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Need to create a matrix with formed, dissolved, mangaged info similar to that of pg 192 (note that limited partnership

is not on that chart) AGENCY LAW 1. Page numbers a. 3 8 2. Code Sections a. UPA 2; UPA 6; UPA 7; UPA 15; UPA 18, RUPA 201; RUPA 202; RUPA 306; RUPA 401 3. General Agency Principles a. Deals with principals being responsible for the actions of agents i. Big exception is when agent is not acting in the course of duty (frolic or detour) 4. Forming Agency Relationship a. Agency Restatement 1.01 Agency defined i. Elements 1. Fiduciary relationship that 2. Arises when one person (principal) 3. Manifests assent to another person (agent) 4. That the agent a. shall act on the principal s behalf, and b. subject to the principal s control 5. and the agent a. manifests assent OR b. otherwise consents to act ii. Doesn t seem to require consideration, once there is reliance will usually be enforceable b. Agency Restatement 1.03-Manifestation-person manifests intent through i. Written or ii. Oral or iii. Other conduct c. Class Hypo: X tells Y, Y, Give this $100 to Z . Y takes the bill i. Has an agency relationship been formed? Has Y consented to act as an agent? 1. Yes, by taking the bill, Y manifested consent even though he didn t say anything. 2. 1.03 of agency says manifestation of assent may be written, oral, or other conduct ii. Because an agency relationship exists, Y is a fiduciary (so Y is supposed to look out for X s interests above his own). Now, Y must carry out the order (subject to exceptions it must be a legal instruction). 5. Identifying Agents in BA a. Sole Proprietorship: Employer = Principal; Employee = Agent b. Partnership: all partners are both agents and principals c. Corporations: corporation (entity) = principal; employees = agents d. Lawyer client: lawyer=agent, client =principal i. Special because have 2 master fiduciary relationship to client and law 1

6. Importance of agency Law a. Corporations can only act through agents 7. Major Issue arising in agency: a. Who Owes fiduciary duties? i. Agents principals ii. Employees Corporation iii. Partners Partnership iv. Directors Corporation/Shareholders b. Liability of Principal: Is the principal responsible for what the agent does? i. Yes under the doctrine of Respondeat Superior c. Respondeat Superior i. Agency Restatement 2.04 : Respondeat Superior-Employer liable for torts committed by employees while acting in the scope of their employment ii. The employee is also responsible for the tort because he is the tortfeasor But of course people go after the employer because he has deeper pockets. 1. Rationale for Respondeat Superior: The employer is hiring someone to do what he doesn t have time for. If you re going to use other people to conduct your business, then you re responsible for what they do (a quid pro quo bargain you can use employees, but in exchange, you re responsible for them). Also, business is in a better position to insure against these problems and pass the insurance costs along to those that use their services. d. Authority of Agents to bind their Principals in K i. Agency Restatement 2.01: Actual Authority-An agent acts with actual authority when: 1. At the time of taking action that has legal consequence for the principal, the agent reasonably believes in accordance w/ principal s manifestations to the agent that the principals wishes the agent so to act ii. Agency Restatement 2.02:-Scope of Actual Authority 1. Agent has actual authority to a. take action designated or implied in principal s manifestations and acts necessary or incidental to achieving the principal s objectives as the agent reasonably understands them when the agent determines how to act 2. An agent s interpretation is reasonable if a. it reflects any meaning known to agent to be ascribed to principal 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 context b. Includes circumstances in which agent has notice and the agent s fiduciary duty to the principal 3. An agent s understanding of the principal s objective is reasonable if

a. it accords w/ the principal s manifestations AND inferences that a reasonable person in the agent s position would draw from the circumstances iii. Agency Restatement 2.03 :Apparent Authority1. The power held by an agent or other actor to affect a principal s legal relations w/ 3rd parties 2. When a 3rd party reasonably believes the actor has authority to act on behalf of the principal AND that belief is traceable to the principal s manifestations e. Other agency law i. Agency Restatement 2.05 Estoppel to Deny Existence of Agency Relationship 1. A person who has not made a manifestation that an actor has authority as an agent and who is not otherwise liable as a party to a transaction purportedly done by the actor on that person s account is liable to a third party who justifiably is induced to make a detrimental change in position because the transaction is believed to be on the person s account if a. person intentionally or carelessly caused such a belief OR b. having notice of such belief and that it might induce others to change their positions, the person did not take reasonable steps to notify them of the facts. ii. Agency Restatement 3.10 Manifestation Terminating Actual Authority-An agent s actual authority terminates if 1. The agent renounces it by a manifestation to the principal OR 2. The principal revokes the agent actual authority by manifestation to the agent. 3. Revocation is effective when the other party has notice of it iii. Agency Restatement 3.11 Termination of Apparent Authority 1. Termination of actual authority does not by itself end any apparent authority held by the agent 2. Apparent authority ends when a. it is no longer reasonable for the 3rd party with whom the agent deals to believe that the agent continues to act with actual authority OVERVIEW OF VARIOUS BUSINESS ASSOCIATIONS 1. Page numbers a. pg. 8 16 2. Code sections a. UPA 15; UPA 31; b. RUPA 201; RUPA 306; RUPA 307; RUPA 1001; c. ULLCA 112; ULLCA 202; ULLCA 203; ULLCA 301; ULLCA 404; d. RMBCA 2.01; RMBCA 2.02; RMBCA 2.03; RMBCA 2.0 3. Intro a. UPA governs partnerships (including LLPs) b. RUPA isn t our law. We only read this to understand modernization i. We will add a few sections from the RUPA to the UPA. EX: Georgia is governed by the UPA (almost word for word), along with a couple of the RUPA replacing some of the UPA provisions. 1

c. ULLCA governs limited liability companies d. RMBCA governs corporations, regardless of close or public 4. 3 questions to Ask yourself: i. Formation: How do you create each of these business entities? How does it come into being? Does it require formality or can it happen accidentally? ii. Management; Liability: Once the entity is formed, how is it organized? Consider liability issues. How are the agents of the organization potentially liable? iii. How do you end (dissolve) these business entities? iv. Limited Liability b. Whenever you want to create any kind of limited liability association, you have to file something 5. All of the business organizations are governed by state law. a. With the exception of some federal law that controls for publicly held corporations i. Ex. SEC 6. Business Forms a. Sole Proprietorship-informal business i. Owned by single individual ii. Owner remains fully and personally liable for all business obligations iii. Along with GP, the only business associations that do NOT require some formal filing or decision or intent to form iv. Standard problem here are agency issues b. Joint Venture-similar to partnership i. Business undertaking for profit owned by 2 or more individuals ii. Usually limited to purpose and period of time iii. Joint venturers are partners for that activity, UPA rules apply w/in that scope iv. Ex. Chevron and Exxon joint venture to build oil rigs, but joint venture only in that scope c. General Partnership (GP)-informal business i. Default form for business owned by 2 or more persons ii. Partners are fully and personally liable for all business obligations of the partnership iii. Can be dissolved anytime by a partner iv. Along with GP, the only business associations that do NOT require some formal filing or decision or intent to form v. An oral agreement to share profits in some agreed upon ratio may be sufficient, even if financial contributions are unequal vi. GP LLP d. Limited Liability Partnership (LLP) i. Modern Modification of the general partnership ii. General partnership in all respects except that the statute provides that partners have no personal liability for firm obligations that exceed the assets of the general partnership 1. Exception: Partners still have responsibility for personal misconduct iii. Tax benefits for being a partnership iv. Have to draft partnership agreement and file RUPA 1001-1003 1

e. Traditional Limited Partnership (LP) i. Two different kinds of partners-one partner contributes capital (Limited partner) and the other party (general partner) assumes daily responsibility of operating business ii. Creature of statute iii. Formed by filing certificate in public office; failure to file renders partnership a GP iv. Limited partners have no liability for firm s debts v. Limited partner could lose shield of limited liability if he takes part in the control of the business 1. only applies to persons who transacted business w/ limited partner believing that the limited partner is a general partner vi. If general partner departs, partnership is dissolved. If ltd. partner departs, partnership is NOT dissolved RUPA 801 f. Limited Partnership with Corporate General Partner i. General partners in a limited partnership may form a corporation to provide themselves with limited liability. ii. Quite common solution prior to the invention of limited liability laws iii. LP LLLP g. Limited Liability Limited Partnership (LLLP) i. Has both limited and general partners ii. General partners have the protection of LLP partners h. Limited Liability Companies (LLC) i. Provides limited liability for all participants ii. Permits flexibility in internal management i. Corporations i. Publicly Held: means that the corporation has shares that are traded on public securities markets subject to federal regulation ii. Closely Held: do not have publicly traded shares; shares are usually held by a few private individuals (family, friends, etc.) iii. Provides limited liability for all investors and participants whether active or passive, to assets of the corporation 1. EXCEPTION: Piercing the Corporate veil (below) iv. Piercing the corporate veil-permits creditors of closely held corporations in limited circumstances to recover directly from directors, officers, and shareholders The General Partnership 1. Pages a. 25-34, 49-52 2. Code sections a. UPA 13; UPA 14; UPA 15; UPA 18; b. RUPA 105; RUPA 301; RUPA 303 3. Definition of Partnership a. UPA 6-A partnership is an association of two or more persons to carry on as co-owners of a business for profit b. RUPA 201-a partnership is an entity distinct from its partners i. A limited liability partnership continues to be the same entity that existed before the filing of a statement of qualification under 1001 (must be approved by vote necessary to amend partnership agreement) 1

4. Partnership Formation i. Very minimal requirements: 1. No writing necessary 2. May be express or implied b. Default is that Unanimous Consent is Required i. UPA 18(g)- No person can become a member of the partnership without the consent of all other partners c. UPA 7-In determining the existence of a partnership: i. Receipt (or an agreement to receive) by a person of a share of the profits of a business is prima facie evidence that he is a partner in the business. ii. HOWEVER, no such inference shall be drawn if such profits were received in payment: 1. as a debt by installments or otherwise 2. as wages of an employee or rent to a landlord, 3. as an annuity to a widow or representative of a deceased partner, 4. as interest on a loan though the amount of payment varies w/ profits of business 5. as consideration for sale of goodwill business or other property by installment or otherwise iii. Other UPA 7 Points 1. persons who are not partners as to each other are not partners as to 3rd persons 2. Joint tenancy, tenancy in common, tenancy by the entireties, joint property, common property, or part ownership does NOT of itself establish a partnership, whether such co-owners do or do not share profits made by use of property 3. Sharing of gross returns does not itself establish a partnership, whether or not persons sharing them have a joint or common right in any property d. RUPA 202i. Except as provided in (b) (formed under a different statute), the association of two or more persons to carry on as co-owners a business for profit forms a partnership ii. In determining whether a partnership is formed, the following rules apply 1. Joint tenancy, etc. does not by itself establish partnership, even w/ shared profit 2. Sharing of gross returns does not by itself establish partnership 3. Person who receives share of the profit of a business is presumed to be a partner in the business, unless profits were received in payment a. Of a debt or otherwise b. For services as an independent contractor or of compensation to emp ee c. Of rent d. Of an annuity or other retiree or health benefit to a beneficiary, representative, or designee of a deceased or retired partner e. Of interest or other charge on a loan, even if payment varies w/ profits of business OR f. For the sale of the goodwill of a business or other property by installment or otherwise. 1

e. Key points to Ask? i. Share of profits? (UPA 7) ii. Equal rights in management? (UPA 18(e)) 5. Adding Someone to the Partnership a. Requires Unanimous Consent i. UPA 18(g)- No person can become a member of the partnership without the consent of all other partners b. Be on the look out for inadvertent addition to the partnership 6. General Partnership Liability i. NOTE: While UPA 18 says subject to any agreement between them , UPA 13-15 do not say that b. Partnership Liability i. UPA 13- Partnership Bound by Partner s Wrongful Act 1. Elements: a. When a partner commits a wrongful act/omission b. While acting in the ordinary course of the business OR with authority from his co-partners c. And loss/ injury/penalty is incurred ii. UPA 14: Partnership Bound by Partner s Breach of Trust: 1. the partnership must make good the loss: a. (a) where a partner with apparent authority receives money or property of a third person and misapplies it; AND b. (b) where the partnership in the course of its buinsess receives money or property of a third person and it is misapplied by any partner iii. RUPA 305 Partnership liability for Partner s Actionable Conduct (same as UPA 14) 1. (a) partnership is liable for injury caused by actionable conduct of a partner acting in the ordinary course of business or with the authority of the partnership. 2. (b) if in the course of the partnership s business or with partnership authority a partner receives money or property of a person not a partner, the partnership is liable for the loss. c. Partner Liability i. UPA 15-All partners are liable: (replaced by RUPA 306) 1. Joint an severally for everything chargeable to the partnership under 13 and 14 AND 2. Jointly for all other debts and obligations of the partnership; BUT any partner may enter into a separate obligation to perform partnership K ii. RUPA 306 (We use this, it replaces UPA 15) 1. (a) All partners are jointly and severally liable for ALL obligations of the partnership EXCEPT a. (b) No personal liability for partnership obligations occurring prior to partner being admitted into partnership b. (c) No personal liability for an obligation of a partnership incurred while the partnership is a LLP. i. Exception: still liable for personal torts 1

iii. UPA 17-Incoming Partners Liability-A person admitted as a partner into an existing partnership is liable for all obligations of the partnership arising before his admission as though he had been a partner when such obligations were incurred, EXCEPT that his liability shall be paid for solely out of partnership property. (i.e. not personally liable for debts & liabilities) iv. Silent Partner s Liability: a partner who does not want anyone to know that he is a partner but wants his check regularly is still subject to liability on behalf of the partnership UNLESS there is a limited partnership. In the event there is a loss or claim against the partnership, the silent partner will be liable with any other partners. There is NO real legal concept of a silent partner . This is totally ineffective for avoiding liability; client should use a limited partnership instead. d. RUPA 307 Actions by and Against Partnership and Partners i. (a) a partnership may sue and be sued in the name of the partnership ii. (b) An action may be brought against the partnership and any or all of the partners in the same action or in separate actions iii. (c) Judgment against partnership may not be satisfied from personal assets unless judgment against partner as well iv. (d) Judgment creditor must first exhaust partnership assets before attacking partner assets EXCEPT 1. Partner is personally liable and a. (1) writ of execution on partnership returns unsatisfied b. (2) partnership is a debtor in bankruptcy; c. (3) partner has agreed that the creditor need not exhaust partnership assets; d. (4) court grants permission to the judgment creditor to levy execution against the assets of a partner because the assets subject to execution are clearly insufficient to satisfy the judgment; e. (5) liability is imposed on the partner by law independent from partnership 7. The Partnership Agreement a. Contents of Written partnership Agreements i. ype of Partnership (GP, LP, LLP, LLLP) ii. Who the parties are iii. How profits and losses will be shared iv. What property (if any) is being contributed to the partnership and what is to remain personal property on loan v. Happenings upon dissolution of partnership the most common provision is that upon withdrawal of any partner the business of the partnership is not to be wound up and terminated, but is to be continued by the remaining partners with the interest of the withdrawing partner begin paid off on some case basis. 1. UPA 38: can be a big pitfall if no agreement In absence of written agreement, partner withdrawing has the right to compel a winding up and termination b. Written Agreement is NOT required i. Advantages of Having: 1. May avoid future disagreements over what the agreement was 1

2. Readily provable in court, while an oral agreement may involve substantial factual controversy 3. Statute of Frauds: a. May be necessary where real estate is to be contributed as partnership property or the agreement includes a term of more than one year 4. May focus attention on potential trouble spots in the relationship which may be unnoticed if partnerships proceed on a handshake deal 5. Allows partners to allocate tax burdens among themselves 6. Allows partners to agree to what will happen if one partner dies or retires a. UPA & RUPA default = dissolution/disassociation b. Having agreements in writing helps surviving spouses, executors, etc. understand rights as intended by parties 7. Allows partners to specify which property is contributed and which property is loaned to the partnership 8. Advantageous to the partnership s attorney a. justifies higher fee; places suggestions and advice in concrete form so there is no misunderstanding (& no malpractice) 9. Serves a cautionary function: lets the signer know he s entering a serious, legally binding relationship ii. Disadvantages of not having a written agreement 1. If there is no written agreement, partnership is governed by statute a. It is unlikely that the provisions of the statute will reflect all of the expectations and understandings among the partners 2. Default Partnership Agreement: The UPA a. If it is unsaid how profits will be shared then UPA 18(a) governs and each partner will share equally the profits and must equally contribute towards losses in proportion to profit share 8. Sharing of Profits & Losses i. UPA 18 is the default, but it is subject to any agreement between the parties so it can be modified b. Default Statutes i. UPA 18(a)-Rules Determining Rights and Duties of Partners-All partners share equally in profits and surplus remaining after all liabilities (including contributions/loans of partners) of the partnership have been paid, and each partner must contribute towards losses in the proportion in which the partner shares in the profit
ii. RUPA 401(b)-each partner is entitled to an equal share of partnership profits, and is chargeable with a share of partnership losses in proportion to the partner s share of the profits

c. See Partnership- Formation and UPA 7 about presumption of profit sharing on formation of partnership i. A couple pages up d. Dividing Profits by Agreement can be accomplished in several ways i. May share on flat percentage basis w/out regard to any other factors 1. May be established in partnership agreement OR 2. Established issuing partnership units to each partner ii. One or more partners may be entitled to weekly or monthly salary 1

1. Payment may be treated as a cost and subtracted before profits are computed for division on some other basis OR 2. Payment may be considered an advance to be credited against amount partner is otherwise entitled to after division of the profit iii. Partners may share on a percentage basis, w/ percentages recomputed each year on the basis of the amount invested during the year by each partner iv. May share on a percentage basis, w/ percentages recomputed each year on the basis of total income, sales or billing of each partner, time devoted to business, etc. v. In large partnerships, each partner may be entitled to fixed percentage applied against percentage (perhaps 80%) of income. Remaining is allocated among junior partners as a form of incentive compensation by committee vi. Agreement may be silent on division, it being contemplated each year that the partners will work out the division of profit by agreement on a mutually acceptable basis e. Richert v. Handly- GP was formed to cut timber, and one party wanted to split profits w/o first repaying one party s contribution to the partnership. There was no provision for the distribution of losses. So after subtracting cost to buy timber rights and cut timber there was actually a loss, so it must be equally split. When a partnership is established and no provision is made for the distribution of losses, losses of the venture are distributed based upon agreed upon distribution of profits. i. Also, Where a loss has occurred and one partner contributed money and the other contributed labor, the other partner s labor contribution is not given value. Losses are calculated based upon either the agreed upon ratio or the ration of expected profit sharing. a. Exception: You can agree on the outset that the capital contribution and the labor being equivalent contributions. (kovacik v. reed) 9. Partnership Rights and Duties a. Right to inspect books i. UPA. 19-Each partner is entitled to access/inspect/copy the partnership's books & records. ii. UPA. 20.- The partnership must provide any partner with complete information regarding all things that are affecting the partnership's business (if the partner so requests). 1. When a partner dies, his legal representative has the same right. b. UPA 18(b)-(h) Rules Determining Rights and Duties of Partners 1. NOTE: Subject to agreement between them ii. (b) partnership must indemnify every partner in respect to payments made and personal liabilities reasonably incurred by him in ordinary and proper course of business, or for the preservation of business/property. iii. (c) Any payment made by partner beyond the amount which he agreed to contribute shall be paid interest from the date of payment. iv. (d) Interest on capital contributed by him limited to that from the date when repayment should be made v. (e) All partners have equal rights in management and conduct of partnership business *** 1

1. Rarely completely true in reality vi. (f) No partnership is entitled to remuneration for acting in the partnership interest, EXCEPT that surviving partner is entitled to reasonable compensation in winding up business vii. (g) no person can become member w/out consent of ALL partners viii. (h) any difference arising as to ordinary matters connected w/ partnership business may be decided by majority of partners, but NO ACT in contravention of any agreement between partners may be done w/out consent of ALL partners c. RUPA 401 Partner s Rights and Duties i. (a) Each partner is deemed to have an account that is: (Capitol/Partner Account) 1. (1) Credited w/ amount equal to money plus value of any other property, net of the amount of any liabilities, the partner contributes to the partnership and the partner s share of the partnership profits AND 2. (2) Charged w/ an amount equal to the money plus the value of any other property, net of the amount of any liabilities, distributed by the partnership to the partner and the partner s share of the partnership losses. a. Bottom Line: Account = capital contribution + share of profits/Losses b. Account may be negative, and if it is negative upon dissolution of partnership, amount is owed to the partnership RUPA 807(b) ii. (c) partnership shall reimburse partner for payments made and indemnify a partner for liabilities incurred by the partner in the ordinary course of the business of the partnership or for the preservation of its business or property iii. (d) A partnership shall reimburse a partners for an advance to the partnership beyond the amount of capital partner agreed to contribute iv. (e) payment or advance made by partners which gives rise to a partnership obligation under (c) or (d) constitutes a loan to the partnership which accrues interest form the date of the payment or advance. v. (f) each partner has equal rights in management and conduct of business vi. (g) partner may use or possess partnership property ONLY on behalf of partnership vii. (h) partner is NOT entitled to remuneration for services performed for the partnership, EXCEPT for reasonable compensation for services rendered in winding up the business of the partnership viii. (i) person may become partner with the consent of ALL partners ix. (j) Difference arising at to matters w/in ordinary course of business may be decided by majority. An act outside the ordinary course of business and an amendment to the partnership agreement may be undertaken only w/consent of ALL partners 10. Fictitious Business Statement: if you start a business under a name that is not yours, you must file this statement (does not apply to corporations) 11. Limited Liability Partnerships Formation(LLP) a. Overview of Formation (For Exam) i. Must be approved by a vote of the partnership necessary to amend partnership agreement. 1001(b) ii. File a Certificate of Qualification under RUPA 1001 1

1. Detail below iii. Include LLP in name to give public notice according to RUPA 1002 iv. After it is formed must file annual Reports under RUPA 1003 b. RUPA 1001-Statement of Qualification i. (b) Terms & conditions on which partnership becomes LLP must be approved by a vote necessary to amend the partnership agreement except, in the case of a partnership agreement that expressly considers obligations to contribute, the vote necessary to amend those provisions. ii. (c) after approval, partnership becomes LLP by filing statement of qualification containing: 1. name of partnership 2. street address of partnership s CEO & street address of an office in the state 3. If the no office in this state, name & address of agent for service of process 4. statement that partnership elected to become LLP and 5. deferred effective date, if any. iii. (d) agent of LLP for service must be resident of state or authorized to do business in state iv. (e) status of partnership as LLP is effective on LATER of 1. filing of the statement OR 2. date specified in the statement -Statement remains effective, regardless of changes in membership, until cancelled v. (f) Status of partnership as LLP and liability of partners is not affected by errors or later changes in information contained in statement of qualification vi. (g) filing of statement establishes that partnership has satisfied all conditions precedent to qualify as LLP vii. (h) an amendment or cancellation of statement of qualification is effective when filed or on a deferred effective date, if specified. c. RUPA 1002-name of an LLP must end w/ LLP, RLLP, etc. 12. LLP Liability a. RUPA 306(C) i. Shields all its members from personal liability so none would be personally liable Partnership Management 1. Pages a. 52-64 2. Codes Sections a. UPA 9; 15; 18 b. RUPA 105; 301; 303 3. Partnership Management a. Decision Making i. UPA 18(e)-If there is no agreement about management and decision making, all partners have equal votes and power, regardless of how profits are split ii. RUPA 401(f)-identical to UPA 18(e) b. Partners as Agents (Agency Principles under Partnership Law) i. UPA 9-Partners as agents of Partnership 1

1. (1) every partner is an agent of the partnership for business purposes. The act of every partner, including execution of partnership name on any instrument for carrying on the usual business of the partnership binds the partnership UNLESS a. The partner had no authority to act for the partnership AND b. The person w/ whom he is dealing has knowledge of that fact 2. (2) An act of a partner which is NOT apparently for carrying on the usual business does not bind the partnership UNLESS authorized by the other partners 3. (3) Unless authorized by the other partners or unless they have abandoned the business, one or more but less than all the partners have NO AUTHORITY to a. (a)Assign the partnership in trust b. (b) dispose of the good-will of the business c. (c) Do any act which would make it impossible to carry on the ordinary business of a partnership d. (d) Confess a judgment e. (e) submit a partnership claim or liability to arbitration or reference. 4. (4) No act of a partner in contravention of a restriction on authority shall bind the partnership to persons having knowledge of the restriction ii. RUPA 301-Partner Agent of Partnership 1. (1) Each partner is an agent of the partnership for the purpose of its business. a. An act of a partner for apparently carrying on ordinary course of business binds the partnership b. UNLESS 1) the partner had no authority to act for the partnership in the particular matter AND 2) the person w/ whom the partner was dealing knew or had received notification that the partner lacked authority. c. Acts include the execution of an instrument in the partnership s name 2. (2) An act not in the ordinary course of business binds only if the act was authorized by the other partners c. General Rules i. All partners are agents of the partnership UPA 9 d. 2 types of Authority (partner acting with actual or apparent authority may bind the partnership) i. Actual Authority- Express or implied, when a partner really has authority to make decisions for a business, and this authority cannot be taken away absent some sort of partnership agreement 1. Methods of conferring actual authority (Nabisco) a. Articles of Partnership b. Verbal Agreement between parties c. Partners have full authority to bind their partnership when acting w/in the ordinary scope of the partnership s business 2. Revoking actual authority 1

a. Absent agreement, a partner s actual authority can only be eliminated by a majority of the partnership. (Nabisco) 3. Ex. a. Nabisco v. Stroud: 2 general partners in grocery store. Disagreement over buying bread and one partner told Nabisco they would no longer purchase while the other made orders. Grocery Partnership was liable for bread order because partner had actual authority to order bread b/c was w/in scope of grocery business and no majority vote denying authority. i. Hypothetically: if there were 3 partners and 2 voted to not buy bread there would be no actual authority, and no apparent authority since Nabisco had notice b. Roach v. Mead: 2 partners in Law GP. 1 partner took loans from client without providing sound legal advice. Court held that the client reasonably believed he was getting legal advice and was therefore in the ordinary scope of the business. Partnership therefore liable when partner defaulted. ii. Apparent Authority- reasonable belief, based on some manifestation of the partnership, that the partner has authority. 1. Apparent authority can be created only by the partnership, not by the partner a. title and past dealing are examples of manifestations by the partnership which might create apparent authority 2. Apparent Authority is defeated if the third party was aware the partner lacked actual authority (Nabisco) a. 3. Ex a. Smith v. Dixon: Family farming partnership. Agreed to sell parcel for 225K, but partner contracted to sell for 200K. NO actual authority was present because not in ordinary business and majority vote denied right to sell for 200K. However, there was apparent authority because Partnership had authorized him in the past to be the point man for selling land. b. Rouse v. Pollard: GP law partnership w/ 7 members. 1 partner secretly embezzled funds from clients by telling them he would act as an investment agent for them. Court held general investing was NOT the ordinary scope of the business so no authority and belief of the client was not reasonable because of no manifestation of authority by the firm. iii. Authority standoff in 2 person partnerships 1. UPA 18 (e) and (f) state that each partner has equal rights in the management and that business decisions are decided by majority rule. 2. (e) and (f) together mean that if there are 2 partners, there can never be a majority and neither can outvote the other or tell the other what to do as long as they are acting within ordinary matters of the business; but if there are 3 partners, 2/3s can outvote 1/3 even if the 2/3s combine to have less than a majority stake in the partnership 1

iv. Two ways to consider authority problems 1. Contract Approach: In the K world, did this agent have authority actual or apparent to enter into this K? It is a scope of authority issue. The partnership is also relieved of liability if the business transacted was NOT in the ordinary scope of the partnership s business. Thus, if no reasonable person could have believed that the transaction was in the normal course of business, then the partnership will not be liable. See Rouse v. Pollard above (must condense and combine) 2. Tort approach: in a tort world, use master/servant terms, and think about the scope of employment. (It is not an issue of authority because the partnership would not give an agent authority to commit a tort!) The relevant question becomes what the employee was supposed to be doing when the tort was committed. A partnership is liable if the client reasonably believed that the services requested of a partner were undertaken as part of the partnership s business, even if others in the industry would regard the services as outside the scope of the partnership s business. Reasonableness is determined by facts of each case. See Roach v. Mead above e. RUPA 303-Statement of Partnership Authority i. (a) Partnership may file a statement of partnership authority, which may state the authority or limitations on the authority of some or all the partners to enter into transactions on behalf of partnership 1. (e) Third parties are deemed to know of the limitation on a partner s authority transfer the partnership s real property if a certified copy is on file 2. (g) a statement of partnership authority is valid for 5 years from the latest amendment Duties of Partners to Each Other (Loyalty & Care) a. Pages a. 64-75 b. Statutes a. UPA 9; 13; 14; 15; 17; 20; 21; 22; 26 b. RUPA 306(b); 404 c. Overview of Fiduciary Duties a. Partners owe fiduciary duties to Partnership (Meinhard v. Salmon & UPA 21) b. Employees owe fiduciary duty as agents (Agency Restatement 1.01) d. Case ii. Meinhard v. Salmon 1. Salmon leased NY hotel with Meihard as financial backing partner. Make big success and lease lasts 20 years. Salmon learned of business opportunity to renew the lease, but didn t tell Meihard b/c wanted to do it alone. Court articulated an extremely high level of fiduciary duty which they described as the duty of finest Loyalty and the punctilio of an honor the most sensitive. Salmon was Legally required to take affirmative steps to inform Meinhard of the new lease opportunity, even if he wanted to do it alone. After informed, could have tried to obtain the lease on his own. Business info is very valuable, and must be shared just like profits. 1

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a. Extremely high standard, but seems to have relaxed b. Courts cite this case (still good law) when the D will probably loose, and really want to hammer home fiduciary duty c. This is partnership opportunity case Overview of Statutory law iii. Tones down the extremely high standards of Meinhard, even though case is still good law iv. Keeps duty of loyalty and care, but these are limited v. Partner owes a duty to render complete and true info on demand vi. Partners owe Fiduciary duty to partnership (put partnership interest above own) vii. Right to formal accounting viii. Also allowed to contract all this loyalty and duty away if they want. UPA 20-Duty of Partners to Render Informationix. Upon demand, a partners shall give true and full information of all things affecting the partnership to: 1. any partner or 2. the legal representative of any deceased partner or 3. partner under legal disability UPA 21-Partner Accountable as a Fiduciary x. (1) A partner must account to the partnership for any benefit derived without the consent of the other partners for any transaction connected w/ the formation, conduct, or liquidation of the partnership or from any use by him of its property 1. Hold as trustee profits so derived xi. (2) section also applies to representatives of a deceased partner engaged in liquidation of partnership affairs Example of UPA 21: borrowed 5K from partnership to bet on ponies. Win 100K. Can not just return the 5K. Partnerhsip has rights 100K because benefit derived from partnership. xii. Exception is if you can argue it was a loan, and then only have to repay what was borrowed UPA 22-Right to an accountxiii. Partner has right to formal account: 1. If he is wrongfully excluded from the business or possession of its property by co-partners 2. If the right exists under the terms of any agreement 3. As provided by 21 4. Whenever other circumstances render it just and reasonable RUPA 404-General Standards of Partner s Conductxiv. (a) Only fiduciary duties are loyalty and care xv. (b) a partner s duty of LOYALTY to the partnership and the other partners is limited to: 1. to account for any property, profit, or benefit derived by the partner in the conduct and winding up of the business or derived from use of partnership property, including appropriation of a partnership opportunity 2. refrain from dealing with the partnership in conduct or winding up of partnership business as or on behalf of party having adverse interest to partnership 1

xvi.

xvii. xviii. xix.

xx.

3. refrain from competing with the partnership in the conduct of the partnership business before the dissolution of the partnership. (c) a partner s duty of CARE to the partnership and other partners is limited to refraining from engaging in grossly negligent or reckless conduct, intentional misconduct, or a knowing violation of law. (d) partner must discharge duties and exercise any rights consistently with the obligation of good faith and fair dealing. (e) partner does NOT violate duty merely because the partner s conduct furthers his own interest (f) partner may lend money to and transact other business w/ partnership and as to each loan or transaction, the rights and obligations of the partner are the same as those of a person not a partner (g) section applies to a person winding up the business if the person is a representative of the last surviving partner

Partnership Property 1. Pages a. 72-75 2. Code overview a. UPA 24, 25, 26 3. Transferring Interest in Partnership allowed? a. UPA 26- Partner s interest in the Partnership i. A partner s interest in the partnership is his share of the profits and surplus, ii. This is personal property. 1. This right to profits may be transferred , but not management or specific property interests(UPA 27) b. UPA 25- Partner s Rights in Specific Partnership Property (ex. truck or land) i. (1) a partner is co-owner of specific partnership property ii. (2)co-ownership means that: 1. (a) a partner only has the right to use partnership property for partnership purposes, unless he is given consent by other partners 2. (b) partner s right in specific partnership property is NOT separately assignable. 3. (e) a partner s right in specific partnership property is NOT subject to dower, courtesy, or allowances to widows, heirs, or next of kin. 4. Statutes a. UPA 24 Extent of Property rights of a partner i. 3 rights 1. Rights as co-owner in specific partnership property 2. Interest in partnership 3. Right to participate in management b. RUPA 204-When Property is partnership property i. Is partnership property 1. If acquired in the name of the partnership (a)(1) 2. If acquired in the name of one or more partners with an indication on the instrument of the person s capacity as a partner but w/out indication of the partnership name (a)(2) 3. By a transfer to the partnership in its name (b)(1) 1

4. By a transfer to one or more partners in their capacity as partners if the name of the partnership is indicated in the transferring instrument (b)(2) 5. Presumption that property purchased w/ partnership assets even if not in the name of the partnership (c) ii. Not Partnerhsip property 1. Property NOT acquired in the name of the partnership is presumed NOT to be partnership property even if the property will be used for partnership purposes (d) c. UPA 28 Charging Order i. Charging order= When a partner s creditor comes into court and sues for debt, if creditor wins the partnership may be forced to give that partner s stream of profits to the creditor. (similar to lien) Partnership Accounting 1. Pages a. 75-81 2. Code a. None 3. 3 basic instruments a. Balance Sheet i. Fundamental Equation 1. Equity = Assets Liabilities ( or also Assets = Liabilities + Equity ) a. Equity is also known as ownership or net worth ii. Double Entry Bookkeeping 1. When you make an entry on one side of a balance sheet, an equal but opposite entry must be made on the other side so that the two sides are equal iii. static snapshot of a business s financial condition at a certain instant. iv. Bottom line is often not meaningful figure 1. transactions that do not affect the real worth of the business to the owners may increase or decrease the bottom line. Taking out loan increases assets bottom line but the company is not in any better position. v. Every transaction potentially creates a different or new balance sheet when the transaction is recorded vi. Numbers cannot be completely accurate b/c hard to quantify good will, reputation, prospects, etc. as assets vii. Aspects of Balance sheet 1. Assets a. Cash- includes cash and cash equivalent like stocks i. fairly accurate on balance sheet b. Accounts Receivable- money people owe company i. Slightly inaccurate on balance sheet because some people just don t pay, but there is formula to adjust c. Inventory-goods you have to sell (based on how much business paid for inventory) i. Inaccurate because under valued because usually sell above cost d. Real Property 1

i. Inaccurate because hard to sell sometimes, and may not get full value e. Fixtures-improvement to real properry(carpet, lighting, sheliving) i. Inaccurate because hard to sell sometimes, and may not get full value f. Equipmenti. Will likely depreciate, so must be reflected in double entry 2. Liabilities a. Accounts Payable money that the company owes to others; not yet paid b. Note to a Partner Partners often lend money to the business, this is different from a capital contribution. 3. Equity a. Assets liabilities i. Bigger the #, the better for partners viii. Balance Sheet Example ASSETS LIABILITIES Cash $19,000 Acct. Payable $73,000 Acc. Reciev. $93,000 Loan $25,000 Inventory $95,000 fixture $42,000 EQUITY Equip $9,000 Partner s $160,000 capital (200 common shares) $258,000 $258,000 ***Bottom Line must always be equal on either side ix. Examples of Effect of change a. BE SPECIFC OF WHAT ACCOUNT, AND LIST TOTALS OF EACH ACCOUNT AFTER 2. Pay off loan a. Have to liquidate an asset i. Maybe receive 10,000 from Acct Reciev. 1. Adjust that number ii. Increase cash b. Remove 25,000 loan from liability c. Remove 25,000 from cash 3. Equip depreciate a. Depreciate equip to 4,000 b. Decrease equity by 4,000 4. What if sale where turn over asset, but not paid immediately a. Still Required to Have double Entry bookkeeping, and totals on either side Match

b. This would be solved by removing the value of the asset from the assets side, but then replacing it on the asset side with the equivalent value in accounts receivable x. Depreciation of assets 1. Many assets depreciate over time. This will be reflected on the balance sheet as the assets being listed for a lower book value. Even though this equipment, inventory, livestock, etc. may be still working as well as last year, if the company tried to sell it would be able to receive less money because older and has limited lifetime for usefulness. b. Income Statement i. Income = Revenues Expenses ii. Dynamic overview (motion picture) of a business s financial situation over time (tells if making money over period of time) 1. Usually comes out monthly, quarterly, or annually iii. Bottom line here is much more meaningful iv. Aspects of Incom statement 1. Sales-=gross income brought in 2. costs of sales-=amount it cost to buy inventory 3. gross profit= sales cost of sales 4. Net profit= gross profit- other expenses (such as advertising, rentals, depreciation, salaries, Misc.) v. Income Statement Example Sales $417,000 Cost of Sales $270,000 GROSS PROFIT $147,000 Expenses vi. Exampl Ads 8,000 es of Rentals 24,000 effects Depreciation 5,000 of Salaries 32,000 change Misc. 18,000 1. A NET PROFIT $60,000 d s actually cost 10K a. Change net profit income statement to 58,000 b. Change in cash on balance sheet 17,000 c. Change Equity on balance sheet 158,000 d. Change income for year on capitol accounts to 29,000 each c. Capital Accounts i. Reflect each partners equity ownership in the company ii. Does not reflect separate loans to the company iii. Capital Accounts Example Opening Income for Drawing for Closing Year Year A 100,000 30,000 0 130,000 B 0 30,000 0 30,000 TOTAL 160,000 1

1. d. The intersection of these 3 tools i. These tools come together at net worth/equity ii. Net profit in Income statement= income for year in capital accounts iii. Total Closing value of capital accounts= equity in balance sheet iv. Equity - net profit = initial capital contribution v. Income statements are bridges between successive balance sheets e. Value of Business i. NOT determined solely by looking at equity or assets ii. Must evaluate earning potential v. risk iii. Really requires a business appraiser f. Tax effects i. Each partner s share of profits for the year is taxable income even if they do not actually receive the money g. EXAM HINT: Partners Capital is the area that we change around a lot when we do balancing statements and stuff Partnership Dissolution 1. Pages a. 81-90 2. Code Overview a. UPA 17; 29; 30; 31; 32; 35(1)(b); 36; 38; 41; 42 3. Three stages to ending a partnership: a. Dissolutioni. UPA 29 Dissolution Definition-the change in the legal relation of the partners caused by any partner ceasing to be associated in the carrying on 1. This should be distinguished from the winding up of the business. 2. Dissolution may be intentional or accidental ii. UPA 30 Partnership Not Terminated by Dissolution 1. Dissolution does not terminate, continues unitl completion of winding up affairs iii. Not the end of business, business still continues iv. Not taking on new business, but finishing up old business b. Winding Upi. closing things down, selling property, settling affairs, etc. ii. UPA 37 Right to wind up 1. As long as partner did not wrongfully dissolve, there is a right to wind up partnership affairs if you can show cause to the court. 2. This allows the partner to be very demanding 3. Most good partnership agreements change this because, this provision would essentially require the business to sell off substantial assets to wind up and as a result kill the business iii. UPA 42 Rights of Retiring or estate of deceased partner when business continues 1. If the business continues after a partner leaves, the retiring partner or legal representative has 2 options: a. May have the legal value of the interest as of dissolution plus interest b. May have the legal value of the interest as of dissolution plus half the profits attributable to partnership property 1

2. This gives incentive to go ahead and settle business shortly after dissolution. c. Terminationi. when all partnership affairs are wound up ii. duty to business finally ends 4. Causes of Dissolution: (UPA 31 and 32) i. MAY and SHOULD be modified by agreement, this is just default b. UPA 31 Causes of Dissolution (Occurs Automatically) i. Dissolution is caused by: 1. (1) If there is no violation of the partnership agreement, dissolution occurs automatically when: a. by termination of the definite term or particular undertaking in the partnership b. by the express will of ANY partner when there is no definite term or particular undertaking 31(1)(B) c. by the express will of ALL partners who have not assigned their interests or suffered them to be charged for their separate debts, d. By the expulsion of any partner in accordance with partnership agreement 2. Even if violating the agreement, any partner at any time may dissolve by express will 3. Any event which makes business unlawful 31)(b)(3) 4. death of any partner 31(d)(4) 5. bankruptcy of any partner OR the partnership 31(d)(5) c. UPA 32 Dissolution by Court Decree (Occurs on order of Court) i. By application by partner 1. Partner declared a lunatic 32(1)(A) 2. Partner is incapable of performing partnership K 32(1)(B) 3. Guilty of conduct which hinders the ability to carry on business 32(1)(c) a. Ex. Such as partner sent to jail 4. Willfully and persistently breaches partnership agreement 5. Partnership can only carry on at loss 32(1)(e) 6. Other circumstances making dissolution equitable ii. By application of purchaser of partner s interest 1. End of the specified term or undertaking of the partnership 2. If partnership was at will when interest assigned or charging order granted 5. Common Agreement modification to dissolution a. Most common provision is a buyout clause that upon any withdrawal, the business of the partnership is NOT to be wound up but is to continue by the remaining partners with the interest of the withdrawing partner being paid off on some cash basis. i. Problem is still coming up with that kind of money 1. Common solutions is buyout overtime 2. Or insurance policy on each partner s life 6. Partnership at will v. Partnership for a term a. Partnership at will allows partner to dissolve partnership at any time b. Partnership for a term i. partnership agreement establishes length of time partnership shall last 1

ii. any partner can still dissolve partnership at any time, but he is then subject to breach of agreement (partner will receive his partnership interest less the amount of damages he caused the partnership) 7. Case Law a. Collins i. GP agree to 30 year fixed partnership for a lease of a cafeteria building, but the financer wanted to dissolve partnership because was required to invest more than expected and he didn t think it would be profitable. Court held it would be profitable if he did not mettle, and Collins had violated partnership agreement by meddeling ii. Each partner has the inherent power (but not the legal right) to dissolve the partnership. Collins was trying to dissolve under 32 to avoid breach damages, but Collins could still dissolve here and just be in breach of K. However he would be liable for massive expectancy damages on 30 year lease for breach of K iii. If this had been partnership at will, then would have been completely different iv. Applicable codes UPA 31 b. Cauble i. 50/50 GP. 1 partner died and left interest to wife. Living partner continued to operate business. He never settled up with former parter s widow. Widow filed suit for accounting of business and winding down. Widow had choices: (1) 37 and 38: She has the right to say that she wants to liquidate the business, pay off the creditors, determine what is left after liquidation, and take the deceased partner's share. (2) 42: Allow the business to continue. ii. Since continued to operate, under 42 widow was entitled to share of business plus interest or profits. iii. Applicable codes: UPA 37 and 42 8. UPA 35-Power of Partner to Bind Partnership to Third Persons after Dissolution a. after dissolution a partner can bind the partnership by: i. by any act appropriate for winding up partnership affairs or completing transactions unfinished at dissolution; ii. By any transaction which would bind the partnership if dissolution had not taken place, provided the other party to the transaction 1. had extended credit to the partnership prior to dissolution and had no knowledge or notice of the dissolution OR 2. If he had NOT extended credit prior to dissolution, had known of the partnership prior to dissolution, but had no knowledge of notice of dissolution and the dissolution had not been advertised in a general circulation newspaper in the place(s) where the partnership business was regularly conducted 9. UPA 38-Rights of Partners AFTER Dissolution a. (1) Dissolution NOT in violation of agreement i. all partners may have the partnership property applied to discharge the partnership s liabilities and the surplus paid to the partners ii. if the dissolution is caused by expulsion of a partner and the expelled partner is discharged from all partnership liabilities, the expelled partner receives in cash only the net amount due him from the partnership b. (2) Dissolution by violation of the agreement: i. (a) Rights of partners who did NOT cause dissolution wrongfully 1

1. Be able to have partnership property applied to discharge partnership s liabilities and be paid his share of the surplus 2. Retain the right to sue the partner(s) who caused the dissolution wrongfully for damages for breach of the agreement 3. Continue business in same name, either by themselves or with others ii. (c) Rights of partners who caused dissolution wrongfully 1. If business NOT continued, party can apply partnership property to discharge the partnership s liabilities and be paid his share of the surplus, subject to suit for damages by copartners 2. If remaining partners continue business, partners who caused dissolution wrongfully can have the value of his interest in the partnership (less any damages caused to the other partners by the dissolution) ascertained (not including the value of business s goodwill) and paid to him in cash and be released from all existing liabilities to the partnership. 10. Rules for Distribution UPA 40-in settling accounts between partners after dissolution: a. (a) assets of the partnership are i. partnerships property & contributions of the partners necessary for payment of all liabilities specified in (b) b. (b)* Liabilities of the partnership shall rank in order of payment, as follows:* i. those owing to creditors other than partners, ii. those owing to partners other than for capital or profits iii. those owing to partners in respect of capital, iv. those owing to partners in respect of profits c. (c) the assets shall be applied in the order of their declaration in (a) to the satisfaction of the liabilities d. (d) Partners shall contribute, as provided by 18(a) the amount necessary to satisfy the liabilities i. If any, but not all, of the partners are insolvent or refuse to contribute, partners shall contribute their share of the liabilities, and the additional amount necessary to pay liabilities in the proportion in which they share profits ii. (e) An assignee for the benefit of the creditors has the right to enforce these contributions iii. (f) Any partner shall have the right to enforce these contributions to the extent he has paid in excess of his share iv. (g) individual property of a deceased partner shall be liable for contributions e. (h) when partnership property and individual properties are in possession of a court for distribution, partnership creditors have priority on partnership property and separate creditors on individual priority, saving the rights of lien and secured parties f. (i) where a partner has become bankrupt or his estate insolvent, claims against his separate property rank in following order i. those owing to separate creditors ii. those owing to partnership creditors iii. those owing to partners by way of contribution 11. Effects of dissolution on Partner liability a. UPA 36- Effect of dissolution on Partner s Existing Liability i. dissolution does not discharge the existing liability of any partner 1

ii. partner is discharged from existing liability upon dissolution when there is a agreement between a. Himself b. the partnership creditor c. the person or partnership continuing the business 2. such agreement may be inferred from course of dealing between creditor having knowledge of the dissolution and those continuing the business. iii. Where someone agrees to assume the existing obligations of a dissolved partnership, the partners whose obligations have been assumed shall be discharged from liability to any creditor who consents to a material alteration in the nature or time of payment of such obligations iv. The individual property of a deceased partner SHALL be liable for all obligations of the partnership incurred while he was a partner but subject to the prior payment of his separate debts. b. UPA 41-Liability of Persons Continuing the Business in Certain Cases: i. When persons continue the business after dissolution, creditors of the former partnership become creditors of the continuing business c. Case Law i. Sheehan: 1. Large partnership where all the partners signed a long term lease. Sheehan withdrew from partnership before moved in. Several new parters joined but they also left before moving in. The partnership ultimately defaulted on the loss. All pre-existing partners sued based on 2 theories, contractual privity and use of the property. Shehan was liable because he signed the lease. Other partners who joined after lease signed, not liable personally because UPA 17. The incoming partners would be liable for all rents & covenants running w/ property while incoming partner is in possession of the property 2. According to UPA 36, Sheehan should have gotten an agreement to release him from liability 12. Competition between departing partner and partnership after dissolution a. Non-compete agreements are generally allowed in almost every industry, except for law i. There is a delicate line because of fiduciary duty to partnership ii. Ethical obligation to allow clients pick their attorney so this is exception iii. There is an important distinction in law firms between taking clients and staff/attorneys iv. Gallant b. Duties owed by departing partner to the partnership i. Before withdrawl/ informing the partnership a partner owes a fiduciary duty to partnership, but modern practice has made more lenient ii. Need to tell firm you are witdrawing so they can fairly compete to keep staff iii. After informing the partnership of intent to withdraw, but prior to witdrawl given more flexibility 1. may then recruit other staff and employees to come 2. still cannot reveal privileged info to competitors even after announcing you are leaving a. can only reveal information that is publicily available b. Not client lists, billable hours and rates, and staff reviews 1

c. A partnership has an obligation to render on demand true and full information of all things affecting the partnership of any partner. UPA 20 iv. Gibbs 1. Breach of fiduciary duty by turning over confidential partnership info to potential new employers while still working at old firm. Not a breach for recruiting other people to go with them in this case Duties owed by partnership to partners v. The relationship between partners is fiduciary in character, and imposes upon all the participants the obligation of loyalty to the joint concern and of the utmost faith, fairness, and honesty in their dealings with each other with respect to matters pertaining to the enterprise. Bohatch v. Butler & Binion vi. A partnership can expel partner w/out breaching any duty in order to resolve a fundamental schism Bohatch vii. Bohatch v. Butler & Binion-Lawyer fired when she accused partner of overbilling. There is no fiduciary duty to remain partners with someone you do not wish to be partners with. 13. UPA v. RUPA dissolution a. 2 theories of partnership: (1) "The Aggregate" (UPA) (standard approach) vs. (2) "Entity" (RUPA) i. Aggregate/UPA 1. This is the method we care about 2. Steps: Dissolution "Winding Up (40) Termination 3. How to avoid: Avoid issues by partnership agreement OR post-dissolution agreement ii. Entity/RUPA 1. The entity usually isn't affected by the departure of a partner. 2. A partner "dissassocates" when he leaves ("a partner has left, but it isn't necessarily a dissolution event). All that's required is to pay off the departing partner or the estate of the partner (must buy the person out) (book value vs. market value) (question: how do you know if it is book value or market value? 3. How to handle: Should have an agreement saying that you want an orderly buyout 4. How statute works a. RUPA 601 defines what is disassociation i. Includes things such as: 1. (1) Partner withdrawing, (2) other agreed event in partnership agreement, (3) Partner expulsion according to partnership agreement, (4) partners expulsion by unanimous vote of other partners, (5) Partner expulsion by judicial determination, (6) Partner becoming bankrupt, (7) Partners death or incompotency, etc. b. After disassociation code gives 2 options i. RUPA 701: Just buy out the old partner and partnership keeps going 1. General Rule 1

ii. RUPA 801: similar to old UPA, which requires liquidation Inadvertent Partnerships 1. Pages a. 117-122 2. Code Overview a. UPA 16 3. Language not binding a. Even if say not partnership is intended, that is not binding i. Even though not binding is always helpful, so clearly specify intent in writing b. Issue is whether they actually agreed to carry on a business for profit, as co-owners 4. 3 Main ways that an inadvertent partnership are created a. Agreeing to share profits (creates a rebuttable presumption of partnership) i. Rebuttable in specific circumstances listed in UPA 7 such as sharing profits to pay debts, wages, interest or other loans. 1. See partnership- formation for more 2. Small percentage of profits is less likely to create partnership because it looks more like incentive bonuses to employees ii. Under RUPA 203(c), person who shares profits is presumed a partner iii. Martin v. Peyton: sharing of profits is prima facie evidence of a partnership, but is not determinative and can be rebutted. See 7(4)(a) (payments on a debt by sharing profits does NOT constitute a partnership) 1. Merely giving some control in partnership to person who loaned money does not create partnership necessarily, it is common for creditors to have some control to protect their investment. 2. If sharing of profits and veto power are only to protect the lenders as creditors, there was no intent to make the lender a partner. Martin v. Peyton 3. Contributing capital alone does not make a partnership b. HELD out to be a partner to third parties i. EXAMPLE: Listed person as a partner on tax returns, listed in name of firm ii. Worst case scenario for associate 1. Get paid like an assoicatie with no claims to profit because you can t force someone to be partners, but then get the liability of a partner iii. UPA 16 Partner by Estoppel 1. When represent yourself or consent to another person representing you as a partner then you are liable like a partner people to whom the representation was made. 2. If representation made in public manner, liable whether or not victim was aware of representation or not 3. Person represented as partner can t use this to claim partnership rights though (worst of both worlds) a. Smith V. Kelly i. partners in accounting business hired to work for them, provided salary and small bonus out of profits. Firm held out as partner in public and public documents listed as partner. Where a partnership is not intended to be created, 1

and the partners did not agree that would be entitled to share in the profits, a partnership is not created. 1. NO partnership unless they intentionally create a partnership, can be partnership by estoppel as to THIRD PARTIES, but not as to other partners. 2. There is no definitive test which courts apply to determine whether a partnership exists. Courts examine the facts and circumstances, including the existence of the following: the sharing of profit; the sharing of losses; an individual's right to manage/control the business; the intent of the parties (express and implied); and contribution of capital (cash/property) to the business. If some of these factors exist, but not others, then it is a caseby-case determination. Profit-sharing, however, is prima-facie evidence of partnership. If the parties don't share profits, then there probably isn't a partnership. b. Kaplan v. Gibson i. (Georgia Case, bad decision and never followed) professional corporation of 2 doctors. Both were suergons and one doctor paralyzed patient. Sued both the doctors and corporation. Justified suing the other doctor because he had referred to him as his partner . Court said this was enough under UPA 16 to create partnership by estoppel because patient relied on this representation. 1. Very shaky logic here. Wells says UPA 16 only applies to contract liability, not tort. Also hard to believe there was actual reliance on statements. 2. Practice tip: just to be safe never refer to business associate as partner if not really partner. iv. How do you try to convince the courts that this person was not a partner? 1. Talk about how the person never made a capital contribution 2. Talk about how he wasn t responsible for the debts of the partnership 3. Talk about how that person had NO say in management v. Smith v. Kelly (below) c. Failure to Create a Limited Partnership as Intended i. Remember: a LP consists of at least one GP and LP ii. A LP has limited liability because of their lmited control over the business, BUT if a LP begins making management decisions, running the businesss, ect. then he can be held to be liable to 3rd parties as a GP 5. Lender Liability a. Common group that must be aware of inadvertent partnerships are banks b. Banks often put covenants in loan agreements (make the debtor agreement not to borrow more money, spend too much, etc., without the bank's consent). This is common. c. To avoid having a creditor become a partnership with a debtor: Make sure to follow 7 prima facie case. Make sure that, if they're paid profits, then they aren't called "profits" 1

(for the direct repayment of debt; once the debt is paid, they don't get anything else; merely for the security of a loan). Limited Partnership 1. Pages a. 135-141 2. Limited partnerships became outdated because of limitations in their format a. Decline in general use of the LP led to a revision of ULPA to RULPA 3. Modern development for Limited Partnerships a. 3 critical problems limited partnerships under UPLA (1916) i. Problem 1:Need to Significantly restricting the potential liability of limited partners for taking part in control of business. 7 of UPLA stated that limited partners were not liable unless he takes part in the control of the business and this was very unclear. ii. Problem 2: Need to Make clear limited partners could not withdraw from the limited partnership during the term of agreement iii. Problem 3: Need for Corporation or other limited liability entities to be capable as serving as the sole general partners b. 3 solutions to the above problems i. Solution 1: 1. RUPLA 303(a) states a limited partner was not responsible for partnership debts unless he: a. Is also a General partner OR b. Participates in the control of the business, BUT only then liable to those who transact with the partnership and reasonably believe the LP is aGP. 2. 303(b) spells out what constitutes participates in control to clear up any confusion (ONLY USE LIST BELOW IF NEEDED FOR PROBLEM) a. (1) Being a contractor for or an agent or employee of the limited partnership or of a general partner or being an officer, director, or shareholder of a general partner that is a corporation; b. (2) consulting with and advising a general partner with respect to the business of the limited partnership c. (3) acting as surety for the limited partnership or guaranteeing or assuming one or more specific obligations of the limited partnership d. (4) taking any action required or permitted by law to bring or pursue a derivative action in the right of the limited partnership; e. (5) requesting or attending a meeting or partners f. (6) proposing, approving, or disapproving, by voting or otherwise, one or more of the following matters: i. (i) the dissolution and winding up of the limited partnership ii. (ii) the sale, exchange, lease, mortage, pleadge, or other transfer for all or substantially all of the assets of the limited partnership; iii. (iii) the incurrence of indebtedness by the limited partnership other than in the ordinary course of its business iv. (iv) a change in the nature of the business 1

v. (v) the admission or removal of a general partner vi. (vi) the admission or removal of a limited partner vii. (vii) a transaction involving an actual or potential conflict of interest between a general partner and the limited partnership or the limited partners; viii. (viii) an amendment to the partnership agreement or certificate of limited partnership; OR ix. (ix) matters related to the business of the limited partnership not otherwise enumerate din this subject (b), which the partnership agreement states in writing may be subject to the approval or disapproval of limited partners g. (7) winding up the partnership; OR h. (8) exercising any right or power permitted to limited partners under this ACT and not specifically enumerated under (b) 3. MAIN POINT: officers, directors, or shareholders of a corporation acting as general partner did not themselves become general partners of the limited partnership merely by taking part in the management of the general partner corporation. ii. Solution 2: 1. 602 and 603 of RULPA provide that in limited partnerships set for a particular term: a. RULPA 602- General partners may withdraw at any time, but may be subject to contract damages b. RULPA 603- Limited Partners have no power to withdraw prematurely i. May be able to sell interest, but capital investment must remain in. iii. Solution 3: (Book pg 139) 1. Started to allow corporations to be the sole general partner in a limited partnership 2. The main push for this came from tax incentives of partnership 3. Corporate general partner creates several unique changes a. First, Corporate general partner is subject to the control of somebody else (may not know who actually makes decisions or what their interest is in partnership) b. Second, Relatively easy to control transfers of managerial authority (shift who is in control w/o affecting the continued existence) c. Third, Corporate partner may be completely responsible even though it has nominal assets compared to size of business it operates d. Fourth, even if Corporate GP has substantial assests at the outset can bleed off the assets to shareholders without consent of LP e. May be potential conflicts of fiduciary duty i. The directors of corporate general partners stand in a fiduciary relationship with the limited partners and with shareholders of corporation. 1

1. General understanding is that the Fiduciary duty to limited partners trumps duty to shareholders c. Result of these changes is that in the vast majority of limited partnerships today the form of limited partner with corporate general partners is used. 4. Most common modern uses of Limited Partnership i. Leverage buyout firms ii. Venture capatilst firms iii. Family limited partnerships b. Family limited partnership i. Most common, used to minimize estate and gift tax c. Large investors commit funds for relatively long periods of time and have very limited rights to compel liquirdation or the repurchase of their interests. They are two groups of modern economic entities that typically are organized as limited partnerships: 1. Venture capital firms a. Professionally managed pools of capital that invest their money in equity securities of closely held companies at early and medium stages of their development. Venture capitalists usually sit on the boards of the companies in which they have invested and take a very active role in the corporate governance of these firms 2. Leveraged buyout companies a. Collects money from investors and combines those funds with money borrowed from financial institutions to buy controlling interests in operating companies ii. The investors are limited partners who receive periodic distributions of income from the LP. The venture capital firm or leveraged buyout company serves as the general partner in these limited partnerships. Withdrawals of capital by the LPs are regulated by K. the limited partnership structure assures continuous centralized management, centralized investment decisions made by managers of the general partner free of involvement by the limited partners. d. In re Spree.com Corp.i. s were sued for making statements to a reporter regarding perspective abilityof the limited partnership to raise capital. ii. Without disclosing confidential material, the venture capitalist breached no duty Federal Income Taxation 1. Pages a. 123-131 2. Historically, The Internal Revenue Code recognized 2 distinct methods of taxing business income, which are generally described as corporate and partnership taxation. a. Corporate taxation 1. Where the entity itself is taxed, and then when dividends are paid the individual is taxed. 2. Results in a form of double taxation if pay dividends 3. Benefit is ability to leave profits in Company so it will grow, and only distribute after a while and tax as long term capital gains ii. Subchapter C vs. Subchapter S corporate taxation 1. Subchapter C a. Default tax schedule for corporations if no election made 1

b. Traditional corporate taxation structure described above c. Double Taxation-corporation is separate taxable entity, thus the dividends paid to shareholders are taxed on 2 levels, at the corporate level on the corporation s taxable income and a second time at the shareholder s level on the actual dividends or distributions d. 2 ways to battle the problem i. organize yourself under LLC or LLP law and get pass-through taxation ii. Year-end planning-remain C corporation and plan to spend profits on business expenses so that at the end of the year your tax bill is essentially nothing zeroing out your profits 2. Subchapter S a. More Modern variation of corporate taxation, but limited to who may elect b. A corporation may elect for S Corporation status If: i. Has 100 or fewer shareholders ii. None of the shareholders are nonresident aliens iii. No artificial entities as owners (such as corp.) iv. Hasn t issued more than one class of stock c. Benefits i. Election allows corporation to be treated like partnership taxation with pass through taxation, rather than double taxation that occurs under Subchapter C ii. Pass through/conduit taxation-permits corporate income to be passed through the corporation and be taxed directly to the shareholders, whether or not it is actually distributed to them. d. An S corporation is a true corporation with all the attributes of a corporation w/ the exception of the tax treatment. e. Corporation must elect S corp. status b. Partnership taxation i. Where there is no entity to tax, so income and losses are reflected on personal taxes ii. pass through Taxation iii. More favorable because results typically in lower tax rates, ability to use losses for taxes, and overall less taxes iv. Subchapter K 1. Partnership itself does not pay taxes 2. Does however compute its taxable income and field an informational return (form 1065) with the IRS. For federal income tax purposes, the income or loss reported by the partnership is passed through to the partners, in accordance with the partnership agreement. The partnership must provide each partner with a statement (Form K-1) informing the partner of his, her, or its respective shares of the partnershp s income and deductions. Each partner must hen include these amounts directly on his, her, or its income tax return. Taxation is therefore imposed solely at the level of owners, not at the entity level. 3. LLC caused problem for taxation a. LLC did not fit neatly into either Partnership or Corporate Tax groups b. IRS developed Kitner rules to establish whether to apply corporate vs. partnership tax status 1

i. Kitner ( If have 3 out 4 tax like corporation) 1. Continuity of Life 2. Limited Liability 3. Free transferability of interests 4. Centralized Management c. Eventually abandoned for modern Check the Box Rule 4. Check the Box Rule a. allows most businesses (all except certain corporations) to choose if they prefer partnership or corporate taxation i. Pass through partnership taxation is considered better because allowed to avoid double taxation. Results in less taxes being taken out b. C corporations still not allowed to choose partnership taxation c. Basic Principles: i. Entity classified as a corporation is a corporation under the statute of the state 1. Once a corporation, such an entity must be taxed as a C corporation or can elect to be an S corporation if it qualifies ii. Entity not classified as corporation and has at least two members can elect to be classified as either a corporation OR a partnership by making an election on its first tax return. Existing entities with 2 or more members retain the tax status they had immediately before the new regulations go into effect. 1. Default is partnership iii. Entity that has only one member may elect to be taxed as a corporation or it can be classified as nothing (i.e. as thought it has no separate existence from its owner). iv. Once entity changes its classification, it may not change its classification back w/in five years w/out permission of commissioner. The conversation of an entity that is currently taxable as a corporation to a partnership is itself a taxable event, treated as though the corporation dissolved and reconstituted itself as a partnership. The conversion in the opposite direction, from a partnership to a corporation, will usually (though not always) be tax free. 5. Basic Tax Principles a. Marginal v. Average Tax rate i. Marginal Tax Rates-tax rate on the last dollar made 1. Progressive-generally the more money the higher the tax 2. Regressive tax rate- In the middle of the corporate tax bracket, there is an area where it is regressive. ii. Average Tax Rate- if you average the rate that all your money is being taxed at, that is the average total tax. Will be less than marginal tax rate because first dollar is taxed at lower rate than last dollar b. Taxation of Long term Capital Gains and Losses i. Gains or losses of assets held more than one year ii. Taxed at preferential rate, because congress wants to encourage investment c. Sole Proprietorships i. NOT treated as separate taxable entity ii. Income or loss is reported directly on proprietor s personal income return d. Individual Tax Rate: (page 125 of book) i. There are 4 different individual income tax rate schedules based primarily on marital status, plus elaborate sets of tax tables based on the rate schedules and used mostly 1

by persons with relatively small incomes. In addition, there is a special tax schedule for the income of trusts and estates. e. Unincorporated Businesses (General and Limited Partnerships, LLC) i. Partnership and LLC are NOT taxable entities ii. Partnerships and LLCs are treated as conduits subject to pass through taxation, which requires the business association to file an informational return (Form 1065) showing income and expenses and allows the partnership to allocate such income or loss to the individual partners in accordance with the partnership agreement. iii. Partners then include their income or loss in their personal tax return. iv. Amount allocated are based on the income calculations of the proprietorship or unincorporated business form and not the amounts actually distributed in cash or property to the proprietor, partner or member f. Corporate Taxation i. Corporate entities are separate taxable entities ii. Rates applicable to traditional corporations are in Subchapter C of the IRC and such corporations are referred to as C Corporations iii. MAIN POINT: Corporate Taxation as a C Corporation results in more taxes being taken out because taxed on corporation s earning and on dividends distributed to shareholders 2.Example using following tax table Taxable Income > But NOT > Tax + Marginal Tax Of the amount > $0 $50,000 $0 + 15% $0 $50,000 $75,000 $7,500 + 25% $50,000 $75,000 $100,000 $13,750 + 34% $75,000 $100,000 $335,000 $22,250 + 39% $100,000 $335,000 $10,000,000 $113,900 + 34% $335,000 $10,000,000 $15,000,000 $3,400,000 +35% $10,000,000 $15,000,000 $18,333,333 $5,150,000 +38% $15,000,000 $18,333,333 $6,416,667 +35% $18,333,333 3. EX: If the taxable income of your corporation was $250,000: a. Then you would pay $22,250 PLUS your marginal tax rate of 39% b. The 39% would be applied to $250,000 - $100,000 = $150,000 c. So . . . $22,250 + ($150,000 x.39) = $80,750 4. Marginal Tax Rate: The rate at which your last dollar will be taxed a. In the example above: 39% 5. Average Tax Rate: Overall, the average rate of taxes you paid on the entirety of your taxable income a. In the example above: 32.3% 6. Basics of Federal Income Taxation a. Basis-investment the seller of property has in the property i. Cost or purchase price of the property that the seller pays or incurs in acquiring the property ii. Substituted Basis: in the case of property acquired by gift, the basis in the hands of the done is usually the same as the basis in the hands of the donor (a substituted basis) 1

iii. A Stepped-Up Basis: in the case of property acquired by inheritance, it is generally the fair market value of the assets on the death of the decedent b. Adjusted Basisi. basis of property 1. Plus capital improvements, including legal costs for defending title 2. Minus returns of capital a. depreciation claimed as tax deductions b. depletion c. deducted casualty loses d. insurance reimbursements, etc. c. amount realized i. cash received for the property on a sale or the fair market value of the property ii. selling expenses, including brokerage commissions the seller pays, reduce the amount realized iii. in the case of property subject to a mortgage, the amount realized also includes the amount of mortgage debt that the seller is relieved from paying as a result of the sale d. Gain-amount realized minus the adjusted basis e. Stepped up basis-the estate has a stepped up basis to the FMV at the date of death Limited Liability Companies 1. Pages a. 154-192 2. Introduction a. Created to be a compromise of the best of other business forms b. Imported into United States, and after they got a favorable IRS tax ruling allowing them to be taxed like a partnership they took off. c. Now available in all states d. Governing law is the ULLCA (not widely adopted) i. ***Law of mercer 3. Basic traits of partnership and Corporation a. Corporation V. Partnership b. Centralized management decentralized management c. Entity taxation pass through taxation d. Limited Liability Unlimited liability e. Perpetual life limited life f. Discrete agent authority Broad agency authority i. (specific position) (partners have broad authority in scope of business) g. Requires registration occurs automatically h. May have 1 owner Must have multiple owners 4. Blend of traits in LLC a. Limited Liability. 201 & 303 ULLCA i. Does not protect: 1. Liability for agreed contributions 2. Excessive distributions 3. For members own wrongs OR 4. For debts the members contractually assume or guarantee b. Partnership Tax Features i. Forced the Check the box taxation to promulgated 1

ii. Can choose to be taxed like a corporation or a partnership c. ability to choose between centralized and direct member-management i. Can be either manager- managed or member managed ii. Hold the power to bind LLC in day-to-day business transactions iii. Take on the roles held both by GPs of Limited partnership and by corporate directors and officers iv. LLC generally not subject to restrictions as to finance and management that bind corporations v. just include choice in operating agreement + articles of organization d. Has perpetual life i. Doesn t die when one of the members dies or quits e. Ownership i. May have 1 or multiple owners f. Formation i. Resembles corporation where formal application is required 5. Disadvantage of LLC a. Not well developed case law so must ofter advice LLC s on difficult legal questions by borrowing on Partnership and Corporate law 6. Lawyer required in court? a. Corporation requires lawyer licensed in that state to be in court to represent Corp. b. Partnership does not require lawyer from that state c. Case law suggests LLC is more like corporation, so must have lawyer from that state to represent in court. (Poore v. Fox Hollow Enterprises) 7. LLC vs. S Corp? a. LLC is more liberal b. LLC can have an unlimited number of members c. LLC can have international shareholders d. LLC can have certain types of shares and shareholders 8. Addition of New Members a. 404(c)(7) of ULLCA states that addition of new member requires unanimous consent of all LLC members 9. 2 documents to really need to draft when forming LLC a. Articles of Organization (required by 202 ULLCA) b. Operating Agreement (allowed under S103 ULLCA, but strongly encouraged) 10. Formation of an LLC a. Creation: i. To form must deliver articles of organization to Sec. of State .( 202 ULLCA) ii. Articles of Organization (203) 1. Name, address of designated office, address of agent for service of process, name and address of organizers, whether term company (if so specified), how managed. 2. More important stuff is actually in the operating agreement 3. This is a brief and formal document b. Name i. must have LLC or similar in it and name must be distinguishable from other LLCs. (105) ii. May reserve a name under 106. Gives you 120 days to formally file after reserved 1

iii. If name already in use in another jurisdiction, May register name even if not currently planning on doing business in state. 107 c. Agent for Service of Process i. Must maintain an office and registered agent for service of process in the state. ULLCA 108 d. Powers: i. Can be organized for any lawful purpose and has same powers of any natural person person. 112 ii. Myer: LLC wanted beverage license in state that denied them to corporations but allowed partnerships to have. Denied liquor license to LLC. e. Contribution of Assets i. 401- May consist of tangible property, intangible property, or any other benefit to the company 1. Very broad- Would even include things such as promise to serve as Manager of LLC or as a CPA (or Etc.) ii. Most common contribution if there was a prior business form that was transitioned into an LLC is the ownership interests from the prior entity 11. Things to do after formation of LLC a. Draft Operating Agreement-103 i. Key agreement among members ii. May be oral, but should be written iii. Similar to partnership agreement or shareholder agreement iv. If things are left out, UCCLA fills in gaps v. Does not have to formally filed vi. Great deal of freedom, but are a couple of Un-waivable provisions 1. Good faith fair dealing 2. Fiduciary duty vii. Agent acting for the LLC does not have to sign, in order for the operating agreement to be binding on the LLC. (Elf Atochem North America) 12. Fiduciary Duties 409 a-d a. Duty of Loyalty-duty of heart, faithfulness 409(b) & 603(b)(3) i. Supposed to act in good faith with the best interest of the company in mind ii. Refrain from self dealing iii. Refrain from competing with the company b. Duty of Care-duty of mind 409(c) & 603(b)(3) i. Obligation to be well informed and make good decisions ii. Don t have to be right. Not even liabile if negligent. Must be GROSSLY negligent to be liable iii. Parties must act in non-negligent manner c. Duties include duty to act in good faith and complete candor and disclosure 409(d) 13. Duty of Good faith a. Can t contract duty of good faith away. b. Abry partners case i. Tried to include exculpatory clause which said they were only liable for fraudulent misrepresentations for a set liquidated amount. This was not allowed 14. Agency of Members 301 a. Agency of member Managed LLC301(a) 1

i. Each member is an agent of the LLC when acting for purposes of the business ii. Similar to UPA 9 b. Agency of Manager Managed LLC. 301(b) i. A member is not an agent of the LLC solely by reason of being a member ii. The Manager is the one with actual authority, but not members. iii. Members may still have apparent authority 15. Liability of Members and managers ULLCA 303 a. Limited liability for Members b. The Debts are solely debts or liabilities for company, (so company is liable) c. Failure to observe formalities is not sufficient to pierce the corporate veil 16. Management of Limited Liability Company: 404 i. Get to choose which you want in articles of Organization b. In a member-managed co. i. each member has equal rights in the management and conduct of the business 404(a)(1) (like partnership), and ii. any matter may be decided on majority vote of the members iii. Subject to 404 when unanimous consent is required c. In a manager-managed co.: 1. Professionally managed, run the company more like a corporation 2. Decisions made by manager, or majority of managers if more than one ii. Selecting/Removing Manager- ULLCA 404(b)(3) 1. May be selected, removed, or replace by a majority of the members iii. Subject to 404 when unanimous consent is required d. Some things always require unanimous consent(ULLCA 404(c)) i. Add new member ii. Change operating agreement iii. Change Articles of organization iv. Some others listed to in 404(c) 17. Sharing of and Right to Distribution: 405(a) a. Any distribution before dissolution must be in equal shares unless OA says otherwise b. Common to modify so can distribute according to contribution 18. Distribution limits and liability a. Can t make distribution if will cause not to be able to pay debts. 406 b. Can t just distribute as they please. 5 limitations in 406 c. If managers give distributions in violation of 406 the managers are personally liable. 407 i. This protects creditors 19. Right to Info. 408 a. 408(a) i. LLC must provide members access to its records for PROPER PURPOSES 1. Proper purpose is to investigate government mismanagement, personal reasons are not proper ii. Only have access during normal business hours and company may impose a reasonable charge for labor and material iii. Similar to corporation right to info
b. What are records i. Kasten v. Doral Dental

1. Right to inspect probably does not include e-mails and informal documents. Must do balancing. ii. Decided later (not in casebook): As persuasive authority the Wisconsin Supreme Ct said that: This is a balancing question. Not all requested emails are necessary to reduce. The company should produce all emails of a business nature or relevance. Emails can be business records.

20. Dissolution rules a. Article 6: Member disassociation i. UCCLA 601- events causing members disassociation ii. UCCLA 602- Member s Power to dissociate, Wrongful Disassociation iii. UCCLA 603- Effect of Member s Dissociation b. Article 7:Member Disassociation when business not wound up i. UCCLA 701Company Purchase of distributional Interest c. Article 8: Winding up Company Business i. UCCLA 801- Events Causing dissolution and Winding Up ii. UCCLA 802- LLC continues after dissolution 21. Randomly mentioned so scared to take completely out a. ULLCA 503 Rights of Transferee. b. ULLCA 504(a) Rights of Creditor c. ULLCA 1002 Application for Certificate of Authority d. ULLCA 1004 Issuance of Certificate of Authority 22. CHOOSING A BUSINESS ASSOCIATION 1. Characteristics That Influence Choice Trait or Characteristic CORPORATION Republican, representative government; more likely to hire managers so owners can sit back and let the returns roll in Entity taxation; either C corporation or S corporation depending on which box the company checks for income taxation Limited liability (same is true for limited partnership); s/h are not liable for debts of corporation b/c they are not the corporation Perpetual; corporation continues along; to get out of the business, s/h sells stock; corporation unaffected by comings & goings of s/h Stock in large, publicly traded corporation is very liquid, but stock in closely held corporation is 1 GENERAL PARTNERSHIP Democratic, direct government; more likely for owners to play an integral role in the management Passthrough taxation: partnership prepares tax return but does not pay actual tax; passes tax liability on to partners Personal liability Fixed or limited term; a general partnership dissolves upon any number of circumstances death, departure could be devastating to business Partners can liquidate assets by forcing a dissolution of the partnership

GOVERNANCE

TAXATION

LIABILITY

LIFE SPAN

INVESTMENT LIQUIDITY

MEMBER POWER

CAPITAL FORMATION COSTS

illiquid because s/h must find buyers (Why would a nonfamily member want to buy into a family-owned business?) Shareholder in a publicly traded corporation generally has no power or authority; this is not necessarily true in a closely held corporation Corporations must sell more stock, which if done publicly requires complying with substantial SEC filing rules

Partners are always the agents of other partners

Partnerships can simply ask others to become partners and contribute capital Partnerships do not need permission from the state to form; however, particular kinds of business and activities require permission from the state to operate Two or more partners

REGISTRATION FEES

Corporations have a lot of filing fees and hurdles to overcome

NUMBER OF PEOPLE

As few as one s/h

Background of Corporations Law 1. Pages a. 193-211 2. History of distrust against corporations a. First idea developed by church because needed something with perpetual life b. People were very suspicious of early on c. Were originally authorized by the crown and charter was similar to monopoly d. Special charter or legislative approval was required, led to corruption i. (solution was later general incorporation statutes) 3. State control a. Each state controls incorporation in that state b. State law governs corporate law 4. International affairs rule a. foreign courts should apply the law of the state of incorporation to issues relating to the internal affairs of a foreign corporation i. Exceptions 1. Largest corporations may also have to deal with federal law 2. Some states have rejected this rule. California is an example. When companies come to CA, must use CA law, not internal affairs rule. 5. Sarbanes-Oxley Act (federal Law) a. overrides some traditional state laws b. Executive Compensation i. SEC has power to seek a freeze of extraordinary payments made to corporate officers and directors during the course of an SEC investigation 1

6.

7.

1.

2.

3.

ii. Requires CEOs & CFOs to reimburse the company for any bonus or equity-based compensation or profits received from the sale of securities during the 12-month period after the first publication of a financial statement that later turned out to be erroneous and had to be restated c. Increases SEC s power to bar people from serving as officers or directors of public companies. i. SEC need only show that person is unfit to bar people from serving as officers and directors for misconduct that falls far short of egregious or recidivist behavior. d. Requires the SEC to develop rules of professional conduct for s of public companies. Why state competition? a. Race of the lax b. All the states want to compete for the filing revenues that incorporation brings c. States compete to offer most innovative and business friendly laws d. Deleware has long been the winner (of fortune 500 over incorporated in DE) Changing state of incorporation a. Example is provided by Dole Food Company, Inc., Proxy statement i. Usually incorporate a subsidiary in the state where you want to re-incorporate ii. Then have shareholders elect to merger into that corporation iii. Reasons Dole incorporated 1. Quorum voting a. HI- requires above 50% for quorum b. DE- Can set lower quorum percentage (1/3) 2. Distributions a. HI (MERCER LAW) only pay dividends if: i. Won t be bankrupt after pay out ii. Will be able to pay bills as come due b. DE- No matter state of books, only if made profit that year 3. Takovers a. DE- prevents taker overs, may have staggered board of directors elects, limited liability for directors Proper Formation of a Corporation a. If Corp. is not adequately formed, existing entity is probably a partnership. Where a corporation is adequately formed, shareholders have no personal liability for that entity s obligations. Their loses are limited to the consideration paid for their shares. Classic Characteristics of a Corporation a. Continuity of Life-existence of the corporation is not dependent on who the owners or shareholders are at any one time. If shareholders die, sell out, etc., the corporation continues as a separate entity b. Perpetual Existence-corporation continues indefinitely until the owners decide to dissolve it or merge it into another business c. Centralized Management-management of a corporation is vested in an independent body, the board, but not in the shareholders themselves d. Free Transferability of Interest-ownership interests of the shareholders may be sold or transferred to third persons w/out approval or consent of the corporation or other shareholders e. Limited Liability-shareholders enjoy limited liability b/c corporation is an entity in its own right 3 Major Documents in a Corporation 1

a. Articles of Incorporation 1. The must set forth is the plain vanilla articles 2. The may set forth is the more complete set 1. Purpose Clause: generally not in the articles now, and if not, the default = for all lawful purposes, but could use a more restrictive purpose clause when you don t want to expand the scope of the business 2. Wells 3 I s (what the directors would appreciate made available) a. Immunity b. Indemnification c. Insurance Policy so the corporation does not have to foot the bill but the insurance will handle the cost of good faith decisions gone wrong b. By-Laws: tend to be longer and have more useful information c. Shareholder Agreement essential for a close corporation 4. Wells: Forming a Corporation, Generally a. First: file the Articles of Incorporation b. Second: sit down with a lawyer and decide the business layout c. Third: By-laws these lay out the details of the corporation d. Fourth: Shareholder agreement The Formation of a Closely Held Corporation 1. Pages a. 212-227 2. Code Sections a. RMBCA 1.20, 1.25, 1.40(2),(21),(22), 2.01, 2.02, 2.03, 2.04, 2.05, 2.06, 3.01, 3.02, 3.04, 4.01, 4.02, 4.03, 5.01, 5.04, 6.01; 6.03, 6.20, 6.21, 7.32 3. Definition-Corporations with few shareholders, whose shares are NOT publicly traded. Shareholders are likely to be active in the management of the business and are members of the board of director. Thus, the functional role of the board of directors is likely to be minimal and purely formalistic 4. Where to Incorporate a. Can essentially incorporate anywhere in the world, but realistically there are 2 choices i. Delaware ii. Home state b. 2 Primary considerations for deciding where to incorporate i. relative costs of incorporating in the state 1. cost of filing higher in deleward, cost of having to defend case there, taxes, cost to maintain agent there, have to qualify to do business in other states where not incorporated, will be considered a foreign coporation if incorporated different place from where do business ii. the advantages and disadvantages of the substantive corporation laws 1. Why Delaware? a. Judiciary i. Judiciary has knowledge, expertise, sophistication and experience in business law b. Well developed Case law i. Leads to Predictability c. Legislature i. Heavily influenced by sophisticated business types 1

ii. Law tends to be drafted in favor of corporation, cutting edge and most liberal business law d. Law protects board of directors, and board of directors determine where to incorporate so it makes sense that they go where they are most protected c. Ultimate Choice i. Small business almost ALWAYS incorporate in their home state because of high costs associated with filing in DE. 5. Process of Incorporation a. Name i. Picking a Name: 401 1. Must contain word corporation , inc. or something to that effect 2. Name must be distinguishable on the records of the secretary of state from other incorporated or registered businesses a. Test: Are the 2 names substantially similar so that there could be probable confusion? ii. Reserved Name: 402 1. May reserve name for a non-renewable period of 120 days 2. Gives public notice iii. Registered Name: 403 1. Foreign corporation may register name in jurisdiction to guarantee exclusive use of that name iv. Reserve the name-reserve the name with the Sec. of State. Corp. then has 90 days to incorporate using that name. Purpose-public notice. MBCA 4.02 b. Filing Articles of Incorporation i. Incorporators: 2.01 1. One or more person may act as incorporator (person who files the incorporation documents) 2. Done through deliver articles of incorporation to the secretary of state (website now, easy process) ii. Requirements for filing documents: 1.20 1. Directs to file with secretary of state, must be typed or electronically submitted, in English, must be signed by someone with authority to incorporate, must pay proper fee iii. Filing duty of Secretary of state: 1.25 1. MUST be filed by SoS if 1.20 requirements are met 2. If SoS refuses to file, must do so in 5 days with explanation of why iv. Articles of Incorporation: 2.02 1. Must include:$2.02(a) a. Corporations name in accordance with 4.01 b. Number of shares corporation is authorized to issue (defined by 1.40(2) see also 6.01) i. The particular number does not matter ii. Should authorize more than needed at first to have expansion opportunities. Can always amend the articles of incorporation, but why bother when you have an easier and cheaper alternative. 1

iii. Important b/c directors can sell these w/o shareholder approval and may be potential for dilution of shareholder interes c. street address registered office and name of registered agent. See (5.01& 5.04) i. Office is usually principal place of business ii. Agent is usually a lawyer d. Name and address of incorporators 2. May include:2.02(b) a. Name of directors i. ***Don t do this here, this should be done in the bylaws according to wells b. Purpose of organization i. Don t do this only limits the corporation c. Defining the powers of the corporation d. Par value i. Means you can t sell for less than certain value ii. No real reason to do this, only a restriction e. Any provision that could be set forth in bylaws f. The Three I s i. *Provision creating immunity for director liability to corporation in most cases ii. *Provision requiring indemnification of directors for their actions taken in that role iii. *Insurance (not specifically listed in 2.02) g. Its really important to have the 3 I s: insurance, indemenification, and immunity v. Time incorporation becomes effective: 2.03 1. When articles are filed, unless delayed time is specified 2. As long as SoS accepts article of incorporation, this is conclusive proof or incorporation vi. In Georgia 1. Must publish Notice to incorporate in the local newspaper (no real purpose other than political lobbying) c. Corporate Purposes and Powers i. Purposes: 3.01 1. Presumed to have the purpose of engaging in any lawful business unless limited to a more specific purpose in the articles of incorporation a. Limited purposed enforced by ultra vires b. Why limit with narrow purpose? i. Some may be uncomfortable w/ complete lack of useful information about purpose of company ii. In closely-held corporations, may be used where one or more persons interested in the corporation wishes to restrict the lines of business ii. General Powers: 3.02 1. Perpetual duration of life (unless otherwise provided) 2. Same powers as any individual 1

a. Lots of stuff included here such as: sue, own property, amend bylaws, contract, lend, make charitable donations iii. Ultra Vires: 3.04 1. Ultra vires means beyond the purpose or power of the corporation 2. Only works if there is a limited purpose clause, and this is how enforeced. Very rarely used now because so few companies have limited purpose. If there is no purpose clause then 3.01 states that the business may engage in any Lawful business 3. Only shareholders, legal representatives of shareholders, or attorney general can use this right to sue corporation for acting beyond purpose 4. Doesn t come up much anymore 6. After Incorporation a. Lawyer draft bylaws: 2.06 i. Incorporators or board must adopt bylaws for corporation ii. May contain any management provision not inconsistent with the articles of incorporation b. Lawyer draft shareholder agreement: 7.32 i. Not required but a really good idea ii. Allows shareholders to: 1. Eliminate board or reduce their discretion 2. Govern distributions 3. Can establish who will be officers 4. Determine voting power 5. Establish dissolution requirements 6. Etc. iii. No longer effective when it becomes a public corporation c. Organizational Meeting: 2.05 i. Meet to elect directors (if not already done),appoint officers, adopt bylaws, etc. ii. Things that must be done are: 1. Read articles of incorporation 2. Create and approve minute book 3. Approve bylaws 4. Present and approve stock certificate 5. Present and approve corporate seal 6. Must actually sell stocks and bring in assets iii. Don t even really have to meet, lawyer can write up a fake transcript as long as they agree 7. Shares a. Required Characteristics of shares i. RMBCA 601(b)(1)&(2) 1. One or more classes or series with unlimited voting rigts 2. One or more classs or series (may be same as voting shares) entitled to receive assets of corporation upon distribution b. Act Definitions: 1.40 i. (2) Authorized shares means the shares of all classes a domestic or foreign corporation is authorized to issue 1

ii. (21) Shareholder means the person in whose name shares are registered in the records of a corporation or the beneficial owner of shares to the extent of the rights granted by a nominee certificate on file with a corporation. iii. (22) Shares mean the units into which the proprietary interests in a corporation are divided. c. Authorized Shares: 6.01 i. Articles of incorporation must set forth all classes of shares and series within class ii. Articles must authorize: (2 main requirements) 1. One or more classes or series with unlimited voting rigts 2. One or more classs or series (may be same as voting shares) entitled to receive assets of corporation upon distribution iii. Articles may authorize: 1. Special voting rights 2. Calculate dividiends or priority to dividends in any manner 3. Etc d. 6.03 Issued and Outstanding Shares i. May issues the number of shares authorized ii. Shares that are issued are outstanding shares until they are reacquired, redeemed, converted, or cancelled. e. 6.20 Subscription for Shares before Incorporation i. Subscription agreement to buy shares before incorporation is binding for 6 months after incorporation unless otherwise stated f. 6.21 Issuance of Shares i. Directors power to issue shares may be reserved by shareholders in articles of incorporation ii. The board of directors may authorize shares to be issued for consideration consisting of any tangible or intangible property or benefit to the corporation, including cash, promissory notes, services performed, contracts for services to be performed, or other securities of the corporation. 1. Cannot give shares away for nothing iii. Hanewald case: 1. If don t pay for stock and company goes under, creditors can sue and force you to pay full value for stock so they have something to take from the company. iv. Occurs at the Organizational Meeting under RMBCA 2.05 (see above from class notes) g. Issuing new classes or series of Shares i. Required to amend the articles of Incorporation to authorize the new type of shares. RMBCA 6.02(c) Premature Commencement of Corporate Business 1. Page a. 236-253 2. Code a. RMBCA 2.04 3. Promoters a. Definition= Persons directly or indirectly taking initiative in founding and organizing the business or enterprise of an issuer 1

b. Promoters must obtain the necessary capital, assets, and personnel so that corporation may function. c. Can be non-natural persons 4. Promoters Duties to others a. Owe significant fiduciary duties to other participants in the venture i. To other promoters (treated as if having a general partnership) AND ii. to the corporation as a separate legal entity AND iii. the members, including those who it was anticipated would make application to invest in the venture b. general creditors of the corporation or their representatives, including trustees in bankruptcy, may stand in the shoes of the corporation and bring claim against promoters who violated their legal duty. c. Self Dealing prohibited i. Class Hypo- What if A acting as promoter buys land for 100K before incorporation. Then incporporates with B, and sells the land to the company at 200K. 1. Breach of fiduciary duty ii. Modified Hypo- Even if the 200K was it actual value 1. Still breach of duty iii. Even if given 200K worth of stock 1. Still breach of duty 5. Liabilities of Promoters a. General rule i. RMBCA 2.04 Liability for Pre-incorporation Transactions 1. All persons purporting to act as or on behalf of a corporation, knowing there was no incorporation under this Act, are jointly and severally liable for all liabilities created while so acting. a. What is Knowing i. Actual ii. Constructive (adopted as mercer law) 1. should have known because it is so easy to find out. (even though is inconsistent with equitable doctrines) b. Even if later becomes a corporation, is still liable unless adoption or novation ii. Under 2.04 a promoter is liable on Pre-incorporation agreement, and even after the corporation is formed the mere formation does not change the promoter s liability. iii. EXAM TIPS: Hypo s from Tests a. Generally test answers have been 2.04 as answer 2. If unknown for a couple of weeks the articles were delayed in the mail, and Martha the manager of LLC executed contracts as President of Scandles, Inc. a. Correct answer: could be enforceable against Martha under 2.04 or Scandles LLC (not corp.)since she was acting on behalf of them 3. AOI mailed in on april 17, but not filed until april 21. Shemp (manager of LLC) executed contract on 17 as NYUCK Inc., by Shemp, as president believing in good faith that would be corp before goods arrived. a. Correct answer: Schemp would be obligor of contact under 2.04 i. Schemp had constructive knowledge of no inc. adoption doesn t fix because still surety 1

iv. EXAM NOTE FOR SUCCESSOR LIABILITY: Do not confuse this with corporationSuccessor Liability where corporation IS liable promoters and predecessor business because of the continuing nature of the business b. ways Relieving Promoter of Pre-incorporation liabilities i. Pre-incorporation agreement to not hold promoter liable 1. K where the third party agrees not to hold the promoter liable, but to only look to the corporation for relief. ii. Ratification1. DOESN T WORK, can only work of corp. was in existence at time K formed, so doesn t apply to pre-incorporation issues iii. Novation1. Works if all the parties (promoter, corporation, and 3rd party) agree to make the corporation liable for the contract rather than the promoter. Essentially is a new contract. Parties agree to give up rights under first K in exchange for rights under second K. iv. Adoption 1. After the corporation is formed, the company adopts the contract and agrees to become liable for the contract. Promoter is still liable as surety unless released from contract c. Equitable and legal defenses 1. ***No equitable without good faith belief*** ii. RMBCA 2.04 1. Argue you didn t know there was no incorporation. Will always loose because Mercer adopts constructive notice and could have discovered whether you were incorporated through checking with the secretary of state iii. Defacto incorporation 1. See below iv. Corporation by estoppel 1. See below 6. Rest. 2d Agency 326 (defines what type of contract promoter might have signed) a. Alternatives that may represent the intent of the parties when a promoter makes an agreement with another on behalf of the corporation to be formed i. Other party is making a revocable offer to the nonexistent corporation with will result in a contract if the corporation is formed and accepts the offer prior to withdrawal ii. May understand that the other party is making an irrevocable offer for a limited time iii. May agree to a present contract by which the promoter is bound, but with an agreement that his liability terminates if the corporation is formed and manifests its willingness to become a party iv. May agree to a present contract on which, even though the corporation becomes a party, the promoter remains liable either primarily or as a surety. 7. Defective Corporation a. De-jure Corporations = corporations which are legally created because they are properly filed in accordance with the law. b. When De-jure incorporation is not accomplished, The strict requirements of 2.04 may hold a promoter liable when the promoter believed they had a corporation, but failed to meet the formal requirements. In response to this, some courts adopt 2 equitable forms of incorporation. (this will be in conflict with 2.04, can t reconcile) 1

c. These 2 doctrines serve as promoters defenses to personal liability i. De Facto Corporations 1. Even though no formal incorporation at the time, it was close enough to factually be treated as a corporation 2. Elements a. Some way to incorporate the business at law i. Almost always met because general incorporation laws b. Some reasonable effort to incorporate i. Just requires sending articles in direction of sec. of state ii. If lawyer is your agent and lawyer doesn t try to file then there is no attempt to incorporate c. Some business was done in the name of the corporation d. Done in good faith 3. Example is Cantor v. sunshine Greenery a. Submitted articles of incorporation but secretary of state failed to file for some unknown reason b. Treated as defacto incorporation ii. Corporation by Estoppel 1. Elements of estoppel a. Representation of facts of some sort b. Someone reasonably relies on that representation c. There is detrimental reliance d. Person making the representation is estopped from denying the truth of his representation 2. How it would work for corporation by estoppel a. Representation from creditor that they would only look to the corporation for payment (general rules of limited liability) b. Both parties act in reliance on the belief there is a corporation c. Creditor is estopped from denying the existence of the corporation to defeat limited liability 3. Example is Cranson v. IBM a. No defeacto incorporation because lawyer didn t make good faith effort to file b. IBM believed Cranson was a corporation,and only expected payment from the corporation so is estopped from claiming there actually was no corporation d. Simple form recognized to protect promoter: Corporation's Name Minnesota (or wherever) Corporation By: (authorized signator) i. if signing on behalf of a corporation, sign with the by line, name of corporation, and title because signing any other ways opens the door to personal liability. ii. However, signing that way does not protect the signer or promoter in all circumstances 1. There is still liability if you sign knowing no corporation exists yet. 2. Promoter is still personally liable EVEN IF he signs correctly if he does so knowing that corporation does not yet exist. 1

3. WHAT ABOUT OTHER PARTNERS? There is a good argument that any partners are liable also if the business association is a partnership trying to incorporate, at least to the extent other parties are aware. 8. Hypos on signatures for documents when corporation is in existence 1. AB Farm Co (typed) DC Wells (signed) Who s debt is this? Wells (it doesn t indicate that he is signing in some capacity for the company) 2. AB Farms Co (typed) By DC Wells, President (signed) DC Wells, President (signed) Who is liable? Both Wells and the Corporation. The by indicates that the corporation assumes liability, and the 2nd usage of the name indicates that wells is taking responsibility 3. AB Farms Co (typed) By DC Wells, President (typed) By Joe Doakes, President (typed) Who is liable? company (2nd by in front of Joe Doakes name trumps the personal which then indicates that the company is liable) 4. AB Farms Co (typed) (Signed name) Authorized signature (court held that Wells was liable for it, because it missed the magic word by Disregard of the Corporate Entity 1. Pages a. 258-288, 300-313 2. Code a. RMBCA 6.22 3. General Shareholder Liability -MBCA 6.22(a) a. A shareholder is not liable to the corporation except to pay the consideration for which the shares were authorized to be issued or specified in the subscription agreement 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. c. Generally assumed shareholders and corporation are separate and distinct 4. Piercing the Corporate Veil Generally a. Purpose: i. General purpose is to prevent fraud or achieve equity ii. The common feature in all piercing cases is that courts agree that piercing is appropriate only when recognition of separate corporate existence will lead to injustice or an unfair or inequitable result ( Baatz v. Arrow Bar.) b. When it arises: i. Usually arises in context of creditor who cannot collect from corporation ii. Occurs in the context when a wholly owned subsidiary has no real assets, so try pierce the veil and reach the parent company iii. Almost exclusively arises in CLOSELY HELD CORPORATIONS c. Mercer law allows piercing for any limited liability company 1

5. Factors considered when Piercing the Corporate Veil a. Fraud i. Promoting fraud or something illegal ii. Misrepresentation, a scheme whereby the corporation cannot possibly make profits or merely nominal profits (Bartle) (the worm case) b. Inadequate Capitalization i. look at what corp. was designed to do, then look at what it needs to do to carry on in a responsible way ii. Baatz v. Arrow bar 1. Capitalized bar corporation with only 5k 2. Had subscription agreement to buy 50,000 in stock, but no evidence they followed through so is NOT an asset. a. Creditors can use subscription agreement to get access to shareholder s money. Creditors can seek to enforce that K, and make shareholders put that money in company where creditors can get it. 3. Court said was sufficiently capatilized, but Wells says no iii. Radaszewski c. Failure to follow corporate formalities i. Subcategories of failure to follow corporate formalities 1. Co-mingling personal and corporate funds 2. Having Directors, that meet, keep formal records, run business 3. Shareholder meetings 4. Financial formalities 5. Doesn t issue stock ii. This alone may not be enough to pierce iii. Dewitt Truck Brokers v. Ray Flemming Fruit 1. Dewitt was a fruit middle man, didn t do anything other than make arrangements to sell 2. Really required no capital except money for phone, so undercapitalization not an issue 3. But failed follow corporate form, court allowed piercing a. Treated company money as his b. Paid himself first, before paying corp. debts c. Didn t even know directors, never met d. More likely in tort cases, than contract cases i. Tort creditors are involuntary creditors, while contract creditors assumed the risk of becoming a creditor e. Alter Ego i. Shareholder(s) use the company simply to conduct their own personal business. ii. The way you prove alter ego is the same list of factors such as corporate formalities, commingling, and lack of capitalization iii. Decisions are in the best interest of the individual rather than company. iv. Sometimes subsidiaries are just alter egos for a parent company (Fletcher) f. Domination and control by a single share holder 6. Piercing involving Parents and Subsidiaries a. General Rule i. Subsidiary1

1. if parent company owns all or a controlling amount of stock of another company then there is a subsidieary. 2. there is a legal separation and parent not be liable on subsidiary s obligations. ii. Division1. Just a group under the same company and no separate incorporation 2. No legal separation between parent and business, and parent is liable for obligations of that business b. Piercing veil of subsdiaries/parents i. Looks to the same factors as before for peircing ii. The bottom line is to look and see if the subsidiary thinks for itself and acts in its own best interest, of it is merely an alter ego of the parent. 1. Factors to considers: operate as single economic entity AND a. whether corp. was adequately capitalized b. whether corp. was solvent c. whether corp. formalities were observed d. where dominant shareholder siphoned funds e. whether corporation simply functioned as faade for dominant shareholder. f. Who the corporation takes care of first does it pay its s/h first and then creditors and employees? g. Whether the subsidiary and parent share directors or officers h. The non-functioning of some officers 2. Factors not suggesting piercing (Fletcher) a. Parents and subsidiaries often file joint tax returns b. Routine legal services provided by parent c. Cash management system i. each subsidiary may be required to transfer all cash on a daily basis to parent. Permits centralized management and investment of funds. ii. Parent merely acts as bank d. Sharing some of the same directors e. Subsidiary not allowed to borrow money w/o parents consent i. Parent borrows in larger quantity and gets better deal 7. Enterprise entity Theory a. Doesn t usually work, would be extremely long shot arguement b. Definition i. Basically involves seeking to peirce liability by suing horizontally to sue other subsidiaries owned by the same parent. c. Carlton Cab Company i. Cab company owned many mini cab companies consisting of just two cars ii. Central dispatching facility controlled all the cabs iii. Each mini company had nominal assets, were mortgaged to the hilt, and had minimum insurance iv. Case where it failed, passenger injured in cab was able to sue that mini cab company and the parent, but not all the other mini subsidiary cab companies 8. Statutory Veil Peirce a. Definition 1

i. Some statutes say that when a corporation commits certain acts then the owners/operators are liable for those acts b. Example i. CERCLA- when there is an environmental disaster government steps in and cleans up. Then give bill to responisible parties. The responsible parties are 2 groups: (may be same entity) a. Owners of property b. Operators of property 2. To hold the owner responsible there must be a piercing of the corporate veil. 9. Cases used in piercing section a. Bartle v. Home Owners Coop. NY 1955. sued to hold liable for Corp. debts. claimed it was not responsible for its wholly owned subsidiary. Where an outward indicia of two separate corporations was at all times maintained during the period in which creditors extended credit, owner of subsidiary is NOT liable. b. Dewitt Truck Brothers v. W Ray Flemming Fruit Co. 4th Cir. 1976. owed trucking co. money for deliveries. had personally guaranteed the notes. Mere fact that all of the corporate stock was owned by one person is insufficient grounds for disregarding corp. c. Radaszewski v. Telecom Corp.-8th Cir. 1992. Person injured by truck driver employed by subsidiary co. Where there is no fraud, the corporate veil cannot be pierced, even if subsidiary goes under. d. Baatz v. Arrow Bar- s were injured when patron from s bar drove drunk. When the court deems it appropriate to pierce the corporate veil, the corporation and its shareholders will be treated identically. Not sufficient facts in this case. e. Fletcher v. Atex, Inc. 2d Cir. 1995. sued for keyboard injury seeking to hold parent co. liable. and Kodak did not operate as a single economic entity, therefore piercing was not permissible in this case. 10. Reverse Piercing a. Definition i. Corporation and organizers themselves (rather than creditors) claim that the corporate form should be ignored to gain some type of benefit in the name of equity. ii. Only basis is in equity b. Acceptance i. Accepted as mercer law ii. Not universally accepted, because makes no sense since the party denying incorporation is the one who filed it. c. Cargill i. Family farm in MN incorporated and run by owner couple ii. Corporation in debt to Cargill for farm equipment, and bankrupt iii. If couple were merely individuals farm would have homestead exemption, as corporation there is no homestead exemption b/c corp. doesn t live anywhere iv. Court agreed to ignore corporate form and allow exemption out of equity d. Texas workers compensation law i. Less likely to work when big corporation tries to argue reverse incorporation ii. Example would be parent company who would be liable for personal injury suit if a separate corporation, but would not be under workers compensation laws if the subsidiary was actually just a division 11. Deep Rock Principle1

a. Definition i. bankruptcy court may subordinate (move to the back of the line) claims presented by controlling shareholder to claims of other creditors or preferred shareholders if the shareholder acted inequitably or unfairly. b. Pepper v. Litton i. Sole owner knows corp. is about to go bankrupt ii. She hadn t paid herself in years iii. Sues her own corporation, allows default to occur so she can take all assets before other creditors iv. Court prevented this c. This is not really piercing, but similar ideas 12. Successor Liability a. General Rule: i. Corporation acquiring all or a portion of the assets of another corporation does NOT acquire that corporation s liabilities and debt b. 4 EXCEPTIONS to general Rule: i. Successor entity is actually a continuation or reincarnation of the predecessor corp. or entity OR 1. Nissen Corp. v. Miller successor liability failed in this case because it was different owners. They argued a continuity of enterprise even though different actors but this argument failed. However, if it is the same cast of characters such as owners and managers then it will likely be deemed a mere continuation of the previous business. ii. there is a expressed or implied agreement to assume liability OR iii. Transaction amounts to merger or consolidation OR 1. Merger= one company merges into other company, and the other disappears 2. Consolidation= companies combine into a 3rd different corporation iv. Transaction was fraudulent, lacked good faith, or was made w/ inadequate consideration. 13. Dissolution and Subsequent Liability a. Issue: i. Once a corporation has dissolved, what if an injury subsequently occurs for which that corporation is liable? Who is there to sue? ii. How can corporation dissolve and extinguish liability? b. Answer: i. If corporation does not follow 14.06 and 14.07 correctly, then under 14.07(d)(2) even if all the assets of the company have been distributed to shareholders a claimant can break the corporate veil and come after individual shareholders for their pro-rata share of the debt 1. Pro-rata= each shareholder is responsible for claim in proportion to their ownership c. 14.06 : Known Claims against Dissolved Corporation i. Dissolved corporation may dispose of known claims against it by NOTIFYING known claimants in WRITING ii. Written notice must include: 1. Must state a deadline (which can be no less than 120 days from effective date of notice) to receive the claim 1

iii. If no claim received by that date then claim is waived d. 14.07: Unknown Claims Against Dissolved Corporation i. Dissolved corporation may publish notice of dissolution and request claimants present them in accordance with the given notice. ii. Published notice must: 1. Must be published one time in newspaper of general circulation in the county where the dissolved corporation s principal office is located 2. State deadline of 3 years to commence proceeding or claim will be barred. e. 14.08 Court Proceedings for dissolution i. Corporation after filing notice as in 14.07 MAY file an application with the court in the county of the principal place of business for the corporation for a determination of amount and form of security which can be left to cover any unknown claims ii. After court sets the amount and form of the provision, if the company provides that amount then they will not be liable for anything beyond that, nor can the veil be broken to get to shareholders f. Other issues with corporate dissolution see 14 generally i. 14.02-Requires shareholder vote for dissolution 1. simple majority will suffice, unless articles state otherwise ii. 14.03-corporation must file articles of dissolution after receiving authorization iii. 14.05-restricts corporation to only carrying out business associated w/ process of winding up after dissolution Corporate Finance 1. Pages a. 314-334, 337-338 2. Code a. RMBCA 1.40(21); 6.01; 6.03; 6.20; 6.21(a)-(e); 6.22; 6.25; 6.26 3. How to get assets into a company a. Equity Capital i. Transfer assets to the company in exchange for shares b. Debt Capital i. Borrow money ii. Bonds and debentures iii. Preferred shares 4. Overview of Debt and Equity Financing a. Equity capital i. Equity capital is composed of 1. contributions by the original entrepreneurs in the firm 2. capital contributed by subsequent investors 3. retained earnings of the enterprise ii. Basic rules of shares 1. 6.01: Authorized Shares a. All shares w/in a single class must have identical rights. MBCA 6.01(a) b. Articles of incorporation sets forth the number and classes of shares corporation is authorized to issue c. 2 basic qualities Shares MUST have i. One or more classes together must have unlimited voting rights 1

ii. One or more classes that together are entitled to receive net assets on distribution 1. (2 qualities can be in same class or shares or different shares) 2. 6.03: Issued and outstanding shares a. Board of directors can issue number of shares and classes authotized by articles of incorporation. b. While shares are outstanding i. One or more shares that together must have unlimited voting rights ii. One or more shares that together are entitled to the net assets on dissolution 3. 6.21(a)-(e): Issuance of Shares a. (a) Power of issue shares may be reserved for shareholders rather than directors in AoI. b. (b) Board may authorize shares be issued for consideration including any tangible or intangible property or benefit i. Can t issue shares for free, consideration required c. (c) board of directors determines if consideration for shares is adequate. This determination is conclusive d. (d) when the corporation receives the authorized consideration, the shares are fully paid for e. (e) corporation may place in escrow shares issued for a contract for future services 4. 6.22: Liability of Shareholders a. Shareholders are not liable to the corporation in any respect other than to pay for the shares b. Not personally liable for acts of company iii. How many shares to authorize in Articles of Incorporation 1. More than you need right now so you can sell later b. Debt capital i. Loan 1. Creditors get right to be repaid debt but no say in management 2. Shareholders can lend to company as well benefits include a. Tax deduction b. Promise to repay c. Helpful if trying to organize so all owners have equal voting power, but provide unequal asset contribution ii. Sell Preferred Shares 1. Preferred shares= usually do not have right to vote, but have preference as to distributions before other stock (can be changed) 2. Prevents S-Corp election for tax purposes 3. Preferred shares provides a form of leverage because you are getting money to use, hopefully paying a low dividend, and earning a higher return than you have to pay. Therefore this is a form of leverage iii. Bonds or Debentures 1. Both are Negotiable debt instrument that is easily transferred 1

2. Both are Essentially long term loan agreements, guaranteed interest and paid off in certain period of time. 3. No voting rights in either 4. Bond= have identified some other piece f property the that can be foreclosed upon (secured) 5. Debenture= no identified collateral, so unsecured obligaton 6. variations a. Zero Coupon Bondsi. pay no interest at all, sell at a substantial discount from face value and upon maturity the holder receives face value-ex. Treasury notes b. Junk Bondsi. widely used in takeovers, are simply below investment grade debt instruments iv. Tax Advantages of Debt 1. interest payments on debt are deductible by the corporation while dividend payments on equity securities are not 2. further repayment of debt may be non-taxable return of capital while a purchase or redemption of equity securities from shareholder by corporation is taxable event. c. Considerations in Balancing Capital Ratio i. Debt/Equity Ratio v. Undercapitalization-Possible Deep Rock problem, Danger of being held too thinly capitalized and subject to piercing and personal liability ii. Liquidation v. Stability iii. Maintaining control of corporation v. need to sell stock to raise Capital outsidebalance the need for outside money v. losing majority control by selling too many shares 5. Leverage: Balancing Debt v. Equity a. Basic Concept of leverage i. Using other people s money to make your own money. So in many ways debt can be a good thing for companies because it can be used to make more money. ii. Making a higher rate of return on your investment than you have to pay in interest on the debt iii. Highly leveraged can rapidly increase profits, but will rapidly increase losses if fail iv. Therefore incentive to borrow if you can receive a low interest rate and think you will succeed. b. Leverage hypo i. No leverage 1. Have 100,000 and Borrow no money 2. Buy one house for 100,000. Sell 5 years later for 200,0000. 3. 100,000 profit ii. Leverage 1. Have 100,000 and borrow 400,000 from bank 2. Buy 4 houses for 100,000. Sell each in 5 years for 200,000 3. 500,000 profit c. Fully leveraged i. Corporation has borrowed as much money as it can because: 1

1. Limits by law 2. Limitation by the articles of incorporation 3. Nobody is willing to lend anymore ii. Rule of thumb: have 1$ of equity for every dollar of debt d. Disadvantages of leverage i. The rate of return on investment may not be as high as you thought, and company may be unable to pay depts. ii. More quickly increases losses if you fail e. Advantages of leverage i. Owners don t have to risk as much of their money ii. Highly leveraged corporation can rapidly increase profits iii. Use other people s money to make money. iv. Tax benefits on paying interest, but none on paying dividends f. Example of Leverage on earnings per share i. Shares cost $100 per share, and corp. needs 500,000. ii. Chart demonstrates that at low profits then high leverage can be bad, but the more earnings made the higher the earnings per share when leveraged Un-leveraged approach (raise 500,000 entirely by selling shares) Assumed Net Earnings 25,000 100,000 150,000 200,000 Number of Shares 50,000 50,000 50,000 50,000 Earnings Per Share .50 2.00 3.00 4.00 Leveraged Approach (raise 250,000 by selling shares & 250,000 by debt) Assumed net earnings 25,000 100,000 150,000 200,000 Interest on bonds (8% 20,000 20,000 20,000 20,000 on 250,000) Earnings allocable to 5,000 80,000 130,000 180,000 common Number of Shares 25,000 25,000 25,000 25,000 Earnings per share .20 3.20 5.20 7.20 6. Issuance of Shares: a. 1.40(21) i. Shareholder means the person in whose name shares are registered in the records of a corporation or the beneficial owner of shares to the extent of the rights granted by a nominee certificate on file with a corporation. b. 1.40(22) i. Shares units into which the proprietary interests in corporation are divided. c. Pre-Incorporation Subscription i. 6.20 1. Subscription for shares entered before incorporation is IRREVOCABLE for 6 months, unless agreement provides other duration 2. Subscription agreement after incorporation is merely treated as regular issuance of shares under 6.21 ii. Potential investors are approached individually to determine whether they would be willing to purchase a specified number of shares 6.20(a)

iii. Once company is formed the condition will be satisfied for acceptance and investor MUST purchase the stocks d. Par Value i. No real reason to have par value ii. Simply sets an arbitrary value at which stock cannot be sold below that price 1. Only applies to original issuance. Can be resold at any price by shareholders (Torres v. Speiser) iii. Used for psychological benefit that shares have certain value iv. MBCA has eliminated requirement and made par value optional. e. Watered Stock i. Watered stock is stock issued for less than par value. 1. If no par value then there will not be watered stock. ii. In most states an investor who purchases watered stock is automatically liable to the corporation for the difference between par value and what he actually paid. 1. Discount Stock-shares issued for cash less than par value (True Watered stock) 2. Bonus Stock-shares which the company gave away and nothing is actually paid iii. Failure to pay for shares in a corporation makes the directors corporately liable to corporate creditors. Hanewald v. Bryan s. f. Payment for Stock i. Can t issue stock for free, must have some form of consideration for stock. 6.21(b) ii. If don t pay for stock and company goes under, creditors can sue and force you to pay full value for stock so they have something to take from the company. (Hanewald) g. 6.25 Issuing Shares with Certificates i. (a) Physical stock certificates are not required ii. (b) If you have a certificate, it must at least have: 1. (1) the name of the issuing corporation and that it is organized under the law of this state; 2. (2) the name of the person to whom issued; and 3. (3) the number and class of shares and the designation of the series, if any, the certificate represents. iii. (c) the designation of class, series, and associated rights must be summarized somewhere on the certificate, or state the corp. will furnish such info on request. iv. Certificate must be signed by 2 of officers or directors and must bear corporate seal h. 6.26 Issuing Shares Without Certificates i. Unless otherwise prohibited, board can authorize shares without certificates ii. Within a reasonable time after the issue or transfer of shares without certificates, the corporation shall send the shareholder a written statement of the information required on certificates by section 6.25(b) and (c), and, if applicable, section 6.27. 7. Types of Shares a. Common Stocki. Two fundamental Characteristics of Common Stock 1. Right to Vote for the election of directors and on other matters a. Unlimited voting rights 2. Right to receive dividends when distribution is made ii. Other rights 1. Inspect books and records 16.02 2. Sue on behalf of corporation to right wrong committed against it 7.40-7.47 1

3. Right to financial information 16.20 4. Value of common stock will increase if earnings are not distributed iii. Classes of Common Shares 1. different classes of common shares are permissible, as long as there are appropriate provisions in the Art. Of Incorp. 6.01 2. Corp. can establish a scheme of consummate generality designed to accommodate the most innovative and ingenious creator of new classes or types of shares. 3. Most states prohibit converting from common to preferred stock upstream conversion 4. If the articles of incorporation do not specify what type of stock, it will be common stock b. Preferred Shares i. Preferential to those assigned common shares, but limited in some ways ii. Preferred shares are usually non-voting iii. holders of preferred shares are typically are entitled to a specified distribution before anything can be paid on common shares 1. Dividend agreements Typically have specific amount dividends or percentage dividends a. Specific amount might pay $10 every year per share b. Percent dividend might pay $6 for 6% on $100 share 2. If can t pay dividend, two types a. Cumulative Preferred stock- If could pay dividend last year, then must pay last years and this years dividend before paying anyone with common stock b. Non-cumulative Preferred Stock- doesn t carry over if couldn t pay dividend last year iv. Rights of Preferred shares (like other shares) can be customized in almost any way v. Common features of publicly traded preferred shares 1. Cumulative dividend right 2. Usually Non-voting a. Customary to provide that shares will receive voting rights if dividends have not been paid in a certain period of time 3. Liquidation preference a. liquidation preference is often fixed at a specified price per share, payable upon the dissolution of the corporation b. it is not a debt but a claim to priority if and when funds are available 4. Right to Convert a. Right to convert to common stock. Could be very beneficial if company is doing very well 5. Participating Preferred a. After paid their preferred dividend, then they are able to participate in common shareholder dividends as well. Essentially 2 bites out of the dividend apple. 6. Redeemable dividend a. The corporation has the power to demand to buy the stocks back at any time. Usually have a set buy back price. 1

8. Authority a. Torres v. Speiser-NY 2000. filed MSJ that sale of his minority interest in corporation was valid. While NY law prohibits an initial issuance of stock in a new corporation for less than par value, this law has no bearing on re-sale of issued shares among shareholders. b. Hanewald v. Bryan s-ND 1988. Art. Of Inc. authorized corporation to issue 100 shares. issued 50 shares but never paid for them. Shareholder is liable to the extent of the difference between the par value and the amount actually paid, and to such an extent only as may be necessary for the satisfaction of the creditor s claim. Securities Regulation 1. Pages a. 347-356, 365-369 2. Code a. RMBCA 7.22 3. History a. Prior to depression there was no securities regulation b. When created first securities Regulations there were 2 pillars i. Sunshine Theory- Make everything out in the open with full disclosure, this would force honesty ii. Efficient Market theory- Anyone who wants to sell stock can if they provide full disclosure and the market will set the value for the stock 1. Ex. of efficient Market theory a. Govt. allowed NV brothel to incorporate but required them to make full disclosure and the market made the stocks worthless c. Two key Acts i. Securities act of 1933 1. Designed to inusre that when people offer/sell securities to the public it is an honest process 2. Registration of securities 3. Only Concerned more with the initial sale of securities 4. System of full disclosure, NOT a permit approach 5. Contains a number of private remedies for investors who are injured due to violations of the Act 6. There are general anti-fraud provisions which bar material omissions and misrepresentations in connection with the sale of securities ii. Securities and Exchange act of 1934 1. Created the oversight of national exchanges, created SEC, addressed securities fraud, proxy regulation, etc. 2. Registration of companies 3. Obligation to every quarter provide information to your investors and the world 4. Takes the 1934 act and says once they are in the market we will regulate it 5. More of an omnibus regulation 6. Regulates all aspects of the public trading of securities 7. Includes section 10(b) 4. What is a Security ? a. stocks, bonds, notes, debentures, evidence of indebtedness, voting trust certificates b. Investment K-Any scheme that involves 1

i. Contract or agreement ii. Where a person makes an investment of money iii. In a common enterprise iv. with profits to come solely from the efforts of others. c. Smith v. Gross i. Plaintiff entered into worm farming contract. Was told worms would multiply 64 times a year and was guaranteed a market in which to sell them. Worms didn t reproduce that fast and there was actually no market. Was declared an investment K, which is covered under the Securities Act of 1933. Counts as security, so there was securities fraud here for unregistered offering ii. When you k 5. Fundamental principle of Sec. Reg. a. Any person who offers or sells securities must either: i. Register that offering with the Fed. government ii. Find an exemption from registration 6. Registering offering with government a. Public offerings are typically an example of a type of securities sale that must be registered with the federal government or run the risk of federal securities fraud. b. Public Offerings i. Test to determine if an offer is Public 1. A public offer need not be open to the whole world. 2. If group doesn t need protection then this might not be public (selling to officers or directors) 3. General employees do not have access to books and need disclosure so it is a public offering 4. SEC v. Ralston Purina a. Offered to sell stock to their employees as reward. Stock was not registered. Even though restricted to employees it was still a public offering. ii. a public offering of securities means that the issue is being sold to members of the investing public through an underwriter. c. Requirement of going public i. To make a public offering, a corporation must file a registration statement with the SEC disclosing certain information and prepare certified financial statements for the previous 3 years. Securities registration is extremely complex and is a high-risk practice for attorneys. ii. Very expensive process, can cost up to half a million dollars d. Registration Statement i. Must be filed by all corporation going public and Consists of two parts 1. Prospectus a. document that is to be distributed to potential and actual investors AND 2. Additional information that must be submitted to SEC and is publicly available but need not be included in prospectus. e. Benefits of going public iii. Raise additional capital for expansion iv. Reduce need to rely on bank debt 1

v. Pay down pre-existing indebtedness vi. Give existing shareholders liquidity vii. Proxy voting viii. Somewhat protected from takeovers f. Cons of Going Public ix. Registration process is VERY expensive x. Public scrutiny with full disclosure g. Securities Regulation from the standpoint of the attorney xi. The corporate check required for an IPO usually involves 2 types of attorneys 1. Those representing the issuer 2. Those representing the underwriter h. Legal Risks in Going Public xii. Company is strictly liable under SA 1933 for material misstatements and omissions in Registration Statement xiii. Must file quarterly annual financial reports and comply w/ strict internal accounting control measures 34 Act & SOX i. Insiders of Company cannot trade in company s stock w/out timing it very carefully 7. Finding an Exemption from Registration a. Reason to find exemption i. Its very important to find exemptions because the expenses of filing a registration and going public normally costs as much as a half million dollars ii. It is much cheaper if you can find an exemption b. 3 categories of exemptions i. Private Placement: 4(2) of the 1933 act 1. Do not have to register if it s a non-public offering 2. Fairly defined group which is very limited in scope 3. That group of people can fend for themselves, and find the info they need to know 4. Rule 506 governs the safe harbor provision for private placement a. See below for more info b. Can be difficult to define so created rule 506 as a safe harbor provision which guarantees it will be a private placement under SEC rules c. Even if not within 506 is still may be private placement, but this simply guarantees it is private ii. Small Offering: 3(b) of the 1933 act 1. Any offering less than 5 million dollars qualifies for an exemption 2. These small offerings can be split into 2 groups a. Rule 504 (offerings less than 1 million) i. See below for more b. Rule 505 (offerings less than 5 million) i. See below for More iii. Intrastate Offering: 3(a)(11) 1. If every part of the offering and corporation is in one state then the offering may qualify for an exemption 2. Requirements a. Offering made to residents on 1 state 1

b. Corporation incorporated in that state c. Corporation primarily located in that state d. Revenues spent in that state 3. If 1 person out of 100 investors is from out of state, then the entire exception is blown a. Can become issue of some investors have multiple homes 4. Rule 147 as Safe Harbor a. If 80% of everything to do with money and business activity is conducted within a state, then SEC guarantees it will meet the exemption b. 80% is measured at the time the exemption is sought, business is allowed to expand at a later point beyond state lines c. Regulation D- Exemptions i. These are the exemptions defined by the SEC. ii. These apply to the private placement and small offering exemptions discussed above Rule 504 Rule 505 Rule 506 Aggregate Offering 1 Million (12 mos.) 5 million (12 mos.) Unlimited price Limitation Number of Unlimited 35 + unlimited accredited 35 + unlimited investors accredited investors Investors y 35=ordinary y 35=ordinary citizens. Must be citizens. Must be able to fend for able to fend for themselves which themselves which usually requires usually requires professional professional representative representative Unlimited = wealthy y Unlimited = people, institutional wealthy people, investors, insiders of co. institutional investors, insiders of co. Investor none none Purchaser must be Qualification Sophisticated (alone or with help of representation). Accredited is presumed qualified. Sales Commissions permitted permitted Permitted Limitations on Usually no general no general solicitation no general solicitation permitted permitted Manner of Offering solicitation permitted Limitations on Usually Restcted restricted restricted Resale d. Remedies for Purchaser of Un-Registered Stock w/o exemption:

i. Corporation must act as an insurer of the value of the un-registered stock for the buyers of the stock ii. Buyer can demand rescission of sale 1. Don t have to prove fraud or intent 2. Only have to prove that they sold security and it should have been registered or was not exempt from registration. iii. Sue for breach of registration requirement 1. receive damages if stock sold at loss e. 12(a), (g); 15(d) Separate Registration 1. Public Companies must register IF a. securities are listed on a public exchange OR b. have 500 or more shareholders and $10 million in assets 2. Once publicly filed, officers, directors, and 10% shareholders can no longer buy or sell in own company freely Preemptive Rights (dilution) a. Pages a. 369-383 b. Code a. RMBCA 6.30, 6.31 c. Dilution a. the power granted to existing shareholders of an on-going corporation to purchase a proportionate part of new issues of common share to protect themselves against dilution of their control in the corporation and to exercise their will in shaping any recapitalization of the corporation b. 2 types i. Dilitution of voting power ii. Dilution of financial interest c. Hypo i. 3 owners with 100 shares each ii. If all 3 buy 100 shares then there has been no dilution. They all maintain equal voting rights, and simply invest more money in the company iii. If corp. issues 1 of the existing shareholder or another shareholder 400 shares, all the other shares have been diluted. iv. Current shareholders at least have the right to buy a proportional amount of the newly issued shares in order to prevent dilution d. 6.30: Shareholder s preemptive rights i. (NOTE THE EXCLUSIONS, THEY CAN BE SNEAKY ii. Only have rights if expressly included in articles of incorporation (must opt in) iii. Current shareholders have Right to purchase proportional amounts of corporations unissued shares, when board decides to issue, in order to prevent dilution. Not required to though f. No preemptive right to the following i. Shares issued as compensation to officers, directors, employees6.30(b)(3) ii. Shares issued to satisfy conversion or opt in rights of officers, directors, or employees. 6.30(b)(3) iii. Shares issued w/in 1st 6 months of corporation6.30(b)(3) iv. Shares sold other than for money. 6.30(b)(3) 1

v. Preferred stock (b/c no voting rights) 6.30(b)(4) e. Publicly Held Companies and Pre-emptive rights i. Publicly held corporations can have preemptive rights but they NEVER do. don t elect pre-emptive rights because it would be so complex if every shareholder had pre-emptive right to buy proportional share ii. Only used by closely held corporations, but probably a good idea for close corporations to have. f. Required to sell at fair price to prevent dilution i. Even if shareholder chooses not to elect his preemptive right, he has right to demand that the new issue of shares be sold at a fair price. ii. Selling shares at below fair value significantly dilutes the value of all shares and violates shareholder rights. iii. Katzowitz v. Sidler 1. 3 shareholders. 1 shareholder decided he was done and didn t want to invest any more. Rejected his preemptive right to new shares. Other shareholders sold themselves shares well below fair value. Resulted in unfair dilution g. In recapitalization there is fiduciary duty i. Lacos 1. Created a new super voting stock, but entitled to less dividend. Who ever owns this stock elects 75% of the board. Essentially owner of this stock runs the company. Manager who was also main stockholder said he wanted to do it to prevent takeovers. This super stock could not be freely transferred so it protects manangement. The deleware court that this type of anti-takeover provision is allowed 2. Problem was that the main owner said that if he didn t get this new type of stock he wanted, that if he didn t get his way he would harm the company and only protect his interests. Court decided he had made illegal threats to breach fiduciary duty. So it was only the approval that was flawed, not the structure. h. 6.31: Corporations acquisition of its own shares i. Corporation may acquire its own shares Distributions by a Closely Held Corporation 1. Pages a. 383-390, 394-415 2. Code a. 6.40(a), 8.33, 6.40(c) 3. Ways to get return on investment in closely held company i. Dividend ii. Stock appreciate in value 1. Probably can t sell iii. Job 1. Director, officer, employee iv. Benefit package a. (All can be risky because none of these are guaranteed to occur. This is why shareholder agreement is so essential to guarantee some of these benefits to potential minority shareholders) 1

4. Distribution by a Closely Held Corporation a. Correctly identify closely held company a. Key features i. Few shareholders (no bright line #) ii. Involved in management or operation iii. No ready market with which to sell shares b. 6.40(a) a. A board of directors may authorize distributions to shareholders. Subject to restrictions of articles and limitation of 6.40(c) c. Distributions definition-1.40(6): vi. Elements 1. Distribution of cash or property a. Microsoft could have software dividend b. Could have stock dividend but is stupid because everyone will still have same percentage 2. Paid to shareholders 3. On account of their share of ownership vii. May come in the following forms: 1. Dividend a. most common to simply give cash 2. Purchase, redemption, or other acquisition of shares a. Corporate re-purchase of shares is distribution b. See below for more 3. Distribution of indebtedness OR otherwise. g. Repurchase of Shares as a distribution i. Reason Re-purchase of shares is distribution 1. Shareholders get money in exchange for returning shares to company 2. Its not a sale because company didn t really get anything of value in return, the company can t list their own stock as an asset 3. If company bought shareholders stocks in another company then this would NOT be a distribution. Company can list this as an asset. 4. Therefore all three requirements of distribution are met. ii. If company re-purchases shares from some, is everyone entitled to repurchase? 1. General Rule a. If : i. majority shareholders, (1) acting as directors, (2) cause the corporation to buy the stock (3) of a majority shareholder, b. Then: i. they must offer each shareholder the equal opportunity to (1) sell a ratable number of his shares (2) at an identical price, or else the majority shareholders have breached their fiduciary duty to the minority shareholder. c. Analysis i. Rule created because court in Donahue v. Rodd Electrotype analogized close corporation to partnership and required partnership fiduciary duty as established in Meinhard v. sammons. Fiduciary duty created 1

2. Exception a. Corporation is allowed to offer repurchase of shares from one shareholder and not others ONLY if there is a legitimate business reason for the selective re-purchase. i. Example: reverse stock split when turn 100 shares into 1in order to go from public to private. Shareholders with less than 100 shares are bought out. 3. Donahue v. Rodd Electrotype a. Donahue is minority stock holder and has no avenue to sell shares. Oldest Rodd, the founder, has decided to retire and corporation is going to buy his stocks to allow him to retire. Corporation repurchases his shares but refuses to buy donahue s for the same price b/c say they don t have the money. b. Held: prohibited to offer re-purchase to Rodd and not Donahue, without legitimate business reason 4. Process for buying out shares of majority shareholder a. Make sure there isn t conflict of interest (shareholder isn t making decision) b. Have a majority of the directors approve the deal c. Offer the other shareholders the same deal (Donahue) d. Make sure doesn t violate 6.40(c) ceiling i. Balance sheet insolvency ii. Equity insolvency (harder question) h. How much distribution must be given? i. General Rule1. directors of closely held corporations generally have discretion over whether and when to declare dividends. Courts will generally not upset good faith business judgment of directors when there is a rational reason to withhold dividends, such as to pay off debt, capital improvements, rainy day fund, etc. ii. Minimum dividend? 1. If there is 1) a surplus and 2) bad faith refusal to pay dividends a corporation can be forced to pay dividends. Gottfried v. Gottfried a. Factors for bad faith: i. intense hostility of controlling faction against minority ii. exclusion of minority from employment iii. high salaries, bonuses, etc. made to officers in control iv. fact that majority group may be subject to higher income tax is dividends paid v. existence of desire to acquire minority stock interest as cheaply as possible 2. Dodge v. Ford Motor Company a. Ford was accumulating massive amounts of corporate revenue and only paying out a minimal percentage. (still a lot, every month paid dividend equal to entire initial investment). Vaguely said was saving money for new plant and rainy day fund, but was very vague and 1

MORE than enough money for those things. Lost suit where minority shareholders sued for dividends b. Basic Jist: Better pay dividend unless you have a good reason for keeping excess money. iii. Maximum Dividend? 1. 6.40(c)- A distribution may not be made UNLESS Neither of the following tests are met: a. (i) Equity Insolvency Test-corporation would be unable to pay its debts as they become due in the usual course of business i. monthly payment debt, power bill, operating expenses b. (ii) Bankruptcy or Balance Sheet Testi. Total assets < total liabilities + sum needed to satisfy preferential shareholders if corporation was dissolved 2. 8.33(a)- Director Liability for Unlawful distribution a. If the board of director pays more than is allowed under 6.40(c) then the directors are personally liable for the excess beyond what was allowed. b. Only directors that vote for or assent to are personally Liable i. Determining ceiling (likely exam question, will probably focus on C2, but must meet C1 as well) i. How much dividend can be paid on AB Inc.? 1. Assets a. 100,000 cash b. 900,000 property 2. Liabilities a. 500,000 3. Equity a. 500,000 i. Common stock 50,000 ii. Preferred stock 100,000 iii. Accumulated earnings 350,000 ii. Solution under 6.40(c)(2) 1. Essentially allowed to pay out all amounts owned in common stock and accumulated earnings. a. 400,000 here b. New total assets would be 600,000 c. Total liabilities + preferred stock= 600,000 2. Problem is you will have to sell some assets to get 350,000 in cash. If you sell the assets will the corporation be able to stay in business and pay bills as they come do without needed equipment? 8. Freeze-Out a. A tactic where majority shareholders oppress/disadvantage a minority shareholder into selling his shares (preferably at a low price) i. Possibilities 1. squeezers may refuse to declare dividends 2. drain of corporations earnings in the form of a. exorbitant salaries and bonuses to majority shareholders OR 1

b. in the form of high rent by corporate property leased from majority shareholders 3. deprive minority shareholders of corporate offices & employment 4. cause corp. to sell assets at inadequate prices to majority shareholders ii. **Best thing to do is to enter into S/H Agreement before buying into closely held corp. b. As long as dividends there is not bad faith in refusing dividend and they are not breaching their fiduciary duty there is nothing the minority shareholder can do. Management and Control of the Corporation 1. Pages a. 419-433 2. Code a. RMBCA 8.01, 7.32 3. Traditional Role of Shareholders and Directors a. Board of Directors i. 8.01: Requirement of Board and Power vested in them 1. Must have board of directors except as provided in 7.32 2. All corporate power vested in the board of directors 8.01(b) ii. 8.02: Possible requirements 1. The AOI or Bylaws may contain requirements to be on the board of directors iii. 8.03: Number of directors 1. Must at least have 1 2. May be changed by amendment or bylaw iv. responsibilities 1. Manage affairs of the corporation 2. appoint officers 3. sell shares as authorized under Art. Of Inc. 4. make distributions AND 5. set salaries and make compensation decisions b. Officers-carry out decisions of board of directors i. Hire employees and agent ii. Day to day hands on management iii. Implement decisions by Board c. Shareholders-don t have a whole lot of power i. Vote & elect board ii. Vote on fundamental corporate changes iii. Amend Art. of Inc. iv. Remove directors v. Sale of assets outside ordinary course of business vi. Mergers w/in corporation 4. Shareholder Agreements a. Benefits i. This is the solution to all the potential mistreatment that minority shareholders are vulnerable to. Absolutely essential for minority shareholders in closely held company because of dangers. 1. Might want following features: a. Buy back provision by company or other shareholders 1

b. Guaranteed distribution plan c. Guaranteed spot on board d. Guarantee that your heir takes spot on board when you die 2. This would all be allowed under freedom of contract b. Problem i. This violates section 8.01 which gives all power to the board, how can you limit the boards power ii. Removing power from the board of directors and giving to the shareholders through a shareholder agreement is a violation of public policy. Therefore shareholder agreement were initially not allowed, iii. Traditional view 1. McQuade a. New York Giants case. 3 parties bought into corporation and on board of directors. Made share holder agreement promising best effort to keep each of them in their director and officer positions. Invalidated shareholder agreement as violation of public policy because prevented directors from using business judgment. Functions of directors and shareholders should be strictly independent. c. Solution i. shareholder agreement were not originally allowed ,but this stance has gradually been chipped away at by the courts and statutes over time. ii. Modern View 1. Galler v. Galler a. If everyone goes along with a shareholder agreement, and no one is hurt then it does not violate public policy. Closely held corporation management is different than publicly held corporation management. Shareholder agreement upheld iii. 7.32: Shareholder Agreements 1. Powers a. 7.32(a): essentially anything that is not fraudulent i. May eliminate board, limit discretion of board, Can make agreement governing distributions, Establish directors, how long serve, selection or removal, Make voting agreements, etc. ii. (believe they can eliminate annual meeting) 2. How created 7.32(b) a. Since so powerful must be UNANIMOUSLY approved by all shareholders at time of agreement. 7.32(b)(1). b. Can only be amended unanimously by all current shareholders, unless agreement establishes otherwise. 7.32(b)(2). i. Must give new shareholders notice about agreement 3. Duration a. Valid for 10 years, unless otherwise specified. 7.32(b)(3) 4. Where displayed a. Must be public b. Must be in articles or bylaws or at least referenced in them. 7.32(b)(1) c. Must be noted on outstanding shares. 7.32(c) 5. Applicability 1

a. Only valid for closely held corporations. 7.32(d) d. Shareholder Agreements are ESSENTIAL as a practical matter in closely held corporations i. Ideally allows an un happy shareholder a way to get out of ac lose corporation, by creating a market by creating certain buy out conditions ii. How do you determine what the Stock is worth? 1. Use the book vale. a. To calculate from the balance sheet, divide total net worth(equity) of the company by the number of outstanding shares to get a rough estimate of value of corporation. (Book value is not a very good estimation of actual value because does not consider future earning potential or chance of appreciation.) i. If you sell stock for more than the book value, then the current shareholders value will rise and the purchasing shareholders value will fall so that they meet in the middle. This tells us that book value is just a place to begin. 2. Example of calculating Book value ASSETS LIABILITIES Cash $4,000 Acct. Payable $2,000 Acc. Reciev. $3,000 Bank Loan $5,000 Inventory $7,000 Loan from A $2,000 fixture $5,000 EQUITY Equip $1,000 Common A (20 $2,000 shares) BMW $600 Common B (20 $2000 shares) Patent $6,000 Common C (1 $1 share) Retained Earnings $12,599 $25,600 $25,600 a. Networth/outsanding shares= book value b. 16,600/ 41= $404.88 per share i. Note: the book value will be equal to maximum distribution that may be made per share under 6.40(c) for the balance sheet test. 3. If there is a market for that stock, look to the Fair Market Value of the stock (i.e., listed on the exchange). How do you determine an FMV for nonlisted stock? i. How is fair value to be determined for a nonlisted stock? Under MBCA 14.34? official comment: the two proceedings (14.34 and 13.30) are not wholly analogous and the court should consider all relevant facts and circumstances of the particular case in determining fair value. 4. Could use calculation based on future dividends 5. Hire professional business appraiser a. Can cost a lot, and the issue of who will pay for it

b. If this is choice, best to settle who must pay for in shareholders agreement 6. Pre-determined formula to determine value of the stock decided in shareholder agreement a. Voting Agreements and Trusts 1. Pages a. 446-465, 472-484, 487-488 2. Code a. RMBCA 7.01, 7.02, 7.04, 7.22, 7.28, 7.31 3. Voting Process a. Establishing Right to vote i. Shareholder Record 1. Corporations need to keep a record list of all shareholders so they know who is entitled to vote. a. Close corporations often have a notebook with all the shares, and when they sell and tear out a carbon copy record is left. b. Public corporations often outsource their shareholder record keeping and they are maintained electronically 2. The problem is that even though they keep these detailed records, they still do no really know who owns all the stock because of the record owner v. equitable owner distinction. ii. Record Owner 1. The party whose name is on the corporation s shareholder record. Often stockbroker firms. iii. Beneficial Owner 1. Person who has beneficial or equitable title to the value of the stock, even though it is held in the stock brokers name. also know as street name. Can ask to become the record owner, but might cost a fee. This is the owner with the right to vote iv. Record Date 1. Since ownership of stocks and shareholder record is always changing the company has to take a freeze frame of ownership at a certain time, and these will be the people entitled to vote in any upcoming election. This is called the record date and who ever has ownership at this time is entitled to vote, even if they sell their stock prior to the election. 2. 7.07: Record date a. May not be more than 70 days before meeting v. Change in ownership after Record Date 1. The previous owner would be able to vote the stock, while the current owner would be unable 2. Solution is that purchaser after notice was given would demand an irrevocable proxy right b. Types of Boards i. Regular Board 1. Everyone on the board is up for re-election every year at the annual stock holder s meeting 1

ii. Staggered Board(classified Board) 1. Board is staggered similar to U.S. senate so only certain group is up for reelection each year and terms are longer than a year. a. Ex. board of 9, may elect 3 each year. 2. 8.06 a. Staggered terms are allowed b. May be split into 2 or 3 groups. 3. Staggering weakens the power of the minority in cumulative voting because the fewer the number of directors being voted on, the more votes it takes to elect one. c. Voting at regular Shareholder Meeting i. 7.01: Annual Meeting 1. Corporation shall hold an annual meeting to elect directors 2. However, may elect directors by written consent without annual meeting ii. 7.05: Notice of Meeting 1. Notify shareholders with right to vote about meeting no fewer than 10 days before, but no more than 60 iii. Who votes? 1. Vote in person a. Many shareholders can t attend because they have other things going on, or they own so few shares its not worth it 2. Proxy a. Giving someone else the right to vote for you, b. Must be in writingMany shareholders will be unable to attend the voter meeting c. 7.22: Proxy i. Allowed to vote in person or by proxy ii. Must be in writing or electronic form iii. Lasts for 11 months unless otherwise stated, iv. Typical System of election 1. The current board of directors selects a nominating committee, who then nominates people to be on the board. They always select majority insiders 2. Very communist style voting, no competition. Usually uneventful. 3. Company has an absentee system where they ask for the proxy of voters, and they re-elect the board and their friends v. Proxy Fight 1. Proxy fight is when 2 competing factions are asking shareholders to giver their proxy to those groups. 2. Tend to occur in large public companies, and become very political 3. Outside party initiating this proxy contest has to pay out of pocket, while the company pays the incumbent boards costs of seeking proxies 4. Minority faction can get the shareholder list created in 7.20 which will provide them with the name, address, and shares of everyone who is entitled to vote d. Exceptions to the general meeting and voting process i. 7.02 Special Meeting 1. May be ordered by 1

a. Board of directors OR b. 10% of voting shares (or other percentage established in AOI, but no greater than 25% may be required) ii. 7.04: Action without meeting 1. May act without a meeting if the action is unanimously agreed to. 2. Look to statute if need more info, is long 4. Straight voting vs. Cumulative voting a. Straight Voting i. Default type of voting unless AOI specifically allows for cumulative ii. Shareholder casts his # of voting shares for each candidate for the board. 1. Ex. If shareholder had 100 shares and was electing 5 directors, he can give 100 shares to each of the 5 candidates iii. shareholder w/ 51% of the vote elects the entire board. iv. System minimizes the voice of minority shareholders b. Cumulative Voting i. 7.28: Cumulative voting 1. (a) unless otherwise stated in AOI, directors are elected by a plurality of votes, when quorum is present 2. (b) NO RIGHT to cumulate, unless AOI opts in 3. (c) Total votes= # of shares owned x # of directors being elected a. This total number of votes can be combined and cast for any person they like b. Ex. 200 shares x 5 directors= 1000 votes to be split among any combination of directors he chooses, or all for 1 candidate 4. (d) must give advance notice before meeting of intent to vote cumulative ii. Effect of Cumulative voting 1. effect is to increase minority participation in board of directors 2. Can become very math intensive and a type of strategy game when voting 3. Only applies to voting involving directors iii. Rule of Thumb 1. The fewer number of directors being elected, the more shares you need to elect one iv. Formula ensuring the election of 1 director 1. [S/(D+1)] + 1 = SHARES necessary to elect 1 director a. S=total number of shares voting b. D=number of directors to be elected 2. Multiply the # of shares needed to elect 1 director by the # of directors being elected to determine how many actual CUMULATIVE VOTES are needed v. Formula hypo 1. Problem a. 1120 total shares b. Electing 3 directors 2. Formula a. Shares i. [1120/(3+1)] +1 ii. (1120/4)+1 iii. 280+1 1

iv. 281 SHARES needed to elect 1 director b. Votes i. 281 x 3 ii. 843 CUMULATIVE VOTES to elect 1 director vi. Formula for electing certain # of directors (e.g. a majority) 1. [(N*S)/(D+1)] + 1 a. N=number of directors you want to be able to elect b. S=number of outstanding shares c. D=number of directors to be elected. i. When directors have staggered terms, ONLY count # of directors to be elected at a particular meeting vii. Minority Shareholders can pool together leftover votes and perhaps elect another director together. Ringling Bros. 5. Shareholder Voting Agreements a. Definition i. Parties maintain control of their stock and ownership rights, but they contractually agree to vote together, but often doesn t have an enforcement mechanism other than breach of contract b. 7.31: Voting Agreements i. Permits voting agreements if in writing and signed c. Ringling Bros v. Ringling i. There were three shareholders, and none had clear majority. 7 directors up for election, but each share holder only had enough to guarantee election of 2 directors. This left 1 director position up for grabs. By 2 of the shareholders joining a voting agreement, they were able to insure the election of 5 directors between the 2 of them. Agreed to vote together, if they couldn t decide an attorney would be the arbitraitor. Problem was there was no means of enforcement because the agreement provided no proxy power to the arbitraitor 6. Shareholder Voting Trusts a. Definition i. A voting trust is a device in which each shareholder (1) transfers legal title of his shares (2) to a trust (which trustees control) (3) in return for a transferable "voting trust certificate" that evidences his (beneficial) ownership of the shares, provides the right to dividends (and other distributions). b. 7.30: Voting Trust i. Most secure form of aggregating votes because no other parties can breach because they no longer have control of shares ii. May enter a voting trust by signing a written agreement which lays out the provisions of trust and transferring shares into trust iii. Is valid for no more than 10 years iv. May be renewed for terms of no more than ten years c. Primary Uses i. bankruptcy, significant loan from a lender, and estate planning (when heirs are too young or immature) d. Brown v. McLanahan i. (illustration of how voting trust used) 1

ii. Case about Baltimore transit companies going into bankruptcy. As part of reorganization stock structure was changed and bank creditors were given debentures and preferred stock. Common stock to shareholders and unsecured creditors. Voting trust created and All stock was put into Voting trust. Banks could elect 8 of 9 trustees. After 10 years the voting trust dissolved and stock was returned. Banks sell their preferred stock but keep debentures. When trust is about to expire, banks try to steal voting power from stockholders by trying to change structure so that debenture holders will elect the board. Clear breach of director and trustee fiduciary duty. e. Fiduciary duty i. Trustees have a fiduciary duty to beneficiaries of trust. (Brown v. McLanaham) 7. Classified shares a. (different from a classified board) b. Allows for different classes of stock to be responsible for electing different directors c. 8.04 Election of Directors by Classified Shares i. Must be included in AOI, so must AMMEND AOI to allow ii. Classes are separate voting groups d. Effects i. May be used to increase minority influence, by guaranteeing election of certain director spots ii. Does not prevent election of S corporation if everything else is the same iii. Prevents deadlock in electing directors problem, but deadlock MAY still continue between directors (Ex. 2 classes of shares each elect 2 directors. 4 total directors still may be in deadlock) e. Should Attoreny ever agree to nominal classified share for tie breaker? i. NO, never because you will eventually have to break a tie and you will piss off one of the faction. Bad idea. See Lehrman v. Cohen below f. Example Lehrman v. Cohen i. 2 families owned a company . had classified stock and each could elect 2 of 4 directors. To prevent deadlock they created a third class of stock with no other rights but voting and gave it to attorney who voted himself on the board. This was held to NOT be a voting trust. Attorney was stupid to agree to be tiebreaker, NEVER DO THIS g. May be alternative to voting trust or voting agreement Deadlocks a. Pages a. 491-506 b. Code a. 14.30, 14.34 c. Definition a. Opposing factions of a board that have an equal number of directors, and neither faction has enough shares to change this result. As a result the board is unable to function because neither side can gain a majority in order to make any meaningful decisions. Result in company paralyzed d. Overview of Board of Directors a. number of directors i. 0 directors are actually required, because this require may be eliminated under 7.32 1

ii. May have an even number of directors b. Vacancies i. Can be created by: 1. Death 2. Resignation a. Can be effective immediately or some time in the future b. Best to make resignation effective only after electing replacement, because resignation may lead to deadlock afterwards if no other director is in place. c. Gearing v. Kelley i. 4 person board split into 2 family factions. 1 person resigns prior to electing a replacement. This leaves the board with only 3 directors and the other faction is then in a position to take control with a 2 to 1 majority to elect the new director. The lone director refused to attend meetings to prevent quorum, because she knew if she showed up she would loose vote to replace vacant spot. She cannot sue because doctrine of unclean hands. Refusal to attend board meetings was a breach of fiduciary duty, because put personal interest over company. Could have been solved by selecting a replacement before retirement. Even better solution would be create 2 classes of stock to elect 2 directors. 3. Incapacity 4. Etc. ii. Cannot refuse to attend meetings to prevent quorum, (Gearing v. Kelley) iii. Who fills vacancies? 1. MBCA 8.10 a. hold shareholder meeting and vote to fill vacancy OR b. Board of directors may fill vacancy by majority vote of the remaining shareholders i. whoever acts first (the shareholders or the board) gets to fill the vacancy (usually the board acts first) c. Length of service i. 8.05(e) 1. despite expiration of term, director continues to serve until new directors are lawfully elected. 2. If there is deadlock and no new directors can be elected, the same board can continue to serve e. Preventing deadlock (Close corporations) i. Don t structure corporation w/ equal numbers of shares owned by equal parties ii. Directors elected by that stock get to replace directors who resign iii. Build into corporation a dissolution provision so that unhappy shareholders will have a way out despite lack of market for shares iv. Build a buy out provision including the rate and time frame for payment of the shares being bought. f. Remedies of Deadlock 1

v. 14.02 Voluntary dissolution 1. Occurs when: a. The Board of Directors directors recommend the plan of dissolution to the shareholders b. The shareholders approve of the plan. c. More shares must vote in favor of the dissolution than against the dissolution. d. A majority of the shares entitled to vote on dissolution must be at the meeting at which the dissolution is voted on. 2. Board of directors may propose dissolution to shareholders 3. The shareholders must adopt the proposal to dissolve vi. 14.30 Judicial Dissolution 1. Court MAY dissolve, this is completely in the discretion of the court 2. Applies only to closely held companies 3. In order to cause dissolution, shareholder must show a. (a) Deadlock that cannot be broken by s/h vote AND must not be able to continue to conduct business profitably OR b. (b) Directors or those in control have acted, are acting, or will act in a manner that is illegal, oppressive, or fraudulent OR i. Not all jurisdictions include oppression (like Ga) c. (c) Deadlock has existed for at least 2 consecutive annual meetings in electing successors to directors whose term has expired OR d. (d) Corporate assets are being misapplied or wasted. 4. Courts are often reluctant todissolve corporations and often refuse to dissolve healthy corporations In re Radom & Neidorff, Inc. vii. 14.34 Election to Purchase in Lieu of Dissolution 1. majority shareholders may be given an alternative to buy out the minority shareholders rather than dissolve the corp. 2. May purchase at fair value 3. May make this election within 90 days after filing 14.30 with the court 4. Davis v. Sherrin a. Court has equitable power to order a buyout in a case where less harsh remedies inadequate to protect the parties g. Duty of Minority Shareholders in Close Corporation viii. Owe duty of loyalty ix. Duties to majority and breach of those duties may be viewed as oppressive in some instances x. Duty may go past alleged misconduct by majority h. See also MBCA 14.01 Dissolution by incorporators or board; 14.02 dissolution by board/ s/h Action by Directors and Officers a. Pages i. 511-519 b. Code ii. 8.20, 8.21, 8.24, 8.25, 8.40, 8.41 c. Agency Law a. Corporations are not real people so they can only act through agents 1

d. How may Board conduct business iii. Meet together all in one location 1. Collegiality principle is that they must come together to exist 2. Generally board can t act if they don t convene iv. Action w/o meeting 1. 8.21 a. May act without a meeting when all directors agree v. Electronic meeting 1. 8.20 a. Requirements are that everyone must be able to hear everyone else b. Has to be something like teleconference, e-mail doesn t count e. Having Board Meeting Required? a. Cannot simply cease having board meetings, this could result in director liability i. Can act without meetings occasionally under 8.21 but this requires unanimous consent and is impractical for long range practice b. May dissolve the board of directors entirely under 7.32 but only if Closely held company i. Need to recall stock certificates and issue new ones with the agreement with the agreement noted on the certificate c. Should NOT hire outside directors just because you don t want to meet because you will loose control of the company f. Binding the company and board to by Resolution a. General Guaranty of Authority i. Third parties usually require a resolution from the board. Will be signed by the secretary and have the corporate seal put on it. Demonstrates the board s authority b. How do you know a resolution is legit i. Best way is for third party to send their lawyer to the meeting where resolution adopted, but at some point this isn t a complete guarantee because you don t know if those were the actual directors ii. So, law is that third parties are allowed to rely on resolution that has secretary s signature as being legitimate, even if it is not board still liable because the fraud is the company s fault. In the Matter of Drive In Development Corp. iii. Corp. Will be estopped from denying the validity of the document g. Authority of Officers a. Old Law i. Officers no matter what rank have no authority at all, unless there is a clear source of it from the board, bylaws, AOI, etc. ii. We are talking about Actual authority, may still have had apparent authority b. Modern Law i. Most people believe officers have actual authority, so law changed to meet this belief and give inherent actual authority to certain offers ii. Inherent authority only applies to high ranking officers, still shaky concept so don t rely on. iii. Inherent authority only applies to actions within the regular course of business. 1

iv. Does not apply actions of extraordinary nature 1. Lee v. Jenkins Brothers a. President recruited an employee to come work for the company. Offered him a lifetime employement contract because would pay pension at age 60 regardless of what happened. Corporation fired before 60 and didn t want to pay pension. Corp. not bound because even though CEO typically has inherent authority, it only applies to things arising under usual and regular course of business, not extraordinary in nature . Lifetime employment contract was deemed extraordinary in nature h. More Code Sections a. RMBCA 8.22-Notice of Meeting i. No need for notice unless AOI or bylaws say otherwise ii. Special meetings must have at least 2 days of notice, unless otherwise specified in bylaws or AOI b. RMBCA 8.23-Wiaver of Notice i. Director may waive any notice requirement 1. Must be in writing, signed, and filed with corporate minutes ii. Directors attendance or participation in a meeting waives any objection to notice c. RMBCA 8.24 Quorum and Voting i. (a) Unless AOI or bylaws require otherwise, a quorum of a board of directors consists of: 1. (1) a majority of the fixed number of directors if the corporation has a fixed board size; or 2. (2) a majority of the number of directors prescribed, or if no number is prescribed the number in office immediately before the meeting begins, if the corporation has a variable-range size board. ii. (b) Cannot make quorum be any less than 1/3 d. RMBCA 8.25 Committees i. (a) Board may create committees, and have directors serve on them ii. (b) Creation of committee and appointments must be confirmed by majority of quorum iii. See supplement for more e. RMBCA 8.40 Officers i. (c) The bylaws or the board of directors shall assign to one of the officers responsibility for preparing the minutes of the directors and shareholders meetings and for maintaining and authenticating the records of the corporation required to be kept under sections 16.01(a) and 16.01(e). (secretary) ii. (d) The same individual may simultaneously hold more than one office in a corporation. f. RMBCA 8.41 Duties of Officers i. Each officer has the authority and shall perform the duties set forth in the bylaws or, to the extent consistent with the bylaws, the duties prescribed by 1

the board of directors or by direction of an officer authorized by the board of directors to prescribe the duties of other officers. Duty of Controlling Shareholders i. Pages a. 519-527 j. General Rule a. The controlling majority shareholder must exercise good faith and fairness on behalf of the corporation and those interested therein (including minority shareholders) when he enters into any transaction where the control of the corporation is material. i. Duties-reasonable investigation and due care i. The duty includes an obligation of the controlling shareholder in possession of facts such as to awaken suspicion and put a prudent man on his guard to conduct a reasonable adequate investigation of the buyer. j. Debaun v. First Bank CA 1975. i. bank owned controlling stock in company, sold to bad businessman who had reputation of looting companies and running them into ground. They relied on the fact that he seemed wealthy and had good reviews from members of an elite social club. Needed to do further research before they can sell majority stock. Bank even had actual knowledge that he had tons of debt and judgements against him. ii. Damages should be measured by the sum necessary to restore the negative worth, plus the value of its tangible assets, plus its going business value determined w/ reference to its future profits reasonably estimated. k. Principles of Corporate Governance 5.16 i. Controlling shareholder has the same right to dispose of voting equity as any other shareholder for a price that is not made proportionally available to other shareholders, but the controlling shareholder does not satisfy the duty of fair dealing to other shareholders if 1. does not make disclosures concerning the transaction to other shareholders OR 2. it is apparent from the circumstances that the purchaser is likely to violate the duty of fair dealing in such a way as to obtain significant financial benefit for the purchaser or an associate ii. Affirmative investigation by controlling shareholder is not required in the absence of facts that would alert a reasonable person to the need for further inquiry in the context of the transaction iii. If facts are sufficient to put the controlling shareholder on notice that it would be imprudent to proceed with the transaction without making further inquiry Introduction to Publicly Held Corporations 1. Pages a. 538-546, 548-551, 554, 558-560, 564-566, 571-588 2. Who to Board of directors owe allegiance a. Owe duty solely to shareholders as agents of capital b. Agents of society 3. Who owns corporations a. Shareholders i. Most shares are not owned by individual directors. Even if individuals do own them they are not the record owners 1

ii. Collective action problem, they have almost no voice because they have such small shares. Really only choice is to sell shares if dissastisfied iii. Shows that shareholders really have NO control in companies b. Institutional investors i. Mutual funds, Pension funds, endowment funds, etc. ii. These investors have much more power because they own massive chunks of stock iii. They actually have enough power to change ownership or pressure company because of their size. 4. Who controls the company a. Individual Shareholders i. Really have no control b. Institutional shareholders i. Have much more control but not a ton c. Officers and directors i. Make all the decisions ii. Solicits the proxy of shareholders which they give in to b/c collective action problem iii. Nominate the board 1. Can have a proxy contest but rare, and even less likely to win iv. Directors and officers keep re-nominating themselves 5. Who monitors the control of the company a. Shareholders i. Really CANNOT do it because collective action problem b. Market discipline i. When shareholders are dissatisfied they sell their shares ii. This depresses the value of stock below its potential value and makes a company prone to a hostile takeover. iii. Managers know if they do a bad job, the market will force them out 6. Lack of Social Responsibility and monitoring a. Large series of corporate failures recently including Enron, worldcom, etc. b. Led to the belief more regulation was needed to regulate corporate failures c. Corporate Governance in 2007Business Failures and Corporate Scandals i. Collapse of dot-coms-loss to individuals who failed in investing was substantial ii. Collapse of Telecoms-telecom industry did not grow as fast as predicted, thousands lost jobs iii. Collapse of Enron-restated earnings to the tune of $567 million iv. Collapse of Arthur Andersen v. Collapse of WorldCom, Inc. vi. Crisis at Adelphia Communications vii. Qwest Crisis viii. Collapse of Global Crossing, Ltd. ix. Tyco International d. Response to Substantial Misconduct i. Resulted in sharp decline in securities prices ii. Was a clear failure of corporate responsibility e. Enactment of Sarbanes Oxley (SOX) i. Result of media frenzy over Worldcom collapse ii. Unconditional surrender by business world 1

f. New ERA Opens i. Reg. G-requires disclosure of non-GAAP financial information, including presentation of the most directly comparable GAAP financial rule 1. ensures independence of auditors 2. limits sources of compensation for audit partners ii. Reg. S-X-requires retention of audit records for 7 years g. Analysis of the Provisions of SOX i. Legislation will significantly increase cost of compliance ii. Does not appear to improve effectiveness of corporate governance iii. Prohibits accounting firms from providing a wide variety of specified non-audit services to firms they audit iv. Prohibits corporations from arranging or extending credit to executive officers or directors v. Requires all listed companies to have audit committees composed entirely of independent directors vi. Requires CEO & CFO to certify accuracy of reports vii. Requires companies in their annual reports to establish internal controls and procedures for (financial disclosure Proxy Regulation and Disclosure Requirements (will definitely be on the exam) a. Pages a. 589-602, 609-610, 638-639, 642-645, 648-651 b. Numbering system for Regulation a. If looking at regulation 10(b)-5 it was authorized by section 10(b) of the 1934 act and was the 5 regulation passed c. Definition of Public company a. 12of the 1934 Act= reporting companies i. Creates additional requirements for public companies meeting the definition of 12 and requires registration of the securities (not just offerings) of certain companies. Essentially you are registering the whole company 1. (2+1) types required to register under 12 a. 12(a)-listed companies i. (stocks listed on national exchange) b. 12(g)- Widely held companies i. Stock held by sufficiently number of public 1. 10 million in assets AND 2. 500 or more shareholders (this is key because most companies have 10 million in assets) c. 15(d)- Temporary requirement to fit under these restrictions i. You are temporarily thrown into the requirements of Public companies listed below when file an initial Public Offering. Will probably be a public company anyway as a practical point because if making public offering will probably have 500 shareholders and 10 million assets. 2. May also voluntarily choose to register even if you don t fit these 2 requirements b. What does being under 12 practically mean (ONLY APPLIES TO PUBLIC CO.) i. Proxy Regulation under - 14(a) and regulation 14(a) 1

1. Much more intense federal proxy laws governing shareholder participation in voting apply to public companies 2. When anyone sells securities you must register the OFFERING, but this requires registering SECURITIES not for the purpose of the offering 3. OTHERS involved in disclosure process can be held liable if found they were aware of FALSE statements in disclosure statements. (Enron & 10b5) a. See Corporation- Disclosure Material liability in index 4. Intended to prevent fraud, omission of material statement, and misleading information when soliciting proxies 5. Required to send out 4 documents: a. Notice of Meeting (consistent with state law) b. Proxy Statement i. Includes all info shareholders should need to vote ii. Can cost a lot of money to draft and send out, probably $100,000 every year. c. Annual Report to Shareholders i. Documents to inform shareholders about company and make them feel good about company ii. Used as type of advertising, some make into glossy magazine iii. Can cost millions to produce d. Actual Proxy Ballot 6. Studebaker Corp. v. Gittlin a. Gittlin was unhappy with Studebaker management (12 public company) because they refused to change practices. He contacted 42 people he knew personally which comrpsied more than 5% of company. Using that 5% demanded shareholder list to contact other and get proxy from other S/H so he could make changes. Studebaker refused to give up the list. Court held that contacting the first 42 shareholders was communication as part of a continuous plan to solicit proxies and was subject to 14 proxy regulation. He failed to comply when contacting those 42 because didn t provide how own version of proxy statement. 7. Rules provisions a. 14(a)(3)- requires proxy solicitation be accompanies by a proxy statement with information. Must include annual report b. 14(a)(4)- specific reglulation to form of proxy regulation c. 14(a)(5)- info in proxy statement must be clearly presented d. 14(a)(6)- proxy statements must be submitted for preliminary review with SEC e. 14(a)(7)- Obligation of company to provide a list of all security holders and estimated costs or making own S/H s own solicitation. This is the rule you use to begin a proxy solicitation. f. 14(a)(8)- Shareholder proposal- see below g. 14(a)(9)- Prevents lying, cheating, and deceiving people in process or Proxies 8. Shareholder Proposals- 14(a)(8) (book pg 638) 1

a. Does NOT currently allow nominating directors b. Created to help promote shareholder democracy because after the depression thought it was problem that people running public companies were not constrained by anything c. Intended to increase shareholder influence, but probably little success, because lots of way for company to prevent by using filters d. Requirements i. Eligibility-s/h must hold at least 1% or $2000 in market value of securities continuously for one year 14a-8(a)(1) ii. Notice & attendance-proponent must give notice and attend the meeting 14a-8(a)(2) iii. Timeliness-Must be submitted sufficiently far enough in advance proxy statement14a-8(a)(3) iv. Number of Proposals-Can only submit one proposal per meeting 14a-8(a)(4) v. Supporting statement-must be 500 words or less 14a8(b)(1) vi. Identification of proponent-must provide name & address , and how many shares you own14a-8(b)(2) e. Omission of Proposal i. Corporation may omit proposal if it falls into 1 of 13 categories-(p. 641. Of book) ii. Includes proposals related to elections of office. Rauchman v. Mobil Corp. 1. . refused to include a proposal regarding OPEC citizens serving on board in its proxy statement. Proposals may be excluded if they related to an election. iii. Corporation must file a reason for its omission w/ the SEC. f. Even when proposals make in on proxy statement, rarely successful because board can recommend against and shareholders usually listen to board ii. Periodic Reporting- 13(a) 1. Reporting preiodiclly to SEC and available to public 2. Report each quarter and every 4th quarter sum up the whole year s business 3. Requires certified accountants 4. If something significant happens file an 8K to explain 5. Part of the Sunshine Principle, that companies more honest when required to operate out in open iii. Tender offer Regulation- 13 and 14 of Williams Act 1. ***Actually benefits company 2. Early detection system for hostile take over 3. If another company tries to begin hostile takeover by buying up stock when they get to 5% hostile takeover company must declare ownership and declare their purpose for buying up lots of stocka 4. Securities Exchange Act Rule 14(e)(3) [Also part of Williams Act] 1

a. Even if Class Theory doesn't work, then 14(e)(3) fills the gap b. 14(e)(3): Can't steal information in a tender offer c. Any person who has taken substantial steps to begin, or has begun, a tender offer has engaged in a fraudulent/deceptive act if he possesses material information relating to the tender offer if he knows that the information is nonpublic and has been acquired from the bidder, target, director, or other person acting for bidder. iv. officer/director/10% shareholder transactions 1. Officers, directors, and 10% or more shareholders must disclose how much stock they own a. Every time they buy more it must be disclosed b. Must be summarized and disclosed each year c. Includes an y other companies you own/control that have stock in company 2. Short term profit swing regulation a. If you buy then sell or sell then buy in 6 month period and receive profit you must disclose it and must disgorge any profits your receive b. Purpose is to prevent insider trading v. Sarbanes Oxley 1. All kinds of rules applying under Sarbanes Oxley. Duty of Care and the Business Judgment Rule 1. Pages a. 659-673, 674-687 2. Code a. RMBCA 8.30, 8.31 i. RMBCA 8.30 Standards of Conduct for Directors (not covered super well) ii. RMBCA 8.31 Standards of Liability for Directors (not covered super well) 3. 2 Classes of duties a. Duty of loyalty i. Duty of the heart. Make sure you are doing things for the benefit of the company not yourself. (covered in next section) ii. Defense: Subchapter F conflicts 860-8.63 b. Duty of Care 1. Duty of mind think about what you are doing and be careful ii. 2 Types of Duty of care (8.30(b)) 1. Potential liability for decisions made a. Tough standard under business judgment rule b. Van Gorkem 2. Liability for failure to monitor a. Caremark iii. Defense: Business Judgment Rule 4. Duty of Care- for decisions made a. Directors in the performance of their duties stand in a fiduciary relationship with the company. Directors need to be informed and take deliberate action that they in god faith believe is in the best interest of the company. (however, SEE Business Judgment Rule ) i. If directors breach they are liable out of their own pocket for damages 1

ii. Duty to act honestly and in good faith, and must exercise some degree of skill and prudence and diligence iii. Must not be judged in hindsight, but at time decision was made iv. Rarely successful, and only real success is if you attack the process and procedures used in making the decision. Smith v. Van Gorkem 1. Amount of delibareation varies based on factors a. Circumstances of case b. Size of decision c. Financial resources involved in decision d. Immediacy of problem presented b. Litwin v. Allen i. PREFACE: Probably didn t violate duty of care here, even though case held they did. Likely product of banks being held to stricter standards because investing other people s money and supposed to be cautious ii. CASE: Company needed to borrow money, but company had already maxed out its self imposed borrowing limit. Company agree s to sell bonds it owns along with their 5% interest to bank, but Company reserves right to buy back at orginal price any time in next 6 months. Disguised type of loan essentially. Problem was that court held it was a loose loose situation for bank because they couldn t sell stock for 6 months and if it appreciated in value company would buy back, but if decreased in value bank would be stuck with it. Court viewed this as negligent and violation of duty of care. (wrong decision, court using hindsight but no reasonable person could have expected 2nd stock crash) 5. Protection from violating Duty of care a. Business Judgment Rule i. Makes duty of breach case almost impossible to win because courts refuse to question decision of boards in business decisions as long as there is a rational basis for decision. Boards not responsible for error in judgement 1. Even if bad decision that s part of business and not breach of duty of care 2. Plaintiff must rebut presumption that directors act 1) on an informed basis, 2) in good faith, and 3) in an honest belief that their actions are for the good of the company. 3. 8.30(f)- Board is entitled to rely officers, employees, lawyers, accountant, experts, special committees when they merit confidence ii. Common example where BJR protects director 1. Shlensky v. Wrigley a. At the time Wrigley was the only field without lights and couldn t play night games. Wigley owned vast majority of company and prevented adding lights. Minority upset and sued as violation of duty of care. Accused Wrigley of refusing lights just because he only liked day games. If that were all the facts may have been problem, but Wrigley had a reasonable business justification. Thought lights would cause deterioration of neighborhood and nobody would come to games if in bad neighborhood.. Wrigley won. iii. Rare example where Duty of Car breached in spite of BJR 1. Smith v. Van Gorkem 1

a. Breach involved insufficient process and standards, was shock to the legal wold to see directors held liable in Deleware b. Some directors thought it was good idea to sell company for tax reasons. Had all-star caliber board. Van Gorkem was chairmen of board and had selfish interest because he wanted to retire and wanted to sell at higher price. Van Gorkem went out on own and found buyer. Stocks had been selling at 35$ per share and found buyer for $55. Problem was that van Gorkem had conflict of interest as well as Board relied entirely on Van Gorkem for all relevant facts. Board did not factual investigation on the value of the company. Didn t even have merger agreement in fornt of them. Didn t have any expert in the room to say $55 was fair price. Was a rush decision without much deliberation. b. Protection Directors by Articles of Incorporation i. Under 202(b) of MBCA may include the three I s protective provisions which protect for violation of duty of care, but not from duty of loyalty. ii. Provisions may include: 1. 202(b)(4)- Immunity= immunity provision eliminating or limiting liability for breach of duty of CARE. Doesn t limit breach if criminality or loyality 2. 202(b)(5)- Indemnification= corporation will indemnify any director held liable for duty of CARE 3. 202(b)(6)-Insurance=director liability insurance 6. Duty of care- failure to Monitor and Inaction a. Two ways to prove failure to monitor i. Show that red flags were raised to the board and the board in bad faith failed to effectively monitor and did nothing. ii. Failure to create monitoring system at all 1. (might be borderline breach of loyalty because board just doesn t even care enough to create system) b. Requirement for failure to monitor: (8.31(a)(2)(iv) is something you can cite) i. Requires board to exercice a good faith judgment that the corporation s information and reporting system is in concept and design adequate to assure the board will receive adequate info in a timely manner ii. 3 elements to show this was breached 1. Knowledge a. directors knew of violations OR b. directors should have known of violations 2. Directors took no step in good faith to remedy the violations 3. Such failure proximately resulted in the loss complained of 4. Failure to act in good faith (Stone v. ritter says this is an element of both duty of care and loyatly, and not its own duty) (MBCA 8.30(a)) iii. Test is really high standard to meet c. In Re Caremark Intern. Inc. Derivative Litigation i. Caremark was a medical service provider, who received a lof of money from federal medical programs ii. There are federal laws and referrals and payments relationg to federal medical programs 1

iii. Caremark had been advised they were within these rules, but they weren t and were hit hard with criminal violation. iv. Cost about 250 million to settle v. Now shareholders want to sue, to get that money back from directors vi. This derivative suit was dismissed for a nominal settlement with shareholders that involved no money, and just put some more procedures in place 1. Such weak settlement because shareholders didn t have a chance vii. Held not to violate duty of care because directors had monitoring programs in place and were seeking out information, but simply never were alerted of their agents who were giving kickbacks Shareholder Derivative Suits a. Code a. RMBCA 7.40-7.46 b. Types of directors viii. Inside directors 1. Also employed at the company in another position as well ix. Outside directors 1. Not employed by company x. Titular director 1. Title of director but that s all they do. 2. Vary bad idea, need to remedy this if you see it 3. Titular director can be held liable for the actions of other board members (Francis Case) c. Process of Derivative Actions xi. Harm to company 1. Sometimes directors or officer breach either duty of care or duty of loyalty and hurt the company significantly. Individual shareholders are not personally injured, but their ownership interest in company is diminished because drop in value. xii. Shareholder demand: 7.42 1. No shareholder may commence derivative action until a. Written demand for corporation to take action AND b. 90 days has passed or corporation declines to take action xiii. Decision to corporation to Pursue Derivative action 1. Since company is the one harmed it is the party with a right to sue. Tough decision because usually involves directors choosing whether to sue themselves. 2. Board must respond to demand letter, but usually chooses not to pursue lawsuit a. We let entire board make this decision and assume they will make a good faith decision, unless there is a high likelihood the suit will win and directors liable b. If best interest of company they may sue. Such blatantly criminal or immoral activity xiv. Shareholders pursue derivative action 1. If board chooses not to bring suit, then shareholders may bring it themselves if they meet standing requirements 1

a. Standing Requirements: 7.41 i. Was shareholder at time the act or omission complained of ii. Fairly and adequately represents the interest of corporation xv. Stay of Proceedings: 7.43 1. Derivative action proceedings are stayed if corporation commences inquiry into allegation of demand letter or complaint xvi. Corporation may dismiss Derivative action: 7.44 1. May dismiss if determination made by: a. Majority of qualified (disinterested directors) if that majority is quorum of meeting OR b. Majority vote of subcomitte (special litigation committee [SLC]) which is appointed board of directors regardless of quorum or by court. i. Common approach ii. Must be independent directors, usually outside directors iii. Will study litigation to see if in best interest of company to proceed. iv. If they make recommendation to dismiss, then the deriviative action is dismissed. xvii. If shareholder is knocked out of court by recommendations of the SLC, shareholder may argue there is a violation of duty in board s decision to dismiss. Problem this is a duty of care issue and shareholders will usually loose here on business judgment rule. Only time it makes sense for shareholder to challenge is when there is an alleged violation of duty of loyalty. 1. Courts consider whether: a. SLC was disinterested, assisted by counsel, prepared a written report, was independent, conducted an adequate investigation, decision made in good faith. 2. PRACTICALLY SPEAKING: this is where derivative suits are battled out a. In Re Caremark - example of a case battled at this stage of dirivitave action where SLC decision was found reasonable and independent b. In Re Oracle Corp. Devivative Action- example of where SLC was not found to be independent and SLC reccormendations to dismiss were not allowed by the court. i. SLC was made up of 2 outside directors employed by Stanford. The accused inside directors were all Substantial benefactors of Stanford university and company had proposed plan to massive millions of dollars contribution. Even though SLC members could not be harmed financially by inside directors there was significant social pressure because of Stanford connections xviii. Court must approve the discontinuance or settlement of the derivative action: 7.45 xix. Shareholder s legal fees: 7.46 1. Judge may award legal fees to shareholder if it finds the litigation was a substantial benefit to the company. 2. This is common. Even in Caremark where the claim was clearly going to fail judge still awarded fees. Duty of Loyalty and Conflict of Interest 1. Pages 1

a. 756-762, 767-777, 779-784, 799-807, 808-812 2. Code a. RMBCA 8.60-8.63 3. Definition of duty of Loyalty a. The duty of loyalty is defined as the corporate director s uncompromising responsibility to put corporate interests first. Requires director to refrain from doing anything that would harm the corporation and to use all resources available to maximize the corporations profit and advantage. 4. Self-Dealing i. EXAM TIP: Might need to mention Sinclair case if facts involve paying dividends to Shareholders. Still probably want to cleanse transaction. b. What is a conflicting Transaction? 8.60(1) i. Transaction effected or proposed to be effected by the corporation: 1. To which the director is a party OR 2. the director had knowledge and a material financial interest known to the director OR 3. The director knew that a related person was a party or had a material financial interest a. Related means 8.60(5) i. Directors spouse, 8.60(5)(i) ii. Director s children, step children, Grandchildren, parents, grandparents, sibling, step sibling, half sibling, aunt, uncle, neice, nephew (or spouse of any of these) 8.60(5)(ii) iii. Individual living in director s home8.60(5)(iii) iv. Other entity controlled by director8.60(5)(iv) v. A person or entity that is employed or controlled by the employer of the director 8.60(5)(iv) c. Old Law i. Historically speaking self dealing was strictly prohibited. Too much risk for undue influence so automatically void. d. New Law i. Conflict of interest because someone on same side of the transaction ii. If no one challenges it is presumably ok iii. Three possible solutions: (laid out in 8.61) 1. Recuse the interested party, and do by vote of disinterested board (8.62: director Action) 2. Put the decision to the vote of the shareholders (8.63: Shareholder action) 3. Test the intrinsic fairness of the deal to the company (8.61 and Marciano v. Nakash) e. Three Possible Solution In Depth 1. Only one is required to cleanse the conflicted transaaction ii. Director s Action: 8.62 1. Cannot challegen conflicted transaction if it is approved by a majority of the non-conflicted directors 2. Conflicted director can be in the room, can discuss, and can vote as long as his vote is not the deciding vote iii. Shareholder s Action: 8.63 1

1. Disinterested shareholders vote on the action iv. Intrinsic Fairness: 8.61 1. Fair to corporation 2. 2 basic elements a. Business reason to enter transaction b. Terms of transaction were reasonable and fair to the company f. Waste of Corporate Assets i. Waste Test 1. an exchange that is so one sided that no business person of ordinary, sound judgment could conclude that the corporation has received adequate consideration. Brehm ii. Brehm v. Eisner 1. Eisner was chair and CEO that recruited one of his friends Ovitz to be a president at Disney. Ovitz was a big time Hollywood agent who was supposed to expand the entertainment division. Ovitz was given an insane contract that guaranteed som much money he was better off to get leave work than finish his 5 year contract as long as he didn t quit or wasn t fired for cause. Board had an expert on executive compensation in the room that approved the deal. Expert botched it. Was Ovitz started work everyone shot down his ideas and he did nothing for a year before Eisner agreed to deal firing without cause. Shareholders sued board that approved contract and board that didn t fire for cause for breach of duty of care. First board protected by BJR because expert in room and allowed to rely on him. Second board was also protected by BJR. Second board was also sued for breach of duty of loyalty because of waste. Found that that co. got something in return, getting rid of Ovitz and no lawsuit from Ovitz. Board won. iii. Intentional dereliction of Duty-conscious disregard for one s responsibilities Brehm II 1. deliberate indifference and inaction in the face of a duty to act 2. There are two categories for bad faith, one of which must be met before board will be liable for waste or Intentional Dereliction of duty a. Subjective bad faith-motivated by actual intent to do harm b. Lack of due care-fiduciary action taken solely by reason of gross negligence g. Parent-Subsidiary-Self-dealing occurs when a parent is on both sides of the transaction with its subsidiary AND causes the subsidiary to act in such a way that the parent receives something from the subsidiary to the exclusion of or to the detriment to the minority stockholders. Sinclair Oil i. Parent forced subisidiary to pay out massive dividends. Not breach of loyalty because minority shareholders got dividends to. Was breach of loyalty when allowed another Sinclair company to breach contracts with Sinven. h. Corporate Opportunity Doctrine i. Doctrine prevents a fiduciary of a company from taking an opportunity away from the company which they have a fiduciary duty to look out for. Must let the Principal have the business opportunity or at least the right to reject. 1. Similar doctrine applies to partnerships. That s what was going on in Meinhard v. Sammons when the court laid down the strict rule of fiduciary duty. ii. Several Tests for the Corporate Opportunity Doctrine (NOT MERCER LAW) 1

1. Line of Business Test a. Intensely factual test b. If corporation is financially able to undertake and is one which the corporation has an interest or reasonable expectancy, and by embracing the opportunity the self-interest of the officer is brought into conflict with the corporation, the law will not permit him to seize the opportunity for himself. 2. Fairness Test a. Rests on the unfairness in the particular circumstances of a director taking advantage of an opportunity when the interests of the corporation justly call for protection. b. Application of ethical standards of what is fair and Equitable in a particular set of facts. 3. Minnesota Combined Test-Two step analysis a. Determine whether a particular opportunity was within the corporation s line of business. b. Scrutinize the equitable considerations existing prior to and at the time of the officer s acquisition. iii. Mercer Law Test: ALI Approach-5.05-Principles of Corp. Governance 1. ALI 505(a): Director may not take advantage of corporate opportunity unless: a. Director first offers opportunity to corporation, disclosing conflicts of interests;AND b. Corporate opportunity is rejected by the corporation AND c. Either of the 8.61 requirements for cleansing corporate transaction i. the rejection of the opportunity is fair to the corporation;OR ii. The opportunity is rejected in advance by majority of disinterested directors (or in a manner that satisfies the standards of the business judgment rule) OR iii. rejection is authorized in advance by disinterested shareholders and the rejection is not equivalent to a waste of corporate assets 2. ALI 505(b): Corporate Opportunity defined a. Any opportunity to engage in business activity of which director becomes aware of either: i. in connection w/ performance of functions as director or under circumstances that reasonably lead director to believe the person offering the opportunity expects it to be offered to the corporation OR ii. Through use of corporate info or property if reasonably expected the oppurtunity would be in the interest of the corporation OR iii. any opportunity to engage in a business activity of which a senior executive becomes aware and knows is closely related to a business in which the corporation is engaged or expects to engage. iv. If usurpation of corporate opportunity is found then profits will be held in constructive trust for the corporation. 1

v. Northeast Harbor Golf Club Inc. v. Harris 1. Course had policy of no development near course but was going through financially difficult time. Realtor contacted president of club wanting to sell property near the club and she bought it personaly. She disclosed it and no one objected. This happened several times. She finally started preparting to build her own housing development and was sued for usurpation of corporate opp. President lost because she was approached because she was the president and is therefore clearly a corporate opportunity and she also failed to comply with the process of 505(a).. 5. Duties to Corporate Constituencies Other Than Common Shareholders a. Preferred Shareholders i. Scope of duty is appropriately defined by reference to the specific words of K ii. However, Cts have recognized duties running to preferred shareholders on questions such as whether the proceeds of a merger were being fairly divided between preferred and common shareholders b. Holders of convertible securities i. Have the right to convert those securities into another type of security ii. Cts. refuse to recognize existence of fiduciary duties b/c until the security is converted into stock, owner of convertible security has no equitable interest and remains a creditor of the corporation. Interests are already protected by the contractual terms. iii. Corporation has duty to provide accurate information about options when they are offered c. Creditors i. Directors owe no duty to creditors ii. Rights of creditors defined by K terms iii. Noncontractual doctrines (fraud, deceit, etc.) apply. iv. When corporation is insolvent but not in bankruptcy, primary duty shifts from shareholders to creditors to preserve value of corporate assets 1. Duty shifts once corporation enters the vicinity of insolvency Securities Fraud & Development of a Federal Remedy 1. Pages a. 813-841 2. Actual wording of Rule 10b-5 makes it unlawful to: a. Employ any device, scheme, or artifice to defraud b. To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statement OR c. To engage in any act that would operate as a fraud or deceit upon any person, in connection with the purchase or sale of any security. 3. ***10(b)-5 applies to ALL companies*** a. This is crucial to remember, 4. Exam Hint: Look to Tipper and Tippee Liability potentially 5. History prompting creation of 10B-5 a. Hotchkins v. Fisher i. At the time there was no rule about lying and misrepreresentation for buying stock, only rules regulated selling stock. Company president lied and said company was not doing well and said there would be no dividend. Agreed to buy others stock, and then 1

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the company actually did awesome and paid big dividends. 10b5 created to solve this tiny issue and then grew into something massive. 10B-5 is a massive rule that can be used to address MANY different things a. Insider trading (most famous use) b. tipping (giving inside info to outside parties c. Corporate disclosure problems d. Corporate Mismanagement (early cases said violation of duty of care or loyalty was a 10 b-5 violation, but new cases have rejected this) e. Broker/Dealer duties when providing info to clients f. Manipulation of securities markets (intentionally putting false info into market to change prices) g. Simple fraud in securities (includes implied private right of action) Advantages a. Nationwide service of process b. Generous discovery rules c. Liberal venue provisions d. can be the basis of a private suit to rescind a securities transaction. e. Language of the rule is broad, flexible, and not hedged w/ qualifications or limiting doctrines f. Does not matter if there is overlap between 10(b) & 14 violation. g. Can hold both 10b-5 claim and state claim in one proceeding-pendent jurisdiction History limiting 10b-5 a. Rule got so massive that threatened to take over all of business law and the supreme court decided to prune its power in several key cases when the composition of the court changed. i. Blue chips v. Manor drug Stores 1. Adopted Birnbaum doctrine- to have standing for 10B-5 you must be a purchaser or seller. ii. Ernst & Ernst v. Hochfelder 1. Nay was president and was committing a ponzi scheme. Had Rule no one else could open his mail. Ernst & Ernst was accountant and was the only solvent one left after company collapse, so they were sued for 10b-5 violation. Claimed they were liable for not finding this mail rule in their audit. Court found them negligent, BUT since 10B-5 speaks in terms of fraud and manipulation it is implied that D have SCIENTER. Ernst and Ernst did not have scienter here. Rule 10b-5 Requirements a. 1) Fraud or deceit, 2) Practiced upon any person, 3) occurring in connection with 4) the purchase or sale 5) of any security b. 1) Fraud or deceit i. SCIENTER is a required element. Ernst & Ernst v. Hoschfelder. 1. Actions resulting from mere negligence or unfairness are not actionable 2. Action must be deceptive or manipulative. Santa Fe a. Manipulative-practices that are intended to mislead investors by artificially affecting the market 3. activities must be viewed in context to determine whether they are merely ordinary and legitimate acts or contrivances and deceptive devices used to fraud. Enron 1

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13. 14.

4. Allegations must demonstrate that they knowingly or w/ reckless disregard stepped outside the boundary of legitimate and professionally acceptable activities in performing material acts to defraud public. ii. Requires a DUTY, to be fraud or deceit. Chiarella iii. Compare Misappropriation theory v. Classic theory c. 2) Practiced upon any person i. Usually talking about s/h, but can apply to corporations as well. ii. See. Blue Chip Stamps d. 3) occurring in connection with i. Must be fairly direct in connection with and not attenuated. e. 4) the purchase or sale i. Exchange for value. ii. Only people who have standing are those who actually purchased or sold securities. Birchbaum Rule from Blue Chip Stamps 1. Doesn t apply to those that almost bought securities but didn t because of misrepresentation f. 5) of any security i. Not limited to 12 securities. Implied cause of Action a. Judicially Created by Kardon v. slavin., but People had assumed cause of action was there for past 30 years Statute of Limitations a. Historically, since no SoL in statute then would look to state law, so resulted in lots of forum shopping b. First modified so Suits must be brought w/in 1 year after the discovery of facts constituting the action and w/in 3 years after such cause of action occurred. Lampf, Pleva, Lipkind v. Gilbertson c. SOX Extended SOL for private securities fraud claims to earlier of 2 years after discovery of facts constituting violation or 5 years after violation. SOX 804(a) Aiding and Abetting a. Held that 10B-5 held that claims based on aiding and abetting were not authorized under that rule.. Central Bank of Denver, NA v. First Interstate Bank of Denver, NA. i. Aiding and abetting= knew ahead of time or after the fact that some time of wrong was done, and provided assistance. Right of contribution a. Held that implied right among s, relative to their responsibility 1934 Act 21D(g). In re Enron corporate securities Dervitive a. Probably the most massive corporate fraud in history. Company was cooking the books. Corporation and its officers were clearly liable for fraudulent transactions and misleading investors. Big issue is whether other people involved in the process such as lawyers, accountants, and banks could be held liable for their compliance. Issue is whether these people were potentially liable under 10b-5 since aiding and abetting is no longer covered. All three groups were considered potentially liable as PRIMARY ACTORS, and therefore could be liable if jury decided. i. Law Firm- elkins ii. Accounting firm Aurthur Anderson iii. Banks 1

1. Assisted in ponzi scheme, because made large loans to generate the necessary money. b. Lawyers have a duty to 3rd parties not in privity not to knowingly or with severe recklessness issue materially misleading statements on which they intend or have reason to expect that those third parties will rely. Enron c. Independent Accountants & Auditors-By certifying reports, the independent auditor assumes a public responsibility transcending any employment relationship w/ the client. Enron i. The ultimate duty owed is to the corporation s creditors and stockholders as a public watchdog. d. A pattern of transactions that are not isolated and are part of a common scheme through which all parties profit may give rise to liability. Enron 15. Disclosure Material Liability a. Key Phrases included just for control F searching. Disclosure lawyer attorney accountant fraud b. Rule: under 10b-5 and Enron case people involved in the disclosure process such as lawyers, accountants, and banks can be held liable as primary actors. i. More info For attorney liability: see book page 351, note 2. Could also argue 14(a)-9 of the 1934 act which prohibits false or deceptive statements. 16. Outside Counsel s Duty upon discovering Fraud a. Up the Ladder Rule i. Report it to appropriate in-house counsel, and if they refuse to act continue to go up the ladder until you reach the Board of directors b. If Directors refuse to act then you should resign i. Sarbanes Oxley does NOT require you to notify SEC. This might even be a violation of the model rule of professional conduct. So Don t Do this, just RESIGN. Insider Trading 1. Pages a. 841-854, 857-864, 2. ***Must meet the rule 10b5 Requirements above*** a. Fraud or Deciet (scienter) (Ernst and Ernst) b. Upon any person (Blue chip stamps) c. In connection with d. Purchase or sale (Birnbaum doctrine) e. Of any security (not limited to 12) 3. Most common type of rule 10B-5 violation 4. Insider a. A special obligation has been required of corporate insiders (officers, directors, 10% s/h) 5. What holder of inside info must do? a. Disclose information with adequate time for it to reach the public OR b. abstain from buying or selling 6. Theories of Insider Trading a. Equal Access doctrine- (no longer good law, modified by chiarella) i. Law 1. Existence of a relationship giving access, directly or indirectly, to information intended to be available only for a corporate purpose AND 2. The inherent unfairness involved where a party takes advantage of such information knowing it is unavailable to those with whom he is dealing 1

ii. Texas Gulf Sulfur1. Some lower executives and engineers discovered mother-load of mineral deposits. Company wanted to keep discovery a secret until they could buy up all the land around the find. Defendants started buying stock in the company and calls (right to buy stock later at now price). Company also lied to public to down play significance of find. 2. Defendants were held liable 3. Held that the purpose was to make markets fair and create equal access. Anyone with unequal access is a cheater is liable for insider trading (Held wrong later because didn t required a duty) b. Classic Theory (GOOD LAW, modifies equal access doctrine by requiring duty) i. Law 1. Existence of a relationship giving access, directly or indirectly, to information intended to be available only for a corporate purpose AND 2. The inherent unfairness involved where a party takes advantage of such information knowing it is unavailable to those with whom he is dealing a. PLUS 3. Fiduciary DUTY to party buying or selling stocks from ii. Chiarella v. US SCOTUS 1. Tender offer situation. Bidding company wanted to acquire a target company hostilly. Bidding Company was getting ready to go to share holders and make tender offer to buy stock. Required to meet publicity steps under 12. Bidding company wants this to be very hush hush till the last minute 2. Have printing company print hard copy of document, but keep out identifiying infor until last minute. Chiarella figured out and bought stock in target company and made good profit when tender offer was made. 3. KEY a. Even though Chiarella would have lost under Equal Access Doctrine, court held that he did not violate 10B-5 because court said there is only a duty to disclose info if you have a relationship to that party creating afiduciary duty. b. Chiarella had duty to printer bidding company bidding company shareholders c. Chiarella did NOT have a duty to target company or their shareholders 4. Misapropriation theory was raised, but to late so not addressed c. Misappropriation Theory (GOOD LAW) i. Law 1. Existence of a relationship giving access, directly or indirectly, to information intended to be available only for a corporate purpose AND 2. The inherent unfairness involved where a party takes advantage of such information knowing it is unavailable to those with whom he is dealing a. PLUS 3. Even though no duty to party buying or selling to, there is a duty to party which Defendant misappropriated the information from and that is in connection with purchase of sale of security. ii. U.S. v. O Hagan 1

1. Was an attorney and used inside info from client who was bidding company and bought stock in target company. IDENTICAL FACTS TO CHIARELLA. This time Misappropriation theory was raised in time. 2. Even though no Fiduciary duty to target, there was a fiduciary duty to the firm and its client the bidder. Fraud and deceit of aginst own company is sufficiently connected to purchase or sale to meet requirements of 10(b)-5. iii. What is misappropriation? 1. Accidentally overhearing a. No. Barry Switzer Case 2. Purposely Evesdropping a. Yes. Class hypo 3. Breaking into office and taking info a. Definitely yes. Class hypo iv. For misappropriation theory to apply must be sufficient connection between fraud and sale. 1. If sale is completed then fraud then not enough 7. defense of Materiality a. When people act on inside information that is NOT material, there is no insider trading violation i. Ex. Rumor that CEO cheated on his wife. b. Materiality=info that a reasonable investor would want to know when buying or selling stock c. Two aspects i. Magnitude (this will be the largest mineral deposit in history) ii. Certainty (this is only a guess) d. A lot of either magnitude or certainty will make something material i. If largest mineral deposit in history is material, even if there is very little certainty. ii. Even if smaller deposit, but was absolutely certain it was there that is material too iii. Not material requires low amounts of both 8. Tippee/Tipper Liability a. Law i. Tippee will be liable only if tipper received an improper benefit from disclosure. Dirks 1. SEC appears to have little problem finding a benefit between tipper and tippee to avoid Dirks wrinkle. ii. Tippee is liable if he knew or should have known that the provision of information to him was a violation of duty by the tipper. 1. TEST: If tipper paid for the info directly or indirectly then this indicates knowledge of breach of duty. a. Includes quid pro quo, sharing profits, giving money to family member you support, or other financial arrangement b. Dirks v. SEC SCOTUS i. Equity funding was large successful company in LA that sold insurance. Former VP Seacrest called dirks to tell him it was all a scam and encourage him to come investigate. Dirks did, and confirmed they were fraudulently making up policies. Dirks called CA insurance commissioner, SEC, and Wall street but no one believed him. Using this info that was unkown to public, He later told his clients to sell because it was a scam. SEC prosecuted him and said was a tipee. Held liable c. Exam Tip: Tipper/Tippee liability 1

i. Corporation A board voted to attempt to tender offer hostile takeover of company B. Prior to the announcement a director told his nephew Trigger about it? 1. Correct Answer. a. There would be a Rule 10B5 violation If b. Tippee bought stock in EITHER company AND c. If directors expected some sort of payment or quid pro quo for the information 2. Proper Citation would be to Dirk v. Scotus 9. Securities Authority a. Blue Chip Stamps v. Manor Drug Stores-SCOTUS-1975. Limits those who can sue to the actual purchasers and sellers of securities. If you didn t act, no standing. b. Ernst & Ernst v. Hochfelder-Rule applies only to activities that involve scienter. c. Santa Fe Indus. v. Green-Conduct must be manipulative or deceptive in order to sustain action. d. Lampf, Pleva, Lipkind v. Gilbertson-Suits must be brought w/in 1 year after discovery of facts constituting cause of action and w/in 3 years after such cause of action accrued. e. In re Enron-TX 2002. s have a duty to 3rd parties not in privity to not issue materially misleading statements. A pattern of transactions that are not isolated and are part of a common scheme through which all parties profit may give rise to liability. f. Cady, Roberts, & Co.-SEC 1961. Corporate insiders have a special obligation to company & public. g. SEC v. TX Gulf Sulphur Co. 2d Cir. 1968. Certain individuals found out about drilling that would yield great profit to co. Insiders include anyone possessing material inside information. Insiders have a duty to report information or abstain from trading. h. Chiarella v. US SCOTUS 1980. A duty to disclose does not arise from mere possession of nonpublic information. i. US v. O Hagan SCOTUS 1997-A person commits fraud when he misappropriates confidential information for securities trading purposes. j. Dirks v. SEC SCOTUS 1983. received nonmaterial public information from insiders with which he had no connection. Tipee assumes fiduciary duty only when the insider has breached his fiduciary duty by disclosing the information to the tippee and the tippee knows there has been a breach. k. Securities Exchange Act of 1934 10(b) It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce or of the mails, or of any facility of any national securities exchange i. To use or employ, in connection with the purchase or sale of any security registered on a national securities exchange or any security not so registered, or any securitiesbased swap agreement (as defined in section 206B of the Gramm-Leach-Bliley Act), any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the Commission may prescribe as necessary or appropriate in the public interest or for the protection of investors. l. Rule 10b-5: Employment of Manipulative and Deceptive Devices 17C.F.R. 240.10b-5 It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce, or of the mails or of any facility of any national securities exchange, i. To employ any device, scheme, or artifice to defraud, 1

ii. To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or iii. To engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person, in connection with the purchase or sale of any security.

1
10b-5 requirements................................................................ 94 10b-5 uses.............................................................................. 94

A
Actual Authority ................................................................. 2, 13 Actual Authority- Manifesting termination ................................ 3 actual authority- revoking....................................................... 13 Actual Authority-Scope ............................................................. 2 Adjusted Basis ........................................................................ 34 Agency- Estoppel to deny existence .......................................... 3 Agency Law .............................................................................. 1 Agency- Manifestation of intent................................................ 1

Agency- Partners as Agents of Partnership .............................. 12 Agency-authority...................................................................... 2 Agency-Elements...................................................................... 1 Agency-Identifying Agents in BA ............................................... 1 amount realized ..................................................................... 34 Apparent Authority ............................................................ 3, 14 Apparent Authority- Termination.............................................. 3 Authority in Agency .................................................................. 2 Authority problems- Contract Approach.................................. 14 Authority Problems- tort Approach ......................................... 15 Authorized Shares .................................................................. 45 Average Tax Rate ................................................................... 33

B
Balance Sheet......................................................................... 18

Balance Sheet- Depreciation ................................................... 19 Balance Sheet- Effects of change............................................. 19 Balance Sheet Example ........................................................... 19 Balance Sheet- sale of asset withou immediate payment......... 19 Bankruptcy or Balance Sheet Test ........................................... 68 Basis ...................................................................................... 34 Beneficial Owner ................................................................... 72 Board of Directors .................................................................. 69 Board vacancies ..................................................................... 76 Bonds..................................................................................... 56 Book value ............................................................................. 71 Business Judgment Rule.......................................................... 86 Business Valuation ................................................................. 20 Bylaws.................................................................................... 44

C
Capital Account ...................................................................... 11 Capital Accounts..................................................................... 20 Check the Box ........................................................................ 33 Classic theory ......................................................................... 97 Classified Shares..................................................................... 76 Closely Held Co.- definition ..................................................... 42 Common Stock ....................................................................... 59 Corporate Opportunity Doctrine ............................................. 92 Corporate taxation ................................................................. 31 Corporate Taxation................................................................. 34 corporation- 12- 5 restrictions .............................................. 83 Corporation- 12 public corp. ................................................. 82 corporation- 14(a) proxy regultion ........................................ 83 Corporation- 10b-5 requirements ........................................... 94 Corporation- 10b-5 uses ......................................................... 94 Corporation- 1933 Act ............................................................ 60 Corporation- 1934 Act ............................................................ 60 Corporation- 3 I's Protetion .................................................... 44 Corporation- Action by Directors and Officers ......................... 78 Corporation- actions req. S/H approval ................................... 69 Corporation- Agency............................................................... 78 Corporation- Agnecy- Resp. Superior ........................................ 2 Corporation- annual meeting .................................................. 73 Corporation- Articles of Incorporation elements...................... 43 Corporation- Articles of Incorporation filing ............................ 43 Corporation- Attorney discovers fraud .................................... 96 corporation- authority of officers ............................................ 79 Corporation- Authorized Shares .............................................. 45 Corporation- Beneficial Owner ............................................... 72 Corporation- Board meeting req. ?.......................................... 78 Corporation- Board of directors .............................................. 69 Corporation- Board vacancies ................................................. 76 Corporation- Boards- types ..................................................... 72 Corporation- Bonds ................................................................ 56 Corporation- Book value ......................................................... 71 Corporation- Business Judgment Rule ..................................... 86 Corporation by estoppel ......................................................... 48 Corporation- Bylaws ............................................................... 44 Corporation- classic Characteristics ......................................... 41 Corporation- classified board .................................................. 72 Corporation- Classified Shares ................................................ 76 Corporation- common Stock ................................................... 59 Corporation- conflicting transaction........................................ 90 Corporation- Corp. by estoppel ............................................... 48 Corporation- Corporate finance .............................................. 54

Corporation- deadlock ............................................................ 76 Corporation- deadlock remedies ............................................. 77 Corporation- debentures ........................................................ 56 Corporation- Debt Capital ....................................................... 56 Corporation- Debt Financing ................................................... 56 Corporation- Deep rock Principle ............................................ 53 Corporation- Defacto Corporation .......................................... 48 Corporation- Defective Corporation ........................................ 48 Corporation- definition of closely held .................................... 42 Corporation- Dejure corporation............................................. 48 Corporation- derivative suits................................................... 88 Corporation- Disclosure Material Liability................................ 96 Corporation- Disregard of the Corporate Entity ....................... 50 Corporation- dissolution and subsequent liability .................... 54 Corporation- distribution by re-purchase of shares.................. 66 Corporation- Distribution elements......................................... 66 Corporation- Distribution forms .............................................. 66 Corporation- Distribution- How much to give? ........................ 67 Corporation- distribution maximum ........................................ 68 Corporation- distribution Minimum ........................................ 67 Corporation- Distribution unlawful ......................................... 68 Corporation- Distributions ...................................................... 65 Corporation- duty of shareholder........................................... 80 Corporation- duty of care ....................................................... 85 corporation- duty of care- decisions made .............................. 86 Corporation- Duty of care- failure to monitor .......................... 87 Corporation- duty of loyalty .................................................... 90 Corporation- Enterprise entity Theory..................................... 52 Corporation- Equity Capital..................................................... 55 Corporation- Equity financing ................................................. 55 Corporation- failures .............................................................. 82 Corporation- financing............................................................ 54 Corporation- formation .......................................................... 42 Corporation- Formation- 3 essential docs................................ 41 Corporation- Formation- Georgia Req. .................................... 44 Corporation- Formation Overview .......................................... 41 Corporation- Fraud discovered ............................................... 96 Corporation- Freeze-Out......................................................... 68 Corporation- General Shareholder non-liability ....................... 50 Corporation- Georgia Notice Requirement .............................. 44 Corporation- Going Public considerations................................ 61 Corporation- Going Public requirements ................................. 61 Corporation- How to get assests in corp.? ............................... 55 Corporation- INadedquate Capitalization ................................ 50 Corporation- Insider Trading ................................................... 96 corporation- Insider trading- theories ..................................... 96 Corporation- Lawyer discovers fraud....................................... 96 corporation- leverage ............................................................. 56 Corporation- Liability of Promoters ......................................... 47 Corporation- Loan .................................................................. 56 Corporation- Management ..................................................... 69 Corporation- meeting ............................................................. 73 Corporation- Merger .............................................................. 53 Corporation- Name................................................................. 42 Corporation- Oppurtuntiy ....................................................... 92 Corporation- Overview ........................................................... 40 Corporation- Par value shares ................................................. 58 Corporation- Peircing the Corporate Veil ................................. 50 Corporation- Piercing by statute ............................................. 52 Corporation- Piercing- Enterprise entity Theory....................... 52 Corporation- Piercing factors .................................................. 50 Corporation- Piercing in reverse.............................................. 53

Corporation- piercing- parent/subsidiary................................. 51 Corporation- Preemptive Rights .............................................. 64 Corporation- Preferred Shares .......................................... 56, 59 Corporation- Premature Commencement of business ............. 46 Corporation- Process of Incorporation .................................... 42 Corporation- Promoter defenses............................................. 48 Corporation- Promoters.......................................................... 46 Corporation- Promoter's liability ............................................. 47 Corporation- Proxy ................................................................. 73 Corporation- Proxy Fight......................................................... 73 Corporation- Proxy regulation................................................. 82 corporation- proxy regulation 14(a) ...................................... 83 Corporation- Public companies ............................................... 81 corporation- public company- definition ................................. 82 Corporation- Public company- who monitors?......................... 81 Corporation- Purpose Statement ............................................ 44 Corporation- Quorum ............................................................. 80 Corporation- Record Date ....................................................... 72 corporation- Record Owner .................................................... 72 Corporation- re-purchase offer must be for all ........................ 66 Corporation- Reverse Piercing................................................. 53 Corporation- Right to Vote...................................................... 72 Corporation- Rule 10b-5 ......................................................... 93 Corporation- Scandals ............................................................ 82 Corporation- Security definition .............................................. 61 Corporation- Self dealing ........................................................ 90 Corporation- Shareholder agreement................................ 45, 70 Corporation- Shareholder derivative suit................................. 88 Corporation- shareholder duty................................................ 80 Corporation- Shareholder limited power ................................. 69 corporation- Shareholder Proposals ........................................ 84 Corporation- Shares................................................................ 45 Corporation- Shares certificates .............................................. 58 Corporation- Shares consideration .......................................... 46 Corporation- Shares- issuing new type .................................... 46 Corporation- Shares- Paying for .............................................. 46 Corporation- Shares- Required characteristics ......................... 45 Corporation- shares- types...................................................... 59 Corporation- Signature by promoter ....................................... 49 Corporation- SLC .................................................................... 89 Corporation- SOX Anayis......................................................... 82 Corporation- Special litgation committee ................................ 89 Corporation- staggered board................................................. 72 Corporation- Subchapter S...................................................... 32 Corporation- Subscription Agreement ..................................... 46 Corporation- Successor Liability .............................................. 53 Corporation Taxation- Subchapter C ....................................... 31 Corporation- Taxation- Subchapter S....................................... 32 Corporation- Tender offer....................................................... 85 Corporation- Ultra vires .......................................................... 44 Corporation- Voting Agreements ............................................ 75 Corporation- voting- cummulative formula ............................. 74 corporation- voting- cumulative.............................................. 74 Corporation- voting process.................................................... 73 Corporation- voting- Record Date ........................................... 72 Corporation- Voting- right to vote ........................................... 72 Corporation- voting- Sharholder record................................... 72 Corporation- voting- straight .................................................. 74 Corporation- Voting trust........................................................ 75 Corporation- Waste ................................................................ 91 Corporation- Watered Stock ................................................... 58 Corporation- When effective?................................................. 44

Corporation- Where to Incorporate ........................................ 42 Corporation- Which law to apply? ........................................... 40 Cummulative voting formulat ................................................. 74 cumulative voting ................................................................... 74

D
deadlock remedies ................................................................. 77 Deadlocks............................................................................... 76 Debentures ............................................................................ 56 Defacto Corporation ............................................................... 48 Defective Corporation ............................................................ 48 Dejure corporation ................................................................. 48 Delaware................................................................................ 42 derivative suits ....................................................................... 88 Disregard of the Corporate Entity ........................................... 50 Dissolution Definition ............................................................ 21 Dissolution- order of distribution ............................................ 24 Distribution by a Closely Held Corporation .............................. 66 distribution by re-purchase of shares ...................................... 66 Distribution forms .................................................................. 66 Distribution- How Much to give?............................................. 67 distribution maximum ............................................................ 68 distribution Minimum............................................................. 67 Distributions........................................................................... 65 Duties to Corporate Constituencies Other Than Common Shareholders ..................................................................... 93 Duty of Care and the Business Judgment Rule........................ 85 Duty of Loyalty and Conflict of Interest .................................. 90 Duty of Partners to Render Information................................. 16

E
Enron ..................................................................................... 95 Enterprise entity Theory ......................................................... 52 Equal Access doctrine ............................................................. 96 Equity Insolvency.................................................................... 68

F
Federal Income Taxation......................................................... 34 Fictitious Business Statement ................................................ 11 Fiduciary duty- Who has them overview ................................... 2 Forming a Corporation Overview ............................................ 41 Freeze-Out ............................................................................. 68

G
General Partnerhsip ................................................................. 5 General Partnership Liability ..................................................... 7 General Standards of Partner s Conduct.................................. 16 GP 5 GP- Formation .......................................................................... 5 GP- Liability .............................................................................. 7 GP- Liability and Suing partnership............................................ 8 GP- Management ................................................................... 12 GP- Partnership agreement....................................................... 8 GP- Rights and Duties ............................................................. 10 GP- Sharing of Profits & Losses.................................................. 9 GP- Suing partnership ............................................................... 8

I
Inadedquate Capitalization ..................................................... 50 Inadvertent Partnerships ....................................................... 27 Income Statement .................................................................. 20 Income Statement- effects of change...................................... 20 Income Statement Example .................................................... 20 Insider Trading ....................................................................... 96 Insider trading- theories ......................................................... 96 International Affairs Rule ........................................................ 40 investment contract ............................................................... 61 Investment K .......................................................................... 61

K
Kitner rules............................................................................. 32

LP- Ability to withdraw ........................................................... 30 LP- common Problems ............................................................ 29 LP- Corporations as general Partner ........................................ 30 LP- duration of Partnership ..................................................... 30 LP- Family limited Partnership................................................. 31 LP- Federal Income Taxation ................................................... 31 LP- general ............................................................................. 29 LP- Leveraged Buyout Firms .................................................... 31 LP- Limited partner's liability for partnership debts ................. 29 LP- Management .................................................................... 12 LP- Most common uses........................................................... 31 LP- Partnership agreement ....................................................... 8 LP- Rights and Duties .............................................................. 10 LP- Sharing of Profits & Losses .................................................. 9 LP- Solutions to common problems......................................... 29 LP- Venture Capital Firms........................................................ 31

L
Leverage ................................................................................ 56 Liability of Persons Continuing the Business in Certain Cases ... 25 Limited Liability Companies .................................................... 35 Limited Partnership ................................................................ 29 LLC- 2 essential documents ..................................................... 36 LLC- Addition of New Members............................................... 36 LLC- Agency of Members ........................................................ 37 LLC- Authority of members ..................................................... 37 LLC- Characteristics................................................................. 35 LLC- Contribution of assets ..................................................... 36 LLC- Decisions requiring unanimous consent ........................... 38 LLC- Dissolution ...................................................................... 38 LLC- Distribution Limits ........................................................... 38 LLC- Duty of Care .................................................................... 37 LLC- Duty of loyalty................................................................. 37 LLC- Fiduciary Duties............................................................... 37 LLC- Formation ....................................................................... 36 LLC- generally ......................................................................... 35 LLC- Good faith....................................................................... 37 LLC- Lawyer in court ............................................................... 36 LLC- Liability of members ........................................................ 37 LLC- LLC v. S Corp.................................................................... 36 LLC- Management Options...................................................... 37 LLC- Manager Managed .......................................................... 38 LLC- Member Managed .......................................................... 37 LLC- Member right to infor...................................................... 38 LLC- Name .............................................................................. 36 LLC- Operating Agreement ...................................................... 37 LLC- Sharing of and Right to Distribution ................................. 38 LLC- Taxation.......................................................................... 32 LLLP- Management ................................................................. 12 LLLP- Partnership Agreement .................................................... 8 LLLP- Rights and Duties ........................................................... 10 LLLP- Sharing of Profits & Losses ............................................... 9 LLP ......................................................................................... 11 LLP- Becoming an LLP ............................................................. 12 LLP- Formation ....................................................................... 11 LLP- Liability ........................................................................... 12 LLP- Management .................................................................. 12 LLP- Partnership Agreement ..................................................... 8 LLP- Rights and Duties ............................................................ 10 LLP- Sharing of Profits & Losses................................................. 9 LLP- statement of Qualification ............................................... 12

M
Management and Control of the XE "CorporationManagement" Corporation ................................................ 69 Marginal Tax Rates................................................................. 33 Materiality ............................................................................. 98 Meinhard v. Salmon ............................................................... 15 Misappropriation Theory ........................................................ 97

N
Nabisco v. Stroud ................................................................... 14 Non compete agreement ........................................................ 25

O
Officers .................................................................................. 69 Oppurtuntiy ........................................................................... 92 Overview of BA......................................................................... 3

P
Par value ................................................................................ 58 Partner Account ..................................................................... 11 partnership .............................................................................. 5 Partnership Accounting.......................................................... 18 Partnership- Actual Authority ................................................. 13 Partnership- adding new partner .............................................. 6 Partnership- Agency of Partners.............................................. 12 Partnership- Agnecy- Resp. Superior ......................................... 2 Partnership Agreement ............................................................ 8 Partnership Agreement- advantages of having .......................... 8 Partnership Agreement- Disadvantages of not having................ 9 Partnership Agreement- Written Contnets............................... 8 Partnership- Apparent Authority............................................. 14 Partnership at will .................................................................. 22 Partnership Bound by Partner s Breach of Trust....................... 7 Partnership Bound by Partner s Wrongful Act.......................... 7 Partnership- calling someone partner ..................................... 27 Partnership- decision making .................................................. 12 partnership- definition.............................................................. 5 Partnership- Disolution-RUPA ................................................. 26 Partnership Dissolution........................................................... 21 Rights of Partners AFTER Dissolution ................................ 23 Partnership Dissolution- 3 stages ............................................ 21

partnership dissolution- Causes of dissolution ......................... 21 Partnership dissolution- Common modification by agreement . 22 Partnership dissolution- Duties departing partner owes partnership ....................................................................... 25 Partnership Dissolution- Duties owed by departing partner to the partnership ................................................................. 25 Partnership Dissolution- Duties owed by partnership to partners ......................................................................................... 26 Partnership dissolution- Duties owed to partnership by partners ......................................................................................... 26 Partnership Dissolution- Effect of dissolution on Partner s Existing Liability ................................................................. 24 Partnership Dissolution- Effect on liability ............................... 24 Partnership Dissolution- effects .............................................. 24 Partnership Dissolution- Liability of Persons Continuing the Business in Certain Cases ................................................... 25 Partnership dissolution- Non compete agreement................... 25 Partnership- Dissolution order ................................................ 24 Partnership Dissolution- Partnership at will ............................. 22 Partnership dissolution- Partnership for a term ....................... 22 Partnership- duty of Care........................................................ 15 Partnership- duty of Loyalty.................................................... 15 Partnership- Fiduciary Duties .................................................. 15 Partnership- Fiduciary duty of partner..................................... 16 Partnership for a term ............................................................ 22 Partnership- Formation ............................................................ 5 Partnership- inadvertent creation (3 main causes)................... 27 Partnership- inadvertent creation- LP becomes involved ......... 28 Partnership- inadvertent partnership- banks ........................... 28 Partnership Liability.................................................................. 7 Partnership Management ....................................................... 12 Partnership- profits and losses .................................................. 9 Partnership Property .............................................................. 17 Partnership- right to accounting.............................................. 16 Partnership- Right to inspect books......................................... 10 Partnership- Rights and Duties ................................................ 10 Partnership taxation ............................................................... 32 Partnership-inadvertent creation- Held out as partner ............ 27 Partnership-inadvertent creation- share profits....................... 27 Partnerships- Inadvertent Creation ......................................... 27 Partnership-Sharing of Profits & Losses ..................................... 9 Peircing the Corporate Veil ..................................................... 50 Piercing factors....................................................................... 50 Power of Partner to Bind Partnership to Third Persons after Dissolution........................................................................ 23 Preemptive Rights .................................................................. 64 Preferred Shares............................................................... 56, 59 Pre-Incorporation Subscription ............................................... 58 Promoters .............................................................................. 46 Promoter's liability ................................................................. 47 Prospectus ............................................................................. 62 Proxy...................................................................................... 73 Proxy Fight ............................................................................. 73 Proxy regulation ..................................................................... 82 Proxy Regulation and Disclosure Requirements ..................... 82 Public offering- exemptions .................................................... 62 Public Offerings ...................................................................... 61 Purina .................................................................................... 61

R
R. 10b-5 ................................................................................. 93 Ralston Purina ........................................................................ 61 Record Date ........................................................................... 72 Record Owner ........................................................................ 72 Registration exemptions ......................................................... 62 Remedies of Deadlock ............................................................ 77 Respondeat Superior ................................................................ 2 Reverse Piercing .................................................................... 53 Richert v. Handly .................................................................... 10 Right to an account ................................................................ 16 RMBCA 14.02- deadlock voluntary dissolution....................... 77 RMBCA 14.06- Known claims against dissolved Corp.............. 54 RMBCA 14.07- unkown claims aginst dissolved Corp.............. 54 RMBCA 14.08- Court Proceedings for dissolution................... 54 RMBCA 14.30- deadlock judicial Dissolution .......................... 77 RMBCA 14.34- Deadlock election to purchase in lieu of dissolution ........................................................................ 78 RMBCA 2.04- Liability for Preincorporation activities ............. 47 RMBCA 2.05- Organizational Meeting ................................... 45 RMBCA 2.06- Bylaws............................................................. 44 RMBCA 3.01- Purpose statement .......................................... 44 RMBCA 3.02- General Powers ............................................... 44 RMBCA 3.04Ultra vires.......................................................... 44 RMBCA 401- Name ............................................................... 42 RMBCA 402- reserved name ................................................. 43 RMBCA 403- Registered Name .............................................. 43 RMBCA 6.01- Authorized Shares ..................................... 45, 55 RMBCA 6.03- Issued and outstanding shares ......................... 55 RMBCA 6.03- Issued and Outstanding shares......................... 45 RMBCA 6.20- Pre incorporation Subscription......................... 58 RMBCA 6.20- Share subscription ........................................... 46 RMBCA 6.21- Issuance of shares ........................................... 46 RMBCA 6.21- Issuance of Shares ........................................... 55 RMBCA 6.22- Liability of Shareholders................................... 55 RMBCA 6.22(a)- Shareholder non-liability.............................. 50 RMBCA 6.25- Issuing Shares w/ certificates ........................... 58 RMBCA 6.26- Issuing Shares w/o certificates ......................... 59 RMBCA 6.30- preemptive rights ............................................ 64 RMBCA 7.01- Annual Meeting ............................................... 73 RMBCA 7.02- Special Meeting ............................................... 73 RMBCA 7.04- Action without meeting ................................... 73 RMBCA 7.05- Notice of Meeting............................................ 73 RMBCA 7.07- Record Date .................................................... 72 RMBCA 7.30- Voting Trust..................................................... 75 RMBCA 7.31- voting agreements........................................... 75 RMBCA 7.32- Shareholder agreement ............................. 45, 70 RMBCA 8.06- Staggered Board .............................................. 73 Roach v. Mead........................................................................ 14 RULPA 303(a)- Limited Parter's liability for Partnerhsip debts 29 RULPA 602- ability for Gen. Partner to withdraw from LP....... 30 RULPA 603- ability for Limited partner to withdraw from LP .. 30 RUPA 301-Partner Agent of Partnership ............................... 13 RUPA 303-Statement of Partnership Authority ..................... 15 RUPA 1001- Statement of Qualification ................................. 12 RUPA 1002- Name of LLP ...................................................... 12 RUPA 201-Definition of Partnership ........................................ 5 RUPA 202 - Determining Existence of Partnership.................... 6 RUPA 203(c)- Sharing profits is rebuttable presumption of partnership ....................................................................... 27 RUPA 204-When Property is partnership property................. 17

Q
quorum of a board of directors ............................................... 80

RUPA 305-Partnership liability ................................................ 7 RUPA 306- Partner Liability ..................................................... 7 RUPA 307- Suing Partner or Partnership .................................. 8 RUPA 401- Rights and Duties of Partners ............................... 11 RUPA 401(b)- Partners share profit an loss Equally .................. 9 RUPA 401(f)- Partnership Decision Making ............................ 12 RUPA 404- Duty of Loyalty and Care...................................... 16 RUPA 701- Disassociation where partnership continues......... 26 RUPA 801- disassocation requiring liquidation....................... 27 RUPA 807(b)- Partner account negative then own partnership ......................................................................................... 11

Tender offer ........................................................................... 85 The Formation of a Closely Held Corporation ......................... 42 Tippee liability ........................................................................ 98 Tippee/Tipper Liability ........................................................... 98 Tipper liability ........................................................................ 98

U
UCCLA 108- Registered agent for service of Process............... 36 UCCLA 405- Sharing and right to distribution ......................... 38 UCCLA 407- Liability for unlawful distributions ...................... 38 ULLCA 1002 Application for Certificate of Authority ........... 39 ULLCA 503 Rights of Transferee......................................... 39 ULLCA 504(a) Rights of Creditor ........................................ 39 ULLCA 103- Operating Agreement ......................................... 37 ULLCA 105- Name ................................................................. 36 ULLCA 106- Reserved Name .................................................. 36 ULLCA 112- Nature of Business and Powers........................... 36 ULLCA 202- Organiztion ........................................................ 36 ULLCA 203- Articles of Organization ...................................... 36 ULLCA 301- Agnecy of Members ........................................... 37 ULLCA 303- Liability of members ........................................... 37 ULLCA 404- LLC Management ............................................... 37 ULLCA 406- Distribution Limits .............................................. 38 ULLCA 408- Member right to infor......................................... 38 Ultra vires .............................................................................. 44 UPA 14- Partnership Bound by Partner s Breach of Trust ........ 7 UPA 31 Causes of Dissolution ............................................... 22 UPA 13- Partnership bound by partners wrongful act .............. 7 UPA 15- all partners liable (replaced) ...................................... 7 UPA 16 Partner by Estoppel .................................................. 27 UPA 17- Partner liability for incoming partner ......................... 7 UPA 18- Rights and duties of partners ................................... 10 UPA 18(a)-Partners share profits and loss equally.................... 9 UPA 18(e)- partnership decision making ................................ 12 UPA 18(g)- joining part. requires consent of all .................... 5, 6 UPA 20-Duty of Partners to Render Information .................... 16 UPA 21-Partner Accountable as a Fiduciary ........................... 16 UPA 22-Right to an accounting.............................................. 16 UPA 24 Extent of Property rights of a partner ........................ 17 UPA 25- Partner s Rights in Specific Partnership Property ...... 17 UPA 26- Partner s interest in the Partnership ........................ 17 UPA 27- Partner may tranfer right to profits, but not management or specific property ...................................... 17 UPA 28 Charging Order (lien) ................................................ 18 UPA 29- Dissolution Definition .............................................. 21 UPA 30- Partnership Not Terminated by Dissolution .............. 21 UPA 32 Dissolution by Court Decree...................................... 22 UPA 35-Power of Partner to Bind Partnership to Third Persons after Dissolution ................................................................ 23 UPA 36- Effect of dissolution on Partner s Existing Liability .... 24 UPA 37 Right to wind up ....................................................... 21 UPA 38- right to compel winding up on partner withdrawing ... 8 UPA 38-Rights of Partners AFTER Dissolution......................... 23 UPA 40- Distribution after dissolution ................................... 24 UPA 41-Liability of Persons Continuing the Business in Certain Cases ................................................................................ 25 UPA 42 Rights of Retiring or estate of deceased partner when business continues ............................................................ 21 UPA 6- Definition of Partnership ............................................. 5 UPA 7 - Determining existence of Partnership ......................... 6 UPA 9-Partners as agents of Partnership ............................... 12

S
S Corporation tax status.......................................................... 32 Sarbanes-Oxley Act................................................................. 40 Securities Regulation .............................................................. 60 Securities Regulation- Exemptions from registration ............... 62 Securities Regulation History .................................................. 60 Securities Regulation- Intrastate offering exemption ............... 63 Securities regulation- investment contract .............................. 61 Securities regulation- Private Placement Exemption ................ 62 Securities Regulation- Public Offering...................................... 61 Securities Regulation- Registration Statement ......................... 61 Securities Regulation- Small offering exemption...................... 62 Self-Dealing ............................................................................ 90 Share Beneficial Owner.......................................................... 72 Share Record Owner............................................................... 72 Shareholder agreement .......................................................... 45 Shareholder Agreement.......................................................... 70 Shareholder derivative suit ..................................................... 88 Shareholder Proposals ............................................................ 84 Shareholder Record ................................................................ 72 Shareholder Voting Agreements ............................................. 75 Shareholder Voting Trusts ...................................................... 75 Shareholders .......................................................................... 69 Shares .................................................................................... 45 shares- Par value .................................................................... 58 shares- types .......................................................................... 59 Signature................................................................................ 49 Silent Partner s Liability ........................................................... 8 SOX Analysis of the Provisions of SOX........................................ 82 Enactment of SOX.............................................................. 82 staggered board ..................................................................... 72 Stock- Payment for Stock ........................................................ 58 straight voting ........................................................................ 74 S-X82

T
Taxation ................................................................................. 31 Taxation- basic principles........................................................ 33 Taxation- Check the box rules ................................................. 33 Taxation- Corporate ............................................................... 31 Taxation- Corporate- Subchapter C ......................................... 31 Taxation- Corporate- Subchapter S.......................................... 32 Taxation- LLC.......................................................................... 32 Taxation- Partnership ............................................................. 32 Taxation- sole Proprietorship .................................................. 33 taxation-average tax rate........................................................ 34 taxation-marginal tax rate ...................................................... 34

V
Valuation of Business.............................................................. 20 Voting Agreements................................................................. 75 Voting Trusts .......................................................................... 75

W
Waste of Corporate Assets ...................................................... 91 Watered Stock........................................................................ 58 When Property is partnership property ................................. 17