distinct from shareholders who own it and having rights to issue stock and exist indefinitely”
B. Incorporation Process
i. Draft articles of incorporation
 1. MBCA § 2.02(a)  Mandatory terms: Name, authorized shares, street address, name
and address of each incorporator
2. MBCA § 2.02(b)  Optional terms
ii. File articles with Secretary of State [MBCA § 2.01]
iii. Returned with a fee and comes into existence the moment secretary accepts is- [MBCA § 2.03]
C. Post Incorporation
i. Draft bylaws [MBCA § 2.06] - can be drafted before but cannot become effective till after
bylaws are in place
ii. Organizational Meetings [MBCA § 2.05] – name of directors, adopt by laws, appoint offices
iii. Issue stock
D. Universe of Corporations
i. Public: some aspect of capital structure held by holders obtaining securities through IPO and
secondary markets
ii. Close: no secondary market for stock
iii. For-profit
iv. Professional (i.e. physicians, lawyers, accountants)
v. Non-profit
E. Critical Attributes of Corp.
i. Legal Personality – corp. is entity separate from its owners
ii. Limited Liability for shareholders, unless they are liable by reason of their own acts [MBCA
§6.22(b)]
iii. Separation of ownership and control
1. MBCA §8.01(b): All corporate powers exercised under authority of Board of Directors
2. Board ACT; Shareholders REACT
iv. Liquidity
v. Flexible capital structure (i.e. securities, stocks, bonds)
F. Rights of Shareholders
i. Vote on directors, amendments to articles of incorp, etc.
ii. Inspect corporate books/records
iii. File derivative suits to redress wrongs suffered by corporation
G. Corporate Structure
i. Executive session: meeting of
Board without management present
ii. Stock Option: stockholder has right
to purchase stock at pre-determined
price at sometime in the future;
usually negotiated at a lower value
than stock price
iii. Partnership v. Corporation
Partnership Corporation
Formation Informal Formal/file
Limited Liability No, but… Yes
Transferability No, but… Yes
Continuity At will, unless…provided by Indefinite
agreement to be permanent
Centralized No, but… Yes
Management
Cost Zero Filing fees, etc.
Default Rules Yes More mandates
Flexibility Yes Less so…
Tax Single – partners taxed on dividends; Double – corp. is taxed, and then
partnership filed informational return shareholders are taxed; losses only
that is not taxed; used by corporation
losses can be used by partners
Need Lawyer Probably Yes
H. Pre-Incorporation: Promoter Liability
i. Promoter: someone who purports to act as an agent of the business prior to incorporation
1. MBCA §2.01 Incorporators: One or more persons may act as incorporator(s) of
corporation by delivering articles of incorporation to secretary of state for filing
2. MBCA §2.04 Liability for Pre-incorporation Transactions: All persons purporting to
act as or on behalf of corporation are jointly and severally liable for all liability created
while so acting
ii. Legal issues for promoter
1. Corporation must be in existence, approve K and adopt K for corp. to become party to
the contract to make it liable
2. Unless agreed to otherwise, promoter can be liable if corp. breaches K even after articles
filed (Agency law – partially disclosed principal)
3. If articles not filed, promoter is liable for K
4. Defectively formed entity can enforce contract
a. Southern Gulf Marine – incorp. by estoppel
i. Plt contracted with Def to buy supply vessel. Def refused to comply
because Plt was not incorporated in Texas, as the initial agreement
stated. Def argued K was invalid.  Def estopped from denying
SGM’s corporate statutes, so SGM could sue to enforce K
ii. Rule: 3rd party estopped from denying plaintiff corp. status if
dealt and relied on firm as though it were corporation
I. Why Incorporate?  Limited Liability
i. MBCA §6.22(b): Unless otherwise provided in the articles of incorporation a shareholder of a
corporation is not personally liable for the acts or debts of the corporation except that he may
become personally liable by reason of his own acts or conduct
1. Going into the business, the only thing you will lose is loss of capital invested
2. Encourages people to be entrepreneurial and invest
J. PIERCING THE CORPORATE VEIL
i. Veil Piercing = Creditor Remedy
1. Usually creditors are looking to receive payment for debts
2. Limited liability protects owner of corporation from being liable (shareholders)
ii. Is it improper to incorporate your business for the express purpose of avoiding personal liability?
1. No (but problem drawing line between personal assets and business profit; PCV)
iii. Is it improper to split a single business enterprise into multiple corporations so as to limit the
liability exposure of each part of the business?
1. No (but potential enterprise liability), if you don't respect the separate form that you
establish you might have enterprise liability. From shareholders level you might not
care, because this horiz, not vertical
iv. TEST
1. Unity of interest (b/w shareholders and corporation)
a. Factors
i. Commingling of funds
ii. Undercapitalization
iii. Disregard for corporate formalities
1. Failure to hold shareholder and/or board meetings
2. Failure to keep separate books and minutes of meetings
3. Failure to issue stock, appoint board, etc.
 b. Example: Walkovsky v. Carlton (176)
i. Plaintiff injured by negligent taxi owned by Def’s corporation. Def was
shareholder in 10 separate corporations that each owned two cabs in
corp’s name. Plaintiff sued Def individually for injuries.
ii. P sues for 3 cases: Enterprise Liability- problem is that all of these
corporations look the same, they are well defined as to who they pay and
who they don't, and they only pay for the who gets paid by that certain. It
just gives you one big thinly capitalized liability. Respondeat Superior
(never works). Piercing Corp Veil
1. No unity of interest – Shareholders were not using corp.
accounts for their own purposes
2. Conduct didn’t rise to level of fraudulence, illegality or
promoting injustice
2. Is Conduct fraudulent, illegal or promotes injustice?
a. Sea-land v. Pepper  unity of interest not enough to pierce
i. Sea-land delivered shipment of peppers for Def Pepper Source, but was
never paid. Plt sued Pepper Source, Marchese (sole shareholder of
Pepper other corporations) to be held liable for payment.
ii. Held: Plaintiff showed unity of interest, but not enough evidence to show
limited liability sanctions fraud.
1. Unity of Interest: Marchese shifted money to evade taxes and
for personal accounts.
2. Fraud/Injustice: Only injustice was uncollected debt – needed
more proof that of bad conduct
3. Looking for something deceptive- “don't worry this debt will be
paid,” “using corporate assets, that have no corporate purpose,
like going on vacay”
a. It is something between fraud & failure to pay debt
b. Some element of unfairness, something akin to fraud
or deception or the existence of a compelling public
interest must be present in order to disregard the
corporate fiction
b. Once sea-land can pierce the corporate veil and gets to Marchese, what can it
do? When you get him, you can look to personal to settle the debt → money,
car, house, stock → his ownership in all the other companies is an asset. A
creditor can take an interest in your stock one it has pierced the corporate veil.
It doesn't become a stock holder, it just takes the stock
i. What does it do to sea land?? In respect to the other entities: where
does stockholder fall? Each of companies the creditors are paid first or
the other companies and then sea land gets paid.
ii. No value really because you are last in line for each corp.
iii. So there is REVERSE PVC- it lets you get to shareholder and then
pierce down through other corporate entities the shareholder owns to
get paid when creditors are. Its like you got a judgment from M and
against each entity and treats you as a creditor for all the entities. Need
to show he was treating other entities in the same manipulative ways
1. Go to discovery and go to figure out if other assets or other
wrong ways. Tie net- exception rather than rule
K. Enterprise Liability = horizontal piercing
i. Court ignores separate legal existences of sibling corporations to pierce their veil so that all the
assets are available for creditor claims – “smush” companies together
ii. When two or more corporations are not co-operate as separate entities, but rather integrate their
resources to get a common goal. They can be held liable
1. Factors- whether corp. has common employees, record keeping, centralize accounting,
payment of wages together, common business name, undocumented transfers, unclear
allocation of profit and losses common telephone number
 iii. **Reverse PCV gets you the result if you collapsed all entities under enterprise liability – you are
giving assets of all the shareholders companies. Whether you reverse piece or enterprise liability
you are getting the same liabilities
L. Parent/Subsidiary Control
i. Parent corporation = shareholder to each subsidiary company
ii. Courts more willing to go after PARENT Corp.  use of corporate veil
1. “The evaluation of corporate control claims cannot, however, disregard the fact that, no
different from other stockholders, a parent corporation is expected – indeed required – to
exert some control over its subsidiary. Limited liability is the rule, not the exception.”
(Bristol – holding that corp. veil should not be pierced)
2. Bristol Meyers- parent corporation: owns all the operating companies underneath it.
Parent corp is referred to as holding company, all it does it hold the stock of all the other
entities. Operating assets are in subsidiaries and the parent company holds the stock.
Bristol wholly owns (holds 100% of stock) MCE.
a. F: Company that developed breast implants, sold and marketed them was
subsidiary to a much larger parent company.
b. H: Was under TOTAL CONTROL of the parent company (factors on page 208).
When sued in tort, the subsidiary company could NOT handle the liability.
Court establishes general rule that IN TORT with a Wholly Owned Subsidiary
of a Parent that Directly Controls, piercing the veil is much easier.
i. DE courts do not necessarily require fraud if a subsidiary is found to
be the mere instrumentality of the parent
ii. Easier for the P if they do not need to show fraud
iii. General factors that DE court looks at for determine if mere
instrumentality: 1) parent and subsidiary have common directors or
officers 2) they have common business departments 3) file
consolidated financial statements and tax returns 4) parent finances
subsidiary 5) parent caused incorporation of the subsidiary 6)
subsidiary operated with grossly inadequate capital 7) parent pays the
salaries and other expenses of sub 8) sub receives no business except
that given by parent 9) parent uses sub property as its own 10) daily
operations of the two corps/ are not kept separate 11) sub does not
obverse the basic corporate formalities

PLANNING
 No bright-line rules for deciding when court will pierce corporate veil
 Transaction planner must:
o Help client set up business to ensure benefit of limited liability
o Respect corporate formalities
o Take out minimum insurance
o Avoid “enterprise liability”  separate books and accounts for each corporation
o Need to act like the OWNER  use corporation for corporate purposes
DERIVATIVE LITIGATION
A. Overview
i. Derivative Suits Defined: “Suit by beneficiary of a fiduciary to enforce a right belonging to
the fiduciary; especially a suit asserted by a shareholder on the corporation’s behalf against a
third-party (usually corporate officer) because corporation’s failure to take some action
against third party”
3. Damages recovered belong to the corporation
ii. Direct vs. Derivative Suits
1. Direct:
a. Brought by shareholder in his own name
b. Cause of action belongs to shareholder in individual capacity
c. Arises from injury directly to shareholder
2. Derivative:
a. Brought by shareholder on corporation’s behalf
b. Cause of action belongs to corporation as an entity
c. Arises out of injury to the corporation as an entity
d. Third parties CANNOT sue derivatively must be shareholder
iii. Tooley TEST (current Del. test)
1. Who suffered the alleged harm, the corp. or the suing stockholders,
individually?
2. Who would receive the benefit of recovery or remedy, the corp. or stockholders,
individually?
a. Eisenberg v. Flying Tiger – direct suit
i. Flying Tiger merged into Flying Tiger Line, giving shareholders
stock in Flying Tiger Corp. Shareholders upset b/c merger gives
Corp. power to make all decisions, less shareholder control,
reduced power of their vote to elect/remove directors. Eisenberg
sues.
1. Lower court decided claim was derivative, so to continue
litigation Plt would have to post $35K security based on
statute. Action dismissed b/c security not paid.
2. Here, Eisenberg argues claim is direct, so statute does not
apply.
ii. Held: Claim is direct, so reversed dismissal.
iv. Plaintiff Qualifications
1. MBCA §7.41(1): Must be shareholder at the time of the alleged wrongdoing
2. MBCA §7.41(2): Named plaintiff must be fair an adequate representative of
corporation’s interests
v. Policy Concerns
3. Derivative suits allow shareholders to hold directors accountable
4. Potential abuses:
a. “Strike suits”  nuisance suits brought for settlement value
b. “Meritorious suits”  settled too easily
vi. Indemnification: to reimburse another for loss suffered b/c of third-party’s or one’s own act or
default…to promise to reimburse another for loss
1. Way to protect directors and officers from suit
2. Statutes: Today, all states have statutory provision authorizing director
indemnification to some degree
a. DGCL §145(b): If derivative suit brought by or in right of corporation,
corp. cant indemnify if you’re adjudged liable
vii. Director & Officer Insurance
1. Can purchase D & O insurance policies, even if you cant indemnify
2. Usually very expensive; does not cover gross negligence, fraud, self-dealing, etc.
viii. Corporate Jurisdiction
 1. Internal Affairs Doctrine: “For disputes over corporations internal affairs – the
relations among firms investors and managers – states generally apply the state of
incorporation”
c. Everyone incorporates in DE b/c it has very developed corporate laws
2. For substantive issues  apply law of state of incorporation
3. For procedural issues  apply federal law (or current state law)
i. Cohen v. Beneficial Industrial Loan

B. Demand Requirement on Directors

i. In derivative suits, shareholders must:
1. Make demand OR
2. Allege demand futility (i.e. demand excused when futile)
a. FRCP 23.1: The complaint shall allege “the efforts, if any, made by the
plaintiff to obtain the action the plaintiff desires from the directors…and the
reasons for the plaintiff’s failure to obtain the action or not making the
effort”
ii. Demand: letter from shareholder to the Board of directors
1. Must request that Board bring suit for alleged cause of action
2. Must be sufficiently specific to apprise Board of nature of cause of action and to
evaluate merits of claims
3. “At minimum, a demand must identify the alleged wrongdoers, describe factual basis
of wrongful acts and harm caused to corporation, and request remedial relief”
iii. Futile Demand: usually when Board itself participated in alleged wrongdoing
iv. Process
1. If demand made you can NOT argue futility
b. Basically concede that there is some fraction of the Board that is
“disinterested and independent,” thus subject to BJR
2. If demand futile  shareholder goes directly to court
a. If court dismisses, you can STILL serve demand letter = two bite of the
apple
b. If file demand and Board refuses  you can argue wrongful refusal
v. Standards for Demand Futility
1. New York Standard (Marx v. Akers)
Demand will be excused if complaint stated w/ particularity that:
a. Majority of directors interested; or
b. Directors failed to inform themselves; or
c. Challenged transaction could not have been product of sound business
judgment
2. Delaware Standard (Grimes v. Donald)
Demand excused if there is reasonable doubt as to:
a. Majority of board has material interest; or
b. Majority of board lacks independence; or
c. Challenged transaction not product of valid exercise of business judgment
vi. Purpose of standards: Whether or not you have disinterested and independent body to make
a objective decision
vii. ANALYSIS
1. Clear up conflicts
2. Do shareholders have §7.41 standing?
3. What happened? Who was hurt? What type of remedy appropriate?
4. Direct or Derivative Suit?
C. Independent Directors
i. Types of Directors on Board:
1. Insider Director: inside corporation’s operations
2. Affiliated Director: not employee, but somehow involved w/ corp.
3. Independent Director: no affiliation or connection to corporation
a. Distinct from “director independence” in actual transaction
b. Sarbanes definition of “independence”:
i. “Director may NOT accept any direct or indirect consulting,
advisory, or other compensatory fees from the company other than
fees for service as a director or member of…committee” AND
ii. “Director may NOT be ‘affiliated’ with the company or any of its
subsidiaries”
ii. Public Companies: Sarbanes and listing requirements require:
1. Majority of Board to be independent directors AND
2. Audit committee to be ALL independent directors
iii. Private Companies: must follow “best practices”
iv. Authority vs. Accountability = Tension
1. Accountability: The derivative remedy, “born of stockholder helplessness, was long
the chief regulator of corporate management and has afforded no small incentive to
avoid at least grosser forms of betrayal”
2. Authority: The derivative action impinges on the managerial freedom of directors
3. POLICY  Balancing task: filter needed to separate cases in which the board is
disabled by conflict of interest form making an independent decision in good faith 
SPECIAL LITIGATION COMMITTEES

D. Special Litigation Committees

i. Created in order to defeat derivative litigation
ii. SLC Creation Process:
1. When Plaintiff files derivative suit OR makes demand on the Board, the Board can
appoint SLC of directors to investigate Plt’s allegations
2. SLC must consist of “independent directors”  NO financial stake in the transaction
in Plaintiff’s complaint
3. SLC conducts investigation and writes extensive report
4. Usually, SLC recommends that Plaintiff’s suit be dismissed
iii. SLC gives court MORE reason to grant BJR protection for Board’s decision to dismiss
demand or derivative suit
iv. Court can use its OWN independent judgment to determine merits of shareholder
derivative claims
1. TWO STANDARDS: NY and Delaware
a. Auerbach v. Bennett -- NY Standard
i. GTE made bribes/kickbacks. 4 of 15 directors personally involved
in misconduct. GTE shareholder brought derivative suit against
GTE, Board and Auditor for breaches of duties. Board created
SLC.
ii. Even though majority of board disinterested, demand was excused
for unknown reasons (control & domination).
iii. SLC has ALL authority “to determine, on behalf of board, the
position that the corporation shall take with respect to the
derivative claims on its behalf”
1. This is okay – SLC members added after challenged
transactions occurred
2. §141(c)(2) gives SLC authority
iv. Held: SLC is “disinterested” and BJR protection
b. Zapata v. Maldonado – Delaware standard
i. Excessive compensation case. Shareholders did not make demand,
arguing it was excused as futile. Plaintiff sues. Company appoints
SLC, which suggest dismissal.
ii. Two-Part TEST (only when demand excused)
1. Through written record of investigation and inquiry
into the independence and GF of committee; inquire
basis of committees recommendations
2. Court may go on to apply it OWN business judgment
re: dismissal
iii. BOP: on Corp. to prove independence, GF, and reasonable
investigation
v. Need an economic motivation for bias
1. Plaintiff must demonstrate that “through personal or other relationships the directors
are beholden to the controlling person”
a. Aronson v. Lewis: Chief wrongdoer owned 47% of corporation’s stock and
allegedly had personally selected each board member. SCOTUS HELD:
this did NOT rend board per se incapable of exercising independent
business judgment
b. In re Oracle  structural bias of SLC
i. Four board members engaged in improper insider trading, other
members guilty of bad faith failure to monitor in connection with
issuance of corp. statements re: expected earnings. Company
appointed SLC composed of two Stanford professors. After
extensive investigation, SLC decides dismiss derivative claims.
Was SLC “independent committee”?
ii. Held: Dismissal of derivative suit denied b/c too many collegial
connections between SLC members and defendants.
1. SLC members (professors at Stanford) had prior
relationships with Defs – taught at Stanford, one def
was former professer of SLC member, one def
donated money to Stanford
2. SLC denied knowledge of prioer relationships with
Trading Defs, but it came out during discovery
3. Clearly an issue of BIAS
iii. RULE: “At bottom, the question of independence turns on
whether a director is for any substantial reason, incapable of
 making a decision with only the best interests of the
corporation in mind. That is…focus on impartiality and
objectivity”
vi. ANALYSIS
1. If you have demand:
a. Direct or Derivative?
1. Derivative  Look at §7.41 to make sure shareholder has
STANDING to bring suit.
b. If standing, do you need to make demand?
1. If demand FUTILE  directly file suit
2. If demand MADE  Board of directs accept OR reject
3. If reject  you may file wrongful dismissal suit (but must show
waste or egregious conduct)
 HYBRID ENTITES

Limited Partnerships
A. Distinct from GENERAL partnerships discussed above
B. Involves at least one general partner and one limited partners
i. General partner: jointly and severally liable for debts of partnership
ii. Limited partners: not subjected to partnership debt if remain passive. not liable for obligations
of limited partnership UNLESS:
1. Limited partner is also the general partner, OR
2. Take control of business above his rights as limited partner
a. If takes control and not a general partner, the limited partner is only liable to
those who:
i. Transacted business AND
ii. Reasonably believed limited partner is general partner
iii. G&S Investment v. Belman- dissolution and the partner dies during the litigation, since the
court had not resolved the complaint, the other provision kicked in and a buyout was initiative
1. Buyout clause- give what I owed for capital ledge, and then bump up based on
average of the profits
a. What is good thing about buy out agreement? No one knows who is going
to be on the other side, you never know if you want buy out or paying to be
bought out so negotiate a fair formula
2. Obligation vs. option
a. Obligation they have to buy out (must pay the buyout formula)
b. Option- when partner A triggers agreement, it shall offer to partners B C
and D at some set amount, if they chose nt to exercise then the party can sell
to whoever we want (right of first refusal)
c. Buyout triggered by death :“Key man” life insurance funds buyout  get
the shares but the money from the insurance policy the estate gets
d. Buyout triggered by retirement: Use pension fund?  Insurance
e. Buyout by partners or by partnership? Lump sum or installment?
 Must have at least one general and one limited partner
o Frigidaire Sales Corp. (198)
 Frigidaire entered K with Commercial, a limited partnership (M&B were
limited partners, and Union Corp. was general partner). Frigidaire went
after M&B.
 Held: Individual limited partners can’t be liable for LP’s breach. Frigidaire
knew Union was general partner. Union was not a “shell” for B&M to
operate Commercial. M&B were agents for fully disclosed P & shielded by
liability.
 Rule: Limited partner is only liable if, for personal gain, it takes
control of business above rights as limited partners.
 Even though two individuals were limited partners (rule is that they have
limited liability unless they act in management of partnership), these guys
were protected because their active management were in capacity of
management of general partner
o Holzman - Partnership goes bankrupt; creditors sue two LPs claiming they acted in a
managerial role. Showed they could OVERRULE the GP on basically every
decision. Limited Liability was LOST and they were held liable.
 Partnership entered bankruptcy in late 1943. Russell and Andrews claimed
limited liability. Plaintiff claimed they had taken control of the business
and had same liability as a general partner.
 Did Russell’s and Andrew’s active participation in the business causes them
to lose there limited partner liability protection?
 YES- Had to have on signature of the LP in order for it to go through. The
court says this seems a bit too excessive. DAY-TO-DAY CONTROL: this
 goes back to day-to-day control. Same factors being considered (Cargill,
diff b/w humble & sun oil)
a. *If you act like a general partner- we are going to treat you as one
Limited Liability Partnerships (LLPs)
 General partnership with limited liability for ALL partners – Professional ONLY
 No passive investments – all general partners limited to your own negligence  All active, but only
liable for your individuals negligence
 Typically restricted to tort claims and professional firms (i.e. law firms)  pre existing limited partners,
and state doesn't let you convert to LLC, then use LLLP (in MD conversion issues)

Limited Liability Limited Partnerships (LLLPs)

 Limited liability protection to both general and limited partners
 All considered passive

Limited Liability Companies (LLCs)

 Flexibility of liability depends on statute
 Can be taxed like a partnership, i.e. one-tier taxing

S-Corporations
 Elects to be taxed like partnership
 Limits on number and types of shareholders and capital structures

LIMITED LIABILITY COMPANIES

 Hybrid between partnership and corporation

 Tax advantages of partnerships  income passes through to members (LLC doesn’t pay its own tax)
 Limited Liability of corporations  members stand to lose capital contributions, but personal attachments
are not subject to attachment
 None of the restrictions of S-corporations
 Funding  members typically contribute capital, i.e. cash, property, services
 Don't have to contribute, but contribution may be cash, property, services rendered, a promissory note, or
other obligation to contribute cash, property, or to perform services. ULLCA § 401.

Formation
 1) File articles of incorp. In designated State office [ULLCA § 202(a)]
o Required and option contents [ULLCA § 203]
o Register name; LLC usually must be included [ULLCA § 105]
 Water Waste Land (269)  what’s in a name
 WWL sued individual Defs Lanham and Clark for work WWL performed.
Through oral K, Defs never fully disclosed to WWL they were acting as agents
to PII (an LLC). Defs argue not liable b/c constructive notice to 3rd party.
 Held: Defs liable b/c agents are responsible when they don’t fully disclose
principle. If Defs had disclosed LLC, then wouldn’t be liable.
 “Constructive notice” (based on LLC filing) only occurs once you disclose in
your name that you are LLC.
 2) Designate office or agent for service of process
 3) Draft operating agreement  basic K governing the affairs of LLC, stating rights and duties of
members
 Atochem v. Jaffari- Membership agreement for LLC stated that all disputes were subject
to arbitration OR Court proceedings in CA(idea guy Jafarri lived in CA). Party argued
that the agreement didn’t BIND the LLC. Court said NO. Full effect to Contract
provisions, LLC and members are BOUND by membership agreement unless it is
“Manifestly Unreasonable” & you shouldn't have put it in your contract
  *Section 18-1101: it is the policy of the act to give the maximum effect to the
principle of freedom of contract and to the enforceability of limited liability
company agreements
o **LLCs are flexible, but must carefully draft operating agreements
because they usually are binding.
 De Facto or Estoppel Formation
o De facto corporation- the defacto corp doctrine provides that a defectively formed corporation, that
is, one that fails to meet the technical requirements for forming a de jure corporation – may attain
the legal status of a de facto corp if certain requirements are met. The entity is treated as an
effective entity at the time of transaction (although it wasn't de jure the law treats it like one)
 Common situation- promotor has done everything they are suppose to do, and often they
forget to sign it or they forgot to pay extra 5 dollars of fee that is technicality
 Factors: Proceeded in good faith, valid statute, authorized purpose, have executed and
acknowledged articles of association
o Corporation by Estoppel- where parties at table think they are dealing with corp, everyone is
dealing with that in good faith. Where a body assumes to be a corporation and acts under a
particular name, a third party dealing with it under such assumed name is estopped to deny its
corporate existence
o Caveat: “If P says that you can form the LLC later, lets just get the assets out and then we
will form later on” but for P not saying to wait, that his actions make him subject to the
equitable estoppel  SOME COURTS rule this way. Maybe a factor need to look to see if
represented by lawyer and are they sophisticated?
o Duray Development LLC hired Perrin to do excavation for Duray’s land development
project. Initially Perrin signed on behalf of his excavating company, Perrin Excavating,
but Perrin and Duray’s sole member, Munger, understood that Perrin would form Outlaw
Excavating, LLC and that a new contract would be substituted for the original. Duray
claimed that that the excavation was botched, sued Perrin, and was awarded a judgment of
$96,367.68. The trial court rejected Perrin’s argument that he was protected by the
doctrines of de facto corporation and estoppel.
 Basic argument- Perrin says only outlaw is liable, because he is an LLC. And
everyone knew he was signing on behalf of LLC. Duray does not like that  they
signed second agreement, and at the time entity was not effective
 Who is liable if the corporation is no liable? Promotor is being an agent for the
yet to be formed principle. Because you are agent to for yet to be formed you are
on the hook until entity is formed and ratified and the counter party gives a
release  a lot has to happen for a promotor who dos business on a yet to be
formed entity  Rest 3 (6)of agency
Financial Interests
o Profit and loss sharing – based on the members’ contribution
o Distinct from partnership law’s equal division of profits/loss
o Withdrawal – may withdraw/demand payment of interest upon giving notice specific in statute or operating
agreement

Management Rights
o Member-managed [ULLCA § 404(a)]
o Absent agreement, each member has equal rights in management of LLC
o Most matters decided by majority vote
o Significant matters require unanimous vote [ULLCA § 404(c)]
o Manager-managed [ULLCA § 404(b)]
o Structured more like a corporation, i.e. Board of Directors, etc., you can centralize mgmt.
o Usually just the manager owes fiduciary duties

Assignment of Interest
 o Unless otherwise provided in LLC Operating Agreement, member may assign financial interest in LLC
[ULLCA § 501-503]
o Similar to partnership rules, usually financial, but typically cannot give away everything (mgmt.
membership w/o approval of all members)  you can always contract out

Dissociation v. Dissolution
o Unlike in partnership, the voluntary disassociation does not trigger dissolution (like it does in the UPA
1997 601(1))
o Dissociation: withdrawal or expulsion of a member [ULLCA § 601]
o Dissolution: winding up of LLC triggered [ULLCA § 801]
o By operation of law:
 Upon event specified in Operating Agreement
 Vote of members (specified in Operating Agreement)
 Unlawful to continue business
o By court order:
o Economic purpose frustrated
o Misconduct by members
o Fisk Ventures v. Segal – deadlock & judicial dissolution
o F: Investor gains license for patents and creates LLC with help from Johnson (Fisk Ventures)
for investment. Johnson and Segal each had 2 votes for Board. Resulted in deadlock, Segal
couldn’t raise money, so Fisk LLC files for dissolution.
o Held: Judicial order for dissolution because “not reasonably practical” to carry on business.
 **Note: The Operating Agreement did not contain provision re: deadlock.
 Fisk will get everything including patents: in order to repay the loan put in by Fisk,
you need the patent money. He extended good faith loans to the LLC, took security
interest in all the assets, which meant when loan was not repaid he got to foreclose
on the assets.
Piercing “LLC” Veil
o “LLC Veil” can be pierced even if statute is silent  look to C/L rules
o Standard for piercing “LLC Veil” is higher than “Corp. Veil”
o Statutes need to be overcome to prove your case for LLC
o ULLCA §303(b): “Failure of LLC to observe the usual company formalities or requirements relating
to the exercise of its company powers or management of its business is not a ground for imposing
personal liability on the members or managers for liabilities of company.”
o It is the same two requirements; you need to look more closely at the facts to see if unity of injuntice will
promote injustice (1. Unity of interest 2. Promoting injustice)
o NetJets Aviation: Netjets had a contract with LAC, LAC did not pay, so NJ sued to PCV to
Zimmerman. Issues looked at:
o Issues for the alter ego theory: in DE “where there is fraud or where corp. is in fact a mere
instrumentality or alter ego of its owner”
o Corporation was adequate capitalized, Corporation was solvent, Whether dividends were paid,
Corporate records kept, Corporate formalities
o Where did Zimmerman go wrong? He was sloppy, he could take money out of the company if he
previously loaned money, but he should have been documenting

Fiduciary Duties in LLC Context

o Created by statute  ULLCA §409 – ‘cabined approach’ to duties
o *You can contract out of duty of care and loyalty, but you cant in corporation*
o Manager-managed  managers have duty of care and loyalty; members do not usually have duties to
LLC or its members [ULLCA §409(h)]
o Member-managed  all members have duty of care and loyalty [ULLCA §409(b) and (c)]
o McConnell v. Hunts Sports (292)
  Hunt and McConnell join in JV performed through LLC. §3.3 of Operating Agreement
says members can compete and make other deals. Nationwide steps in to build arena,
McConnell takes deal for self.
 OH Court held: Within contractual rights to compete with own company.
 H: a plain meaning that McConnell could do what he did, they contracted out of the
fiduciary duty
 Hunt lawyers argue- pick up “other,” other means business other than owning
the NHL franchise
 “Boilerplate language”- in the language Hunt should have included that you
can’t compete by owning another NHL team: doubtful that it would be included
because they are being interpreted in any other way. I would never sign the
agreement if I knew they would undercut the deal and steal the stadium away
 Bottom-Line:
o Be sophisticated in K drafting- plain language governs (esp. in
boilerplates)
o Fiduciary duties protect business and people running business; not a
form of creditor protection
o Exculpation provisions  can’t eliminate duty of loyalty, but can
identify specific activities that don’t violate duty [ULLCA §103(b)(2)]
 “Cannot just eliminate the duty of loyalty. But can identify
specific types of categories of activities that do not violate the
duty of loyalty”

CORPORATIONS – Fiduciary Duties

DUTY OF CARE (DGCL §§ 141, 102(b)(7); MBCA §§ 8.30-8.31) did we not bring up duty of care in in re
ebay because this is not a judgement that the business made? So the BJR did not spring up, does duty of
care always go do what the board of directors say?

A. Overview – Obligations of Directors

i. Separation of ownership and control in corporation
1. Owners <------ separation ----- Board of Directors
2. Corporate decision making is with the Directors; shareholders have very little
control, so derivative suits are a primary way to control
3. Board of Directors delegate most of their authority §8.01 to officers and senior
managers of the company to do day to day activities
ii. MBCA § 8.01: All corporate powers shall be exercised by or under the authority of the
board of directors of the corporation, and the business and affairs of the corporation shall
be managed by or under the direction, and subject to the oversight, of its board of directors,
subject to any limitation set forth in the articles of incorporation or to the agreement
authorized under 7.32
iii. Directors owe TWO primary duties (i.e. Corp= principal, Board=agent):
1. Duty of Care
2. Duty of Loyalty
 a. Duty of Good Faith (some courts impose this duty; Delaware Supreme
Court says it is part of Duty of Loyalty)
Secured Creditors  Subordinated Secured  General Unsecured Creditor  Equity/Shareholder
iv. Beneficiaries of directors’ duties:
1. If corp. solvent  fiduciary duty is owed shareholders
a. Solvent: you can pay all debts and have something left over
b. ** In DE, you owe fiduciary duties to shareholders until absolutely
insolvent **
c. Residual owner (who can get paid last)- shareholders
2. If corp. insolvent  fiduciary duty to creditors
a. Insolvent: assets less than liabilities
b. Residual owner- creditors
3. If corp. is nearly insolvent  then it depends on “Zone of insolvency”
a. Measured by valuation
v. Objective of Directors’ Duties = MAXIMIZE SHAREHOLDER VALUE
a. Dodge v. Ford - DIVIDENDS
i. Ford Motor Co. super successful. Ford was dominant shareholder.
From 1911-1915, FMC paid $41 million in dividends. In 1916,
Ford cut dividends to $1.2 million and re-invest into the business.
Dodge brothers (minority shareholders) sue FMC to resume
dividend payments. Two issues: (1) Require FMC to issue special
dividends? and (2) Enjoinment of construction on Plant?
ii. Held (1): FMC must issue special dividends
1. RULE OF LAW re: DIVIDENDS: Court will
generally leave dividends to direction of directors, but
will intervene if refusal to pay amounts to “such an
abuse of discretion as would constitute fraud, or
breach of good faith” or is arbitrary  Here FMC was
so successful that it could have still issued dividends and
reinvest
2. Improper to stop dividends  Ford ran FMC as
“eleemonsynary”(charitable) institution
3. Business corp. must be organized and carried on primarily
for the stockholders.
iii. Held (2): FMC can continue with construction of plant
1. RULE OF LAW re: Expansion: Court will not
interfere with decisions that come under business
judgment of directors
2. POLICY: Judge are not business experts. BJR
B. DUTY OF CARE – tells directors to not be negligent
i. When does duty of care apply:
1. Day to day management
2. Approval of transactions
3. Disclosure
ii. MBCA § 8.30(a): Standard of Conduct: “Each member of the board of directors, when
discharging the duties of a director, shall act:
1. In good faith, and
2. In a manner the director reasonably believes to be in the best interests of the
corporation”
a. Similar to the negligence standard exercise degree of skill, diligence and
care a reasonably prudent person would exercise
b. Distinct from negligence:
i. Reasonably prudent business person
ii. Tempered by Business Judgment Rule
c. BJR= evidentiary presumption, it is presumed unless proven otherwise
i. Policy- you don't want frivolous lawsuits, cost efficient
 d. To overcome BJR= show more than negligence, gross negligence, reckless
conduct, breach of duty of loyalty, fraud, illegal conduct. Conflicts of
interest ALWAYS get you past
** NOTE: Aspirational  How you HOPE business people will act
In hindsight, there may be mistakes. But, if there is GF, director is protected
against liability, i.e. BJR
iii. MBCA § 8.31(a): Standard of Liability: “Director shall not be liable to corp. or
shareholders for any decision to not take action or any failure to take action, as a
director, UNLESS the party asserting liability establishes:
1. No defense posed by director based on (i) provision in the articles of incorp.
authorized by §2.02(b)(4) or, (ii) protection afforded by §8.61 (for compliance to
§8.62 or §8.63), or (iii) protection afforded by §8.70, precludes liability; AND
2. Challenged conduct consisted or result of:
(i) Action not in good faith; or
(ii) A decision that
(A) director did not reasonably believe to be in best interest of
corp.; or
(B) as to which director was not informed to extent director
reasonably believed appropriate in circumstances; or
(iii) lack of objectivity due to director’s familial, financial, or business
relationship with, or lack of independence due to director’s domination
or control by, another person having material interest in challenged
conduct…or
(iv) sustained failure of director to devote attention to ongoing
oversight of business and affairs of corp…or
(v) receipt of financial benefit to which director was not entitled to any
other breach of director’s duties to deal fairly with corp. and its
shareholders that is actionable under applicable law
** NOTE: This is what directors are really liable for – being BAD actor

C. BUSINESS JUDGMENT RULE (BJR) – insulates directors from liability

i. Rebuttable Presumption  in making business decision, the directors acted on informed
basis, in good faith, and in the honest belief that action taken was in best interests of
company (Aronson v. Lewis)
ii. What happens when BJR goes down
1. If you bring back down by reckless conduct or gross negligence- look at 102b7, if
they contracted out of duty of care then they are not held liable
2. If you bring down for duty of loyalty, bad faith or illegal dividends- the burden shifts
to D to show entire fairness
iii. PLAINTIFF BEARS BURDEN to bring down the BJR must show fraud, illegality,
conflict of interest or self-dealing by the directors
1. Shlensky v. Wrigley
a. Shlensky was minority stockholder in corp that owned Chicago Cubs and
operated Wrigley Field. Cubs losing money. Wrigley owned 80% stock and
refused to install lights – believed baseball is day-time sport and night
games negatively impact neighborhood. Shlensky sues in derivative suit.
b. Holding: Complaint dismissed – Wrigley wins
i. Wrigley not motivated by profits, not a business decision -- Day-
games will not guarantee profits
ii. Shlenksy failed to provide evidence to bring down BJR
iv. Court won’t interfere with directors decisions unless evidence of fraud or dishonest
practice
1. Kamin v. AmEx
a. Def Corp. and officers refused to sell stock on open market (at Plt’s
demand) and distribute to shareholders as special dividend. If AmEx sold
stock on open market, would have received tax benefit. Kamin files
 derivative suit against Def for breach of duty of care and duty of
loyalty/self-dealing.
b. Held: Although decision to declare dividend may have been unwise, it is
outside the judgment of the court unless evidence of fraud or dishonesty
i. No breach of duty of care  evidence that directors thought of
alternative options
ii. No breach of duty of loyalty  4 of 20 directors were
officers/employees of corp., but no evidence that they dominated
or controlled other 16 directors
v. To be protected by BJR: Directors must gather and review all materials “reasonably
available” to them and make well-informed decisions
1. Duty of board to be informed  Process, process, process
2. Duty of Disclosure to Shareholders  Primarily in mergers
3. Courts will look at totality of circumstances to determine if decision is informed
4. Smith v. Van Gorkom (312) – breach of duty of care
a. Not only are BOD protected from duty of care by BJR, the corporation can
exculpate for monetary damages from duty of care (102b7)
b. Plts bring class action suit against Def corp. Trans Union and its directors.
Van Gorkom was CEO of Trans Union and ready to retire. VG had CFO
compute leverage buyout price of $50-$60. VG, without approval, agreed
for friend Pritzker to sell company for $55/share (highest price ever).
i. “Lock-up” = encourage someone to come in as friendly bidder, set
up price, get locked in (scares other bidders)
c. Held: Directors breached duty of care because they were grossly negligent
in failing to inform themselves of transaction they approved, and failed to
disclose all material info to shareholders.
i. VG promoted deal and sale price, then went to Board
ii. Board made no attempt to learn “intrinsic value” of company –
decision based on VG presentation, CFO statement, no merger
agreements shown
iii. Board decided in 2-hour meeting, with no notice that buyout would
be subject of meeting and no emergency to make immediate
decision
d. Significance: Weakened BJR requiring simple, rather than gross negligence
for director liability
i. BUT, DGCL§102(b)(7): allows exculpation for gross negligence
and misconduct
ii. What does the law do for the BOD
1. It depends on the wrong of the director
2. Indemnification statute- basically indemnifies from the
ordinary course of the business, but if its harm for the
corporate entity It wont help you for the harm you caused
3. So no indemnification in this process, what else does
court do to protect BOD
4. Directors and officers insurance liability- it will cover
them for gaps the law wont let them
iii. 102.b7 of DE corporate law came in out of Gorkem- now you
know why duty of loyalty and good faith is so important, that's
the only place you can get damages
1. Therefore most companies contract out of duty of care –
NO LIABILITY under 102.b7 it is an affirmative defense.
They are not liable for this duty of care – (in response to
insurance products increasing) limiting liability for the
directors. You have protected BOD, not officers, it is just
for BOD can exculpate BOD (for being negligent, grossly
negligent,)
  Where did Board go wrong?
e. Board can rely on officer reports, but must be an informed calculated
opinion [DGCL §141(e)]
i. Van Gorkom: Directors didn’t perform due diligence and did not
see any report
f. Board can rely on outside advisor reports [DGCL §141(e)]
i. Van Gorkom: there were no outside advisor reports
ii. Selection and reliance must be reasonable
vi. If Plaintiff brings down BJR: DEF has to prove FAIR transaction to not be held liable:
1. Intrinsic Fairness TEST – Factors – from Bayer
a. Timing
b. Initiation
c. Negotiation
d. Structure of transaction
e. Disclosure and approval by directors
f. Disclosure and approval by shareholders
vii. BJR protects decisions (to act and not to act); but, BJR does NOT protect a complete
failure to make any decision
1. Francis v. United Jersey Bank – total failure to act as director
a. What was this business? This company was insuring insurance company
b. Pritchard was director of P&B re-insurance broker. Her sons (also directors)
misappropriated $12 million by documenting that they are “loans”.
Pritchard didn’t attend Board meetings, knew nothing of corp’s affairs, and
didn’t pay attention to duties. Trustee sues Pritchard’s estate. There was
nothing left in the bank to pay the re-insurers since the sons took all the
money
i. Red flag- taking shareholder loans out of the account, linear trend
that the loans were getting larger
c. Held: Pritchard breached duty of care and liable for losses.
d. IT IS NOT A DEFENSE- to say you don't have capacity to be a director,
the court says she has a duty, and at least understanding the basics of what it
is all about is needed
e. Basic concept- directors have a duty to know the basic understandings of
the company they are running. You don't have to be a financial expert (there
just needs to be one), duty to know what you don't know
i. If you ask someone to help and then get duped then you can use
the 141(e) defense  which was used in van gorkem
f. Why did the BJR protect her- she wasn't making decisions. It is critical, that
if someone suing and the client hasn't made a DECISION (it protects to act
or not to act), you have to at least deliberate, and then BJR can spring up
i. If the decision is to do nothing- that is protected by BJR, here she
didn't do anything
g. Does not protect a complete failure to make any decision
i. Directors must stay informed and be aware of misconduct – need to do something to have
basic understanding of business  Pritchard closed her eyes]

 BEST PRACTICES for BOD:

o Give BOD of 48 hours of meeting all documents you will be giving
o Concern- when you have a like minded group of individuals so you have groupthink
o Concern for silent board meetings

 EXAMPLE: Corporation owns and operates a chain of health spas. The spas are in financial trouble.
Annual spa membership fees are paid in advance. Corporation continues to sign up members and hire
employees. Corporation has $5,000, which it proposes to use for an advertising campaign. Someone on the
board said the advertising will help about 5% only.
 o In the board room: Duty of care
 Outside counsel: will tell them to bring in real experts, outside advisors, long board
meeting to make sure we are making an informed decision
 You don't have to do everything that van gorkem said; you just need to the particular
circumstances. Not a static process, process
o Insolvency: if you are saying books and records show we are not clearly insolvent, all we have is
5K liquid assets  we may decide we are solvent and our duties fair to shareholders
 Is there a conflict of interest? If one of our directors knows a shareholder really well, and
he or she is making a decision solely to preserve relationship then you might have
conflict of interest. Then you look at AMEX, one conflict is probably not deliberating
o People buying advance $500 you probably have a claim that the person is a creditor. DE not so
sure, they are very uneasy for shifting the duty at all until you are in bankruptcy. You don't know
if you are nearing insolvency then your residual owner becomes the creditors and not shareholders
 Maybe you have them pay by day, so that saves you from getting more people when they
are nearing insolvency

*If yes to all, then the defendants have to show entire fairness

DUTY OF LOYALTY (DGCL §144)

A. Overview
a. Duty of Loyalty: “Duty not to engage in self-dealing or otherwise use position to further personal
interests rather than those of the beneficiary”
i. Not protected by the BJR
b. Includes claims for: only need one of them
i. Self-Dealing
ii. Corporate Opportunity
iii. Conflict of interest
iv. Good Faith  Duty to Monitor
v. You cannot exculpate corporate directors from duty of LOYALTY- they are
monetarily. LLC is different because like DE you can waive all duties
c. Quorum Statutes
i. DGCL § 141(b): Quorum defined: A majority of the total number of directors shall
constitute a quorum for the transaction of business unless the certificate of incorporation
or the bylaws require a greater number… vote of the majority of the directors present at
the meeting at which quorum is present shall be the act of the board of directors unless
the certificate of incorp. or bylaws shall require vote of a greater number.
 Majority constitute quorum, need a quorum to act
 This statute discusses regular business decisions
 EX; Alice and Ed vote for transaction. Dr. Dreyfus abstains. Has it been
approved? Because the majority were present at meeting. 144a(1) comes
 into play to see can it come to in effect (2/4 is not majority, so in order to
get 144a1 protection. What would happen? Company can still do contact
since 141 approval, if they get sued cant at summary judgment stage say
144a1 and have case kicked out, they just need to do what Dreyfus did in
Bayer & go to the total fairness! 144a1 gives a blessing on the deal
ii. DGCL § 144: Interested Directors; Quroum (like Bayer)
(a) No K or transaction between a corporation and 1 or more of its directors or officers…
shall be void or voidable solely for [reason of being interested] if:
(1) Director approval  Material facts as to director/officer’s relationship to K
are disclosed or are known to the Board of Directors, and Board in good faith
authorizes contract by votes of majority of disinterested directors, even if less
than quorum; OR (Common or interested directors made my counted* (144b)
(2) Shareholder approval  Material facts of director’s relationship are
disclosed or known to shareholders entitled to vote, and K is approved in good
faith by vote of [“disinterested”] shareholders; or
(3) Entire fairness test  K or transaction is fair as to the corp. as of the time it
is authorized, approved or ratified, by the Board of directors, committee, or the
shareholders. (This is Bayer)
(b) Common or interested directors may be counted in determining quorum at meeting
of Board or committee that authorizes transaction.
 If the defendant can prove ONE of the above (a)(1)-(3), the burden
SHIFTS back to Plaintiff.
iii. ANALYSIS
 Conflict of interest? (i.e. Dreyfus hiring wife)
 Do we have quorum under § 141?
o Under §141(b), do we have quorum, i.e. “majority of total number of
directors”?
o Under §141(b), do we have majority vote of directors present at the
meeting?
 Do we have “cleansing,” i.e. director approval, under §144(a)(1)(2)(3)?
B. SELF-DEALING & CONFLICT OF INTEREST
a. Self-Dealing: “Participation in a transaction that benefits one-self instead of another who is owed
a fiduciary duty”
b. To prove NO breach of duty: BOP on Defendant to show transaction was FAIR
i. Fair price and fairness of dealings
ii. Entire fairness must be shown even though no formal process
c. One’s conduct can influence the duty of loyalty amongst various members of a Board of Directors
i. Bayer v. Beran (334) – structural bias; entire board has duty
 Plts filed derivative shareholder action against Def directors re: Board’s
decision to pay for radio advertising that employed the president/director’s
wife (who is opera singer). Did Board breach duty of loyalty by approving
radio deal?
 Held: Under rigorous scrutiny of Board’s decisions (since no BJR
protection), no breach of duty by directors.
 BJR yields to the rule of undivided loyalty- designed to avoid possibility of
self-interest
 A business decisions that would not typically merit an analysis under the
normal business judgment rule will undergo more careful scrutiny when
there is a conflict of interest. The duty of loyalty trumps the business
judgment rule.
 BJR walls come down  Burden on Directors to prove that transaction was FAIR
 Focus on balancing authority and accountability
 Non-fiduciary duty at issue = transaction was ultra vires (beyond corp’s
power) b/c no formal board action took place
  Court says informality is okay, court characterized the transaction as an arms-
length deal with the wife. She helped promote others, she got paid less (this is how
you can protect from 144)
 Structural bias- when an individual working with Dreyfus doesn't have
conflict per se, but home working on this close-knit community favors a
bias in whatever Dreyfus wants. Relations as oppose to economic incentives
are enough to create conflicts in the board room
ii. Benihana of Tokyo (339) – play both sides = conflict of interest: 141A approval
 Benihana needed money to renovate. Benihana makes deal with BFC to sell
preferred stock. Abdo on both sides of deal b/c he was on both Benihana
and BFC Boards. Was there conflict of interest?
o Benefit of BFC- economic benefits, BFC was going to earn a lot of
return and sizeable interest
 Has the ability raise money in market—most c corporations, Class A stock
and Common Stock (lowest chain of ownership, residual owners), one stock
above them and that is class A stock, preferred stock (debt & equity, gets
paid dividend and convertible into common) is stock that has the right to get
into common stock
 Debt holder- can only get principal and interest
 Common stock holders- can hold dividends, special dividends, but value of your
stock increases as value of company increases
 Held: No breach of loyalty for dealing with Abdo.
 When director is on both sides of the transaction, if the other directors know
about the conflict, and the majority of the ones un-conflicted still vote to allow
the transaction, then it is protected by the business judgment rule  Here,
Directors spend a lot of time in process of decision making, and transaction was
fair deal approved by majority of disinterested directors
 BJR could only be overturned for evidence of “corp. waste”
o Corporate waste: an exchange of corp. assets for consideration so
small as to lie beyond the range at which a reasonable person might be
willing to trade
 Deference to the business, one that Van Gorkem did. They say they knew he was
in both places, we have to treat them with sophistication
 141a challenge- were they directly informed? Or were they really disinterested?
They didn't say we just love Abdo deals, they had other offers and then they
eventually chose Abdo with the disinterested committee, you are giving court the
confidence in the judgment even though there is a taint of bias
C. CORPORATE OPPORTUNITY DOCTRINE-
a. Objective: Deter appropriations of new business prospects “belonging to” corp.
i. Look at corporate opportunity from the perspective of the person trying to prove
corporate opportunity
b. Targets:
i. Officers & Directors of corporation
ii. Dominant shareholders who take active role in managing firm
c. TEST (Del.) -- Corporate opportunity exists where (one way you can show breach of duty of
loyalty): -- Totality of the circumstances –
i. Corporation is financially able to take the opportunity
 Need information re: financial stability of company, i.e. insolvency
ii. Opportunity is in the corporation’s line of business
 Line of business: “activity to which corp. has fundamental knowledge,
practical experience, and ability to pursue” (In Beam)
 Look to the intent of business, who they target
iii. Corporation has interest or expectancy in the opportunity, and
 Interest: something which firm has a legal right (i.e. renewal right)
  Expectancy: takes something which, in ordinary course of things, would
come to the corporation
iv. Embracing opportunity would create conflict b/w director’s self-interest and that of
the corporation
 By taking opportunity for his own, corp. fiduciary will thereby be placed in
a position [inimical] to duties to the corp. (In Beam)
 At the time of dispute Broz’s duties flowed to CIS, he had no relation to Pri
because Pri had not bought CIS yet.
d. Court must balance all factors in particular case -- No single factor dispositive
i. In Beam ex rel. Martha Stewart – no corp. opp. usurped
 Beam sued Stewart and Doerr (member of MSO Board) for taking corp.
opportunity by selling MSO stock to investors to raise capital. Instead of
selling personal stock, corp. should have been able to issue their own stock
to raise capital.
 Held: NO usurp of corporate opportunity. Court balanced all 4 factors of
test:
 MSO financially able to take opp. b/c they had enough authorized and unissued
stock
 Selling stock was not in “line of business as selling advice to homemakers”
 No facts to imply MSO was interested or expecting need of additional capital
 No conflict of interest between director and corp. b/c Del. allows directors to
buy/sell stock so long as in good faith
e. Del. doesn’t require director disclose opp. for pre-approval
i. Broz v. Cellular Info Systems – no corp. opportunity
 Broz wore “two hats”: (1) Shareholder/president of RFBC, and (2) Board
member of CIS. CIS in financial difficulty and being acquired by
PriCellular. Broz finds opp. to buy cell phone franchise Michigan-2. CIS
doesn’t want franchise, so Broz buys franchise under RFBC. PriCelluar
sues Broz for breach – didn’t present opp. to CIS/Pricellular.
 Held: Broz wins. At time of purchase, CIS was insolvent and formal
presentation to board of opp. not req. in Del. Under TEST:
 RFBC bought the investment, CIS not financially able to take opp. b/c it was
insolvent
 Opp. possibly in “line of business” but company was insolvent
 No expectancy re: new license since CIS was divesting most of its operations
 At time, PriCellular had not merged with CIS yet. Broz duty to CIS, not
Pricellular.
 This was a two step merger- go to marker than becomes shareholders for
minority who didn't want to sell
f. Security investments can be in the “line of business”
i. In re eBay Shareholder Litigation – corp. opp. usurped
 Goldman Sachs “spinning” IPO shares to eBay execs for low price.
Shareholders bring derivative suit against directors/officers for taking
opportunity to buy shares in IPOs, when it should have been given to
shareholders
 If Goldman Sachs could have given the stock to Ebay, then Ebay could
have flipped the stock and made a profit
 Held: Shareholders win b/c security investments were corp. opportunity that
eBay insiders usurped.
 Investing in IPO shares was in “line of business” for eBay b/c they had 100s of
short-term and long-term investments, even if not eBay’s principle business.
 You would have thought that Ebay was more of a marketplace than an investment
house – given that corporation was the entity hiring Goldman Sach there was an
expectancy that the money would flow to EBay not the individual directors
  Conflict of interest- the directors will hold more favorable to Goldman because
they know they will get preferential treatment (sprinning), directors might not
market for underwriters, they'll go straight to GS
 Make separate claims- COUNT 1: breach of fiduciary duty of loyalty (put
the interest of shareholders before anyone) COUNT 2: breach of fiduciary
of loyalty breach of conflict of interest (tainted) COUNT 3: breach of
loyalty corporate opportunity
ii. How would we help DIRECTORS- 144, fully informed basis put it out in front
D. Zapco Problem-
a. When you are defending a corporate opportunity doctrine, make sure you identity the corporate
opportunity (is it the job and compensation, is Zapco in the business of owning this stock), Zapco
woulf say general line of business.  Don't think it is a corp if he was just there, but if George is
at a booth for Zapco and the W people come to you. Harder to defend because looks likes its
presented to Z.
b. 144- if full disclosure was made and the company didn't want it, then its fine for George.

E. DOMINANT SHAREHOLDERS AS FIDUCIARIES

a. DOMINANT Shareholders (i.e. controlling shareholders) OWE fiduciary duties to the minority
shareholders (i.e. non-controlling shareholders)
i. Shareholders acting as shareholders owe NO fiduciary duties to each other- DEFAULT
rule. If you are controlling 50.1 then you are controlling and duties arise. You can have
less than 50$% control, but you have de facto control (have a blocking vote, have
directors on board)
b. Duty of Complete Disclosure
i. Even if controlling shareholder is not a director/officer, duty to disclose to minority
shareholders all the information reasonably needed to protect their interests  C/L Duty
Zahn v. Transamerica
 TransAmerica was controlling shareholder of Axton-Fisher, electing majority of
Board. A-F had two types of stock:
o Class A: small part owned by Trans, had no voting rights, but entitled
to double liquidation dividend, right to convert to Class B anytime,
and callable by corp. at $60/share (Preferred)
o A call is an option- can call and get it
o Put- want the company to buy it back
o Class B: ALL owned by Trans, voting rights, ½ liquidation dividend,
not convertible, not callable. (Common_
 Trans knew value of tobacco increased, decided to sell, and liquidate. Three
options to deal with Class A shareholders: (1) give full notice, (2) liquidate
without calling Class A shares [best for A shareholders], or (3) call A shares
 without disclosure of expected liquidation and valuable inventory [best for B
shareholders]. Trans did not disclose and B shareholders received all the value of
liquidation.
 Held: TransAmerica breached fiduciary duty to Class A shareholders by not
disclosing.
o There was a huge demand overseas for tobacco, what happens when
you want cigarettes at home? Shortage, so price of cigs increase. All
the tobacco leaf was valuable now; the industry could demand really
high prices, which means the inventory was valuable. Trans had
people on board who knew all of the decisions and where tobacco
was,
o 100 shares of A – 100 share of B (have $6000 spend)
o Need to keep the 2:1 so $40 per share for A, $20 per share for
B. Class B are the residual owners, the class that directors owe
duty. If you call now, then class A needs $60 to redeem, and
then that leaves nothing for B
o Just because you owe duty to class B as residual owners, you can’t
screw all other classes of stock
 The real party on the hook is the controlling shareholder (because of their defacto
control they had duty to make people do right thing, and you cant have something
that benefitted you to the detriment of others)
 RULE: Redeem after giving notice of the material facts and intent to
liquidate.
o Def controlled the Board of directors and decision to redeem without
notice was decided by directors. Directors owe duty to disclose to the
shareholders.
c. Parent-Subsidiary Relations
i. DGCL § 123: Parent can own stock of the subsidiary company
 Wholly owned subsidiary: parent owns 100% stock in subsidiary
o This is the best because wont sue yourself
 Majority controlled subsidiary: parent owns 50.1% or more stock
 Minority controlled subsidiary: Parent owns less than 50% stock
ii. Parent usually has fiduciary obligation to the other shareholders in subsidiary, but
obligation depends on context (i.e. mergers, dividends)
iii. Two Standards of Review (Sinclair)
 Business Judgment Rule: BOP on Plaintiff to rebut BJR. BJR protection
UNLESS there is self-dealing
Sinclair v. Levien
o Sinclair owned 97% stock in subsidiary Sinven, controlled its Board,
and caused Sinven to pay high dividends of common stock in excess
of earnings. Sinven minority stockholders wanted money to be re-
invested not paid out, so sue Sinclair for breach of fiduciary duty to
Sinven. Sinclair was paying to everyone, because that goes to whether
they were self-dealing recognize it is narrow scope. For controlling
shareholders it is not to benefit yourself to the detriment of everyone
else*
o Sinclair Issue #1: No self-dealing b/c no usurp of corporate
opportunity by Sinclair.  BJR Standard
o Sinclair was methodical, objective and consistent in terms of
allocating dividends.
o Whether or not to declare a dividend that is discretionary of the
board to give
o Issue #2- expansion policy was BJR, need to prove evidence
 o When there is a call from the expansion to the board, and XYZ
comes in takes it, then you need to apply corporate opportunity
 will bring down BJR because of potential conflict
o Because BJR brought down now D needs to prove Intrinsic
(entire) Fairness: BOP on Def to show transaction fair
a. Controlling shareholder + self-dealing = intrinsic
fairness needs to applied
o Issue #3: Yes, breach of K by selling oil to another subsidiary  Intrinsic
Fairness standard
 Sinclair could not show transaction was entirely fair to Sinven b/c
Sinclair got all the value for itself.
 It was transaction between sinven & other subsidiary, since
international was wholly owned he got the money
F. RATIFICATION: defense for the board of directors to give, can we always use this for duty of
care and loyalty?
a. Shareholder ratification of transaction between corporation and interested party will not be
legitimate if the majority of shareholders are the interested parties
i. DGCL § 144(a): No K or transaction between a corporation and 1 or more of its
directors or officers…shall be void or voidable solely for [reason of being interested]
if:
 Approved by majority of disinterested directors
 Approved by majority of [disinterested] shareholders
b. §§144(a)(1) and 144(a)(2)
i. Must be fully informed AND need majority of disinterested vote
 Fliegler v. Lawrence
o President acquires properties and offers to Agua (company), which
declines. New company formed to hold rights to property, option for
Agua to purchase. Agua directors vote to exercise option. Majority
shareholders vote same, but directors comprised of majority of
shareholders. Shareholder sues for unfair transaction and usurp of
corporate opp.
o USAC- saying that shareholders approved a majority but
majority of shareholders were directors
o Held: Shareholder ratification not legitimate. Not enough evidence of
majority of disinterested shareholders voted. But, enough proof that
transaction was fair.
o BOP- Complaints filed against BOD, BJR pops up, how can
plaintiff bring down BOP (fraud, conflicts, self dealing), now
were are in 144, directors have 3 choices to defend now the
allegations the burden is on them: 1) disinterested directors
fully informed approve 2) disinterest fully informed
shareholders approved 3) entire fairness
o Here the court says the shareholders approval does not GO
because majority were directors in shareholders (CONFLICT).
They are left with entire fairness test  have all the intrinsic
fairness test
a. Showed that board thought about it, fair and appropriate
because USAC developed the minerals and then Agua
would exploit it and get profits that would benefit everyone
 Wheelabrator Technologies
o Merger b/w Waste and WTI. Waste owns shares in WTI at the time of
deal 22%, they are on the board of WTI
o Is waste a controlling shareholder? No, they did not own actual
company and only own 22% (you can either control with 50.1 or do
controlling functions)
 o You can have people on the BOD, but that doesn’t mean
controlling per se, it could be 1/11. What type of review are we
then using? BUSINESS JUDGEMENT
o Complaint filed- the shareholders of WTI got a combo of stock
so not even money they are not happy, BJR comes up, we have
controlling shareholder can bring wall down, and then court
says NO wall stays up because only 22 percent, so to bring the
wall down they need to find something else, they need to prove
others (gross negligence, reckless, fraud, self dealing waste)
none of it was proven here so end of the day court protects
BJR.
ii. Calculation of “disinterested” votes
 Take the total number of disinterested shareholders (regardless of whether
they vote)
 Calculate the majority of # disinterested shareholders to find out how many
votes you need for ratification
 # Disinterested shareholders / 2 = half disinterested
 Half disinterested + 1 = majority
c. Wheelabrator: Effect of Shareholder Approval
i. Duty of Care claims extinguished by informed vote from disinterested
ii. Duty of Loyalty claims
 Against DIRECTORS  Fully informed vote shifts BOP to plaintiff to
show waste (BJR)
o If plaintiff sues, if you have fully informed disinterested votes, and
then all disinterested vote yes, BJR comes back up and then plaintiff
can show waste only as a defense  Basically defendants WIN
 Against CONTROLLING SHAREHOLDER  fully informed vote
shifts BOP to plaintiff to show unfairness
o When not classic case of fully informed disinterested vote, BJR goes
up controlling and manipulating, wall comes down, IF there is a fully
informed disinterested vote from shareholders, wall goes back UP,
then the shareholder just needs to show unfairness
o Unfairness is easier to prove: very subjective, fact based inquiry,
was it unfair to the plaintiff. Why make it easier for plaintiff to win
against shareholder than a director? The role directors play, we want
them to do it, and disciplines shareholders more when they over
breach
iii. In sum, if there is a majority of disinterested shareholder approval, BOP on Plaintiff to
prove: (1) waste or (2) unfairness
d. DGCL § 144(a)(3): “entire fairness” of transaction
i. Entire fairness is relevant if:
 Transaction approved without requisite majority of disinterested directors or
shareholders
 There was defective disclosure to directors OR shareholders
ii. Hallmarks of “fair” transaction:
 Within the range of terms that parties bargaining at arms-length might reach
 See Bayer no evidence to show that hiring President’s wife to sing was
“unfair” to the corporation
e. Huge implications if CONFLICT of one infect the whole board (structural bias), but if you can
isolate and say its one guy who is infected then only one is interested, the rest are disinterested and
you can count the disinterested directors into the approval

OBLIGATION OF GOOD FAITH

A. Overview
i. Cannot exculpate duty of loyalty claims
 ii. Good faith is a small component of both the Duty of Care and Duty of Loyalty
1. To bring a cause of action based on breach of duty of good faith, you must bring it under
the umbrella DUTY OF LOYALTY
 Executive session- meeting of board without management present, typically off the record. Common
to have CEO and CFO to be on board of directors, if you are trying to make objective discussions
about CEO and CFO you as them to leave
o When the CEO is negotiating his or her own compensation packager, she is allowed to
be self-interest, we have to make sure disinterested are approving the deal on the other side
of the table. That's why they want to put shareholder comp packages to a vote, it makes it
clear that disinterested approved
o Save on Pay votes- give shareholders vote on CEO or CFO’s compensation package, because
typically that only needs to be approved by BOD
 Stock Option- compensation component that provides recipient option to purchase stock at set price.
If you give employee opportunity to be an owner you are better aligning the interests. Give employee
option to buy in the stock at relatively low price once certain things happen
iii. Disney and Stone establish the high standard to prove bad faith:
2. Where the corporation has a §102(b)(7) exculpation clause, directors are liable only if
they act in bad faith; AND
3. Only a conscious disregard of duty – not a mere gross negligence – can establish bad
faith.
B. Compensation
i. Good Faith: “Not simply the duties of care and loyalty… but all actions required by a true
faithfulness and devotion of interests of the corporation and its shareholders” (Disney)
1. Examples of failure to act in Good Faith:
a. “Fiduciary intentionally acts with a purpose other than advancing the best
interests of the corporation”
b. “Fiduciary acts with intent to violate applicable positive law”
c. “Fiduciary intentionally fails to act in the face of a known duty to act,
demonstrating conscious disregard for his duties”
ii. Corporate Waste: “exchange that is so one sided that no business person of ordinary, sound
judgment could conclude that the corporation has received adequate consideration” WASTE IN
EVERY COMPLAINT
1. Claim of waste arises in rare “unconscionable case where directors irrationally squander
or give away corporate assets”
2. Very high standard to establish BJR applies to Board’s decision unless decision can’t
be “attributed to any rational business purpose”
3. Must be asserted upfront in the complaint
a. In re Walt Disney Co. (374)  no corporate waste or bad faith
i. Disney CEO Eisner hired Ovitz to be president – signed 5-yr contract
valued at $24M/year. Board approves of hiring and contract. But, 14
months later, Disney fires Ovitz “without cause” which triggered the non-
fault determination provisions of his contract, which were quite lucrative:
Ovitz receives $39M in cash payment and $101M stock options.
Shareholders sue Board and Ovitz. (Nice severance package)
ii. Issue 1: Did Ovitz breach fiduciary duties of care and loyalty by
accepting NFT package?
1. Held: Ovitz owed no duty b/c he was not officer or director.
2. Don't have a fiduciary duty until you are office of director, the
plaintiff did a good job in saying defacto officer, but you need to
see after time you are pulling the strings in the board room.
iii. Issue 2: Did Board breach duties of care and GF by approving
employment K and NFT package?
3. Held: Board did not breach duties
 a. Although not “best practices,” NFT package was
approved by “reasonably informed” committee so no
breach of duty of care
b. Ovitz was a desired candidate on the market, so business
justification to make competitive offer to him
c. Corporate law gives a lot of discretion to delegate duties
to certain people – like delegate packages to these 4
people of the board. You can do complete delegation
d. Board had 144(e) defense because they had intelligent
people making these decisions
iv. Issue 3: Payment to Ovitz constituted “waste” (it was so one sided)? They
are saying the board did not approve it and Eisner went rogue to fire
Ovitz.
4. Held: No corporate waste b/c Disney was contractually obligated
to pay NFT amount- consideration (fully informed arms length
contract)
5. Held: did not breach duty for no cause, it was legal under DE law,
Eisner could do it. He had the authority to do it
iii. Executive Compensation
1. Prior to Sarbanes, many companies did not account for compensation expenses relating to
stock and option grants
2. Now, Dodd-Frank Act created “say on pay”  requires periodic shareholder advisory
votes on executive compensation
C. Oversight (i.e. Duty to Monitor): failed to act in a known duty
a. Caremark Claims: failure of Board to exercise oversight results in bad faith
i. In re Caremark: Board failed to monitor overseas operations when company
referred patients to physicians, so breach of duty of loyalty
1. Finds potential problem, opens investigation, and then shareholders start
suing
b. TEST: Liable for failure to monitor if:
i. “Sustained or systematic failure to exercise oversight” [i.e. failure to
monitor/oversee system], OR
1. Not a snapshot picture, it has to be an ongoing actively engaged monitoring
system. If you have program in place, but no on going training, periodic
review as to how system is working, lapses in program can expose you to
arguments not in good faith or even discouraging reporting or when Dodd
frank brings new laws is the old system updated to assess current risks and
laws
ii. “Utter failure to attempt to ensure a reporting and information system” [i.e.
failure to implement a system]
1. Complaint filed say there is NO monitoring in place, question is whether
failure to have system was in good faith? Is it a per se liability? Intent plays
a role in good faith is it intentional, when BJR comes down in any scenario
there is per se liability on defendants, the burden now is now on D to show
entire fairness. What you argue for D is that based on the decisions, even
though employees violated law, it was in the best interest in the company
not to implement monitoring system,
2. We will not get out of at 12b6 or summary judgment, we are going to trial
because BJR does not help it
c. To prove breach of duty: Board must have notice/knowledge of bad conduct AND
inactivity at resolving the situation
i. Difficult to prove breach of duty to monitor  standard is very HIGH
1. Public policy- since it makes board service for qualified service while
continue to act as good faith performance by BOD & seeks to equate a bad
outcome with bad faith - Stone
 ii. All you need to satisfy duty to monitor is a rudimentary system that ensures people
are complying with their obligations
1. Stone v. Ritter: DE Supreme Court affirmed Caremark decision re: director
liability for failure to detect that bank employees were not filing SARs, as
required by federal anti-money laundering statutes. Directors win.
a. Board had “something” in place and it was a “reasonable reporting
system”
b. Shareholders- you failed to property monitor, grossly negligent in
the monitoring system you had in place
c. Court was saying unless you did something, you've shown good
faith
d. Board delegated to employees the job to monitor filings and report
back to Board  Rebuts claim that Directors knew of misconduct
e. Allegations were not sufficient to bring down BJR b/c they were
not plead with “particularity”  never crossed into the world of
duty of loyalty
f. To connect DISNEY, if we find lack of good faith, we are saying
duty of loyalty and d
g. Duty of loyalty is not protected by the BJR and directors cannot be
exculpated = HUGE liability for the officers
h. FACTORS- court said company hired outside help, training, it was
aware, the industry customs
iii. Different scenario that if these violations kept happening and the BOD knew and
then it doesn't change, that is a different set of facts. These are red flags that
something more needed to be done
d. Duty to Monitor  Classified as Duty of Loyalty/ Good Faith
i. Stone shifted “good faith/duty to monitor” into the Duty of Loyalty bucket  No
BJR protection for directors under Duty of Loyalty Does it automatically go
away? It still comes up, what is the different between BJR in duty of care and
duty of loyalty?
1. If you are making company break law then the BJR comes down and now
on D to show entire fairness and show what is the corporations best interest
2. If it is a $200 fine and corporation is not putting reputation at risk then it is
in the best interest of the corporation – No case law on point when a
company has not violated GOOD FAITH when broke the law, you still need
to inform them that you are violating law and how it is helping and hurting
and what is best for entity you are in good shape!
ii. No longer subject to §102(b)(7) exculpation clauses

DISCLOSURE AND FAIRNESS

A. Securities – Generally
a. Purpose of Federal Securities Law
i. Full disclosure  make sure investors have all the information they need to make
informed decisions
ii. Prevention of fraud  agency cost problem re: disclosure
b. Securities Act of 1933
i. Regulates offering and sale of new securities
ii. Transactional focus  process for selling based on registration statement with SEC
iii. Required in any public sale
1. 1933 Act § 2  defines security
2. 1933 Act § 5  what happens with improper regisration
3. 1933 Act § 11  imposes liability for fraudulent or inaccurate statements in
registration statement
c. Securities Exchange Act of 1934
i. Regulates secondary market activity
ii. Regulates tender offers and proxy contests
 iii. Periodic focus  only required of registered companies
d. Securities Exchange Commission (SEC)
i. Created in 1934 in response to Great Depression
ii. Enforces security laws; promulgates rules and regulations to implement laws
effectively
e. Universal Corporate Governance Law

B. Security Defined
a. Securities Act §2(a)(2): Security means “any note, stock…bond, debenture…investment
contract…or, in general, any interest or instrument commonly known as a ‘security’”
i. Investment Contract  Howie Test
1. Contract, transaction or scheme whereby a person invests money
2. In common enterprise
3. And is led to expect profits
4. Solely from the efforts of the promoter or third party
ii. Common Enterprise: requires business purpose + common scheme for investment of
money; can be horizontal or vertical
1. Horizontal Commonality: relationship between individual investor and
other investors who put money into the scheme  Requires pooling of
interests, i.e. shareholders of corporation
2. Vertical Commonality: relationship between investor and promoter of
scheme  Requires that investor and promoter of scheme be involved in
common enterprise, but no pooling of interests by multiple investors
b. Analysis of a Security:
i. Per se Rule: some instruments, like stock, are per se securities
1. Characteristics of Stock:
a. Right to receive dividends
b. Negotiability
c. Ability to be pledged or hypothecated
d. Conferring voting rights
e. Capacity to appreciate in value
ii. Totality of Circumstances: analyze the economic realities in a totality of the
circumstances to determine if a security
c. Is an LLC or Partnership Membership Interest a “Security”?
i. Robinson v. Glynn – LLC interest not a ‘security’
1. Glynn said he would perform test with new technology and didn’t.
Robinson, as result of lie, invested more money and appointed two
directors. Robinson sued Glynn for federal securities fraud, in that his
interest in the LLC was an “investment contract,” “stock,” or both.
2. Held: LLC interest did not constitute “security” under Howie b/c Robinson
didn’t seek profit from others
a. Robinson was an ACTIVE investor, so he had ways to supplement
his knowledge and ask questions to protect himself
 b. Failed last prong of Howie Test  He wasn’t primarily relying on
third-parties for protection
c. Just because instrument was labeled as “share” doesn’t mean it is a
“share” in the legal sense
ii. General Partnership interest: generally NOT a “security” b/c partners have equal
management rights, which takes them out of the last prong of Howie Test
iii. Limited Partnership interest: almost ALWAYS a security interest b/c partner
usually passive
1. NOTE: LPs can exercise considerable de facto control (see Holtzman v.
Escamilla)
2. If cross the line into management, you begin to look like GP
iv. POLICY: Security laws are meant to protect the “helpless investor”  the investor
NOT making day-to-day decisions
1. Need to mitigate the management

C. Registration Process
a. Most companies have “securities”
b. Company needs to register the securities if it is a “public offering”
i. Exemption from registration  Private Placements
1. If not registered, the business is YOUR business (not the SEC)
c. Private Placement TEST (Doran v. Petroleum)
i. Number of offerees and relationship to issuer
1. Small number of offerees
2. Relationship to issuer:
a. Offerees’ knowledge and sophistication
b. Offerees’ access to information
ii. Number of units offered
iii. Size of offering
iv. Manner of offering
1. Doran v. Petroleum
a. Plaintiff bought interest in LLC, shortly after LLC become
unprofitable. Plaintiff wanted to rescind obligations to LLC,
alleging Defs violated Security Exchange Act by not registering
offering. Defs argued affirmative defense of exemption from
registration.
b. Held: Remanded to determine “private offering” based on test.
i. Number of offerees (8 which is small) and relationship to
issuer (issuer must have made available all information a
registration statement would have afforded a prospective
investor in public offering)
d. 1933 Act § 11: Imposes liability for fraudulent or inaccurate statements in registration
statement
i. Issuer is per se liable
ii. Company cannot get out  NO due diligence defense
1. Escott v. BarChris – standard is “material” false statement
a. Escott held debentures of Def. corp. that built bowling alleys. Def
experienced financial issues and filed registration statement found
to be inaccurate. Escott sued Def for misstatement or omitting facts
in registration statements.
b. Issue: Were the misstatements “material” under Securities
Exchange Act?
c. Held: In totality of circumstances, misstatements were “material”
i. Reasonable Investment standard
ii. Due diligence is not a defense  must conduct a
reasonable investigation
 iii.
“Material” misstatement = limits information to matters as to which an average
prudent investor ought reasonably to be informed before purchasing security
registered
iv. If you sign statement, you will end up being responsible
1. Don’t fail to ask questions when you see red flags OR
2. Being in senior position, don’t push the question off
e. ANALYSIS

PROBLEMS OF CONTROL
a. Shareholder Rights  Common Stock as Bundle of Rights
i. Economic Rights
1. Receive dividends (distribution of profits) when and as declared by board of
directors
2. Residual claim on assets in liquidation
ii. Voting Rights
1. Elect directors
2. Approve some extraordinary matters
3. Special Voting Rules
a. Election of directors by plurality (movement towards majority)
b. Cumulative Voting (optional voting system; default is usually
straight)
c. Voting by groups (potentially applicable when corporation has
multiple classes of stock)
iii. Packaging Rights
1. MBCA § 6.01(b)
a. Need at least one class with unlimited voting rights
b. At least one class with residual claim
i. Can be split up any ways, as long as there is at least one
class
2. MBCA § 6.01(c)
a. Authorizes non-voting stock and other variants on one share-one
vote
b. Voting for Directors
i. Straight vs. Cumulative
1. Straight: each shareholder votes # of shares he owns for as many
candidates as may be elected; shareholder with majority of the shares can
elect the entire board of directors
a. ex) If I own two shares and there are 4 directors, I can vote two
shares for each of the 4 directors
2. Cumulative: each shareholder gets block of votes equal to the # shares
owned multiplied by the # of directors to be elected; designed to give some
control to minority shareholders
a. ex) If I own two shares and there are 4 directors, then 2x4= 8 votes
for me, which I can vote all to one director
ii. Plurality vs. Majority
1. Plurality: whoever gets the most votes gets a seat on Board
a. ex) 5 seats on Board of Directors. 10 stockholders with equal
voting rights. 6 candidates running for Board.  Whoever gets the
MOST votes will get a seat (don’t need majority votes)
2. Majority: whoever gets the majority gets a seat on Board
b. Movement towards majority voting – normally paired with straight
voting
c. Closely-Held Corporations
i. Definition: “one in which the stock is held in a few hands, or in a few families, and
wherein it is not at all, or only rarely, dealt in by buying or selling”
1. No secondary market for shares
 2. Governed by state statute (not every state has statute)
ii. Close vs. Public Corp. Shareholders
1. Close Corp. Shareholders
a. Often undiversified
b. Interested in the company’s performance and dividends, not share
price
c. Minority shareholders may have little influence on Board or
management
d. Personality conflicts can lead to deadlock or oppression
2. Public Corp. Shareholders
a. Usually own small % of shares as part of diversified portfolio
b. Interested in share price
c. Have little influence on Board or management
d. If dissatisfied, typically follow “Wall Street Rule”  easier to
switch than fight
iii. Solutions to Deadlock
1. Voting Trust: agreement amongst shareholders to assign all their shares to
a “trustee,” who becomes nominal record owner of the shares
a. Trustee  votes the shares in accordance with provisions of trust
agreement, if any, and is responsible for distributing any dividends
to the beneficial owners of the shares
b. Requirements:
i. DGCL § 218: copy of trust document must be filed with
corporation’s registered in Delaware office
ii. Old DE statute said duration of trust could not exceed 10
years (issue in Ringling)
2. Shareholder Agreements
a. Vote Pooling Agreements (Agreements re: election of Board)
i. Shareholder agreement to pool votes to get power in
corporation (specifically BOD)
ii. Ringling Bros. – enforcement mechanism of
1. Ringling and Haley family factions had written
agreement under which they would vote
together. Corporation used cumulative voting to
elect directors (so minority could elect). Both
Ringling and Haley each had 315 votes out of
1000 shares. North had remainder shares.
Pooling agmt called for arbitrator (Loos) to
resolve disputes. Haley’s husband didn’t follow
agmt and voted to adjourn. Ringling sued to
force Haley to vote according to Loss’ decision.
2. Issue: Was vote pooling agmt valid?
3. Held: Yes, pooling agmt valid and Haley’s votes
rejected b/c breached K.
b. Agreements relating to limitation on the Board’s discretion
i. Directors must exercise their independent business
judgment on behalf of all shareholders
ii. If directors agree in advance to limit that judgment, then
shareholders do not receive benefit of their independence
iii. McQuade v. Dodge – protect minority shareholders
1. Stoneham owned majority stock in NY Giants.
McGraw and McQuade bought small interest.
Shareholder agreement in which they agree to
elect each other as directors and appoint officers
at specific salaries. Minority shareholders were
 not party to agreement. McQuade was fired and
sued for specific performance.
2. Held: Agreement void against public policy
since minority shareholders excluded.
3. Agreement had 4 provisions that were
valid/invalid:
a. McQ, McW and Stoneham to be elected
directors  valid
b. McQ, McW, and Stoneham to be
appointed specific officer positions 
invalid
c. McQ, McW and Stoneham to be paid
specific salaries  invalid
d. No corp. changes in corp. governance
structure unless parties agree  invalid
i. Provisions (2)-(4) shifted
authority to shareholders with
no accountability; typically
decisions of the Board
4. Agreement was invalid b/c shift in authority
created “puppet” out of the Board  shareholder
CAN elect, but can NOT set salaries
iv. Clark v. Dodge: McQuade protects minority shareholders
not party to the agreement
5. If corp. has NO minority shareholders, McQuade
does NOT apply
 CASE SUMMARIES

AGENCY
 Gorton v. Doty (1937): Women LETS football coach use her car to take team to the game. Agency relationship IS found,
held liable. Gave directions, under HER control. Not what you THINK it is, its what the facts SHOW it is. LOAN your car
specifically.
 Gay Jenson Farms v. Cargill (1981): Big Corp bankrolled little farm, exuded Significant control over the smaller company,
established as Principal/Agent through a number of factors. All About the level of control you HAVE (not exercise) over the
Agent.
 Mill St Church of Christ v. Hogan (1990): Church hired Bill to paint the church, gave him no special instruction. Bill hired
his Bro who was injured. Actual Agency for Bill to hire Bro because of past conduct between the parties, demonstrating
Implied Authority.
 Three-Seventy Leasing v. Ampex (1976): Employed salesmen confirms shipment outside his authority. Apparent authority
deals with PRINCIPAL manifestations to THIRD PARTY.
 Watteau v. Fenwick (1892): Undisclosed principal theory. Kept license in mans name, held him out as his agent. Liability
of principal is dependant on HOLDING OUT the individual as his agent, the ability to PREVENT an action is a reason for
instilling liability.
 Botticello v. Stefonovicz (1979): Husband agrees to SELL property to an individual on a long term lease to own. Wife only
though that they were renting. After accepting benefit, she CANNOT ratify the agreement because she DID NOT know all
the details of the agreement AND gave no indication that husband spoke on her behalf.
 Hoddeson v. Koos Bros. (1957): Lady is tricked by individual impersonating a salesmen, gets taken for some cash. Sues
Department store on the theory of Estoppel, they could have prevented her loss.
 Atlantic Salmon v. Curran (1992): Fake corporation set up, enters into K’s through an agent. Agents ARE A PARTY TO
THE K when representing an undisclosed or partially disclosed K UNLESS agent and 3rd decide otherwise.
 Humble Oil v. Martin (1949): Car left at gas station for servicing rolled off its property and injured some people.
Employee/Independent Contractor. Issue is LEVEL OF CONTROL. Since station manager was BOUND to do whatever
Corporate told him, he is an Employee NOT an IC.
 Hoover v. Sun Oil (1965): Fire at service station Operated by Barone started by His Employee. Is Sun Oil the franchisee
liable. Inditia of control (ability to sell competitive products, no obligation to listen to advice) demonstrated that station was
an Independent Contractor.
 Murphy v. Holiday Inns (1975): Someone slips and falls due to drippy AC unit at a Holiday Inn, sues corporate. NO
Master/Servant relationship discovered. Purpose of regulations was to achieve STANDARDIZATION, how particular acts are
done is up to Location Manager.
 Vandermark v. McDonalds Corp (2006): About establishing Employer/Employee relationship between Franchisor and
Franchisee. All about RIGHT to Control and whether the franchisor has Held this party OUT as an employee; OR, how has
Either Party demonstrated that it is NOT master/servant.
 Miller v. McDonalds: Independent Contractors owned and ran McDonalds, lady BIT into a rock while eating at the
restaurant. Court determined that CONTROL factors demonstrated McD HELD OUT the restaurant to the public as if it was
associated with the CORPORATION.
 Reading v. Regem (1948): American Military serviceperson ENDS his career with military, but still gets escort jobs, which
he performs under the Guise of an American Serviceperson. CANNOT keep profits, must return. Cannot use your position
as a servant to gain ANY personal benefit, and any personal benefit you DO GAIN in fact belongs to the master.
 General Auto Manufacture v. Singer (1963): Man hired to act as a salesmen manager for GAM, does his job BUT creates a
side business to which he directs GAM customers. Kept profits without telling GAM. Violation of duty. Cannot act in
DIRECT COMPETITION to your master. Duty to Disclose.

PARTNERSHIPS
 Fenwick v. Unemployment Commission (1945): Biz Owner wanted to retain his receptionist and REFRAIN from owing
Unemployment, wrote up a partnership agreement with her. Look to FACTORS, written agreement is NOT
DETERMINATIVE. About Control, Ownership, Loss Obligation, representation to 3rd Parties, Name on agreement,
Rights upon Disolution. PRESUMPTION of Partnership w/Profit Sharing.
 Martin v. Peyton (1927): Broke partnership gets a LOAN from a flush Partnership. Option to buy in, Veto Rights over
management and Profit Sharing CAPPED at 40%. Court said NO PARTNERSHIP, no holding out, only had VETO power,
not actual control. Only an OPTION to buy in, never executed.

58
  Southex v. Rhode Island Builders Assoc. (2002): Southex has a K to produce RIBA shows, it eventually expires and Southex
SUES to enjoin RIBA from running a show without them. Look at Totality of the Circumstances, and ALTHOUGH profits
were shares, it was for a Fixed Term, NO Risk of Loss…essentially looked like an Independent Contractor agreement.
 Pship by Estoppel Young v. Jones (1992): Investors lost all their investment after giving money to PWC Bahamas. Tried to
sue PWC NY (easier jurisdictionally) under Partnership by Estoppel theory. Representation was there, but there was NO
RELIANCE in this particular instance.
 National Biscuit v. Stroud (1959): Specific partner had ALWAYS purchased bread from Nabisco for partnership. Allegedly
one of the partners had REMOVED this authority. Court determines that (1) partner had no right to strip this authority
(requires a majority vote to change status quo) and (2) whether or not partner could BIND the partnership is based on the
Reasonable Understandings of Third Party.
 Summers v. Dooley (1971): Two individuals ran a trash collecting business. One was on the shelf for an extended period of
time, other partner HIRED another person to do his job for him. Looked to get indemnified by partnership. Court says NO
outside the Ordinary Course of Business meaning that you need a MAJORITY VOTE to approve.
 Day v. Sidley & Austin (1975): Partnership rules were CHANGED BY AGREEMENT, all partners SIGNED new rules.
Partner sued complaining he got screwed. Court says TOUGH, you signed it you’re stuck with it.
 Putman v. Shoaf (1981): Woman SOLD total interest in partnership WITH unanimous vote. AFTER SALE found out there
was some fraud going on, company was worth more than she thought. Sued to get the different. Court said NO, stuck with K
you made. Mutual ignorance does not warrant reformation.
 Duty of Loyalty Meinhard v. Salmon (1928): Two men entered into an agreement to run an apartment complex. One was
the manager the other was the money guy. Opportunity came about to the manager BECAUSE of his management position.
Court said the Duty of Loyalty bound him to share that information with his partner. Must At Least Disclose, disclosure is
the ultimate Equalizer.
 Good Faith Meehan v. Shaughnessy (1989): Partners in law firm were planning to leave. Activly recruited members of the
firm to come with them, scouted out a new location. When asked they LIED about their plans. The lying was the Fiduciary
issue. Making the plans is not a problem, but you CANNOT LIE. Also need to be FAIR when recruiting clients to come
with you, must give the old firm a chance to keep them.
 Good Faith Lawlis v Knightlinger & Gray (1990): Lawyer has been given three chances to work through alcoholism, cant
do it, eventually expelled by partnership through a clause HE SIGNED in the Pship agreement. He sues claiming predatory
action (looking to increase profits, bad faith). Court says this is a Legitimate Application in Good Faith of the Pship-
Agree. No problems.

Dissolution/Disassociation
 Owen v. Cohen (Bowling Alley Case 1941): Cohen gave CASH to partnership which it treated as a Loan, and Owen was
supposed to run the business. Owen did NOTHING, and when Cohen tried to get out Owen claimed his leavening was
WRONGFUL (Leaving TERM early is generally Wrongful). Court disagreed, found that OWEN’S ACTIONS drove Cohen
to leave, found that he “materially hindered the proper conduct of partnership business through his actions.” Equity Idea.
 Collins v. Lewis (Cafeteria Case 1955): Two men agreed to run a cafeteria together. One would manage, the OTHER would
fund it. Pship-Agree put NO CONTRIBUTION CAP on money guy. Cost a lot more than he thought, tried to CUT OFF
funds. Court said NO, you are bound by the agreement you signed.
 Page v. Page (1961): Laundry business, tough first couple of years, finally started making money and the Partner who owns
a 47K Loan wants out. Other partner argues wrongful action, court says NO. This was an AT WILL partnership, he can
leave as long as he acts in GOOD FAITH, not Subverting the partnership for his own interests. Cannot “freeze out” the
other partner for your own benefit.
 Prentiss v. Sheffel (1973): Three person partnership, allegations that minority partner did not contribute his fair share. No
Pship-Agree on winding up procedures, Court determined this AT WILL Pship should end due to Freeze Out by majority
and should be SOLD at auction. Majority partners purchased. Court Determined management freeze out was NOT wrongful
(he was minority) and purchase WAS in Good faith (paid Fair Market Value for the Pship, likely more than anyone else
would have.
 Pay-Saver v. Vasso (1986): ASK ABOUT THIS SPECIFICALLY

CORPORATIONS Generally/Limited Liability

 Southern-Gulf v. Camcraft (1982): SG purchased a boat from Camcraft, got a great deal, boat is now worth a lot more.
Turns out SG was never properly incorporated in the manner they had expressed to Camcraft. Camcraft tries to argue this
point and rescind the K, so they can keep the boat and sell to another party. Court says NO, used Corp. by Estoppel
principal to bind Camcraft.
 Walkovszky v. Carlton (Taxi Case 1966): Man owns TEN cab companies each running on the Minimum capitalization. One
injures a person, sues All Comp & Owner Individually. Tries Enterprise Liability (fails, all Corps have no $$), Respondeat

59
 Superior (never works), and Piercing the Corporate veil (also fails, corporate form was Respected, no alter ego problem; also
no wrong or injustice being done).
 Piercing Sea-Land v. Pepper Source (1991): PS placed an order, stiffed the carrier after delivery and dissolved (had no
assets). Sued the Owner personally & five other entities. Court FOUND (1) Alter Ego was present (Corp used as owners
Toy, co-mingling, undercapitalization) & and the POTENTIAL for a legit injustice, remanded. As of this point though, No
Suffienct Wrong was Discovered. Hard to Pierce. Lists factors to consider.
 In re Silicone Gel Breast Implants (1995): Company that developed breast implants, sold and marketed them was subsidiary
to a much larger parent company. Was under TOTAL CONTROL of the parent company (factors on page 208). When sued
in tort, the subsidiary company could NOT handle the liability. Court establishes general rule that IN TORT with a Wholy
Owned Subsidary of a Parent that Directly Controls, piercing the veil is much easier.
 Frigidaire Sales v. Union Properties (1977): Two Gentlemen own a Corp which is the GP in a Limited Partnership where
they are also the limited partners. Limited partnership gets sued, go after GP which is the corp, Two Gentlemen are shielded
through Limited Liability. Court says this kind of layered protection is specifically allowed by statute.

HYBRID ENTITES
 LP: Holzman v. De Escamilla (1948): Farmer(GP) in Latin American country creates a Limited Partnership with two
American businessmen (LPs). Partnership goes bankrupt, creditors sue two LPs claiming they acted in a managerial role.
Showed they could OVERRULE the GP on basically every decision. Limited Liability was LOST and they were held liable.
 LLC: Water Waste & Land (Westec) v. Lanham (1998): Clark purported to work for Lanham and PPI, an Limited Liability
Company (LLC). Court determined that this is Undisclosed Principal and an agent is a Party to the K. Additionally, to gain
the protections of LL, you MUST clearly notify those you are doing business with that you Are acting as under LL. Simply
filing paperwork with the state is Not Enough.
 LLC: Elf v. Jaffari (1999): Membership agreement for LLC stated that all disputes were subject to arbitration OR Court
proceedings in California. Party argued that the agreement didn’t BIND the LLC. Court said NO. Full effect to Contract
provisions, LLC and members are BOUND by membership agreement unless it is “Manifestly Unreasonable.”
 LLC: Kaycee Land v. Flahive: If state legislatures had intended that the LLC form be an impenetrable shield against
Liability for owners, they would have specifically said so. Same Piercing principles apply, but they must be applied
differently due to the lack of corporate formalities. Fact Specific Analysis considering the Membership Agreement and the
actions performed.
 LLC: McConnell v. Hunt Sports Enterprises (1999): LLC formed to get a Hockey team in Columbus. Membership
agreement made HUNT the representative BUT allowed members to compete. McConnell was eventually approached
AFTER Hunt rejected proposal and McConnell personally accepted. Court rulled (1) membership agreement that LIMITED
duty of loyalty WAS NOT manifestly unreasonable AND (2) Hunt had a fiduciary duty to bring ALL proposals back to the
group before rejecting them.

Corporate Governance Cases

 Duty of Care
 DoC; Biz Judge; Planning Dodge v. Ford Motor (1919): Corp made tremendous profit. Ford, with de facto control of the
board, didn’t want to pay special dividends, instead wanted to reinvest into company for (1) expansion and (2) “the good of
the public.” Court was OK with expansion plans (didn’t want to get in the way of long term planning; Judges give Deference
to business Decisions); but NOT OK with “good of the public.” Purpose of a corporation is ALWAYS to maximize profits for
shareholders.
 Biz Judge; Deference; DoC Shlensky v. Wrigley (1968): Cubs Maj owner refuses to put in lights in his field for Night
games, minority owners sue, claiming that the lack of night games is hurting the teams value. Court says NO, majority has
Legitimate Business Reasons for not installing lights, there decision can STAND. Court WILL NOT interfere.
 Business Judge; DoC Kamin v. American Express (1976): Company makes decision to provide dividend in kind to
stockholder of crappy company RATHER THAN sell the shares and get a big tax benefit. Shareholders sue derivatively
claiming Waste. Court determines that BOTH options were legitimate, deferes to company. Was a reasoned analysis, court
wont second guess them. HINT of self dealing NOT ENOUGH, need to show Domination or Control of the board by these
people.
 BIGGEST CASE Smith v. Van Gorkum (1985): See Big Outline
 Delegability; DoC; Biz Judge Francis v. United Jersey Bank (1981): Woman took over as a director after her husband died.
She literally did nothing while people STOLE from the company and ran it into the ground. Company goes into bankruptcy,
creditors sue her estate (she is now dead) claiming Dereliction of Duty. Not protected by business judgment if you don’t DO
ANYTHING. Her estate was held liable (it was her sons who were stealing all the money).
 Duty of Loyalty
 DoL; Entire Fairness Bayer v. Beran (1944): Business trying to sell product, gets a radio music hour doing classical music,
hires the wife of director. Shown that the director So Dominated or Controlled the Board that NO ONE was disinterested.

60
 Strict examination, Court determined that the deal was Arms Length and Fair, independent agent for wife and a Fair salary.
Entire Fairness Satisfied.
 DoL; §144(a) Benihana of Tokyo v. Benihana: Family infighting, kids want to DILUTE stepmothers shares, vote to sell
Preferred Stock to finance rehabilitation of restaurants. BUT company buying preferred stock (BFS) was owned by a
member of Benihana’s board. Court says the transaction is OK because it was approved by Majority of Disinterested
Board Members. §144(a)(1) Cleansing Action.
 DoL; Corp Opportunity Broz v. Cellular Info (1996): Man was board on one cell company and wholly owned another. An
opportunity came to his wholly owned company, he was sued by the company IN THE PROCESS of acquiring the company
he worked for. They argued corporate opportunity, court created Broz Factors Test, which he PASSED, no violation of
DoL.
 DoL; Corp. Opportunity In re Ebay Shareholders (2004): Goldman gave eBay executives opportunity for quick pop with
IPO’s, shareholders sued claiming the item should have been offered to the company as a whole. Shareholders won after
Broz Factor Test was considered.
 DoL Maj. Shareholder Sinclair Oil v. Levien (1971): Company owned a ton of subsidiaries, gave right to drill oil in
Venezuela to its Venezuelan subsidiary. THAT was OK, but the company was ALSO having its subsidiary basically GIVE
AWAY oil to the parent company (majority holder). Minority owner sues and wins complaining that this is the majority
holder SCREWING the minority out of his fair share.
 DoL Majority Shareholder Zahn v. Trasnsamerica (1947): Tobacco company had a unique stock system with calls
between A and B class shares. Stockholder thought he got screwed out of a lot of money because his stock was improperly
redeemed. Court says redemption was appropriate, BUT should have allowed stockholders to CONVERT their shares to
class B.
 DoL §144 Approval Fliegler v. Lawrence (1976): Claim that one of the officers WRONGFULLY stole a corporate
opportunity. Court noted that this passed ALL THREE of the 144(a) cleansing actions.
 DoL Majority Shareholders In re Wheelabrator Tech (1995): Stockholder approval of merger FROM Majority of Minority.
Becomes the PLAINTIFFS duty to demonstrate deal Lacks Entire Fairness.

GOOD FAITH REQUIREMENTS

 Good Faith; DoL In re Disney Derivitive Litigation: Disney hired Ovitz as its new president, after a year they had to fire
him and pay him a HUGE severance package. Shareholders cried waste, violation of good faith, court said no. Contract was
reasonable under the circumstances, on par with the market, approved by Majority of Disinterested directors AND
stockholders. Board TRIED to find a for cause reason to fire, couldn’t do it. NOT A CASE of Intentional Dereliction of
Duty.
 Good Faith Jones v. Harris (2008): Good faith action against close mutual fund. Demonstrates that GOOD FAITH
violations are INDUSTRY SPECIFIC. Affirmed Gartenburg Factors
 Caremark Claims Stone v. Ritter (2006): Serious fraud going on inside this company, stockholders sued under a Caremark
claim (duty to monitor). Establishes that GF is a Subset of DoL, and all Caremark requires is that you Set Up a System and
Reasonably Monitor it.

DERIVITIVE ACTIONS
 Jurisdictional Issues; Security for cost Cohen v. Beneficial Industrial (1949): Petitioners challenge whether a Security for
Cost statute applies to their case AND is constitutional. Court determines (1) Security for cost statutes ARE constitutional
and (2) the security for cost statute which applies in EVERY CASE is the statute of the State in which the action is
commenced.
 Direct/Derivative Differentiation Eisenberg v. Flying Tiger (1971): Corporation does some serious fundamental changes,
makes stockholders only owners of a HOLDING company Instead of the company with Managerial Control. Court say
this is a DIRECT action because the stockholders are suing for THEIR RIGHTS to be reinstated through revision of a K.
 Demand Req.; Derivative/Direct Diff Grimes v. Donald (1996): Corp made a WRECHED contract with an executive,
stockholder sues. Claims that No Abdication of duty, explanation of demand requirement in Del and explanation of the
Grimes Tool @ Hand.
 Marx v. Akers (1996): Shareholder sues complaining that the corp wasted Corp assets by raising board compensation.
FAILS demand futility for INSIDE directors (introduction of Barr Test NY Test). Pass demand futility for OUTSIDE
directors, but failed to state enough it claim to demonstrate that there was ANY WASTE.
 SLC without Excusal; Auerbach v. Bennett (1979): Audit committee hired NEW independent counsel to investigate into
whether board was receiving kickbacks. Found some directors got kickbacks, derivative suit commenced. Special
Litigation Committee (SLC) was named to evaluate merits of suit, threw it out. Because demand WAS NOT EXCUSED,
Court ONLY looked into the Independence of the SLC (Procedure in Selection), NOT their Substantive Decision (product
of Biz Judge).

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  SLC WITH Excusal Zapata Corp. v. Maldonado (1981): When Demand is EXCUSED, courts will apply a HIGHER level
of scrutiny, looking at Process and Independence of SLC, BUT ALSO applying their OWN Business Judgment to the
substantive Decision.
 Institutional Bias In re Oracle Corp (2003): SEE BIG OUTLINE

Securities Law Generally

 Robinson v. Glynn (2003): Man purchased partial ownership rights in Geophone company. Court found that what he owned
was Not A Security under the meaning of the term, mainly because he was NOT a passive investor, but an executive in the
company. Economic Reality demonstrated this WAS NOT a Security.
 Doran v. Petroleum Management Corp (1977): Unregistered SALE of securities, have to see if it Qualifies for an Exception.
Discusses relevant factors to consider for a private offering. Most important is NUMBER OF OFFEREES (Nine in this
case). Need the Same Level Of Disclosure you would have in Registration. Remands for additional factual findings.
 Escott v. BarChris (1968): Misleading statements in a Registration statement, WHO IS LIABLE. Go through each persons
actions, expert statements, non-expert statements relied upon, etc. Requires a REASONABLE INVESTIGATION into Non-
expert statements. Lawyers not Generalized Experts.

Shareholder Voting Control & Close Corporations

 Ringling Bros v. Barnum & Bailey (1947):Family agreed (two parties) to pool votes so they had the power to elect 5 of 7
directors. In the case of a deadlock, they had an ARBITRATOR tell them the best corse of action, and they had to follow.
One person didn’t, sued. Court eventually NULLIFIED their votes. Have to follow the agreement.
 McQuade v. Stoneham (1934): Shareholder agreement for many things, including limiting what the directors could do in
Typically director controlled actions. Not 100% of Shareholders in agreement. Court INVALIDATES agreement, says that
shareholders Cannot Limit director actions
 Clark v. Dodge (1936): Two people OWN company, reach an AGREEMENT limiting the directors ability to perform certain
director controlled tasks. UPHELD by the court, determines that when you have 100% shareholder agreement, you can limit
director actions. However, if any shareholders try to SELL their stake, they must INFORM perspective buyers about these
limitations.

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 Business Forms Matrix

Feature Partnership Corp. LLC

Formation/ Informal Formal Formal
Costs  No filing, just meeting of the minds  File AoI, pick a state  Filing of AoI ULLCA § 202(a)
 Association 2+ carry on as co-owners for  Draft bylaws  Draft operating agreement
$ UPA § 202(a)  Select directors/officers Filing fees, annual registration, etc…
No costs No filing fees, annual registration, etc…
Default Rules  UPA  Internal matters  place of incorporation  ULLCA
 Partnership agreement can deviate except (e.g., del. code)  Operating agreement can deviate except
§ 103(b) &103(b)
Limited Liability No Shield Limited Liability Shield Limited Liability Shield
 Jointly & severely liable  MBCA § 6.22(b)  ULLCA § 303(a)
Management Decentralized Management Centralized Management Extremely Flexible
 Equal management rights UPA § 401(f)  Board ACTS  Equal rights ULLCA § 404
 Shareholders REACT  Unless varied by AoO3
Member Managed (closer to partnership)
 Each member is a manager
 Each has fiduciary duties
 Default
Manager Managed (close to corporation)
 Can be structured as BoD, CEO, both
 Must be specified in AoO
Participant Rights/ 50/50 Rights of Shareholders Contribution Based
Profits & Losses  Profits are shared equal  Vote on limited range of issues (e.g.,  Profits/losses based upon how much
 Losses are proportional to the share of directors, AoI amends., fundamental member contributes
profits transactions like mergers)  Member may withdraw & demand
 Unless agreed otherwise  Receive payment of dividends when and payment of interest upon giving notice
 UPA § 401(b) as declared by board
 No right GP property  Right to file derivate litigation to redress
Transferring Interest Interest Dependent Fully Transferrable Default
 Economic interest: transferable UPA §  Just sell stock!  Financial interest: transferable ULLCA §
502 501
 Management rights: not transferable UPA  May restrict in AoO
§ 503(d) unless ALL partners consent Assignees of Management Rights (closer to
UPA 401(j) partnership)

3
Articles of Organization
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  Acquire other rights only by being
admitted as member
 All must consent
 Consent requirement may be modified in
operating agreement
Taxes Single Double Single
 Pass through to partners  Tax corp. profits & dividends  Pass through to members
 File jointly  Losses only used by corp.
 Losses can be used by partners
Dissolution/ At Will Perpetuity  More like partnership
Dissociation  End/Leave when ever you want  Continues unless dissolution triggered
At Term (e.g., by vote, by agreement or by court
 May leave but it will probably be order4)
wrongful; owe damages UPA § 602
Raising Capital Hard Easy Medium
 Interests in partnership is not transferrable  Issue more equity (public)  Hard to raise public $ b/c not publically
 Loan risky b/c of JSL  Raise money through IPO (closed) traded
 Easier to get loans because of LL  Member typically give capital
 Inherently attractive to investors b/c of LL  Inherently attractive to investors b/c of
limited liability
Fiduciary Duties Cabined Approach Product of C/L & Statute Cabined Approach

4
Court would have to find that the economic purpose was frustrated.
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 Fiduciary Duty Matrix
Feature Partnership
Duty of Care Refrain from engaging in gross neg.,
reckless conduct, intentional misconduct,
or knowing violation of law UPA 404(c)
Duty of Loyalty  Account to partnership & hold as
trustee for it UPA § 404(b)(1)
 Refrain from dealing w/ partnership
in conduct or on behalf having
adverse interest UPA § 404(b)(2)
 Refrain from competing with
partnership UPA § 404(b)(3)
Duty to Disclose
 Furnish partner with any info
concerning business & affairs
reasonably required for proper
exercise of partner’s rights & duties
 Meinhard (leasehold case – no breach
if he disclosed the opportunity to his
partner)
*Can’t eliminate in partnership agreement
UPA § 103(b)(2)
Duty of Good Faith  Obligation to act in good faith and
fair dealing UPA 404(d)
 Can’t advantage oneself at
disadvantage of partnership Meehan
(law partners leaving)
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Corporation LLC
 Owned by directors/officers & Member Managed
dominant shareholders  Refrain from engaging in grossly
Duties negligent or reckless conduct,
 Duty to be reasonable informed intentional misconduct, or a knowing
 Duty to inform stockholders violation of law
 Overall duty to act in the best interest Manager Managed
of the company  Refrain from engaging in grossly
Protections negligent or reckless conduct,
 BJR intentional misconduct, or a knowing
 Exculpation Del. Code § 102(b)(7) violation of law
 Owned by directors/officers & Member Managed: members own duties
dominant shareholders Manager Managed: members, who are
Duties NOT manager own no duties ULLCA §
 Duty to Monitor (Caremark Claim) 409(h)(1); managers are held to same
 Self-Dealing/Conflict of Interest standard detailed in (b) – (f) ULLCA §
 Corporate Opportunity 409(h)(2)
 Good faith  Account to the company and to hold
Protections as trustee for it any property, profits
 Director Ratification Del. Code § or benefit…including the
144(a)(1) appropriation of a company’s
 Shareholder Ratification Del. Code opportunity ULLCA § 409(b)(1)
144(a)(2)  Refrain from dealing with the
 Entire fairness Del. Code 144(a)(3) company as or on behalf of a party
having an interest adverse to the
company ULLCA § 409(b)(2)
 Refrain from competing with the
company ULLCA § 409(b)(3)
*Can’t eliminate in operating agreement
ULLCA § 103(b)(2)
See Duty of Loyalty
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