Super Business Associations Outline

Super Business Associations Outline

General Exam Tips 1

Definitions 1

Partnerships 2

Areas that cannot be modified by contract 2

Formulation 2

Revised Uniform Partnership Act (RUPA 1997): 3

Fiduciary Duty 3

Partnership Property 4

Partner’s Authority/Liability 4

Partnership Profit/Loss Share 6

Transfer of Partnership Interest 7

Corporations I 8

History of the Corporate Form 8

Limited Liability and Piercing the Corporate Veil 9

Theories of Liability 9

Why are neglected corporate formalities necessary to pierce the corporate veil? Walkovszky v. Carlton debate. 10

Take Home Lessons on how to avoid getting the corporate veil pierced 11

Derivative Actions 11

Corporation’s Objective and Conduct 16

Business Judgment Rule Flowchart 18

Duty of Care 18

Duty of Loyalty Flowchart 22

Directors and Officers Generally 22

Ratification 27

Close Corporations 28

Voting Arrangements 28

Oppression and Abuse 29

Dissolution 31

Hybrids 32

Limited Liability Corporations (General) 32

Piercing the LLC Veil 33

LLC Fiduciary Duty 33

Corporations II (Federal Regulations) 34

Background on Federal Securities Law 34

Misrepresentation 34

Insider Trading & the Use of Inside Information 35

Acquisition of Control 39

Shareholder Resolutions 41

Shareholder Inspection Rights 43

Mergers and Acquisitions 44

Freeze-out mergers 46

Fairness Standard 47

Takeovers 47

Takeovers2 49

Takeovers3 (State Anti Takeover Statutes) 53

General Exam Tips

a) BA about politics and distribution of wealth involving social, ethical and political questions.

i) Who gets what and why in corporate America?

b) Manifestations of federalism

i) Corporations dually regulated on the federal level (Securities and Exchange Act of 1934, SEC) and state level (laws governing corporations from state of incorporation).

(1) National regulation usually affects large publicly held corporations.

c) Think of BJR as really big advantage that comes with good faith, honesty and informed decisions that directors start with at the beginning of the contest. Shareholders will try to dislodge the BJR, but if the directors can hold onto it, they win.

d) Cite New Jersey statutes; refer to handout.

Definitions

a) Joint venture – formed for a specific limited purpose. By contrast partnerships are similar to free-flowing corporations.

b) Types of companies

i) Corporation – limited liability, but double taxation. Very formal rules.

(1) Completely based on entity theory. Corporation then treated as a person under the constitution.

(a) What are the key goals that govts are trying to achieve by making corporations separate from owners? (Creating a pro-business creation enviroment)

(b) What are the social and economic consequences of granting that status to the corporation? (Removing liability from owners can be construed to encourage unethical/unhealthy corporate behavior)

(2) Director’s powers

(a) Only directors have the power to give dividends, one vote per director.

(b) Directors have the power to set compensation for directors

(d) Directors appoint officers.

(3) Why have different types of stock issued?

(a) Attracts a diverse body of shareholders that have different preferences of risk and return on stocks.

(4) Voting Definitions

(a) Cumulative voting – if 7 directors and 100 shares, you get 700 votes which you could put all toward one candidate or spread them out. (Allows guaranteed control of a small portion of board) (Unlike partnership which standard is one vote per partner)

(b) Voting Trust – A statutory mechanism where shareholders can transfer their stock certificates to a trustee who votes in a certain way. (Stockholder is a stock beneficiary)

(i) Formally separate economic rights from voting rights, see a lot in family businesses (p623Case)

(c) Pooling Agreement – Two or more shareholders make an agreement to pool their votes to elect directors. (When agree to do other things it is called a shareholder’s agreement)

(d) Irrevocable proxy – transfer of authority from stockholder to proxy for vote in certain way. (Can be revoked unless coupled with an interest, ex – one share of stock. Similar to a voting trust) (can put time limit as well)

(5) Closed Corp

(a) Closed Corp – a corporation with a small number of shareholders and a lack of a secondary market where shares are traded.

(i) Lack of exit when no secondary market, if public company then almost always a ready exit.

(ii) Size is not determinative.

(b) Secondary Market – market where shareholders can trade stock without the corporation itself.

(i) NYSE, NASDAQ, ASE, London Bourse, etc.

(i) Initial Public Offering

(d) Freezeout – taking advantage of majority shareholder position to force the minority shareholder out of corporate offices and employment. P641Case

(6) Tender Offer – offer to buy out shareholders in a proportionate amount. Way to get control over a company without dealing with the management.

(7) Insider trading

(a) Tippee – person who received a tip from an insider.

(b) Call – an option, which is a right to buy a security at a fixed price at a certain period of time.

(c) Warehousing – p506Case where friendly parties buy up stock so that friendly people will own stock when the tender offer goes through.

ii) Partnership – personal liability, but taxed only once.

iii) Limited Liability Partnership – Combines best of both worlds. Just runs like a partnership

iv) Limited Liability Company - Combines best of both worlds. Just runs like a corporation.

c) Leveraged Buyout – like a mortgage puts a small amount down and uses corporation assets as security for the large amount of debt. Hoping that profits will generate enough cash flow to pay off the principal of the debt incurred.

d) Management Buyout – same as a leveraged buyout only here management insiders look to cash out the public shareholders.

e) Lockup Option –in context of takeover where a white knight gets market price of certain number or percentage of shares. (treasury stock) This compensates for risk taking and time. Also acts as a deterrent for other potential purchasers as drastically increases the price.

f) Treasury Stock – company stock that had been originally issued and repurchased by the corporation.

g) Control Premium – A premium above market value that is paid for shares to obtain control of the corporation.

h) Holding Company – parent company that owns subsidiaries that act as operating companies.

i) Preferred Cumulative dividend – if company misses a few dividend payments it will pay them everything owed in the past before any other stockholders.

j) Liquidation Rights – stockholders rights to payment upon liquidation of the company.

k) Residual rights – getting the rest of what is left of the corporation after all payments to stockholders and creditors is done.

Partnerships

Areas that cannot be modified by contract

i) Personal liability

ii) Dissolvable at will

iii) No blanket waiver of fiduciary duty

(1) RUPA 103(b)(3)– duty of loyalty may not be eliminated, however specific categories of activities that do not violate the duty of loyalty may be eliminated, if not unreasonable.

Formulation

iv) Rule Analysis

(1) RUPA 202(a): Don’t need a contract only an agreement.

(2) Remember that loss sharing is not an element of a partnership.

(3) Very little uniformity throughout the States and different versions of the UPA and RUPA adopted.

(4) All elements are conjunctive.

v) Elements of a Partnership (Conjunctive)

(1) Voluntary agency or voluntary association to form a partnership

(a) Don’t need contract to associate

(2) At least 2 or more persons

(3) Must be a business, not just an investment

(4) With anticipation of profit

(5) Co-owners with profit sharing and joint control (Usually the snag)

vi) Uniform Partnership Act (UPA 1914):

(1) Partnership Defined: §6

(a) A partnership is an association of two or more persons to carry on as co-owners a business for profit.

Revised Uniform Partnership Act (RUPA 1997):

(2) Formation of a Partnership §202

(a) The association of two or more persons to carry on as co-owners a business for profit forms a partnership, whether or not the persons intend to form a partnership.

(b) (c)(3): A person receiving a share of profits establishes a rebuttable presumption of a partnership, unless

(i) received for payment of debt,

(ii) wages for employment,

(iii) rent,

(iv) retirement benefit,

(v) for sale of property

(vi) or interest charge on loan even if varies with profits of business.

vii) Cases

(1) Fenwick v. Unemployment Compensation Commission - No partnership established for an employee in a beauty salon because although they met the first four requirements Fenwick maintained exclusive control over the business. So although there was profit sharing, Mrs. Chesire, the employee, had no control except to view the books.

(a) Might have been influenced by politics because she would have been the 8th employee and required him to pay for insurance of some kind.

(b) RUPA §202(c)(3): Could apply here because she had 20% profit sharing.

(i) Question is whether it was compensation for being an employee.

(2) Martin v. Peyton - No partnership established because first four elements were met even though argued
as not voluntary association and only an investment, but for anticipation of profit under best scenario they could get 40% profits up to$500,000.

Qualifies as profit sharing and creates presumption of partnership under RUPA §202(c)(3).

(ii) Question is whether it can be seen as a debt.

(i) The trustees here had enormous control over the partnership because they installed their own CEO and could dictate who was a partner in the firm, they also had the right to inspect books and veto business transactions.

(ii) No partnership because they could not initiate any type of investment and therefore only had passive control.

(iii) Public Policy: probably decided that way because court wanted to encourage lenders to bail out companies that were in trouble through investments without lenders having to worry about whether they can be personally liable.

Fiduciary Duty

i) Made up of the Duty of care and Duty of loyalty

ii) RULE: Joint adventurers have the same fiduciary duty to each other that partners have.

iii) Cases

(1) Meinhard v. Salmon – a joint venture in real estate in time square. Meinhard had no idea about how to manage real estate and was a co-adventurer. Salmon entered a deal for a new lease for himself. JV because both on the lease.

(a) Cardozo Quote: A trustee is held to something stricter then the morals of the market place. Not honesty alone, but the punctilio of an honor the most sensitive, is then the standard of behavior.

(i) Legal Scholars argued over whether disclosure enough or need disclosure and consent.

1. Prof Opinion: Cardozo probably just wanted him to tell him beforehand. However in today’s context for corporations it is not enough to disclose and must have consent.

(ii) Public Policy: Found a fiduciary duty by analogizing to a partnership because Cardozo felt that Meinhard was vulnerable being silent co-adventurer and must be protected from the managing co-adventurer, however Meinhard had the same reciprocal fiduciary duty.

1. Salmon was the managing co-adventurer and could have abused the silent co-adventurer.

(b) Andrews dissent: Felt that joint adventures were for a specific limited purpose and so only have a fiduciary duty in relation to that specific venture.

Partnership Property

iv) RULE: Separate Entity theory – Under UPA and RUPA partnership property treated as an entity. Partners are owners of a portion of an undivided entity. Sees partnership as distinct from and superior from the rest of individuals.

v) Uniform Partnership Act (UPA 1914):

(1) Nature of a Partner’s Right in Specific Parnership Property: §25

(a) (2)(a): All partners have an equal right to specific partnership property for partnership purposes, but have no right to the property for other uses unless other partners consent.

(b) (2)(b): a partner’s right to partnership property is not assignable unless all other partners also assign the rights of the same property.

(d) (2)(e): partnership property not subject to dower or courtesy, allowances to widows or heirs.

(2) §31: Under UPA there is automatic dissolution whenever someone leaves.

vi) Revised Uniform Partnership Act (RUPA 1997):

(1) Partnership Property §203: Property acquired by the partnership is property of the partnership and not of the partners individually.

(2) §802(b): Under RUPA it is not an automatic dissolution when a partner leaves, could be a buyout and the partnership can survive even though the personnel changes.

vii) Cases

(1) Putnam v. Shoaf – Putnam wanted to sell her share of partnership to the Shoafs. Mrs. Putnam argued that while she transferred her interest in the partnership property that she did not sell her right to a cause of action for the money recovered from book keeper who was cheating.

(a) There is no personal property owned by the partner except to be able to share in profits and use the partnership property when a partner. The entity of the partnership owns all the property.

Partner’s Authority/Liability

i) Personal Liability: Aggregate Theory: each individual owns their own separate share.

ii) Rule Analysis:

(1) UPA 9 and RUPA 301 are the same.

(2) UPA 13 and RUPA 305a are the same.

(3) UPA 14 and RUPA 305b are the same.

(4) UPA 15 and RUPA 306 are different. In UPA joint and several for some (contracts) and jointly for others (torts). In RUPA jointly and severally unless contracted otherwise.

(5) RUPA 307 does not match a UPA section.

(6) 15/306 is the critical distinction between UPA and RUPA.

iii) RUPA § 306b: not liable for partnership obligations acquired before became partner. UPA silent.

(1) RUPA partners don’t take on the debts of the partnership acquired before they came onto the partnership. RUPA uses aggregate theory.

iv) Uniform Partnership Act (UPA 1914):

(1) Partner Agent of Partnership as to Partnership Business: §9

(a) (1): Each partner is an agent of the partnership for the purpose of its business and if in partnership name acts in the ordinary course of partnership business then it binds the partnership.

(i) Unless the partner had no authority to act for the partnership in that particular matter and the person whom the partner was dealing knew or received notification that the partner lacked authority.

(b) (2): An act of a partner not within the ordinary course of the partnership business binds the partnership only if the act was authorized by the other partners.

(2) Partnership bound by Partner’s Wrongful Act: §13

(a) Wrongful act or omission by any partner acting in ordinary course of business or with the authority of co-partners, the partnership is liable to the same extent of the partner so acting or omitting.

(3) Partnership bound by Partner’s breach of Trust: §14

(a) (a): Where partner acting within scope of apparent authority receives money or property from a third person and misapplies it.

(b) (b): Where the partnership within ordinary course of business receives money or property from a third person and it is misapplied by any partner while still in partnership custody.