Corporations Law Outline – Gabaldon – Fall 2010

I. Professional Responsibility Issues in Corporation Law

  • 1. Conflicts of Interest
  • ABA Model Rule 1.7 (Handout) (When representing 2/concurrent clients)
  • 1) A Lawyer cannot represent a client if conflict of interest exists, and one does exist if:
  • Representing one client directly adverse to another
  • Risk that representing one will be materially limited by responsibilities to another
  • 2) Exception
  • The Lawyer reasonably believes he will be able to provide competent/diligent representation
  • It is not prohibited by law
  • Representing one does not involve assertion of one client against another
  • Each gives written informed consent
  • Generally
  • Not an issue, and can concurrently represent
  • 2. Business Transactions
  • Are presumptively fraudulent with client
  • Model Rule of Professional Conduct 1.8
  • A Lawyer shall not enter into a business transaction with a client or knowingly acquire an ownership, possessory, security, or other pecuniary interest adverse to the client unless:
  • 1) The transaction and terms on which lawyer acquires interest are fair and reasonable and fully disclosed, in writing to the client, in way which can be understood
  • 2) The client is given a reasonable opportunity to seek the advice of the independent counsel in the transaction (Lawyer must advise client to seek independent counsel)
  • 3) The client consents to it in writing
  • 3. Note:
  • If you are barred in 1 state, you may give advice on the law of another state
  • Where you are located by “seat of your pants” doesn’t limit you, only your competence does

II. Basic Principles, Policies, and Theories of Corporation Law

  • 1. Formalities and Filing Requirement
  • Certain business organization types require a filing with state to “create”
  • Filings can get very expensive
  • Revenue Stream for the State
  • 2. Factors Evaluated On
  • Control of Business
  • Filing Requirement
  • Limited Liability for shareholders for tort, contractual, debt obligations
  • Federal Tax Implications
  • 3. Limited Liability Concept
  • Greatly dependent on the corporate structure selected
  • “Limit” is deceiving
  • liability is limited, but not lost…merely shifted to 3rd parties ,entities, etc…
  • Original Intentions:
  • Limited Liability accompanied Passivity
  • More Control of management Less Limited Liability
  • The more passive control, the more liability was limited
  • Policy:
  • Encourages Investment
  • Limits Risk Averse Investors risk they are taking
  • Creates Revenue Stream for state with filing fees to gain LL
  • Modernly:
  • There has been a shift away from LL being based on control of business
  • Now, if you “file” appropriate paper work, you gain limited liability
  • Proponents/Opponents of Limited Liability
  • Proponents
  • Creates agglomeration of Capital
  • Stimulates by investing in 1 large entity
  • Diversification
  • By limiting liability, allows you to invest in companies which may be riskier
  • Don’t need to worry about the risks of the company, monitoring what they do day to day
  • Can invest in more risky companies than
  • Necessary to permit active trading
  • People with different amounts of personal wealth will value certain investments less, if there is more to lose, through liability by investing in it
  • By limiting liability, allows those with much and little $ to value investments the same, permitting more active trading
  • Opponents
  • Creates Aglomeration of Capital
  • Too big to fail type companies
  • Moral Hazard
  • Allows risk taking, without risk on the risk-taker
  • Only upside potential
  • Downside risk is passed along to third parties (Gulf Coast, Workers, etc…)
  • May not be entirely true
  • Still have risk of losing $ in investment
  • 4. Theories of Corporation Law:
  • Traditionalist:
  • Business is a fictional person
  • Board  brain
  • Shareholders  Stomach
  • Officers  Hands and Fingers
  • Contractarian:
  • Established in the 1980s through the Law and Economics Movement
  • “Nexus of Contracts”
  • The corporation is not an “entity,” but instead an assembly of contrcts between shareholders, employees, directors, business, etc…
  • All are acting within their own best interest, with a common goal
  • The Rules, then, attempt to apply the most efficient outcome they would have chosen  attempt to substitute their bargains
  • Progressives:
  • Established in 1990s at GW
  • Argued that with the prior 2 theories, there was not enough interests represented when rules were designed
  • Argued that there were many more social stakeholder, that Social Corporate Responsibility needed to be represented
  • Team Production Theory:
  • Established in 200s
  • Focused on the Board of Directors as the “Mediating Heirarchy”
  • Mediating the team inputs
  • Business is a team, made up of stockholders, employees, managers…which Board mediates
  • Directors encourage investment by mediating all interests, and assets

III. Basic Business Forms

  • 1. Sole Proprietorship
  • Control Single Individual
  • FilingNo Filing
  • Created at start of business… As soon as you start making shoes in your garage
  • Limited Liability None for Sole Proprietor
  • Liable for torts of employees, contract, debt obligations
  • Two Methods
  • EG: A & B
  • A as Proprietor, B as employee
  • A is liable, B is not
  • A as Lender, B as Sole Proprietor
  • B is liable, A is not
  • Federal Tax Direct Tax to individual tax return
  • 2. General Partnership
  • Default
  • Def: An association of 2 or more people to carry on a business as co-owners for profit
  • Control General partners Control
  • Filing None required…just two or more people entering business
  • Limited Liability None for general partners
  • Ending GP:
  • “Dissociation” UPA (1997) §601: Ends when partner gives express notice of withdrawal
  • Federal Tax
  • 3. Corporation
  • Def: A type of juridical person; can do most things human beings can
  • Have constitutional protections: Freedom of speech, due process, etc…
  • A Creation of the state by filing articles of incorporation
  • Control Directors
  • FilingArticle of incorporation must be filed
  • Can be very expensive
  • Limited Liability Yes, for shareholders and participants
  • Federal Tax
  • 2-Tier Structure (not for S-Corp (see infra))
  • Income Taxed in year earned by corporation
  • Dividend payouts to shareholders is also taxed as income to shareholder
  • 4. Limited Partnership
  • 2 Types of Partners
  • A partnership (2 or more people who carry on business as co-owners for profit) with an association of 2 different types of partners
  • Must Include
  • 1 or more general partners
  • 1 or more Limited Partners
  • Traditionally
  • Limited Partners could not participate in “control of business”
  • Back to the idea of Limited Liability being function of Passive Control
  • Creature of statute, if not followed correctly, reverted to GP
  • If Limited Partners participated in control of business, became General Partner
  • Amended by ULPA (1976) §303:
  • Control General Partners…Limited Partners cannot
  • FilingYes
  • Limited Liability Yes for Limited Partner, No for General Partners
  • Federal Tax
  • 5. Limited Partnership with Corporate General Partner
  • Same as Limited Partnership, except that the general partner is a corporation
  • Therefore, the Corporation (GP) has limited liability
  • The shareholders of the Corporation are usually the limited partners, effectuating control over the GP, while maintaining limited liability
  • Contrary to idea of passivity with Limited Liability
  • Control Directors of Corporation (GP/LP)
  • Filing 2 Filings
  • File for Limited Partnership
  • File for Corporation
  • Federal Tax
  • 6. Limited Liability Company
  • A “person” formed by the state
  • History
  • First appeared in 1980s, in Wyoming
  • After evaluated the factors that the IRS was judging how to tax businesses, several people figured out a way to meet the factors of gaining conduit tax, while still having limited liability
  • The IRS agreed, and the LLC was borne…quickly spread to all states
  • Passivity
  • With the LLC, you could manage the business, and gain limited liability
  • This went away from the idea of Passivity to create investment rewarding it with limited liability
  • ControlTwo Types, depending on agreement
  • Member Managed
  • Can vote to decide business matters with majority
  • Each member is an agent with respects to matters pertaining to business
  • Manager Managed
  • Managers have the right to control if 1 manager, or if more, by majority
  • Members are not agents in Manager Managed LLC, Mangers are
  • FilingRequired, ULLCA §202-203
  • Limited Liability For members
  • Federal TaxCheck the Box
  • 7. Limited Liability Partnership
  • General Partnership, which all members have Limited Liability
  • ControlGeneral Partners
  • Filing Required, GP’s get LL
  • Limited Liability Yes
  • 8. Limited Liability Limited Partnership
  • All partners gain limited liability
  • A result of legislature seeing that LP, the GP’s could not get LL, but LLP could
  • Limited Partnership simply files for Limited Liability
  • Control General partners
  • Filing 2 Filings
  • File for Limited Partnership
  • File for LL for the general partners
  • Limited Liability For GP and LP
  • 9.Historical Alterations to Business Forms
  • The above list is in chronological order
  • From 1960s-1980s, much changed in attempt to gain Limited Liability
  • Change also from attempt to get most beneficial tax form and limited liability
  • Federal Tax Changes
  • With the creation of the LLC, the IRS eventually gave in to change in corporate structures and taxing them
  • As lawyers pushed to get the benefits of tax, while also getting Limited liability, IRS gave in
  • Eventually granted “Check the Box Tax”
  • Allows unincorporated businesses to choose their own tax form
  • Not for publically traded businesses
  • 10. Modernly

Type / Filing / Control / Limited Liability / Federal Tax
Sole Proprietor / No / Individual / No / Direct Tax
General Partnership / No / General Partners / No / Conduitgave way to “Check the Box”
Corporation / Yes / Director / Yes for shareholders and participants / 2-Tier Tax
Limited Partnership / Yes / General Partners / For Lmtd. Partners / Conduit “Check the Box”
LP with C. G. P. / Yes x 2 / General Partner (Shareholders of corporation who is GP) / Yes for LP and corporations shareholders / Conduit and 2 tier “Check the Box”
LLC / Yes / Members/Managers / Yes / Conduit “Check the Box”
LLP / Yes / General Partners / Yes / Check the Box
LLLP / Yes x 2 / General Partners / Yes for both GP and LP / “Check the Box”

IV. Agency Law in Business Transactions

  • The Law of Agency is implicated in all corporate law
  • 1. Why?
  • Creates liability for principal when agent acts on their behalf
  • Tort, Contract, Tax
  • Implicates Employer versus Independent Contractor Vicarious Liability
  • Corporations/Business Entities
  • Can only act through an agent, although they can be both principal and agent
  • 2. Basics
  • Agent: Acts on behalf of the principal, who has manifested assent for agent to act on his behalf, and agent has accepted to do so creating a fiduciary relationship
  • Agent is subject to the Principals control
  • Principal: One for whom the agent acts, who is in control of agent, authorizing Agent to act on Principals behalf
  • Authority Created in Agent
  • Actual: Arises from express manifestation of Principal to the Agent, that he has power
  • Agent is not liable for obligations he makes within scope of authority
  • Principal is bound and liable
  • Apparent: Arises from manifestation from Principal to a 3rd Party, that another (Agent) is authorized to act on his behalf, as his agent
  • 3rd Party’s Reasonable Belief: If 3rd party acts on this apparent authority, he must have a reasonable belief that agent is authorized
  • If he knows or has reason to know Agent is not authorized, authority ends
  • Both can be simultaneous
  • Scope of Authority created in Agent:
  • Agent can act as designated (Actual), or implied, necessary and incidental to achieve the principals objectives the agent reasonably understood
  • Inherent Authority- Arising from the type of agency
  • Binds principal
  • EG: Agent is manager of store
  • Manager has inherent things that go along with this type of position
  • Incidental Authority- Authority to do things incidental to completing transaction that was authorized
  • Implied Authority- Based on conduct, implied manifestation may create:
  • Implied Actual Authority
  • Implied Apparent Authority
  • Remember: With apparent, 3rd party must have reasonable belief that agent has the authority
  • So, Authority does not have to be express but can be implied to the agent or 3rd party
  • Authority is terminated the same way it was created
  • C. Fiduciary Relationship
  • Agent is accountable for all profits arising from his transactions; cannot act adversely to or assist adverse party to principal
  • Breach of Duty if he acts for himself or someone other than principal
  • Agent must act with reasonable care, meeting standard of care in locality
  • D. Vicarious Liability
  • A Principal is liable for his Servant/Employee’s torts
  • Not those of Independent contractor
  • Must Determine if Master/Servant (Employee) or Independent Contractor
  • Servant/Employee: Physical conduct is controlled by the master
  • Always an Agent of the Principal
  • Master:Controls the servant, or has the right to control, by employing the servant’s service
  • Independent Contractor: Person who contracts to do something, but who’s physical control is not controlled by the other
  • Sometimes an Agent, but not always
  • If Principal can control, but not control physically
  • Factors to Determine if EE or IC:
  • The extent of control the master may exercise over the details of the work
  • The kind of occupation, reference to locality, and if it is done typically by employed at discretion of employer, or a specialist without supervision
  • Skill required to perform occupation
  • Does the Workman or the employer supply the instrumentalities
  • EG: IC brings tools to job, which has planned outcome, but register worker comes and uses employers clothes, area, register, etc…
  • Length of time employed
  • Method of payment- by time or job?
  • Is work part of regular business of employer?
  • What the parties think
  • But- Simply denominating the job as EE or IC will not create that
  • Look to the factors and definition to determine
  • EG:Is Professor Gabeldon a EE or IC?
  • School could control, even though they choose not to
  • They give her the class, student, room, pay her salary
  • Part of regular business of employer
  • Employee
  • Overall, it really does not take much control to be considered an Employee
  • EG:
  • General Partners are Agents of Partnership and each other
  • UPA (1997) §301: “Partners are mutual agents of partnership for purposes of the partnership”
  • Limited Partners are not
  • LLC- Depends on Member/Manager managed
  • Look at filing to determine who is agent
  • E. Liability
  • Tort
  • Principal is liable for agent’s tort
  • Intentional
  • Negligent
  • Authorized
  • EE/Servant
  • Agent is always liable for his own tort
  • 3rd party will not be liable to Principal for tort on Agent
  • Makes no sense…no tort was committed on principal
  • Contract
  • 3 types of Principals only matter here, when dealing with Contract liability
  • Disclosed Principal: When 3rd party knows who agent and principal are
  • Undisclosed: When 3rd party does not know who principal, or agent is acting on behalf of someone
  • 3rd party thinks A is doing it for himself
  • Generally no apparent authority (3rd party doesn’t even know there is P)
  • Partially Disclosed/ Unidentified: 3rd party knows Agent, and that there is a principal, but not who the principal is
  • Stock-broker
  • When is Principal liable for K Agent enters in to?
  • Disclosed P: P is liable (assuming there is authority)
  • Undisclosed P: P is liable (assuming there is authority)
  • Partially Disclosed P: P is liable (assuming there is authority)
  • When is Agent Liable for K he enters into on behalf of Principal?
  • Disclosed P: Agent is not liable
  • the Bloomingdales clerk is not liable to return your $ back
  • Exception: if A personally guarantees then A may be liable, assuming contract law is satisfied (consideration, O&A, SOF)
  • Undisclosed P: Agent is Liable
  • When Disney’s people go into countryside to buy, but people don’t tell buyer that they are buying for Disney, agent is liable
  • Makes Sense
  • Fair that Agent liable in suit
  • 3rd party thinks they’re making contract with Agent
  • Partially Disclosed P: Agent is liable
  • Exception: If A specifically disclaims, clarifying that he is not liable
  • Overall, A will most likely be liable, unless P is Fully Disclosed
  • When is 3rd Party liable to Principal for the contract he made with Agent?
  • Disclosed P: 3rd party is liable
  • Partially Disclosed:3rd party is liable
  • Undisclosed P:
  • 3rd party will be liable, unless
  • 1) Fraudulent Concealment by Agent:
  • Agent specifically says he is not buying for Disney
  • 2) Knowledge of Principal is Material to the K:
  • If $, knowledge of who P is probably won’t be material, unless you say it is specifically
  • If personal services K, more likely to be material
  • Overall, 3rd party will be bound to Principal unless Fraud or Materiality
  • Ratification
  • When the agent does something, the Principal can ratify it
  • EG: Officer of company purchases land. The Board can ratifiy this purchase
  • Express: Formally ratifying Agent’s action (above example)
  • Implied: Accepting the benefits of the contract
  • Ratification can create additional authority
  • Actual or Apparent depending on what is said, implied to Agent or 3rd party

V. The Partnership

*Definition: UPA (1914) §6: 2 or more people carrying on as co-owners, a business for profit *

  • 1. General:
  • We will deal with law that applies to General Partners
  • Also Applies to:
  • General Partners within LLP
  • General Partners in a Limited Partnership
  • UPA (1914) §6/UPA (1997) §202 Both say to use the UPA to fill in gaps between GP and LP
  • General Partners within a LLLP
  • Remember:
  • The UPA is not law, until it is adopted by the state
  • It is a group of scholars who get together to create laws with uniformity
  • The idea was that partnerships are casual, used in many states and across state boundaries, so we should have uniform laws governing them
  • This is also true of Restatements and Model Acts (which we will deal with in Corporations)
  • Subject to Agreement Language:
  • UPA (1914)
  • § say “subject to agreement”
  • §13, 14, 15 may not change liability to 3rd parties
  • UPA (1997) §103
  • Creates blanket “subject to agreement” for all sections, rather then writing it out at the beginning of each section
  • Applies to all except for Section §103 (B)
  • Limits ability to contract out of fiduciary duty owed to partner (infra)
  • §103 (b) (10) Agreement cant change liability to 3rd parties
  • 2. Writing
  • No writing is required
  • But is advisable:
  • Avoids potential disagreements about what agreement was
  • Without it, UPA governs/applicable statute, and it may not represent best interest/desires
  • Note THE UPA IS THE DEFAULT IF THERE IS NO WRITTEN AGREEMENT
  • Creates Fee income for lawyers, and avoids possibility of malpractice suit
  • Will be Required, However:
  • If the Statute of Frauds applies to the provision, then a writing will need to exist for that provision to be enforceable
  • Year or more, Real-Estate, etc…
  • A partnership is created by it fitting into definitionEven if intentions show not wanting to be one
  •  If by definition you are, then you are partnership
  • UPA (14) §6 / UPA (97) §202
  • Note:
  • See Inadvertent Partnership Section
  • 3.