Business Associations O'Kelley/Outline

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Business Associations
Authors O'Kelley
Text Image of Corporations and Other Business Associations: Cases and Materials [Connected Casebook] (Aspen Casebook)
Corporations and Other Business Associations: Cases and Materials [Connected Casebook] (Aspen Casebook)
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  1. Agency Law
    1. Duty of Loyalty
      1. Rules:
        1. Under the duty of loyalty, an employee may not solicit for him or herself business which they are obligated to solicit on behalf of their employer. Reilly v. CCS.
        2. An employee-agent making logistical arrangements such as securing financing or lease for a new business does not constitute violation of duty of loyalty. Hamburger.
      2. Types of Authority
        1. Actual authority
          1. Occurs when principal manifests consent directly to the agent
          2. Express or Implied
            1. Express: When principal directly communicates to agent the scope of his or her authority.
              1. For example, if Jake directly communicates to Sharon that it’s ok for her to give a 10% discount to any new customers over a period of time, then Jake is obligated to honor those promises by Sharon.
            2. Implied: principal silently acquiesced to agent’s actions and said nothing.
              1. For example if Jake saw Sharon giving a 15% discount to new customers and Jake said nothing, bc he silent acquiesced, he would then have to honor that discount that she provides those third parties with.
            3. Apparent Authority (ostensible)
              1. Occurs when principal makes either express or implied communication to the third party customers that the agent is in fact authorized.
                1. Example: Jake calls Sam and says "hey my sales person Sharon will hook you up with deals:
              2. Must have reasonable belief that agent is acting on behalf of principal. (critical to add to outline)
              3. Often used in context of "implied apparent authority"
              4. Go to store, ask cashier to use coupon. Fact that cashier is employee of store implies apparent authority to accept coupon.
              5. Occurs through indirect or unspoken communication from principal to third party
  • Inherent Authority (if grey as to apparent authority, argue this too) (2 requirements) (Arises if there is no actual authority)
    1. Express authority was granted to agent to carry out specific goal or task
    2. The act or contract in question must be usual or necessary in carrying out the functions expressly authorized
      1. Example:
        1. Manager of retail store – employer has granted manager express authority in managing the store
        2. What are some of these things? Inventory, hiring/firing, etc.
  • What if owner specifically tells manager she is not allowed to give a discount on certain clothes? And then customer comes in and she gives discount anyways, you could argue inherent authority.
  1. Fairness mechanism: principals should be managing their agents rather than putting burden on third party
  2. Rules:
    1. Issue: May a principal be held liable to third parties for fraud if the principal puts an agent in a position that enables the agent, while apparently acting within his authority, to defraud a third party?
      1. Rule: A principal who puts his agent in a position that enables the agent, while apparently acting within his authority, to commit a fraud upon third persons is subject to liability to such persons for the fraud. (Rationale: agents position facilitates the consummation of fraud in that from the point of view of the third person the transaction seems regular on its face and the agent appears to be acting in the ordinary course of business confided to him.)Blackburn v. Witter.
    2. Issue: May a third party recover from a principal on a theory of apparent authority if the third party did not specifically rely on the agent’s capacity to act on the principal’s behalf?
      1. Rule: Third party may not rely on a theory of apparent authority for recovery if the third party did not specifically rely on the agent's capacity to act for the principal. Sennott v. Rodman.
    3. 'Partnership Law'
      1. Partnership Formation
        1. Rule: In order to prove the existence of a partnership, one must show the intent to divide the profits of the venture. In demonstrating that a partnership exists, the acts, dealings, conduct, admissions, and declaration of the purported partners, in addition to other direct evidence, may be utilized. When the controversy is between two partners, stricter proof of the intention to create a partnership is required. Hyansky v. Vietri.
          1. Evidence of a partnership agreement is strong, but not conclusive as to whether partnership exists. Doesn't matter whether parties intended to form partnership but rather look at other factors.
            1. Factors:
              1. Compensation -> share in losses/profits (in some jurisdictions, can be dispositive.)
              2. Shared ownership --> assets/liabilities; have they actually invested in the business (personally invested?)
  • Management --> policymaking, act as an agent, assign work, hire employees (do these Individual’s participate in key policy decisions; governance decisions; hiring and firing)
  1. Affirmation --> how does each member refer/identify themselves/aspects of the enterprise? (ex: Tax purposes: whether or not the partner filed a partnership form; transactions: whether or not the partner describes the association as a "partnership" or "corporation”
    • - (How do these individuals actually reference themselves? I.e. in hyansky, he treated losses as his own so not referencing as a partnership)
  2. *for exam: need to evaluate each factor.
  3. Duties of Partners
    1. Duty of Loyalty
      1. Defined by UPA 404(b).
      2. Rule: A trustee is held to something stricter than the morals of a marketplace. Not honesty alone, but the punctilio of an honor the most sensitive. Partner should subordinate personal interests to the partnership. Meinhard v. Salmon.
      3. Misappropriation of partnership opportunity is a violation of duty of loyalty.
        1. How do we define a partnership opportunity? Nexus of relation: opportunity is within the scope of the partnership's business (must be sufficient nexus of relation btw the new opportunity and underlying business of partnership) [ex: if new opportunity was in diff state or diff neighborhood, probably not sufficient nexus of relation].
      4. Partners can contract around the duty of loyalty.
        1. According to UPA 103(b)(3)(I) as long as the provisions are not manifestly unreasonable.
          1. If the carve-out completely undermines partnerships ability to operate its underlying business
            1. Ex: if an opportunity arises for a partner to purchase the plant in which the partnership operates, perhaps produces textbooks, if partner purchases that plant (would be manifestly unreasonable bc needed to operate the business; could just buy a new plant but would be manifestly unreasonable)
            2. Or a carve-out that’s too board (partner may pursue any and all opportunities that may arise in the future)
  • Or provision that doesn’t include all material facts, such as this opportunity could put partner in position to be competing with the partnership
  1. 103(b)(3)(ii) provides an "ex-post solution" would arise after the transaction has already occurred.
    1. Allows partners to ratify/agree to particular transaction that would otherwise violate duty of loyalty; however, in order to ratify transaction of this nature, must be provided with disclosure of all material facts
    2. So if they agree to allow partner to purchase plant in which they operate and then lease from him, but if partner fails to disclose that they intend to lease to another third party, would not constitute disclosure of all material facts
    3. Agree to this provision before transaction occurs
  • Self-Dealing
    1. Rule:
    2. Storch: A partner who breaches his duty of loyalty to the partnership is still entitled to recover his capital contribution to the partnership, though that sum may be reduced by the amount of any improper profits the partner earned due to the breach of duty
    3. Covalt: One partner cannot compel another to come to any particular decision regarding partnership business, even if the decision would benefit the partnership.
  1. Dissolution and Dissociation SEE FLOWCHART
    1. Dissolution is when partnership ends; Dissociation is when a partner leaves
    2. Flow chart:
      1. First question: what is the partnership to be assessed?
        1. First box of flowcharts
      2. Second: 603 gives us instructions
      3. Third:
        1. Article 8: Liquidation: judicial auction then divided up into existing partners (assets are up for grabs)
        2. Article 7 buyout: remaining partners simply buy out the departing owner’s interest in the partnership.
  • Fiduciary duties apply to partners even when they are dissociating from the partnership (duty of good faith here). Page v. Page.
  1. Exclusion: If partner with more resources decides to leave, court might order a dissolution instead. Nicholes v. Hunt.
  2. Corporations
  3. Shareholder Meetings and Removing Directors
    1. Hoschett v. TSI International Software:
      1. Issue: --> under section 211(b)© and 228(a), are corporations required to have an annual meeting even if board of directors already elected through a written consent procedure?
      2. Rule: Absent unanimous consent, the mandatory language of 211(b) places on TSI the legal obligation to convene a meeting of shareholders to elect directors pursuant to the constitutional documents of the firm. The obligation to hold an annual meeting may not be satisfied by shareholder written consent action.
      3. --> SEE SECTION 211(b) (amended as a result of this case)
      4. Written consent can happen in lieu of meeting if all director seats are empty (leaving before re-election is occurring at annual meeting) but otherwise written consent is not allowed.
    2. Amending Bylaws
      1. In Delaware, a bylaw passed at a company’s annual meeting that is inconsistent with the corporation’s charter is invalid. Airgas Inc. v. Air Products and Chemicals
    3. The Business Judgment Rule and the Duty of Loyalty
      1. How to pierce the BJR
        1. Default rules:
          1. Judicial presumption that BOD had complied with their fiduciary duties in approving particular transaction.
          2. Burden is on shareholder to pierce this judgment rule presumption
          3. Rule: Courts may not interfere with business judgment of directors absent fraud, illegality, conflict of interest, or damage to the corporation. Shlensky v. Wrigley.
          4. Rule: As long as there’s some rationally related benefit accruing to shareholders in relation to the transaction, the business judgment rule applies. Dodge v. Ford.
        2. Corporate Opportunity
          1. Rule: The corporate opportunity doctrine holds that a corporate officer or director may not take a business opportunity for his own if: (1) the corporation is financially able to exploit the opportunity; (2) the opportunity is within the corporations line of business; (3) the corporation has an interest or expectancy in the opportunity; and (4) by taking the opportunity for his own, the corporate fiduciary will thereby be placed in an position inimicable to his duties to the corporation. Broz v. CSI.
            1. Guth (RULE USED IN Broz) also established that a director or officer may take a corporate opportunity if: (1) the opportunity is presented to the director or officer in his individual and not his corporate capacity; (2) the opportunity is not essential to the corporation; and (4) the director or officer has not wrongfully employed the resources of the corporation in pursuing or exploiting the opportunity.
          2. Conflict of Interest Transactions
            1. Rule: Under the duty of loyalty, director must disclose a financial risks to the corporation. Silence is insufficient as a corporate fiduciary is aware of the transaction's negative effect on the corporation. Globe Woolen Co. v. Utica Gas and Electric.
            2. COMMON DIRECTOR
            3. Corporation is actually participating in the transaction
            4. Two corporations that transact with each other, but they share a common director.
            5. Idea is that person doing the trading (director) is using info to get himself better deal bc he knows their financials; whereas corporation might get better deal if they got deal from non-interested actor
            6. DGCL 144: conflict of interest taint can be cleaned if the corporate fiduciary:
              1. discloses all material facts AND obtained approval by the majority of disinterested directors {BJR protection}; OR
              2. discloses ALL material facts AND obtains approval by a vote of disinterested stockholders {BJR Protection}; OR
  • Proves the intrinsic fairness of the transaction.
    • - Even if BJR protects conflicted transaction, burden shifts to plaintiff shareholder to show that action was wasteful. (if 1 or 2 doesn’t happen)
    • - Even if they didn't cleanse the taint through 1 or 2, can still show that transaction was fair.
  1. Components of the intrinsic fairness test:
  2. Fair dealing:
    • - Embraces questions of when transaction was timed, how it was initiated, structured, negotiated, disclosed to the directors, and how the approvals of the directors and the stockholders were obtained. Weinberger decision.
  3. Fair price:
    • - Relates to the economic and financial considerations of the {litigated transaction} including all relevant factors: assets, market value, earnings, future prospects, and any other electments that affect the intrinsic or inherent value of a company's stock
  4. Self-Dealing
    1. Rule: Occurs when the parent, by virtue of the domination of the subsidiary, causes the subsidiary to act in such a way that the parent receives something from the subsidiary to the exclusion of, and the detriment to, the minority stockholder of the subsidiary. Sinclair Oil Corp.
    2. If plaintiff can meet his burden of proving that a dividend cannot be grounded on any reasonable business objective, then courts can and will interfere with decision to pay dividends.
    3. BJR does not apply when self-dealing is present.
    4. All self-dealing is conflict of interest but conflict of interest is not necessarily self-dealing.
    5. Self-dealing is more "culpable" bc of control. If self-dealing found to have occurred, BJR automatically pierced/ therefore burden shit to directors to prove intrinsic fairness of the transaction.
  5. Duty of Care (subset of duty of loyalty)
    1. Rule: They were not well-informed because they failed to inform themselves of all material information that was reasonably available to them. Van Gorkem.
    2. Issue: Whether board was grossly negligent in failing to inform themselves of all material information that was reasonably available to them. Van Gorkem.
    3. Relevant facts in Van Gorkem:
      1. Directors did not adequately inform themselves as to Van Gorkem’s role in forcing the sale of the company and in establishing the per share purchase price; were uninformed as to the intrinsic value of the company; were grossly negligent in approving the sale of the company upon two hours consideration, without prior notice, and without existence of a crisis or emergency.
      2. Price of premium not relevant: did not request chief financial officer to make any valuation study or review of proposal. Board lacked valuable information adequate to reach informed BJ.
      3. Marketplace analysis irrelevant: no evidence that merger agreement was amended to give board freedom to put up for auction or that was public auction was held.
      4. Collective experience and sophistication irrelevant. Chancery found BJR pierced for failure to give board opportunity to make fair and reasoned decision. Evidence of gross negligence overwhelming. Buyer intended to force quick decision; mtg too short, outside directors not notified; no current appraisal of oil/gas interests.
      5. Legal advice irrelevant. Lawyer did not have enough info to give informed advice.
      6. Question turns on whether "shareholders have been fully informed such that their vote can be said to ratify director action "turns on the fairness and completeness of the proxy materials submitted by the management to the shareholders". Burden falls on Ds.
        1. No reasonably adequate info as to intrinsic value of company
        2. Lack of valuation problem should have been exposed.
  • Board's characterization of the romans report was misleading.
  1. Board's reference to the "substantial" premium offered misleading.
  2. 102(b)(7): allows for contracting around shareholder litigation but directors cannot carve out claims regarding to shareholder loyalty
  3. Duty of Good Faith (subset of duty of loyalty)
    1. Rule: In order to be liable for director over sight, (a) the directors utterly failed to implement any reporting or information system or controls; or (b) having implemented such a system or controls, consciously failed to monitor or oversee its operations thus disabiling themselves from being informed of risks or problems requiring their attention. Stone v. Ritter. (* **very high burden for plaintiff shareholders to allege so would have to show that directors CONSCIOUSLY disregarded these red flags (so severe that you had to work to ignore)'
      1. Failing to act in good faith may be shown for instance:
        1. Intentionally acts with a purpose other than that of advancing the best interests of the corporation;
        2. Fiduciary intentionally fails to act in the face of a known duty to act, demonstrating a conscious disregard for his duties; or
  • Where the fiduciary acts with the intent to violate positive law.
  • Derivative Litigation
    1. Shareholders derivative suits respond to a particular type of actual or potential self-dealing: if a majority of the board of directors are the target of a non-frivolous potential lawsuit where 1) they would personally benefit from a decision not to litigate and 2) they control the decision.
    2. Issue is to determine whether a particular litigation decision should be protected by the BJR and entrusted to the sole discretion of the directors, or, instead is akin to self-dealing and should be the province of the shareholder controlled action.
    3. Issue: When is a stockholder's demand upon a prior board of directors, to redress an alleged wrong to the corporation, excused as futile prior to the filing of a derivative appeal?
    4. Rule: In determining demand futility, the court must decide whether, under the particularized facts alleged, a reasonable doubt is created that (1) the directors are disinterested and independent and (2) the challenged transaction was otherwise the product of a valid business judgment.
      1. This requires two inquiries:
      2. One into the independence and disinterestedness of the directors and
        1. Reviews factual allegations to decide whether they create a reasonable doubt that BJR is protected.
        2. Means that the director's decision is based on the corporate merits of the subject matter before the board rather than extraneous considerations of influences. To establish lack of independence, a plaintiff meets his burden by showing that the directors are either beholden to the controlling shareholder or so under its influence that their discretion is sterilized.
      3. The other into the substantive nature of the challenged transaction and the board’s approval thereof.
        1. Court does not assume that transaction is a wrong to the corporation requiring corrective steps by board.
      4. Particularized facts that create a reasonable doubt that the directors are independent or disinterested OR not the product of an informed business judgment.
        1. Relevant facts in Van Gorkem: stock ownership alone insufficient (when not majority; not enough to say he selected board members; directors have broad power to assign compensation
      5. Aronson test analysis from The Limited:
        1. To meet first prong of the Aronson test... P must plead particularized facts sufficiently demonstrating that the defendant directors had a financial interest in the challenged transaction that they were motivated by the desire to retain their positions on the board or within the company (entrenchment motive) or that they were dominated or controlled by a person interested in the transaction.
        2. Director disinterestedness
          • - Directorial interest exists whenever divided loyalties are present, or a director either has received or is entitled to receive a personal financial benefit from the challenged transactions.
          • - Bc Wexner, in his individual capacity and as trustee for the trust, negotiated the redemption agreement at its creation, an agreement that was for the benefit of his children, the complaint has alleged sufficiently particularized facts creating a reasonable doubt as to his disinterestedness in connection with the company's rescission of the redemption agreement. Mrs. Wexner also stood similarly.
  • Director Independence
    • - Means that the director's decision is based on the corporate merits of the subject matter before the board rather than extraneous considerations of influences.
    • - To establish lack of independence, a plaintiff meets his burden by showing that the directors are either beholden to the controlling shareholder or so under its influence that their discretion is sterilized.
    • - Court applies a subjective actual person test to determine whether a particular director lacks independence bc he is controlled by one another.
  1. Reasonable business purpose
  2. Waste is a subset of duty of loyalty.
    1. Rule: whether distribution of corporate assets was a gift, must determine whether corporation received compensation; and whether there was any legitimate business purpose)
  3. Closely Held Corporations
    1. California
      1. Pooling agreements are valid and may be enforced equitably. Ramos v. Estrada.
    2. Massachusetts:
      1. Rule: If the stockholder whose shares were purchased was a member of the controlling group, the controlling stockholders must cause the corporation to offer each stockholder an equal opportunity to sell a ratable number of his shares to the corporation at an identical price. (Donahue; Massachusetts)
      2. Rule: When a LGP for a controlling group's action is asserted by such group, minority shareholders then have opportunity to show that the same legitimate business objective could have been served by an action less harmful to the business' interest. (Wilkes; Massachusetts)
      3. **for a closely held corporation, would need to evaluate both Donahue and Wilkes
    3. Delaware: (DGCL 141(a)); 350-54
      1. Issue: Under Delaware law, do corporate directors owe a fiduciary duty of equal treatment to all shareholders? (Nixon v. Blackwell; Delaware)
        1. Whether a closely held corporation is obligated to treat all shareholders equally? No.
        2. Whether the business judgment rule applies to the two transactions? Yes.
      2. Rule: Equal does not necessarily mean fair. A subsection of directors may need more protection than others.
        1. Under Delaware law, unless a corporation elects to become a close corporation under the manner prescribed by statute, it will not be considered a close corporation or be entitled to the special protections of a close corporation.
      3. A rational purpose is to protect the stock from passing out of the control of the corporation into the hands of family or descendants of the employee.
    4. New York:
      1. Rule: A closed corporation can be involuntarily dissolved if the challenged activity is illegal, fraudulent, or oppressive. In Re Kemp.
        1. Oppressive: The majority conduct must substantially defeat expectations that, objectively viewed, were both reasonable under the circumstances and were central to the minority shareholder's decision to commit their capital to the enterprise.
        2. Reasonable expectations: bonuses, dividends, voting power
      2. Remedy: The Corporation may be dissolved, but the court must consider the totality of the circumstances to determine if there are any alternative means.
        1. I.e. the corporation can buy back the shares.
        2. Dissolution as last resort.
      3. New York legis carved out special power for certain participants to compel involuntary dissolution of corporation. Provided that: under special circumstances, such as illegal conduct, fraudulent or oppressive conduct, holders of at least 20% of corporation can compel dissolution of the company. Gimpel.
        1. Issue: Whether the court should involuntarily dissolve the closed corporation?
          • - Two ways of determining Oppressive:
            1. Reasonable expectations test:
              1. If the majority shs have engaged in conduct that defeats the reasonable expectations that remaining shareholders had at the outset of the venture. (ex: owning shares in cc structure could put those shs in position where the expect to have a job w corporation, dividends, special bonuses etc.) We measure this test at the outset of the venture/when sh became member of corp. For those shs, who acquired as a gift, reasonable expect does not apply. This expect also runs both ways. Corporation expects they will be good employee, not embezzle money, etc.
  • - Inherently Oppressive test
    1. To extent that reasonable expectation doesn’t apply... Test: burdensome, harsh, and wrongful conduct; a lack of probity and fair dealing in the affairs of a company to the prejudice of some of its members; or a visible departure from the standards of fair dealing, and a violation of fair play on which ever shareholder who entrusts his money to a company is entitled to rely.
  • - Even if waste exists, does not justify an involuntary dissolution.
    1. Waste: a director may have been paid an excessive amount, such that a minority shareholder would be unfairly disadvantaged. The property or assets of the corporations are being looted, waste, or diverted for non-corporate purposes.
  1. States covered in closely held corporations: California, Massachusetts, Delaware, and New York
  2. Piercing the Corporate Veil
    1. Difference between BJR and piercing the corporate veil?
      1. Public Corporation BJR protects directors (allows them to be able to make risky bJS without interference from courts, shs, liability) (whereas here, third parties cannot pierce BJR. Shs are the ones trying to pierce; SHs have right to be able to compel directors to sue corporation
        1. Extent to which shs within corporation can bring derivative lawsuit
      2. Corporate veil: limited liability protection/shield for shareholders which protects them from having to pay for obligations/debts of closely held corporations (to third parties)
        1. Context: how 3rd parties can pierce this corporate veil of limited liability protection to access personal assets held by each of these shareholders.
        2. Third parties who are not shs of corporation who have somehow been harmed by corporation so trying to go after assets of shareholders)
      3. How to pierce the corporate veil via the Fletcher Test
        1. Defendant shareholder dominated and controlled the corporation so that corporation had no mind of its own. (makes decisions by following corporate formalities, keeping records, keeping assets separate from personal assets of directors)
        2. Defendant used this control to commit some sort of fraud or wrongdoing. (One possibility occurs under capitalization—did they sufficiently capitalize or infuse corporation with money? Measured when actually formed. If corporation significantly changes course of its business, court will measure capitalization at this venture)
        3. D’s wrongdoing was cause of the injury.
  • LLCS
    1. A contractual provision in an LLC operating agreement stating that all disputes are to be resolved by arbitration is valid even if the LLC that the agreement formed did not sign the agreement. Elf Atochem.
    2. A withdrawing partner in a limited partnership and a withdrawing member in an LLC are generally entitled to the fair value of their equity interest, but this may be modified by contract. Olson v. Halvorsen.