AGENCY
Reciprocal Duties of Agent and Principal (20-39)
· Community Counseling Service
o Need for non-competition clause in contract – but must be careful not to violate public policy
o What is the duty of a party to the firm when he is planning to leave but hasn’t yet left?
§ You cannot seek out firm’s clients while you are still working there
· Hamburger
o Did not solicit clients’ business while he was still their employ
o Anderson Rule: categorical – fiduciary duty obliges the fiduciary to act in the best interests of his client or beneficiary and to refrain from self-interested behavior not specifically allowed by the employment contract.
o Easterbrook and Fischel Rule: difficult to apply in practice – socially optimal fiduciary rules approximate the bargain that investors and agent would strike if they were able to dicker at no cost. (not a great rule because there are always transaction costs)
o Limitations on the right to discharge
· Foley
o Must decide what the relationship between the parties is: independent contractor, employee, etc?
§ Cannot be fired for irrational reasons or for certain protected reasons (if employee)
o Employees invest and rely, therefore they need protection
o Alleged public policy: employees doing the right thing for their employer
§ Court says there is no public interest in helping a private employer
§ Employer’s interest ≠ public interest
o Employer handbook can be used as evidence to prove it is not at-will employment
o Tortious breach of good faith and fair dealing – Court says no, there would be no duty to mitigate for contract breaches, therefore it’s not a good idea
Duty to Creditors (39-49)
· Blackburn
o 3P reasonably believed A was acting with the authority of P, P did nothing to discourage her belief
· Sennot
o All partners are agents for the principal, by default
PARTNERSHIP
Partnerships and other Non-Corporate Forms
· GPs
o An association of two or more people to carry on, as co-owners of a business for profit
§ A lot of litigation is decided on whether or not the parties were co-owners
o Intent that counts is not the creation of a partnership, but the intent to carry on a business for profit as co-owner
o Evidence of whether or not there is a partnership:
§ Control
§ Sharing of profits and losses
· JVs
o Partnership for a limited time and limited purpose
· LPs
o Limited partners are very much like stockholders – they are just investing their money, they don’t have management rights/ powers and are not liable for partnership debts
§ Generally, only one general partner and multiple limited partners/ passive investors
§ Cannot accidentally fall into a limited partnership because LPs must be registered with the government (gen. state)
· LLCs
o Form of a business organization for a small number of people with a relatively close relationship but who don’t want to be personally liable for business expenses
o As similar as possible to a corporation without being taxed like a corporation
o Interests are not freely transferrable like in a corporation
· LLPs
o Same as general partnership except creditors cannot go after partners personal wealth for partnership debt
· LLLPs
o The general partner is no longer liable for partnership debts
o Same can be achieve if the GP is a company (or some other non-human)
Characterizing the Relationship
· Byker v. Mannes
o The definitive way to ensure your relationship is not characterized as a general partnership is to become a different type of business organization
o You can always leave a partnership, at any time
o You can fall into GPship
· Hynansky v. Vietri
o H never filed a partnership tax return and treated the losses as his own
o Pretty iron-clad rule: you have a to have a right to profits to be considered a partner
Sharing Profits and losses
· Kovacik v. Reed
o Didn’t talk about who was going to share losses
o One gave money, the other gave only labor
o Default rule is that losses follow profits
o Lost opportunity costs for both parties
Fiduciary Duty (75-87)
Duty of Loyalty
· Meinhard v. Salmon
o Question of fiduciary duty
o Meinhard claims Salmon should have told him about the new deal
o Salmon got the opportunity through being a partner, therefore he owes Meinhard, at least, the duty to disclose
o Salmon has a duty to Meinhard in their common business – what is their common business?
o Revised Partnership Act
§ §403: Duty of care
§ §404: Duty of loyalty
§ §103(b): Set of default rules, subject to limitations – (3) duty of loyalty cannot be taken away
Self-dealing
· Vigneau v. Storch Engineers
o Managing partner refused to pay out his partnership interest because he violated his fiduciary duty
o It is clear he breached his duty, but what are the damages?
§ He is not allowed to keep his gains from the illicit, fiduciary-duty breaching business
o Ended up with a worse deal from the court than from Storch
o Breaching party has the duty to prove by clear and convincing evidence that they acted fairly/ fiduciarily
Management (87-98)
· Covalt v. High
o Conflict of interest is always known: Covalt gains more on the lease; High loses more on the lease
o Court says it doesn’t want to second guess the business decisions
o Partnership decisions must be made my majority; if no decision can be made, then the status quo continues – the dissenting partner can withdraw and dissolve the partnership
§ Dissolution is always the remedy for the oppressed party – you have to liquidate the partnership and split the assets
§ Assets put up at auction if the partners cannot agree on value
Contracting for Absolute Discretion
· Starr v. Fordham
o To what extent should courts be paternalistic and save people from the consequences of their contracts?
o When there is self dealing in the fiduciary context, it is on those preaching to prove fairness by clear and convincing evidence
o The partners gave themselves completely unfettered discretion
o The partners can’t come up with criteria that disfavor P, they must have some criteria that favor him
Duty of Care
· Ferguson v. Williams
o Very few cases in partnerships because you are closely associating with them, therefore you ought to know if they are not good with partner with and you should get out.
§ Be aware if your partners are incompetent
o Must be grossly and recklessly incompetent
o Courts do not like to be called in for monitoring duty
Dissolution and Dissociation: Basic Framework (98-109)
· McCormick v. Brevig
o Revised UPA (1997)
§ Art. 6: Dissociation – something the partners do
ú Effects:
· Might or might not result in dissolution
· If dissolution, collect all assets, pay creditors, liquidate, anything left goes to partners (winding up and dissolution)
§ Art. 8: Dissolution – something that happens to the partnership
ú Events causing dissolution:
· An at-will partner expresses his not wrongful will to dissociate, the default is dissolution, but it can be stopped.
· Wrongfully dissociating partners cannot force dissolution
§ Art. 7: Not dissolution
ú Provides for a buyout – figure out a way to value the interest of the dissociating partner and pay him that
· Deciding value is difficult
· If litigating value, you must issue a partial payment up front
· Departing partners tend to want market value, which usually means an auction
o Brother/ sister partnership in the family ranch
o What is the best way to value the partnership?
§ If total value is know, how to distribute the value to the partners?
§ Auction:
ú Issues of institutional competence when the court gives a valuation
ú If there is an auction, there’s no need to prove any valuation to the court
Wrongful Dissociation (109-119)
· Drashner v. Sorenson
o They ask the court to expel Drashner for them: §601(5) allows you to apply to the court to expel a partner.
o §602(b)(1): there are strict limits on wrongful dissociation – it purports to be an exhaustive list
o “good will” is the value of the business that can’t be accounting for in its physical assets (an accounting term)
o Under UPA (1997) a wrongfully dissociating partner gets his interest back but must pay for any damages he caused – you don’t get market value for your interest, the court values it.
· McCormick v. Brevig
o §601(5): expulsion
§ Only wrongful under UPA if it was partnership for a term
o §801(5): judicial determination of dissociation, it causes immediate dissolution
o §601(5) and §801(5) may or may not cause the same result.
o You don’t need partner’s consent to continue on if they wrongfully dissociate
o Partnership for a term: if a partner wrongfully dissociates, she doesn’t have to be paid until the end of the agreed-upon term
o §801(2)(i): the death of a partner opens up a window for dissolution
· Page v. Page
o Purported term: until they pay off their debts
o How much are you bound? IF you see a better business opportunity, you can’t necessarily just leave, but you aren’t forced to stay forever
o UPA (1997) limits the fiduciary duty owed to people
Fiduciary Limits on Expulsion (119-135)
· Bohatch v. Butler & Binion
o Partner alleges managing partner is overbilling the main client; after some investigation, they decide there is no merit to her accusation. They expel her from the partnership.
o They still owed her a fiduciary duty, which they breached by not giving her proper notice of her firing and not giving her her bonus.
Contracting to Prevent Opportunistic Withdrawal
· Meehan v. Shaughnessy
o Some partners prepare to leave a law firm, but they repeatedly lied about leaving and sent letters to clients that were misleading about the old firm
o Duty to talk was in the agreement as part of the fiduciary duties owed – disclose on demand.
o Their letters to the clients damaged the firm.
Allocating Risk of Loss in Transactions with Third Parties (135-151)
· P.A. Properties
o UA hired PAP and never mentioned their partnership
o PAP was unaware of Moss until after UA had gone bankrupt and failed to pay its debts
o Not everything the agent does binds the partnership
o Actual authority?
§ Is UA a partner? Yes.
§ In the absence of an agreement to the contrary, he has the actual authority to bind the partnership for the purpose of its business. §301(1)
§ Is there an agreement to the contrary? Moss says yes.
o Apparent authority?
§ PAP didn’t know Moss existed – there cannot be apparent authority on behalf of an undisclosed principal.
o Inherent authority?
§ Yes. Inherent authority is very broad.
o UA’s intent was to benefit the JV, not just itself and the outcome was a benefit to the JV
o UA’s action was very much within the scope of what managers do.
· Haymond v. Lundy
o Between partners
o Lundy promises 3P ~$300,000, negotiates it down to $150,000. Partnership agreement states he cannot make an agreement to pay more than $10k to a 3P.
o Does not deal with the rights of 3P, it just deals with the what the partners actually agreed to – actual authority
o The contingency fee is a material asset; Lundy says they did not customarily agree to treat those fees as material assets – insufficient evidence that that is true.
o Partnership Agency
§ No reasonableness requirement, but you can say it as not the apparent carrying on of the ordinary course of the partnership business
§ When you’re a partner, you’re automatically an agent
· Dow v. Jones
o Even if the partnership is dissolved, the partnership can still be held liable under two theories:
§ The party’s action is a continuing matter
§ Power to bind the partnership under ordinary circumstances continues because party did not receive proper notice of the dissolution
ú Partner can lose this authority through agreement to the contrary or majority vote (to take it away)
THE CORPORATE FORM
Introduction and General Principles (153-166)
· Shareholders elect board; board appoints management
· Shareholders always have the power to amend the bylaws
· The board of directors can sometimes amend the bylaws
· Shareholders have the power to elect the board, but it can sometimes be very difficult to exercise their control over the corporation
o Too much shareholder power can result in paralysis
· Almost nothing requires a unanimous vote, only waste requires it, so, in reality, nothing does
· Default rule: shares are readily transferrable, partly because the shareholders do not have a lot of say in management
· Shareholders ≠ agents of the corporation and they are NOT direct owners
· DGCL §141
· MBCA §8.01
· DGCL §151: very flexible, can issue claims in the company and design them any way you want
· MBCA §6.01: there must be some class with unlimited voting rights and must be able to identify who gets the residual (common stock), but can have other types of shareholders
· You want a large number of authorized shares
· There needs to be cushion between issued shares and authorized shares because you have to go back to the shareholders to authorize more shares
· Must always have common stock
· Preferred stock is something between common stock and pure debt – in the event of liquidation, they get paid before common stock, there is a fixed return except they may not get it every year; they often have no voting rights; no right to the residual.
· Pure debt is when someone makes a loan to the company, they get a fixed return with very limited downside but they don’t benefit from the company’s success.
Voting Rights (166-175)
Normally shareholders vote their percentage holdings on each vacant director seat (you don’t divide your votes), if you’re the majority shareholder, you can choose every seat.