Corporations Outline

BASICS OF CORPORATIONS

  1. Closely held v. publicly held
  2. Closely held – 5 or fewer owners (overlap w/ control), no active mkt for shares
  3. Forming a Business Entity – Reasons:
  4. Liability for protection of owners.
  5. Set forth an understanding of management/rules.
  6. Establish change of control/exit/succession procedures
  7. Taxes & Investment/Raise Money – easier to do with an established model
  8. Ownership and profit issues
  9. Taxes – important in determining which business form to choose
  10. Basics
  11. Marginal rate (each add’l $ above threshold) v. average rate
  12. Capital Gains/Losses
  13. Long term, taxed at 15% v. short (up to 1 year), taxed at norm rate
  14. Long term and short term netted separately
  15. Losses may be carried to offset gains in future years
  16. Proprietorship – not a separate taxable entity from owner (Schedule C)
  17. Unincorp Business Entity – at least 2 owners/partnership – Subchapter K – pass through taxes to owners
  18. C-Corp – double taxed (if distribution made, shareholders taxed)
  19. S-Corp – created to deal with issue of double taxation. Req’s:
  20. Less than 100 shareholders
  21. No non-resident or non-individual shareholders
  22. Only 1 class of stock
  23. Internal Affairs Rule – foreign courts apply law of state of incorporation

GENERAL PARTNERSHIP

  1. Governed largely by state statute: Uniform Partnership Act; 1997 Revised UPA – adopted by 36states, DC, VI, and PR
  2. Formation
  3. Established by default where “2 or more ppl carry on as co-owners of a business for profit” – prima facie case if share profits.
  4. UPA and RUPA provide rules for assisting in determ of if established.
  5. Estab. whether there was intent or not.
  6. Creditors can give some business advice – if too involved, can be seen as partners
  7. Partnership Agreement
  8. RUPA – agreement may be written, oral, or implied – doesn’t have to be in writing
  9. If not in writing won’t reflect all expectations/understandings of partners.
  10. Only reason to have in writing is for statute of frauds issues (Gano v. Jamail)
  11. No analogous UPA provision.
  12. Default rules (of state statute) apply unless altered by agreement btwn partners.
  13. Profits – partners share equally in profits
  14. Management – each partner has equal right to participate in mngmnt.
  15. Unlimited personal liability.
  16. Liable for act depending on when you entered P-S in relation to when liability-creating event occurred – later/earlier partners not subj. to liability
  17. NOW – generally have an exhaustion requirement for partnership’s assets before going after partners personally; prev. did not have exhaustion req.
  18. Flow through taxation to partners – partnership preps statement for filing to inform of profits.
  19. Joint Venture – specific venture/specific undertaking – NOT general operation.
  20. Generally limited time and limited purpose
  21. Each must have equitable interest in profits; joint sharing of losses commonly regarded as essential
  22. Treated as “general partnership w/ limited purpose” – thus partnership laws generally govern
  23. Kessler v. Antinora (NJ 1995) – partnership profits
  24. K to provide funds to build house; A to build it – profit split, but silent on losses; house sold for a loss.
  25. Issue – what sort of entity is formed? Should A have to cover K’s losses?
  26. Holding – partnership (by default); Not required to cover losses – Cali Rule.
  27. General Rule – repay capital contribution first; if there is a loss, it should be split along lines that the profits were to be split (unless agreement specifies otherwise).
  28. If both parties put in capital, repayment is split into that proportion before reverting to the profit/loss rule.
  29. Might require one partner to pay cash to the other to reach that split
  30. CALIFORNIA EXCEPTION (Kovacic v. Reed) – if one party contributes only labor (and is not compensated for it), he does not have to compensate the capital partner.
  31. The labor investment is valued equally to the capital investment.
  32. Thus, labor investment is losing 100% of its value, while investing partner only losing a small percentage.
  33. If labor partner is compensated, default rule kicks in.
  34. Indemnification & Contribution
  35. INDEMNIFICATION – UPA S.18(b) & RUPA S.401(c) – partnership must indemnify partner for payments made and liab incurred in ordinary course of partnership’s business (unless altered by agreement)
  36. Obligation of the partnership
  37. CONTRIBUTION – if insuffic funds to pay obligations on dissolution, partners must make up the short fall.
  38. Creditor may go after indiv partners, but only liable up to their share (RUPA 307(d)
  39. AGENCY RELATIONSHIP
  40. Definition
  41. “Fiduc relationship which results by manifestation of consent by principal to agent to act on principal’s behalf and subject to his control; and agent consents to act”
  42. Manifestation by principal
  43. Agent’s acceptance of undertaking
  44. Understanding that principal is to be in control of relationship
  45. As long as legal def. met, agency is present even if parties did not intend one.
  46. Relationship is not limited to natural persons (partners to partnership)
  47. If not within scope of the business, there is no authority.
  48. Principal is liable to a 3d party when agent acts w/: actual, apparent, inherent auth.
  49. May also arise through estoppel or ratification.
  50. Cannot remove authority after the fact and invalidate liability to 3d party
  51. Except, if didn’t have authority, can quickly say “no” to avoid liab – needs to be before there is detrimental reliance.
  52. Actual Authority
  53. Stems from communication btwn principal and agent – is it reasonable for agent to believe he has authority to act?
  54. Can be revoked beforehand
  55. If after the fact – ratification/estoppel
  56. May be express or implied (from prior acts)
  57. If principals words/conduct would leave reasonable person in agent’s position to believe agent has authority to act, agent DOES have actual authority (hypo – principal left note on wrong desk to do act)
  58. Incidental Authority – authority for agent to engage in acts necessary to accomplish an authorized transaction.
  59. UPA S.9 – Partner Agent of Partnership as to Partnership Business
  60. Carrying on in usual way of P-S binds P-S, unless acting partner has no such authority AND 3d party knows he has no such authority
  61. If not w/in usual scope of business, BUT is within apparent course of business of other firms in same business, than still falls under S.9
  62. If not in usual business, doesn’t bind partnership unless authorized.
  63. Certain acts require no authority less than all partners – (see list)
  64. National Biscuit Co. v. Stroud (1959)
  65. S advised N it would not be responsible for more bread; F bought more
  66. Issue – Can acts of 1 partner bind partnership as a whole?
  67. Holding – YES, each partner has actual authority for the partnership
  68. Each GP has equal mngmnt authority, within scope of the partnership
  69. Other partner cannot restrict such authority by notifying 3d party
  70. To revoke, must dissolve partnership
  71. Holds unless partnership agreement states otherwise – RUPA S.303 (if agreement publicly filed) – no similar UPA provision.
  72. Outcome would be different if F had been
  73. Agent (rather than partner) – can revoke actual authority
  74. F might still have apparent auth, unless S notified Nabisco
  75. Apparent Authority
  76. Arises from manifestation of PRINCIPAL to 3d PARTY – if Principal’s words/conduct would lead a reasonable person in 3d party’s position to believe agent has such authority (cannot be created by agent)
  77. May be created through agent’s position/title – if not clearly estab, what is industry standard for such position/title.
  78. To dispel, principal must note that not authority exists to the 3d party
  79. Estoppel
  80. No affirmative representation made, but principal contributed to 3d party’s belief OR failed to dispel it.
  81. 3d party must have undergone a detrimental change in position.
  82. Fiduciary Duties
  83. UPA S.21 – Partner Accountable as a Fiduciary
  84. Every partner must account to P-S for any benefit
  85. Applies to all representatives of a deceased partner as well.
  86. Meinhard v. Salmon (NY 1928)
  87. Lease btwn G & S, S enters separate agreement with M – S to operate, M to pay ½ costs. Near end of lease, reversion enters into extended lease; S did not tell M.
  88. Issue – Does S have a duty to include M in the new lease?
  89. Holding – YES, related to their nexus of opportunity
  90. Those acting as partnership have undivided loyalty to one another
  91. New lease was incident of the enterprise, which S appropriated in secret, excluding M from chance to compete from opportunity arising from participation in partnership
  92. Should receive half of lease, with ~1share adjustment to account for S’ mngmnt interest
  93. JV/General Partnership distinction doesn’t seem to matter
  94. If G had approached capital partner instead, maybe a diff outcome – S has greater duty b/c of mngmnt role.
  95. Dissociation and Dissolution
  96. 3 stages: formal dissolution; winding down; termination
  97. Fiduc duties still exist - might even be heightened to avoid looting.
  98. Also continue to be personally liable during this period (unless altered by agrmnt)
  99. Except if P-S continues after dissolution, leaving partner not liab for future acts.
  100. Terminates actual authority (except that needed to wind down) – problem is apparent authority (key is to send notice to 3d parties)
  101. UPA S.29 – Dissolution
  102. Def – change in relation of the partners caused by any partner ceasing to be assoc in carrying on of the business (refers to personal rel. of the partners)
  103. Terminology
  104. At will – agreement has no specified definite term or undertaking (default)
  105. Term Partnership – implicit/explicit agreement by all partners that P-S shall have definite term for a particular undertaking.
  106. Statement that goal of partnership is to recoup investment not suffic to constitute a “term”
  107. Rightful Dissolution – w/o violation of the agreement
  108. Wronful – in contravention of terms of agreement
  109. Dissolving partner must pay damages, for breach of contract.
  110. Formal Dissolution – Step 1
  111. Req’s a formal event.
  112. P-S to end on set date
  113. Partner walks away
  114. Death/Bankruptcy
  115. Court Order – Key reasons:
  116. Breach of agreement/partner conducts self unreasonably
  117. P-S can only carry on at a loss
  118. Indiv partner capable of performing function
  119. Lunatic
  120. Partnership can continue after dissolution event
  121. Have to give accounting to leaving partner – either then or later
  122. If later, accounting = amount of share (valued at time of dissolution) + (interest on capital OR returns gained from capital)
  123. Partners choice – encourage P-S to make accounting when leaving
  124. Equitable Rule – allows reasonable efforts to make acct’g – can’t find partner, so put money into escrow/trust
  125. Generally not made when leaving, b/c ppl for get or it isn’t much at the time (eg: FaceBook)
  126. Winding Down – Step 2
  127. Close any transactions; distrib assets:
  128. Creditors, partners (non capital contrib), capital contrib, profits
  129. Partners personally responsible for contribution to satisfy liabilities
  130. Selling assets can be piecemeal or as a going concern
  131. Authority/Agency still exists in a limited way.
  132. Termination – Step 3
  133. Collins v. Lewis (Texas 1955)
  134. C puts up money, L operates cafeteria – goes way over cost
  135. Issue – May court dissolve partnership?
  136. Holding – NO, L hasn’t done anything wrong; but C may walk away
  137. Partners have inherent power of dissolution, but not the right
  138. Court will not assist in braking of partnership where partner not fully or fairly performed agreement – courts as a policy don’t like breaking up P-S
  139. C did not perform when he stopped his payments to L (no finance cap in agreement)
  140. L could perform his role (mngmnt) but for C’s stopping payment.
  141. L not dissolving b/c no incentive
  142. He has a set cash flow
  143. Cali Rule won’t apply b/c receiving compensation for his labor, so would have to repay losses.
  144. C could potentially bring suit later, arguing P-S not possible to carry on for any profit – but that might have to be awhile to avoid appearing as if trying to scuttle the P-S
  145. Case heard under Texas Law, but outcome largely the same under UPA

OTHER BUISINESS FORMS

  1. Change to a diff structure does not affect liab for acts while done under prev. structure
  2. Some states may say that after certain time, that is no longer the case.
  3. Main Partnership/Corporation trade-off is taxes v. liability.
  4. LP
  5. State statutes generally explicitly link to general partnership law.
  6. Formation – req’s filing with the state
  7. Real details of rights/duties/operation is in the partnership agreement (non-public)
  8. Can withdraw w/o notice, triggering dissolution.
  9. Statute does not explicitly grant/deny mngmnt rights to LP, but cases hold that LP may not participate in mngmnt – agreements also tend to deny mngmnt rights.
  10. LP participates in control, loses LP status: “control rule liability”
  11. Generally no voting rights, except for major transactions
  12. LLP
  13. General partnership law applicable, when not explicitly altered
  14. All partners have right to participate in mngmnt w/o risking loss of limited liability – provides “peace of mind” insurance for innocent partners
  15. Supervisory liability – only liability for acts you engage in and wrongful acts of ppl you supervise.
  16. Formation – must fall w/in general def. of partnership, and meet certain formalities (such as filing with the state and carrying specified insurance funds)
  17. LLLP
  18. Allows for an LP to register as an LLLP.
  1. The Control Rule – lmt’d partner has no liability for debts of venture beyond initial investment, but can lose that protection if they participate in mngmnt.
  2. Signif litigation on how much activity is necessary
  3. Each progression of LP statute, control rule has become more protective of LP – last version eliminated control rule
  4. Gateway Potato Sales v. GB Investment Co (AZ 1991)
  5. S (GP) told Gateway that GBI (LP) providing the financing and was actively involved in the management – GBI never confirmed, and took it at face value
  6. Issue – Is GBI liable as a general partner, even though Gateway did not directly know of GBI’s mngmnt acts?
  7. Holding – YES, can be (remanded for determination of liability)
  8. Threshold question is whether there is authority for the transaction
  9. Actual authority – yes, GP’s role to manage affairs
  10. Apparent authority – no – agent cannot create authority, must come from partnership (principal)
  11. Is there liability? 3 rules, under 2 statutes
  12. If LP’s participation in control is not substantially the same, then must have actual knowledge of participation in control
  13. If there is no actual knowledge of participation, then LP’s control must be substantially the same as GP’s.
  14. Participate in control in substantially the same way and signal it to creditor – saying the LP provides funding not suffic b/c that is the LP’s role.
  15. AZ adopts rules 1 and 2.
  16. Under current law, when “substantially the same” test is met, direct contact not req’d. If test not met, then direct contact is req’d.
  1. LLC
  2. Combines benefits of corporation and partnership – lmt’d liability and pass-thru tax
  3. Large freedom to arrange internal operations of venture
  4. Members can appoint managers – members don’t have authority
  5. Can also be “member-managed” – all members have authority
  6. Most states allow LLC to be formed by 1 person
  7. Can unilaterally disassociate at any time, but dissolution req’s a vote.

CORPORATIONS

  1. Formation of a Closely Held Corporation
  2. Where to Incorporate – appraisal of 2 factors: cost of incorp and law of state of incorporation
  3. Usually comes down to state conducting business w/in and Delaware
  4. How to Incorporate
  5. File w/ state – 4 req’s: agent, #shares, corp name, name of incorporators
  6. Permissive provisions
  7. Opt-in (must be put into charter to apply) – lmt’d liab of directors
  8. Opt-out – purpose of court
  9. Then must create bylaws (not publicly filed)
  10. Restated (articles redone – only need to check one copy)
  11. Amended – only certain parts redone (need to check all versions)
  12. Signif issue – what to put into articles – trend toward simplification, only put in what is req’d
  13. MBCA provisions
  14. S 2.02 – Articles of Incorp
  15. Must contain – corp name, # shares, street address of office and name of agent, name and address of each incorporater
  16. May contain – name and address of initial directors, purpose of corp, defining powers of managers/directors/shareholders, imposition of personal liab for shareholders, director liability and indemnification
  17. S 2.03 – Incorporation: effective when docs filed (concl. proof of proper existence)
  18. S 2.05 - Org of Corp
  19. After incorp, initial dir must appoint managers and create bylaws
  20. S 2.06 – Bylaws: may contain any provision for managing the business
  21. Ultra Vires
  22. Ashbury Railway v. Riche – beginning of doctrine
  23. Corp NOT liable to contrast RR b/c it was “beyond power of corp” – which was to “make or sell, lend, hire”
  24. Doesn’t matter that corp’s shareholders agreed
  25. Articles of Incorp are public record and should be looked at when doing trans
  26. Some courts avoided ultra vires by construing purpose clauses broadly or finding implied purposes – could also use estoppel, unjust enrichment, waiver
  27. 711 Kings Highway Corp v. F.I.M.’s Marine Repair Service (NY 1996) – diminish UV
  28. Casea arguing ultra vires should be dismissed for failure to state a claim
  29. People weren’t checking public record (undermines reason for UV)
  30. NY Bus Corp Law S.203 – no act of a corp shall be invaled by fact it was w/o capacity or power to do such act
  31. Except:
  32. Act brought by shareholder to enjoin corp act
  33. Act by corp against incumbent or former officer
  34. Act brought by state AG
  35. Sullivan v. Hammer (DE 1990) – Chartable Donations
  36. Financial support for museum to be named after corporation’s founder – settlement for court approval
  37. Allows settlement to go through – in making determ, Court should look at fairness of the case, considering:
  38. Probable validity of claims
  39. Difficulties in enforcing claims through court
  40. Collectability of judgment
  41. Delay, expense, and trouble of litigation
  42. Amount of compromise
  43. Views of parties involved
  44. No personal benefit, lack of indep, or gross neg shown – so get BJR
  45. If this is UV depends on how purpose clause written – “any lawful purp”
  46. Defense – gift contributes to goodwill of the corp – speculative at best, but doesn’t matter b/c of BJR protection
  47. What considerations matter? – geography, entity donated to, indiv’s name in relation to the corp
  48. State statute – allows for reasonable contrib to charity
  49. CL – reasonableness interp and ultra vires.
  50. Citizens United
  51. UV arg for corp making political donations didn’t work
  52. Promoters
  53. “Person who directly/indirectly takes initiative in founding/organizing” firm – could be a promoter w/o knowing it
  54. Owes signif fiduc duty to others in corp – corp may bring suit v. promoter after corp control transfers to subsequent investors.
  55. Default Rule – promoter liable for contracts made when no corp exists – unless there is an agreement to look to some other entity for liability.
  56. Where performance called for before corp existence, inference promoter intended to be personally liable, and corp not liable on contract unless it explicitly/implicitly adopts contract (McArthur v. Times Printing Co)
  57. Yaki v.