BA-FinalNotes

docx

School

St. Mary's University *

*We aren’t endorsed by this school

Course

7310

Subject

Law

Date

Feb 20, 2024

Type

docx

Pages

62

Uploaded by UltraCaribou2378

Report
Chapter 2-Agency Recapitulation What is agency? Rest. 2 nd Agency § 1. — Agency is the fiduciary relation which results from the manifestation of consent by one person to another that the other shall act on his behalf and subject to his control, and consent by the other so to act. Liability: (a) Tort liability – servant vs. independent contractor Servant-- Independent Contractor —Employer is not responsible except in performance of non-delegable duties (b) Contract liability— (i) Principal to 3 rd – Principal will be liable on K to a third party when an agent and a third party when the agent acts with actual, apparent, and inherent authority. If agent lacks authority, principal may still be liable under estoppel or ratification (ii) 3 rd to Principal— When an agent makes a K for a disclosed or partially disclosed principal , the third party is liable to the principal if the agent acted with authority so long as principal is not excluded in K. When an agent makes a K for an undisclosed principal , the third party is liable to the principal if the agent had authority, so long as the principal is not excluded from the K. Fraudulent Exception Rule —Third party can avoid the K if the agent falsely represents that the agent is not acting for the principal and the agent or principal knew that the third party would not have dealt with the principal. (iii) Agent to 3 rd — If an agent contracts with a third party on behalf of a disclosed principal, the general rule is that the agent is not a party to the contract and is not liable to the third party. Duties—Fiduciary Duties of Agent —Agents are to act only as authorized by the principal. Duty of Care, Duty of Loyalty; Basic Duties of Principal —compensate agent as agreed. Indemnify agent against claims, liabilities and expenses incurred in discharging duties assigned by the principal. Termination of agency – power vs. right – A principal or an agent has the power to terminate, but he may not have the right. Both can also renounce actual authority.
Chapter 3 The General Partnership Recapitulation – Partnership Formation Definition: - Profit is primary issue –but not dispositive - Also look to control –active vs. passive–Active—Power control in the business Partnership Agreement: UPA/RUPA are mostly default, so agreement often controls Entity vs. Aggregate view: understand difference ( Fairway case ) Entity view—RUPA states that a partnership is distinct from its partners. (i.e. Doesn’t matter if one person leaves) May sue or be sued as a partnership Aggregate—UPA states that if a partner leaves, then that p-ship ceases to exist and a whole new partnership is created Partnership by Estoppel : helps 3 rd parties – and the key is the nature of 3 rd party reliance—It is a third party claim. Valid whether or not there is a partnership. Equitable remedy. Recapitulation – Management Default rule: partners have equal rights – so a majority is required for “ordinary” decisions. What is a decision that requires some sort of vote? Probably a change in status quo. Unanimity required for extraordinary decisions. Recapitulation – Financial Rights and Obligations Accounting–know what a capital account is — it essentially sets forth the partner’s ownership interest in the partnership. The account equals the capital contributed by the partner less the amount of any distributions to the partner PLUS the partner’s share of the profits less the partner’s share of the losses; Understand the basics of financial accounting material — 1. Assume business is a separate entity 2. All entries are to be in dollars. 3. A balance sheet must BALANCE! Liabilities and Assets 4. Every transaction must be entered in two ways if #3 is to be met. Profit and Loss Default: partners share profit equally, and loss follows profit Can get complicated if one side contributes labor – see Kessler — P-ship lost money on house investment; 60-40 splits on sale of house. Court found OA controlling and each party was to split money on the sale of the house; OA was silent as to losses. Note: UPA 18—states that parties contribute towards losses the same way they split losses; court did not follow this because of what was in the partnership agreement.
Liability Focus: Partner liability for partnership obligations— UPA: joint liability vs. joint and several liability— Unif.Partnership Act 1914 § 13. Partnership Bound by Partner's Wrongful Act. Where, by any wrongful act or omission of any partner acting in the ordinary course of the business of the partnership or with the authority of his co-partners, loss or injury is caused to any person, not being a partner in the partnership, or any penalty is incurred, the partnership is liable therefor to the same extent as the partner so acting or omitting to act. § 14. Partnership Bound by Partner's Breach of Trust. The partnership is bound to make good the loss: (a) Where one partner acting within the scope of his apparent authority receives money or property of a third person and misapplies it; and (b) Where the partnership in the course of its business receives money or property of a third person and the money or property so received is misapplied by any partner while it is in the custody of the partnership. § 15. Nature of Partner's Liability. All partners are liable: (a) Jointly and severally for everything chargeable to the partnership under sections 13 and 14. (b) Jointly for all other debts and obligations of the partnership; but any partner may enter into a separate obligation to perform a partnership contract. NOTE: -Sections 13-15 work with section 18 to make all partners individually liable for the acts of the partnership, however, the liability is only “joint” as to contract and related claims of the partnership – this means all partners had to be joined in such an action. -RUPA removes this distinction. RUPA: see slides 47- 49 for changes to UPA RUPA makes big changes: (1) All liability is “joint and several” (don’t need to join all partners in contract claims); (2) Judgment creditors must satisfy claims from partnership assets first; (3) Sets up rules about naming partners in lawsuits. § 307. Actions By and Against Partnership and Partners.
Your preview ends here
Eager to read complete document? Join bartleby learn and gain access to the full version
  • Access to all documents
  • Unlimited textbook solutions
  • 24/7 expert homework help
(c) A judgment against a partnership is not by itself a judgment against a partner. A judgment against a partnership may not be satisfied from a partner's assets unless there is also a judgment against the partner. (d)A judgment creditor of a partner may not levy execution against the assets of the partner to satisfy a judgment based on a claim against the partnership unless the partner is personally liable for the claim under Section 306 and: (1) a judgment based on the same claim has been obtained against the partnership and a writ of execution on the judgment has been returned unsatisfied in whole or in part; (2) the partnership is a debtor in bankruptcy; (3) the partner has agreed that the creditor need not exhaust partnership assets; (4) a court grants permission to the judgment creditor to levy execution against the assets of a partner based on a finding that partnership assets subject to execution are clearly insufficient to satisfy the judgment, that exhaustion of partnership assets is excessively burdensome, or that the grant of permission is an appropriate exercise of the court's equitable powers; or (5) liability is imposed on the partner by law or contract independent of the existence of the partnership. Indemnification & Contribution: Partnership must indemnify a partner for expenses incurred by partner in ordinary course Partners must contribute to partnership if partnership cannot satisfy its obligations. Partners contribute enough to make plaintiff whole. Recapitulation – Fiduciary Duties Common Law: common law (like Meinhard ) is very open-ended; UPA 21 provides relatively little guidance. Statutory Developments & Role of Contract (Below) RUPA 103 (a) Except as otherwise provided in subsection (b), relations among the partners and between the partners and the partnership are governed by the partnership agreement. To the extent the partnership agreement does not otherwise provide , this [Act] governs relations among the partners and between the partners and the partnership. (b) The partnership agreement may not: (3) eliminate the duty of loyalty under Section 404(b) or 603(b)(3), but: ( i) the partnership agreement may identify specific types or categories of activities that do not violate the duty of loyalty, if not manifestly unreasonable; or (ii) all of the partners or a number or percentage specified in the partnership agreement may authorize or ratify, after full disclosure of all material facts, a specific act or transaction that otherwise would violate the duty of loyalty; (4) unreasonably reduce the duty of care under Section 404(c) or 603(b)(3); (5) eliminate the obligation of good faith and fair dealing under Section 404(d), but the partnership agreement may prescribe the standards by which the performance of the obligation is to be measured, if the standards are not manifestly unreasonable ;
Duty of Loyalty: understand RUPA 404(b) (b) A partner's duty of loyalty to the partnership and the other partners is limited to the following: (1) to account to the partnership and hold as trustee for it any property, profit, or benefit derived by the partner in the conduct and winding up of the partnership business or derived from a use by the partner of partnership property, including the appropriation of a partnership opportunity; (2) to refrain from dealing with the partnership in the conduct or winding up of the partnership business as or on behalf of a party having an interest adverse to the partnership; and (3) to refrain from competing with the partnership in the conduct of the partnership business before the dissolution of the partnership. Duty of Care: understand RUPA 404(c) -(c) A partner's duty of care to the partnership and the other partners in the conduct and winding up of the partnership business is limited to refraining from engaging in grossly negligent or reckless conduct, intentional misconduct, or a knowing violation of law. -Same result since the judgment to merge was based on good faith; his claim was just based on mere negligence. Contractual Limitations: under 103, limitations of fiduciary duty are generally permitted Duties When Leaving Partnership: cannot go “too far”; “logistical arrangements” vs. competition; also, cannot lie to partners Recapitulation – Ownership Interests & Transferability Partnership Property: - UPA and RUPA both treat property as belonging to the partnership. - Creditors need to pursue charging orders (which only gets at the partnership interest, or financial interest). Transferring a Partnership Interest: Recognize the difference between a financial interest and a full partnership interest: Financial interests —Can be transferred by a partner in whole or in part; this person gets former partner’s share of the profits, losses of the partnership, and the rights to receive distribution; transferee is not entitled to management rights of the business; the interest is personal property. “Pick your partner” is the default rule for “full partnership interest”— To transfer full partnership interest all of the partners have to agree, unless agreement states otherwise.
Recapitulation – Dissociation & Dissolution UPA: - Review Slide 105 - See Dreifuerst regarding how property is split under UPA § 38. Partnership Dissolution -In absence of an Agreement UPA § 38. Rights of Partners to Application of Partnership Property . (1) When dissolution is caused in any way, except in contravention of the partnership agreement , each partner, as against his co-partners and all persons claiming through them in respect of their interests in the partnership, unless otherwise agreed, may have the partnership property applied to discharge its liabilities, and the surplus applied to pay in cash the net amount owing to the respective partners. RUPA: Dissociation vs. Dissolution Dissociation (RUPA) —Occurs when a partner leaves the partnership via withdrawal, death, bankruptcy, or expulsion. Dissolution (RUPA) -is synonymous with winding up. An at-will partner who dissociates may compel dissolution and winding up. In a term partnership, if wrongful dissociation, dissolution and winding up occurs only if, within 90 days after dissociation 1/2 of the remaining partners agree to wind up the partnership. Once an even requiring dissolution and winding up occurs, the partnership is to be wound up unless all of the partners (including any dissociated partner other than a wrongfully dissociating partner) agree otherwise.
Your preview ends here
Eager to read complete document? Join bartleby learn and gain access to the full version
  • Access to all documents
  • Unlimited textbook solutions
  • 24/7 expert homework help
- Review Slides # 123 for framework. UPA § 31. Causes of Dissolution . Dissolution is caused: (1) Without violation of the agreement between the partners, (a) By the termination of the definite term or particular undertaking specified in the agreement, (b) By the express will of any partner when no definite term or particular undertaking is specified, (c) By the express will of all the partners who have not assigned their interests or suffered them to be charged for their separate debts, either before or after the termination of any specified term or particular undertaking, (d) By the expulsion of any partner from the business bona fide in accordance with such a power conferred by the agreement between the partners; Section 601: events that cause dissociation Section 602 - (a), (b): wrongful or rightful? - (c): liability of one who wrongfully dissociates Section 603: generic effects of dissociation Section 801: when does dissociation lead to “dissolution and winding up”? Article 7: what happens if dissociation does not result in “dissolution and winding up” (involves a buy-out of dissociating partner’s interest) Article 8: what happens if dissociation does result in “dissolution and winding up” (basically, how to wind up the business) - Note that RUPA Article 8 dissolution procedures are similar, in substance, to UPA.
Chapter 5-Formation Closely Held Corporations-Recapitulation 1. Where to Incorporate – Delaware vs. Everywhere Else 2. How: - Articles of Incorporation: key document; §§ 1.20 (1) articles must be filed with Secretary of State (§ 1.20(b)&(i)); (2) articles must be executed and signed by either the chairman of the board of directors, or its President (or other officer); OR if directors have not been selected by an incorporator; OR if the corporation is in the hands of a receiver, trustee, or other court-appointed fiduciary, by that fiduciary (§ 1.20(f) & (g)); (3) articles must be accompanied with any payment required (§ 1.20(j)); 2.02 set forth applicable requirements; trend is toward brevity (4) articles of incorporation must set forth a corporate name for the corporation (§ 2.02(a)); (5) articles of incorporation must set forth the number of shares the corporation is authorized to issue(§ 2.02(a)); (6) articles of incorporation must set forth the street address of the corporation’s initial registered office and the name of its initial registered agent at that office (§ 2.02(a)); and Registered agent is a person representing the corporation that is able to be served on behalf of them corporation. (7) articles of incorporation must set forth the name and address of each incorporator. Name: § 4.01 sets forth requirements (a) A corporate name: (1) must contain the word “corporation,” “incorporated,” “company,” or “limited,” or the abbreviation “corp.,” “inc.,” “co.,” or “ltd.,” or words or abbreviations of like import in another language; . . . in order to put other people on notice that they are incorporated. (b) Except as authorized by subsections (c) and (d), a corporate name must be distinguishable upon the records of the secretary of state from: (1) the corporate name of a corporation incorporated or authorized to transact business in this state; (2) a corporate name reserved or registered under section 4.02 or 4.03; . . . - Duration, Power, Purpose: trend is away from limits - Directors, Shareholders, Capital Requirements: must have a board of directors; shareholder and capital requirements are on their way out 3. Ultra Vires - Acts that are outside purpose/power of corporation - Section 3.04 limits as to who can enforce the doctrine (b) A corporation’s power to act may be challenged: (1) in a proceeding by a shareholder against the corporation to enjoin the act; (2) in a proceeding by the corporation , directly, derivatively, or through a receiver, trustee. or other legal representative, against an incumbent or former director, officer, employee, or agent of the corporation; or (3) in a proceeding by the attorney general under section 14.30.
(c) In a shareholder’s proceeding under subsection (b)(1) to enjoin an unauthorized corporate act, the court may enjoin or set aside the act, if equitable and if all affected persons are parties to the proceeding, and may award damages for loss (other than anticipated profits) suffered by the corporation or another party because of enjoining the unauthorized act. 4. Premature Commencement a. Promoters: promoters liable unless other party agreed to look elsewhere. b. Defective Incorporation: - Know de jure, de facto, corporation by estoppel What is a de jure corporation? Legit properly formed corporation. What is a de facto corporation? Corporation but it doesn’t fully comply with state law. What is the practical difference between de jure and de facto ? What is “corporation by estoppel”? Law of equity whether corporation is estopped from denying their existence. - Understand § 2.04 (liable if acting while knowing no incorporation. All persons purporting to act as or on behalf of a corporation, knowing there was no incorporation under this Act, are jointly and severally liable for all liabilities created while so acting.
Your preview ends here
Eager to read complete document? Join bartleby learn and gain access to the full version
  • Access to all documents
  • Unlimited textbook solutions
  • 24/7 expert homework help
Chapter 6 Recap – Disregard of Corp Entity Piercing in Context Piercing the Corporate Veil— The judicial act of imposing personal liability on otherwise immune corporate officers, directors, and/or shareholders for the corporation's wrongful acts. Analysis basically turns on fairness, which is often interpreted via various factors we discussed (see Slide #10, for example). Factors court says should be considered: 1. Under-capitalization 2. Failure to observe corporate formalities 3. Non-payment of dividends 4. Insolvency of the corporation at the time (what time – time of suit? Time money is initially sought?) 5. Siphoning of corporate funds by the dominant shareholder 6. Non-functioning of other officers and directors besides the defendant 7. Absence of corporate records 8. Corporation as a façade – Non-participation in corporate affairs by shareholders other than defendant There are, though, some fault-lines to think about: -Contract versus tort claimants – these are not entirely different, but the factors may apply somewhat differently. In K cases , the defendant can say that the creditor knew the corporation was undercapitalized, so therefore they assumed the risk of K. In tort cases , undercapitalization can go a long way helping to prove negligence; can justify inference that a parent of sub or are either deliberately or recklessly creating a business that will not be able to pay its bell or satisfy judgments against it. -Closely held versus parent/sub – claims will be hard to establish, but (again) factors may apply somewhat differently . Remember the court is still focusing on equity in these instances. Undercapitalization is still indicative of fraud because it justifies an inference that the parent is either deliberately or recklessly creating a business that will not be able to pay its bill or satisfy judgments against it, BUT look to see if they have something like insurance to satisfy its liabilities. What three things does court require to pierce in a parent/sub situation? 1. Control (complete domination) 2. Used to commit fraud or wrong 3. Control and breach of duty must proximately cause injury or unjust loss In what two situations does Delaware recognize a piercing claim in parent/sub situations? Where there is fraud or where it is mere instrumentality or alter ego of its owner. How does a plaintiff prevail on an alter ego theory ? You don’t need to show fraud, but the plaintiff must show 1) that the parent and the subsidiary “operated as a single economic unit” and
2) that an overall element of injustice unfairness is present.” Where it would be inequitable to uphold a distinction between them. Remember BoD of parent/subsidiaries can overlap. **If you are on the board for a subsidiary, you need to make sure that you act in the best interests for the subsidiary company** Piercing will occur when there are inequities. What bother courts is fraud, inequity, and undercapitalization. For example Does capitalization matter more in tort? Goes a long way in helping to prove negligence if undercapitalized; In K, it is voluntary dealing so one can argue plaintiff knew company was undercapitalized. Are corporate parent companies more likely to observe formalities? Yes because they need to account for its subsidiary. Includes taxes 25 years of Piercing Texas • Castleberry decision in 1989: - Gave jury broad power to pierce but scant instruction on when it was appropriate. - Rejected distinction between contract and tort. - Very broadly described fraud (including “actual” and “constructive”). • Response: - Texas legislature reacted, attempting to define when piercing is available. - Did away with the failure to observe corporate formalities factor and only explicitly listed “actual” fraud as the reason to pierce. - However, the statute is limited to contracts cases . - As such, in Texas, Castleberry presumably still applies in tort. Second Circuit • Initially the standard was fraud OR where the parent dominates and controls the subsidiary, but now seems to have subbed in the word AND for OR (meaning you need both). • The factors for when a parent controls a subsidiary are listed on p. 236 and are similar to the ones we have already gone through. Adequately capitalized, whether it was solvent, dividends were paid, records kept, officers and directors functioned properly, formalities observed, whether dominant shareholder siphoned funds, and whether the corporation simply functioned as a façade for the dominant shareholder. Alaska • Alaska is a demonstration of how many states have approached piercing. • It, like many states, has adopted a laundry list of factors that are looked at in making the piercing decision. • The problem with this approach is one we have already discussed – the factors change, mutate, and sometimes seem to have little relevance.
1. Last 20 Years – know about the Texas law ( Castleberry , formalities, tort v. contract). • Castleberry decision in 1989: - Gave jury broad power to pierce but scant instruction on when it was appropriate. - Rejected distinction between contract and tort. - Very broadly described fraud (including “actual” and “constructive”). • Response: - Texas legislature reacted, attempting to define when piercing is available. - Did away with the failure to observe corporate formalities factor and only explicitly listed “actual” fraud as the reason to pierce. - However, the statute is limited to contracts cases. - As such, in Texas, Castleberry presumably still applies in tort. 2. Reverse Piercing— In reverse piercing claim, either a corporate insider or a person with a claim against a corporate insider is attempting to have the insider and the corporate entity treated as a single entity treated as a single person for some purpose. - This isn’t really about “reverse” piercing – it’s about other ways to avoid the corporate format. - Again, this is based on equity. - Recall the Deep Rock doctrine (subordinating insiders’ claims, based on equity). DEEP ROCK DOCTRINE: Claims of corporate insiders are subordinate to claims of outsiders. SUBSTANTIVE CONSOLIDATION: is an equitable doctrine that permits a bankruptcy court, in appropriate circumstances, to disregard the legal separateness of a debtor and a related but distinct legal entity, which may or may not itself be a debtor in bankruptcy, and to merge their respective assets and liabilities for bankruptcy purposes in order to pay the creditors FIRST. 3. Successor Liability - Understand a full merger vs. asset sale. Merger– The absorption of one organization (esp. a corporation) that ceases to exist into another that retains its own name and identity and acquires the assets and liabilities of the former. Asset acquisition –Acquisition of a corporation by purchasing all its assets directly from the corporation itself, rather than by purchasing shares from its shareholders. As a general rule, are successor companies liable for the debts of the company it takes over by way of an asset purchase? NO—because the other company still exists if you just buy the assets. - Know the general rule (the four bases on which to hold a successor entity liable). 1) There is an express or implied agreement to assume liabilities; 2) The transaction amounts to consolidation or merger; 3) the successor entity is a mere continuation or reincarnation of the predecessor entity; or 4) the transaction was fraudulent, not made in good faith, or made without sufficient consideration.
Your preview ends here
Eager to read complete document? Join bartleby learn and gain access to the full version
  • Access to all documents
  • Unlimited textbook solutions
  • 24/7 expert homework help
Chapter 7 Recapitulation – Financial Matters and the Corporation 1. Debt & Equity Capital – must understand basic difference Debt characteristics: 1. Must be repaid at some point. 2. Interest on the amount borrowed must be paid periodically. 3. The repayment of principal and interest is not contingent on the success of the business. Equity Capital Characteristics: 1. Composed of contributions by the original entrepreneurs in the firm. 2. Capital contributed by subsequent investors usually in exchange for ownership interests in the business. 3. Retained earnings of the enterprise. 2. Equity - Basics of shares (MBCA 6.01) -“Shares” means the units into which the proprietary interests in a corporation are divided. -The articles of incorporation must set forth any classes of shares and series of shares within a class, and the number of shares of each class and series, that the corporation is authorized to issue. If more than one class or series of shares is authorized, the articles of incorporation must prescribe a distinguishing designation for each class or series and must describe , prior to the issuance of shares of a class or series, the terms, including the preferences, rights, and limitations, of that class or series. Except to the extent varied as permitted by this section, all shares of a class or series must have terms , including preferences, rights and limitations, that are identical with those of other shares of the same class or series.
- Understand basic, common differences between common and preferred. Common stock – A class of stock entitling the holder to vote on corporate matters, to receive dividends after other claims and dividends have been paid (esp. to preferred shareholders), and to share in assets upon liquidation. Preferred stock – A class of stock giving its holder a preferential claim to dividends and to corporate assets upon liquidation but that usu. carries no voting rights. *Dividends are capped Types of Preferred Stock Cumulative – if dividends are not paid one year, they carry over to the next year and the common stock cannot get a dividend until the preferred shares are paid the full amount. Noncumulative – each year, you hit the reset button and there is no carry over effect. Partially cumulative – cumulative to the extent there are earnings in a given year but if the whole dividend can’t be paid, the excess does not carry forward. Participating Preferred – PPS also get an additional dividend after the CS gets paid a specified amount. Classes of Preferred – The corporation can create different classes of PS that will take before other classes, e.g. Class A preferred, Class B preferred etc. Blurring the lines Preferred can be subdivided to be given voting and profit rights in conjunction with, or in preference to, common stock. Similarly, common stock can be classified as giving preference payments over other types of “preferred” stock.
3. Issuance - Know what a share subscription is. § 6.20. SUBSCRIPTION FOR SHARES BEFORE INCORPORATION (a) A subscription for shares entered into before incorporation is irrevocable for six months unless the subscription agreement provides a longer or shorter period or all the subscribers agree to revocation. (d) If a subscriber defaults in payment of money or property under a subscription agreement entered into before incorporation, the corporation may collect the amount owed as any other debt. - Under MBCA 6.21, corporations have much flexibility in issuing stock § 6.21. ISSUANCE OF SHARES a) The powers granted in this section to the board of directors may be reserved to the shareholders by the articles of incorporation. b) The board of directors may authorize shares to be issued for consideration consisting of any tangible or intangible property or benefit to the corporation, including cash, promissory notes, services performed, contracts for services to be performed, or other securities of the corporation. c) Before the corporation issues shares, the board of directors must determine that the consideration received or to be received for shares to be issued is adequate. That determination by the board of directors is conclusive insofar as the adequacy of consideration for the issuance of shares relates to whether the shares are validly issued, fully paid, and non-assessable. - Understand par value (which restricts flexibility) and associated watered stock concept. Par Value – an arbitrary dollar value assigned to shares of stock, which, after being assigned, represents the minimum amount for which each share may initially be sold. Watered stock—stock issued without payment; putting a corporation into business without sufficient equity investment. 4. Debt – understand concept of leverage and tax treatment of debt (deductible, unlike dividends) Two Basic Points About Leverage (1) If interest rates are low, it actually makes more sense to borrow if you believe you will get a greater return on your investment than the interest rate you are paying . (2)Interest payments on a loan are tax deductible from the corporation’s earnings, but distributions and dividends are not. Slappey Drive – “While we should not expect a creditor-shareholder to evidence motivations and behavior conforming perfectly to those of a mere creditor, neither should we abandon the effort to determine whether the challenged transaction is in substance a contribution to capital masquerading as debt.” Interest as a loan is tax deductible. “Straight Debt” – a written unconditional promise to pay a sum certain which contains (a) interest rates and interest payments that are not contingent on profits, the borrower’s discretion or similar; (b) there is no direct or indirect convertibility of the debt into stock; and (c) the creditor is an eligible shareholder under Chapter S. Chapter S elections can only have one class of shares. Debt can be reclassified into equity. **Pomeroy—If your debt is characterized as equity you have a problem because S corporations are restricted to one class of shares; if you have more classes you can lose you S Corp.** Debt can be re-characterized as equity.
Your preview ends here
Eager to read complete document? Join bartleby learn and gain access to the full version
  • Access to all documents
  • Unlimited textbook solutions
  • 24/7 expert homework help
5. Planning Capital Structure – review book section for questions Pg. 306-307 6. Public Offerings – understand basic reasons to go public and basic reasons not to go public 7. Preemptive Rights & Dilution - To protect voting rights: preemptive rights under common law; preemptive rights under MBCA 6.30 Common law: Where does this right come from?  Court says that it is an inherent right (inherent rule of ownership) and relates it to a property right that cannot be taken away by the join action of other stockholders. Court also says that an individual stockholder has the right to vote in proportion to the number of shares that he owns, and since his voting power was cut by one half, this deprived him of his right of property right. What is the danger of not recognizing this “preemptive right”? –This would deprive him of his legal rights, and if it wasn’t recognized, and stockholders are not given the opportunity to buy new shares, then the company buying these new shares would be able to dilute out other stockholders’ ownership and equity in the corporation. MBCA § 6.30. SHAREHOLDERS’ PREEMPTIVE RIGHTS— No preemptive rights unless you opt-in (a) The shareholders of a corporation do not have a preemptive right to acquire the corporation’s unissued shares except to the extent the articles of incorporation so provide . (b) A statement included in the articles of incorporation that “the corporation elects to have preemptive rights” (or words of similar import) means that the following principles apply except to the extent the articles of incorporation expressly provide otherwise: (1) The shareholders of the corporation have a preemptive right , granted on uniform terms and conditions prescribed by the board of directors to provide a fair and reasonable opportunity to exercise the right, to acquire proportional amounts of the corporation’s unissued shares upon the decision of the board of directors to issue them . (2) A shareholder may waive his preemptive right . A waiver evidenced by a writing is irrevocable even though it is not supported by consideration. (3) There is no preemptive right with respect to :
(i) shares issued as compensation to directors, officers, agents, or employees of the corporation, its subsidiaries or affiliates: (ii) shares issued to satisfy conversion or option rights created to provide compensation to directors, officers, agents, or employees of the corporation, its subsidiaries or affiliates; (iii) shares authorized in articles of incorporation that are issued within six months from the effective date of incorporation ; (iv) shares sold otherwise than for money . - To protect against equity dilution: protect against bad faith in CHC (by prohibiting under-FMV sale) Distributions by Closely Held Corporation - Can’t refuse to make dividends for a reason other than a “business reason;” directors are fiduciaries and cannot withhold declarations of dividends in bad faith. Bad faith test is whether the policy of the directors is dictated by their personal interest rather than the corporate welfare. - Redemption can function like a distribution— when a corporation purchases the stock of shareholders. 9. Legal Restrictions on Distributions – basically understand MBCA tests and recognize other tests § 6.40. DISTRIBUTIONS TO SHAREHOLDERS (a) A board of directors may authorize and the corporation may make distributions to its shareholders subject to restriction by the articles of incorporation and the limitation in subsection (c). *** (c) No distribution may be made if, after giving it effect: -(1) the corporation would not be able to pay its debts as they become due in the usual course of business; or -(2) the corporation’s total assets would be less than the sum of its total liabilities plus (unless the articles of incorporation permit otherwise) the amount that would be needed , if the corporation were to be dissolved at the time of the distribution, to satisfy the preferential rights upon dissolution of shareholders whose preferential rights are superior to those receiving the distribution. (d) The board of directors may base a determination that a distribution is not prohibited under subsection (c) either on financial statements prepared on the basis of accounting practices and principles that are reasonable in the circumstances or on a fair valuation or other method that is reasonable in the circumstances. Duty of trust and absolute loyalty is owed from majority shareholders to minority shareholders
Chapter 8: Recapitulation – Management and Control of a Corporation 1. Traditional Role of Shareholders & Directors - Historical rule is no restriction on director discretion - MBCA (7.32) and some state law (i.e., Delaware) may displace this MBCA § 7.32. SHAREHOLDER AGREEMENTS § 7.32. SHAREHOLDER AGREEMENTS (a) An agreement among the shareholders of a corporation that complies with this section is effective among the shareholders and the corporation even though it is inconsistent with one or more other provisions of this Act in that it: 1) eliminates the board of directors or restricts the discretion or powers of the board of directors; . . . 3) establishes who shall be directors or officers of the corporation, or their terms of office or manner of selection or removal; . . . (6) transfers to one or more shareholders or other persons all or part of the authority to exercise the corporate powers or to manage the business and affairs of the corporation, including the resolution of any issue about which there exists a deadlock among directors or shareholders; (7) requires dissolution of the corporation at the request of one or more of the shareholders or upon the occurrence of a specified event or contingency; or (8) otherwise governs the exercise of the corporate powers or the management of the business and affairs of the corporation or the relationship among the shareholders, the directors and the corporation, or among any of them, and is not contrary to public policy. (b) An agreement authorized by this section shall be: (1) set forth (A) in the articles of incorporation or bylaws and approved by all persons who are shareholders at the time of the agreement or (B) in a written agreement that is signed by all persons who are shareholders at the time of the agreement and is made known to the corporation; (2) subject to amendment only by all persons who are shareholders at the time of the amendment, unless the agreement provides otherwise; and (3) valid for 10 years, unless the agreement provides otherwise. The law in Delaware states that a close corp. can be upheld even if it restricts the conduct of the business and affairs of the corp. as to restrict or interfere with the discretion of powers of the board of directors. The is true as long as everyone knows -The state recognizes a special subclass of close corporations which operate by direct stockholder management. It also does not proscribe a provision as contained in the shareholder’s agreement. No harm to anyone, no foul.
Your preview ends here
Eager to read complete document? Join bartleby learn and gain access to the full version
  • Access to all documents
  • Unlimited textbook solutions
  • 24/7 expert homework help
2. Shareholder Voting & Agreements - Understand logistics (record date, shareholder list, straight vs. cumulative voting) MBCA § 7.07 RECORD DATE—The date where they declare that someone is a shareholder. (a) The bylaws may fix or provide the manner of fixing the record date for one or more voting groups in order to determine the shareholders entitled to notice of a shareholders’ meeting, to demand a special meeting, to vote, or to take any other action. If the bylaws do not fix or provide for fixing a record date, the board of directors of the corporation may fix a future date as the record date. (b) A record date fixed under this section may not be more than 70 days before the meeting or action requiring a determination of shareholders. MBCA § 7.20. SHAREHOLDERS’ LIST FOR MEETING (a) After fixing a record date for a meeting, a corporation shall prepare an alphabetical list of the names of all its shareholders who are entitled to notice of a shareholders’ meeting. The list must be arranged by voting group (and within each voting group by class or series of shares) and show the address of and number of shares held by each shareholder. (b) The shareholders’ list must be available for inspection by any shareholder , beginning two business days after notice of the meeting is given for which the list was prepared and continuing through the meeting, at the corporation’s principal office or at a place identified in the meeting notice in the city where the meeting will be held. A shareholder, his agent, or attorney is entitled on written demand to inspect and, subject to the requirements of section 16.02(c), to copy the list, during regular business hours and at his expense, during the period it is available for inspection. (c) The corporation shall make the shareholders’ list available at the meeting , and any shareholder, his agent, or attorney is entitled to inspect the list at any time during the meeting or any adjournment. Straight (Noncumulative) Voting : A corporate voting system in which a shareholder in board elections can vote his/her total shares for each candidate. The result is that a majority shareholder will elect the entire board of directors. Cumulative Voting : A system in which each voter may allocate his/her shares among the candidates. Cumulative voting helps a minority elect at least one representative. It is common in shareholder elections. Review voting agreement and voting trust issues (see MBCA 7.30, 7.31) MBCA §7.30 Voting Trusts (a) One or more shareholders may create a voting trust, conferring on a trustee the right to vote or otherwise act for them, by signing an agreement setting out the provisions of the trust (which may include anything consistent with its purpose) and transferring their shares to the trustee. When a voting trust agreement is signed, the trustee shall prepare a list of the names and addresses of all owners of beneficial interests in the trust, together with the number and class of shares each transferred to the trust, and deliver copies of the list and agreement to the corporation’s principal office.
(b) A voting trust becomes effective on the date the first shares subject to the trust are registered in the trustee’s name. A voting trust is valid for not more than 10 years after its effective date unless extended under subsection (c). MBCA §7.31 Voting agreements (a) Two or more shareholders may provide for the manner in which they will vote their shares by signing an agreement for that purpose. A voting agreement created under this section is not subject to the provisions of section 7.30. (b) A voting agreement created under this section is specifically enforceable. - Understand share restrictions (see MBCA 6.27) MBCA §6.27 Restriction on Transfer of Shares and other Securities (a) The articles of incorporation, bylaws, an agreement among shareholders, or an agreement between shareholders and the corporation may impose restrictions on the transfer or registration of transfer of shares of the corporation. A restriction does not affect shares issued before the restriction was adopted unless the holders of the shares are parties to the restriction agreement or voted in favor of the restriction. (b) A restriction on the transfer or registration of transfer of shares is valid and enforceable against the holder or a transferee of the holder if the restriction is authorized by this section and its existence is noted conspicuously on the front or back of the certificate or is contained in the information statement required by section 6.26(b). Unless so noted, a restriction is not enforceable against a person without knowledge of the restriction. (c) A restriction on the transfer or registration of transfer of shares is authorized: (1) to maintain the corporation’s status when it is dependent on the number or identity of its shareholders; (2) to preserve exemptions under federal or state securities law; (3) for any other reasonable purpose. (d) A restriction on the transfer or registration of transfer of shares may: (1 ) obligate the shareholder first to offer the corporation or other persons (separately, consecutively, or simultaneously) an opportunity to acquire the restricted shares ; (OPTION) (2) obligate the corporation or other persons (separately, consecutively, or simultaneously) to acquire the restricted shares; (BUY/SELL) (3) require the corporation, the holders of any class of its shares, or another person to approve the transfer of the restricted shares, if the requirement is not manifestly unreasonable; (4) prohibit the transfer of the restricted shares to designated persons or classes of persons, if the prohibition is not manifestly unreasonable. §6.27 is generally ok with restrictions on alienability as long as some restrictions are met under subsections (b), (c), (d) Ex: must be noted “conspicuously” on certificate, but if not and person has actual notice or knowledge, then it is enforceable Restrictions under (d) are right of first refusal and buy-sell agreement Buy-sell agreement allows SH to require corp or fellow SH to buy their equity interest in the corp at some mutually-agreed-upon triggering event - Conceptually, see that this is leading to issues of dissension and deadlock: these sorts of agreements and restrictions are meant to provide “escapes” in case of deadlocks.
3. Action by Directors and Officers - To prove authority: get certified copies of resolutions (Ex. A bank may want this) - General rule: officers can take “usual and ordinary” actions (MBCA gets there, as well, though probably through apparent authority) Chapter 10: Duty of Care and the BJR - Recapitulation Talking about limits on corporate officers/directors. § 8.01. REQUIREMENT FOR AND DUTIES OF BOARD OF DIRECTORS (a) Except as provided in section 7.32, each corporation must have a board of directors. (b) All corporate powers shall be exercised by or under the authority of, and the business and affairs of the corporation managed by or under the direction of, its board of directors , subject to any limitation set forth in the articles of incorporation or in an agreement authorized under section 7.32. § 8.41. DUTIES OF OFFICERS Each officer has the authority and shall perform the duties set forth in the bylaws or, to the extent consistent with the bylaws, the duties prescribed by the board of directors or by direction of an officer authorized by the board of directors to prescribe the duties of other officers. Focusing on duty of care via the business judgment rule. Business Judgment Rule - The presumption that, in making business decisions not involving direct self-interest or self- dealing, corporate directors act on an informed basis, in good faith, and in the honest belief that their actions are in the corporation's best interest. - The rule shields directors and officers from liability for unprofitable or harmful corporate transactions if the transactions were made in good faith, with due care, and within the directors' or officers' authority. Duty of Care – A duty owed by directors and officers to exercise proper care in managing the corporation’s affairs. (Pom says i.e. duty not to be stupid or slimeball) Schlensky : tightens the standard – a presumption to be rarely overcome. Set really high standard to hold directors liable. Court does not want to substitute its own judgment. Do you think that it was an easier call for a judge to decide whether the Chicago Cubs would be better off with night baseball? Yes, because absent fraud or self-dealing, the court does not want to go into what are the prudential business decisions that should be done; those decisions are best left to the directors elected by the shareholders. “Directors are elected for their business capabilities and judgment and the courts cannot require them to forego their business judgments because of the decision of directors of other companies.” –Pg. 556
Your preview ends here
Eager to read complete document? Join bartleby learn and gain access to the full version
  • Access to all documents
  • Unlimited textbook solutions
  • 24/7 expert homework help
MBCA: focus on process MBCA § 8.30. STANDARDS OF CONDUCT FOR DIRECTORS (a) Each member of the board of directors, when discharging the duties of a director, shall act: (1) in good faith , and (2) in a manner the director reasonably believes to be in the best interests of the corporation . (b) The members of the board of directors or a committee of the board, when becoming informed in connection with their decision-making function or devoting attention to their oversight function, shall discharge their duties with the care that a person in a like position would reasonably believe appropriate under similar circumstances. Hansen’s Approach to Process-Focused Duty of Care : 1. Due care must be used in ascertaining relevant facts and law before making the decision; and 2. The decision must be made after responsible deliberation. When these are met, courts will only interfere in cases of egregious bad judgment or where there is evidence of bad-faith . ***Important and what most courts look at*** Smith : swinging back toward Litwin somewhat – informed judgment and gross negligence. Chapter 10: BJR - Recapitulation Still talking about limits on corporate officers/directors. Section 102(b)(7): know the principles and basic application. Allows boards for boards to exempt themselves from liability in certain situations. Pg. 576 Delaware 102 (B)(7) “Raincoat provision”— allows you to opt in to avoid liability; doesn’t do away with business judgment rule. Useful to directors if they can you can use it prior to discovery with a motion to dismiss. Caremark : requires monitoring systems to satisfy duty to monitor. This court says that it is important that the board exercise a good faith judgment that the corporation’s information and reporting system is in concept and design adequate to assure the board that appropriate information will come to its attention in a timely manner as a matter of ordinary operations, so that it may satisfy its responsibility. This is a business judgment call and just has to be reasonable and in good faith. Stone : two bases for failure to monitor; DoC vs. DoL. Directors have a duty of loyalty and can be held accountable for a failure to monitor. Do these speak to the duty of care or the duty of loyalty? Both because the court says that the duty of care is a subsidiary element of the duty of loyalty. Court says that if you’re not doing shit, then it is a breach of the duty of loyalty. If you have shit set up, then it is breach of a duty of care. Malone : duty when making disclosures. Don’t lie and tell the truth! Cases about the duty of care. Held that directors who knowingly disseminate false information that results in corporate injury or damage to an individual stockholder violates their fiduciary duty and may be held accountable.
Your preview ends here
Eager to read complete document? Join bartleby learn and gain access to the full version
  • Access to all documents
  • Unlimited textbook solutions
  • 24/7 expert homework help
In a derivative suit , a shareholder sues on the corporation’s behalf to remedy or prevent a wrong done to the corporation, usually by the directors. In a direct action , a shareholder sues based on a cause of action arising from his or her ownership of stock. So why does this difference matter? If you want to bring a derivative suit, you need to go to the corporation first because you need them to allow the suit, so you need to demand it. You can skip the demand process if it is excused. When is a demand excused? A court must determine whether the particularized factual allegations of a derivative stockholder complaint create a reasonable doubt that that, as of the time the complaint was filed, the board of directors could have properly exercised its independent and disinterested business judgment in responding to a demand.
Your preview ends here
Eager to read complete document? Join bartleby learn and gain access to the full version
  • Access to all documents
  • Unlimited textbook solutions
  • 24/7 expert homework help
Chapter 11—Duty of Loyalty—Recapitulation Definition of self-dealing — Simply means you are on both sides of the transaction. Not necessarily bad Section 144 of Del. Gen. Corp. Law: two-tiered test – if sanitized, BJR; if unsanitized, intrinsic fairness. SLIDE. Intrinsic fairness test is to be used when reviewing self-interested transactions. We should look to the overall fairness of the transaction itself and how it benefits the corporation and its shareholders and whether the self-interested party is taking advantage of their position at the expense of the corporation. § 144. Interested directors; quorum. (a) No contract or transaction between a corporation and one or more of its directors or officers, or between a corporation and any other corporation, partnership, association, or other organization in which one or more of its directors or officers, are directors or officers, or have a financial interest, shall be void or voidable solely for this reason, or solely because the director or officer is present at or participates in the meeting of the board or committee which authorizes the contract or transaction , or solely because any such director's or officer's votes are counted for such purpose, if: (1) The material facts as to the director's or officer's relationship or interest and as to the contract or transaction are disclosed or are known to the board of directors or the committee, and the board or committee in good faith authorizes the contract or transaction by the affirmative votes of a majority of the disinterested directors , even though the disinterested directors be less than a quorum; or (2) The material facts as to the director's or officer's relationship or interest and as to the contract or transaction are disclosed or are known to the shareholders entitled to vote thereon, and the contract or transaction is specifically approved in good faith by vote of the shareholders; or (3) The contract or transaction is fair as to the corporation as of the time it is authorized, approved or ratified, by the board of directors, a committee or the shareholders. Subchapter F of MBCA – an attempt to create bright-line principles; ask (1) is it a conflict, (2) is it permissible? Compensation – Duty of loyalty issues— If the by-laws by which they are enacted are fair and approved by the stockholders and absent waste of corporate assets, then the compensation package should stand.
Your preview ends here
Eager to read complete document? Join bartleby learn and gain access to the full version
  • Access to all documents
  • Unlimited textbook solutions
  • 24/7 expert homework help
Compensation – sanitized (waste/spoliation, judged per BJR) vs. unsanitized (intrinsic fairness)
Your preview ends here
Eager to read complete document? Join bartleby learn and gain access to the full version
  • Access to all documents
  • Unlimited textbook solutions
  • 24/7 expert homework help
Chapter 11-Duty of Loyalty Recapitulation Compensation issues – duty of care vs. duty of loyalty (implicated when discussing good faith). Duty of Care —Did you know what you were doing? The standard for judging the informational component of the directors’ decision making is to know whether the committee was reasonably informed. The standard for judging the informational component of the directors’ decision making does not mean that the board must be informed of every fact. They are responsible for considering only material facts that are reasonably available, not those that are immaterial or out of the board’s reasonable reach. If the committee was reasonably informed, then there is a strong presumption that they followed the BJR. Duty of Loyalty — Bad faith—An intentional dereliction of duty, a conscious disregard for one’s responsibilities. (1) “fiduciary conduct motivated by an actual intent to do harm”; (2) “fiduciary action taken solely by reason of gross negligence and without any malevolent intent”; and (3) “intentional dereliction of duty, a conscious disregard for one’s responsibilities.” There is a wide range of latitude for directors to make decisions as long as they are informed. Self-dealing in a parent-subsidiary context – definition of self-dealing and implicated standard (intrinsic fairness). What two standards is the court faced with when reviewing a parent/sub fiduciary duty claim? BJR and the intrinsic fairness test. Intrinsically fairness test moves burden to the party being challenged to overcome the burden and has to prove objective fairness of the deal. Applied when a fiduciary duty is accompanied by self-dealing. Simply means you are on both sides of the transaction. Not necessarily bad . BJR you just have to say you mad the deal, but you were informed of the deal. Applied when there is a fiduciary duty, but no self-dealing. Chapter 11 Recapitulation Recognize that there are four different tests. Corporate Opportunity —Four basic approaches to corporate opportunity cases 1. The interest or expectancy test (plaintiff would have to show that a corporation had a preexisting contractual expectation with which a director had interfered) 2. The line of business test 3. The fairness test 4. The combined or dual test Understand ALI’s 5.05 – definition of corporate opportunity and wrongful taking ALI’s Principles of Corporate Governance §5.05 5.05 sets up a 3-part test for defining corporate opportunity: 1. Aware through position; 2. Aware through corporate information ; or 3. In line of business
Your preview ends here
Eager to read complete document? Join bartleby learn and gain access to the full version
  • Access to all documents
  • Unlimited textbook solutions
  • 24/7 expert homework help
-When may an executive or director take advantage of a “corporate opportunity”? Essentially when there is full disclosure of the opportunity and the corporations rejects the opportunity, and the rejection has to be fair and by disinterested directors. -Who has the burden of proof? The person challenging the taking of a corporate opportunity, unless you can show there was no rejection of disinterested directors, then the burden shifts to show fairness. -If you never made the offer to the corporation, then you will probably lose.
Your preview ends here
Eager to read complete document? Join bartleby learn and gain access to the full version
  • Access to all documents
  • Unlimited textbook solutions
  • 24/7 expert homework help
Chapter 12-Derivative Suits and Special Litigation Committees Recapitulation Derivative Suits & Special Litigation Committees— When there is a breach of fiduciary duty, how does it get brought. A corporation has the right to sue the directors. Whose responsibility is it to bring suit on behalf of the corporation? The board of directors because it is the corporation’s cause of action, and the corporation can only act through its agents (BOD). Governed by the BJR What rule is this decision (i.e. the decision of whether the corporation should sue its directors/officers) governed by? BJR The court cites to United Copper in stating that the BJR is the relevant standard – is this case distinguishable? P wanted board to sue a 3rd party, here, board says you should’ve sued yourself. What is the effect of a litigation committee deciding in its business judgment not to pursue a suit? Trying to set up independent disinterested directors not being sued to try and show court that it was a valid BJ. A disinterested committee apart from the board. Despite this being within the discretion of the litigation committee, does the court rule for Exxon? Yes, they apply BJR. When will it not care about a board’s decision as to a shareholder demand? When you are demand excused and a demand is futile. But if the case is demand excused, how should the litigation committee’s recommendation be judged by the court when the company makes a motion to dismiss? Look at chart. If demand excused, then excused from BJR. If demand is made=BJR.
Your preview ends here
Eager to read complete document? Join bartleby learn and gain access to the full version
  • Access to all documents
  • Unlimited textbook solutions
  • 24/7 expert homework help
Aronson v. Lewis— In Aronson , the court distinguished Zapata by pointing out that you only get to the Zapata two-step analysis when the demand is excused. -If the demand is not excused, the BJR applies to the litigation committee’s decision (meaning, the SLC decision will only be over-turned if the directors are not disinterested or did not take reasonable steps to inform themselves of material information or act with the requisite degree of care). In other words, if demand is not excused, the case is almost always a slam dunk for the company. So when is demand excused? Demand Excused Plaintiff alleged with particularity facts that create a reasonable doubt: 1. That the current BoD is disinterested or independent, or 2. That the challenged transaction would be protected by the BJR (due to conflict of interest, bad faith, lack of duty of care) -Under Spiegel , if a plaintiff does make a demand, then that’s a tacit acceptance of the lack of demand futility – in other words if you make a demand, you can’t plead demand excused aftwerwards. - Levine states that where a demand is made, and a plaintiff wishes to argue the decision was “wrongful,” the plaintiff is not permitted to conduct discovery to basically go on a fishing expedition to find that it was “wrongful” – must allege particularized facts that create a reasonable doubt that the refusal was a proper exercise of business judgment. -So if you can’t conduct discovery, how do you find out if a decision is “wrongful”? Scattered Corporation establishes that though discovery is not available, a plaintiff can still use “the tools at hand” such as a shareholder’s right to inspect corporate books, records etc. to plead particularized facts. These same tools were used in In re Walt Disney Co . , to show that a demand was excused. Gordon v. Goodyear— Plaintiff brought a derivative lawsuit against Navigant, alleging “excessive executive compensation.” Claims this is a breach of fiduciary duty because the executives received substantial compensation despite a negative shareholder vote and despite the poor performance of the company stock. Plaintiff did not make a demand on the corporation that it pursue its claims against the executives. What law governs this lawsuit? Delaware Was a demand made? No So what do we have to determine, in order to decide whether the case can go forward? Aranson test —Was the demand excused. How would a plaintiff prove that the board isn’t disinterested or independent? Can’t be on both sides of the transaction nor expect to derive any personal benefit from the challenged transaction in the sense of self-dealing, as opposed to benefitting everyone. DELAWARE How would a plaintiff prove that the challenged transaction isn’t protected by the BJR? Court wants facts to show that they were not protected by the BJR. Did plaintiff establish either of these? So what’s the result? Remand and allow to replead.
Your preview ends here
Eager to read complete document? Join bartleby learn and gain access to the full version
  • Access to all documents
  • Unlimited textbook solutions
  • 24/7 expert homework help
MBCA § 7.42 § 7.42. DEMAND No shareholder may commence a derivative proceeding until: (1) a written demand has been made upon the corporation to take suitable action; and (2) 90 days have expired from the date the demand was made unless the shareholder has earlier been notified that the demand has been rejected by the corporation or unless irreparable injury to the corporation would result by waiting for the expiration of the 90-day period. MBCA § 7.44 § 7.44. DISMISSAL A derivative proceeding shall be dismissed by the court on motion by the corporation if one of the groups specified in [subsections (b) or (e)] has determined in good faith, after conducting a reasonable inquiry upon which its conclusions are based, that the maintenance of the derivative proceeding is not in the best interests of the corporation. MBCA § 7.44 § 7.44. DISMISSAL Unless a panel is appointed pursuant to subsection (e), the determination in subsection (a) shall be made by: (1) a majority vote of independent directors present at a meeting of the board of directors if the independent directors constitute a quorum; or (2) a majority vote of a committee consisting of two or more qualified directors appointed by majority vote of qualified directors present at a meeting of the board of directors, regardless of whether such qualified directors constitute a quorum. MBCA § 7.44 § 7.44. DISMISSAL c) If a derivative proceeding is commenced after a determination has been made rejecting a demand by a shareholder, the complaint shall allege with particularity facts establishing either (1) that a majority of the board of directors did not consist of qualified directors at the time the determination was made or (2) that the requirements of subsection (a) have not been met. (d) If a majority of the board of directors consisted of qualified directors at the time the determination is made , the plaintiff shall have the burden of proving that the requirements of subsection (a) have not been met; if not, the corporation shall have the burden of proving that the requirements of subsection (a) have been met. MBCA Derivative Suits— UNDERSTAND DELAWARE AND MBCA ANALYSIS TG’s board is made up of McNulty, Kima, and Freamon. The board unanimously votes to guarantee their own compensation until they die, regardless of services performed. Bunk, a stockholder in TG, is outraged and wants to bring a derivative suit. Can he do so? Yes. Make a demand to the board of directors.
Your preview ends here
Eager to read complete document? Join bartleby learn and gain access to the full version
  • Access to all documents
  • Unlimited textbook solutions
  • 24/7 expert homework help
What if Bunk does make a demand, and the BoD does nothing? Wait 90 days ... What if, in response to his demand, the BoD form a SLC of Kima and McNulty, and, after some deliberation and investigation, they choose not to move forward on the claim? Bunk has to show that board’s decision was not made in good faith, fails BJR, or BOD is not a disinterested party and be specific. Would our result change if the BoD elected two independent BoD members to the SLC (let’s say Herc and Bubbles), and they made the same determination?
Your preview ends here
Eager to read complete document? Join bartleby learn and gain access to the full version
  • Access to all documents
  • Unlimited textbook solutions
  • 24/7 expert homework help
Chapter 13—Recapitulation – Dissension in the CHC Deadlocks If parties haven’t agreed around issues ahead of time, deadlocks can arise. How do they arise? -If there is a 50-50 split on share ownership with straight voting. -High quorum and voting requirements for shareholder meetings so that a minority has an effective veto power. -High quorum and voting requirements at the board of director’s level. -Where there are even number of shareholders, and each faction gets half of the directors. Deadlocks can be very difficult situations in corporate setting – may not have any easy solutions. § 8.10. VACANCY ON BOARD — Case where shares given to son-in-law and director doesn’t want to vote. Court holds for directors. (a) Unless the articles of incorporation provide otherwise, if a vacancy occurs on a board of vvv directors, including a vacancy resulting from an increase in the number of directors: (1) the shareholders may fill the vacancy; (2) the board of directors may fill the vacancy; or (3) if the directors remaining in office constitute fewer than a quorum of the board , they may fill the vacancy by the affirmative vote of a majority of all the directors remaining in office. Dissolution is a potential solution, but is not clear-cut (may not be available or may be subject to court discretion (see Radom and MBCA 14.30)). Radom— Brother and sis hate each other, she refuses to sign his paychecks, he seeks dissolution although business run successfully. Court denies petition bc not enough facts and business flourishing. “Only granted when competing interests are so discordant as to prevent efficient mismanagement.” What standard does the court indicate needs to be met before it will exercise that discretion? Necessity for dissolution and whether this remedy will be beneficial to the stockholders or members and not injurious to the public.
Your preview ends here
Eager to read complete document? Join bartleby learn and gain access to the full version
  • Access to all documents
  • Unlimited textbook solutions
  • 24/7 expert homework help
MBCA § 14.30. GROUNDS FOR JUDICIAL DISSOLUTION (1)The [relevant adjudicatory body] may dissolve a corporation:” MBCA § 14.30. GROUNDS FOR JUDICIAL DISSOLUTION (2) In a proceeding by a shareholder if it is established that: (i) the directors are deadlocked in the management of the corporate affairs, the shareholders are unable to break the deadlock, and irreparable injury to the corporation is threatened or being suffered , or the business and affairs of the corporation can no longer be conducted to the advantage of the shareholders generally, because of the deadlock; (ii) the directors or those in control of the corporation have acted, are acting, or will act in a manner that is illegal, oppressive, or fraudulent ; Other dissolution provisions § 14.01. DISSOLUTION BY INCORPORATORS OR INITIAL DIRECTORS A majority of the incorporators or initial directors of a corporation that has not issued shares or has not commenced business may dissolve the corporation by delivering to the secretary of state of state for filing articles of dissolution that set forth: (1) the name of the corporation; (2) the date of its incorporation; (3) either (i) that none of the corporation’s shares has been issued or (ii) that the corporation has nnn not commenced business; (4) that no debt of the corporation remains unpaid; (5) that the net assets of the corporation remaining after winding up have been distributed to the shareholders, if shares were issued; and (6) that a majority of the incorporators or initial directors authorized the dissolution. Other dissolution provisions § 14.02. DISSOLUTION BY BOARD OF DIRECTORS AND SHAREHOLDERS A corporation’s board of directors may propose dissolution for submission to the shareholders. For a proposal to dissolve to be adopted: (1) the board of directors must recommend dissolution to the shareholders unless the board of directors determines that because of conflict of interest or other special circumstances it should make no recommendation and communicates the basis for its determination to the shareholders; and (2) the shareholders entitled to vote must approve the proposal to dissolve as provided in subsection (e). (e) Unless the articles of incorporation or the board of directors acting pursuant to subsection (c) require a greater vote, a greater number of shares to be present, or a vote by voting groups, adoption of the proposal to dissolve shall require the approval of the shareholders at a meeting at which a quorum consisting of at least a majority of the votes entitled to be cast exists.
Your preview ends here
Eager to read complete document? Join bartleby learn and gain access to the full version
  • Access to all documents
  • Unlimited textbook solutions
  • 24/7 expert homework help
Other dissolution provisions § 14.20. GROUNDS FOR ADMINISTRATIVE DISSOLUTION The secretary of state may commence a proceeding under section 14.21 to administratively dissolve a corporation if: (1) the corporation does not pay within 60 days after they are due any franchise taxes or penalties imposed by this Act or other law; (2) the corporation does not deliver its annual report to the secretary of state within 60 days after it is due; (3) the corporation is without a registered agent or registered office in this state for 60 days or more; (4) the corporation does not notify the secretary of state within 60 days that its registered agent or registered office has been changed, that its registered agent has resigned, or that its registered office has been discontinued; or (5) the corporation’s period of duration stated in its articles of incorporation expires. Oppression There are a lot of ways that oppression can occur. Rodd (Electric corp.) —Shareholder demands their shares be purchased also at same price. How did the corporation respond to the request? They denied the request. Did the corporation make any counter-offer? Yes, for $40 to $200 a share. Is there anything inherently wrong with the corporation re-purchasing stock from some shareholders but not others? Not necessarily. There could be valid reasons for it, and it is protected by the BJR. Not wrong to try to purchase stocks at different prices as long as it is in good faith and in the best interest of the company. Here the intent is to help Rodd Sr., they oppressed and the decision was not for the best interest of the company. We examined distributions as a method of oppression -- Radom Remedies Buy-outs may be available (depending on court or available statute). § 14.34. ELECTION TO PURCHASE IN LIEU OF DISSOLUTION— In a shareholder petition for dissolution (14.02), if a corporation elects, or if it fails to elect, one or more shareholders can buy all shares owned by the petitioning shareholder at the FMV. This election is irrevocable, unless inequitable. Provisional directors, custodians, receivers are other potential remedies (not all are contemplated by MBCA). § 14.32. RECEIVERSHIP OR CUSTODIANSHIP-- A court in a judicial proceeding brought to dissolve a corporation may appoint one or more receivers to wind up and liquidate, or one or more custodians to manage, the business and affairs of the corporation. The court shall hold a hearing, after notifying all parties and interested persons designated by the court, before appointing a receiver or custodian. The court appointing has exclusive jurisdiction over the corporation’s property wherever located
Your preview ends here
Eager to read complete document? Join bartleby learn and gain access to the full version
  • Access to all documents
  • Unlimited textbook solutions
  • 24/7 expert homework help
Chapter 14-Transactions in Shares: Securities Fraud and Sales of Control Rule 10b-5 – Employment of Manipulative and Deceptive Devices It shall be unlawful for any person , directly or indirectly , by the use of any means or instrumentality of interstate commerce, or of the mails or of any facility of any national securities exchange, a) To employ any device, scheme, or artifice to defraud, b) To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or c) To engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person, in connection with the purchase or sale of any security . ( Birnbaum Rule ) Rule 10b-5 Questions: What does Rule 10b-5 prohibit – is it a simple antifraud statute? No, list is: Can’t defraud, lie or omit material facts, or any act that deceives. Might Rule 10b-5 cover the types of trading by a director like Marlo described above? Bc he is misleading by omitting a material fact. Why isn’t securities fraud a matter primarily for state law, instead of federal? Interstate Commerce/Stream of Commerce Kardon v. Nat’l Gypsum Co.— Prior to selling, the Slavins bought out the Kardons without mentioning the intended sale for $1.5M. Is there a private cause of action for violations of Rule 10b-5? Yes, fraud. Can be basis to rescind. Is Rule 10b-5 limited to corporations that are registered under the Securities and Exchange Act? No. “Any person...” What is the nexus with interstate commerce needed to bring Rule 10b-5 into play? SEA § 3(a)(17)— The term "interstate commerce" means trade, commerce, transportation, or communication among the several States, or between any foreign country and any State, or between any State and any place or ship outside thereof. The term also includes intrastate use of (A) any facility of a national securities exchange or of a telephone or other interstate means of communication, or (B) any other interstate instrumentality. Interstate Commerce The corporation’s business is entirely local. Herc (who is also the director and CEO of the corporation) calls up Carver (Shareholder) on the telephone and offers to buy his shares. Is Rule 10b-5 applicable to that transaction? Yes, telephone.
Your preview ends here
Eager to read complete document? Join bartleby learn and gain access to the full version
  • Access to all documents
  • Unlimited textbook solutions
  • 24/7 expert homework help
Blue Chip Stamps v. Manor Drug Stores Plaintiffs alleged they failed to purchase securities when offered to them because a prospectus was overly pessimistic. Is this a violation of Rule 10b-5? No limited to actual purchasers or sales or securities. Does the status of the plaintiff matter? No What is the danger in expanding the class of plaintiffs to those who do not buy stocks? Claims may be groundless and allow plaintiffs to take up other people’s time making it an in terrorem increment of the settlement value, rather than the merits of the claim. Ernst & Ernst v. Hochfelder— This is an aiding and abetting case. Caveat : The Supreme Court later held in Central Bank of Denver that private aiding and abetting claims are not covered by section 10(b) and Rule 10b-5 – but that’s not what this case is decided on. -This case involves the liability of an accounting firm for failing to discover a serious fraud perpetrated by the president of First Securities, Leston B. Nay. -Nay was basically pocketing the money of his investors but managed to hide this fact by instituting a “mail rule” whereby he was the only one who could open envelopes addressed to him. Should Ernst & Ernst have discovered this fraud? Maybe, but the culprit was President. Why should that awaken suspicion? Plausible deniability. Did Ernst & Ernst directly perpetrate any fraud? No. What would be the effect if Ernst & Ernst is found liable under 10b-5 for negligence? Violate the intent of the rule, which was scienter. Scienter : a mental state in which one has knowledge that one’s action, statement, etc., is wrong, deceptive, or illegal: often used as a standard of guilt. Santa Fe Indus., Inc. v. Green The plaintiffs sought to challenge, under Rule 10b-5, a cash-out merger that eliminated minority shareholders on allegedly unfair terms. Was the plaintiffs’ complaint that the transaction was deceptively presented or that there was an absence of full disclosure? Deceptively presented and manipulated. What is essentially being alleged? Shareholders were treated unfairly. Is this enough, by itself, to raise an issue under 10b-5? No So if the plaintiffs have been harmed, what is their remedy? State court There are six basic elements a plaintiff needs to prove in order to recover in a private action under 10(b)-5: (1) a material misrepresentation or omission by the defendant (“omission” will become more important, when we discuss insider trading); (2) scienter; (3) a connection b/w the misrepresentation or omission and the purchase or sale of security; (4) reliance upon the misrepresentation or omission; (5) economic loss; and (6) loss causation.
Your preview ends here
Eager to read complete document? Join bartleby learn and gain access to the full version
  • Access to all documents
  • Unlimited textbook solutions
  • 24/7 expert homework help
Chapter 18 Limited Partnership - Recapitulation Introduction: focus on RULPA (1985), ULPA (2001); understand linkage. Formation: must file certificate with Secretary of State; issues of substantial compliance What is a limited partnership?: Limited Partnership is a creature of statute comprised of at least one general partner and at least one limited partner . General Partner = unlimited liability for the obligations of the firm; generally controls the firm. *Does not have to be a majority owner* Limited partner = no liability for the debts of the venture beyond the loss of his investment; often does not exercise control. * Subject to one exception: A limited partner can lose their limited liability protection, if they participate in the "control" of the business .* Five Aspects of Limited Partnerships 1. Unlike a general partnership, a limited partnership requires a statutory filing for creation; 2. General partners have unlimited personal liability for the obligations of the limited partnership, while limited partners have limited liability; 3. Limited partnerships provide their owners with significant contractual freedom and flexibility; 4. Limited partnerships are subject to pass-through tax treatment; and 5. General partners typically (though not always) have the right to manage the venture while the limited partners serve primarily as passive investors. Operations: general partner generally controls; partners can vary by agreement (though control creates risk) if they do, then they can be liable for the obligations of the partnership. Limited Partnerships – Management under RULPA § 403(a): General partners in a LP have the same rights and powers as a general partner in a general partnership. This includes the ability to participate in management, the ability to bind the partnership via apparent authority, and the ability to vote. BUT: These rights/powers are only default rules. i.e. , a partnership agreement can restrict or alter them. RULPA does not grant or deny management rights to Limited partners. BUT – under RULPA §303, limited partners who participate in the control of the business risk liability for some or all of the obligations of the venture. Limited Partners may be able to bind the LP via apparent authority (cases go both ways) RULPA 302 (voting) Limited Partner, by default, CAN vote in the LP under RULPA if it’s in the P-ship Agreement. Can include all or some. Doesn’t mean they have control. ULPA 302 (2001)- Can vote on extraordinary matter of the LP. (admission/expulsion of a LPer/ GPer, amendment of the p-ship agreement, disposition of property outside ordinary couse)
Your preview ends here
Eager to read complete document? Join bartleby learn and gain access to the full version
  • Access to all documents
  • Unlimited textbook solutions
  • 24/7 expert homework help
RULPA § 302. Voting. Subject to Section 303, the partnership agreement may grant to all or a specified group of the limited partners the right to vote (on a per capita or other basis) upon any matter. You don’t have default voting right, but you can set it up via partnership agreement. Limited partners can vote under certain limitations and still not be in substantial control of the LP. Limited Partnerships - Formation RULPA § 304. Person Erroneously Believing Himself Limited Partner- Make a mistake forming you can either fix it or back out of the LP. (a) Except as provided in subsection (b), a person who makes a contribution to a business enterprise and erroneously but in good faith believes that he [or she] has become a limited partner in the enterprise is not a general partner in the enterprise and is not bound by its obligations by reason of making the contribution, receiving distributions from the enterprise, or exercising any rights of a limited partner, if, on ascertaining the mistake, he [or she]: (1) causes an appropriate certificate of limited partnership or a certificate of amendment to be executed and filed; or (2) withdraws from future equity participation in the enterprise by executing and filing in the office of the Secretary of State a certificate declaring withdrawal under this section. (b) A person who makes a contribution of the kind described in subsection (a) is liable as a general partner to any third party who transacts business with the enterprise (i) before the person withdraws and an appropriate certificate is filed to show withdrawal, or (ii) before an appropriate certificate is filed to show that he or she is not a general partner, but in either case only if the third party actually believed in good faith that the person was a general partner at the time of the transaction . Finances: RULPA (1985) – split according to contribution; ULPA (2001) – split according to agreement Profits and liabilities: RULPA— unless otherwise agreed in a written partnership agreement, the profits, losses, and distributions of a limited partnership shall be allocated " on the basis of the value * * * of the contributions made by each partner to the extent they have been received by the partnership and have not been returned. " Allocation is a paper concept on who has to pay taxes on the profit. Distribution goes to the partners ULPA — has no default assume partners will discuss ahead of time. Important to understand partnership taxes. LP is its own entity.
Your preview ends here
Eager to read complete document? Join bartleby learn and gain access to the full version
  • Access to all documents
  • Unlimited textbook solutions
  • 24/7 expert homework help
Control: limited partners’ liability generally limited; exception for control, a fact-sensitive inquiry; relevance of control has evolved over time A limited partner can lose their limited liability protection, if they participate in the "control" of the business How does a limited partner exert “control”? It depends , in part, on the governing statute: RULPA (1985) §303(a) Except as provided in subsection (d), a limited partner is not liable for the obligations of a limited partnership unless he or she is also a general partner or, in addition to the exercise of his or her rights and powers as a limited partner, he or she participates in the control of the business. "However , if the limited partner participates in the control of the business, he [or she] is liable only to persons who transact business with the limited partnership reasonably believing, based upon the limited partner's conduct , that the limited partner is a general partner." “CHANGES THE EITHER OR” TO “AND.” § 303(b) A limited partner does not participate in the control of the business within the meaning of subsection (a) solely by doing one or more of the following: 1. being the agent or employee of the limited or general partner, or being affiliated with a general partner that is a corporation; 2. consulting or advising the general partner; 3. being financially liable for the debts of the limited partnership; 4. effecting a derivative action on behalf of the limited partnership; 5. participating in meetings and voting of partners; and 6. winding up the limited partnership. ULPA (2001) § 303 completes the pro-limited partner evolution by wholly eliminating the control rule: "A limited partner is not personally liable, directly or indirectly, by way of contribution or otherwise, for an obligation of the limited partnership solely by reason of being a limited partner, even if the limited partner participates in the management and control of the limited partnership." Section 7 of the 1916 ULPA stated, in its entirety, that “[a] limited partner shall not become liable as a general partner unless, in addition to the exercise of his rights and powers as a limited partner, he takes part in the control of the business." Example: Say that none of Kima, McNulty, or DeAngelo want to be personally liable under the LP set-up, but they all want to participate in management – what could they do? Maybe create LL entity incorporate, with the General Partner being the sole shareholder. LPs can be on the BOD of the corporation that is the GP so that they have control. They can form a limited liability entity to be the general partner.
Your preview ends here
Eager to read complete document? Join bartleby learn and gain access to the full version
  • Access to all documents
  • Unlimited textbook solutions
  • 24/7 expert homework help
Wrinkle: limited liability entity as general partner. Example: Say that none of Kima, McNulty, or DeAngelo want to be personally liable under the LP set-up, but they all want to participate in management – what could they do? Maybe create LL entity incorporate, with the General Partner being the sole shareholder. LPs can be on the BOD of the corporation that is the GP so that they have controlThey can form a limited liability entity to be the general partner. Chapter 18 Recapitulation—Limited Partnerships Fiduciary Duties: general partner fiduciary duties imported from partnership law (see duty of care and duty of loyalty, under RUPA) RULPA § 403. General Powers and Liabilities Except as provided in this [Act] or in the partnership agreement, a general partner of a limited partnership has the rights and powers and is subject to the restrictions of a partner in a partnership without limited partners. Limited Partnerships – Fiduciary Duties RULPA (1985) does not explicitly address the topic of general partner fiduciary duties. So: general partnership law is imported to deal with the topic. Thus, the fiduciary duty material that you studied in the general partnership area is important in the limited partnership area as well. RUPA § 404. General Standards of Partner's Conduct. a) The only fiduciary duties a partner owes to the partnership and the other partners are the duty of loyalty and the duty of care set forth in subsections (b) and (c). b) A partner's duty of loyalty to the partnership and the other partners is limited to the following: (1) to account to the partnership and hold as trustee for it any property, profit, or benefit derived by the partner in the conduct and winding up of the partnership business or derived from a use by the partner of partnership property, including the appropriation of a partnership opportunity; (2) to refrain from dealing with the partnership in the conduct or winding up of the partnership business as or on behalf of a party having an interest adverse to the partnership; and (3) to refrain from competing with the partnership in the conduct of the partnership business before the dissolution of the partnership. c) A partner’s duty of care to the partnership and the other partners in the conduct and winding up of the partnership business is limited to refraining from engaging in grossly negligent or reckless conduct, intentional misconduct, or a knowing violation of law.
Your preview ends here
Eager to read complete document? Join bartleby learn and gain access to the full version
  • Access to all documents
  • Unlimited textbook solutions
  • 24/7 expert homework help
d) A partner shall discharge the duties to the partnership and the other partners under this [Act] or under the partnership agreement and exercise any rights consistently with the obligation of good faith and fair dealing. Limited Partnerships – Fiduciary Duties These duties can be contractually substantially modified, particularly in Delaware. Can they be modified under RULPA (1985) or ULPA (2001)? In Delaware, you can modify them as long as you act in good faith and fair dealing. ULPA doesn’t address it so we go to RUPA 103 RUPA § 103. Effect of Partnership Agreement; Nonwaivable Provisions a) Except as otherwise provided in subsection (b), relations among the partners and between the partners and the partnership are governed by the partnership agreement . . . . b) The partnership agreement may not: 3) eliminate the duty of loyalty under Section 404(b) or 603(b)(3), but: -(i) the partnership agreement may identify specific types or categories of activities that do not violate the duty of loyalty, if not manifestly unreasonable; or -(ii) all of the partners or a number or percentage specified in the partnership agreement may authorize or ratify, after full disclosure of all material facts, a specific act or transaction that otherwise would violate the duty of loyalty; 4) unreasonably reduce the duty of care under Section 404(c) or 603(b)(3); 5) eliminate the obligation of good faith and fair dealing under Section 404(d) . . . . ULPA (2001) § 110. Effect of Partnership Agreement; Nonwaivable Provisions. a) Except as otherwise provided in subsection (b), the partnership agreement governs relations among the partners and between the partners and the partnership. To the extent the partnership agreement does not otherwise provide, this [Act] governs relations among the partners and between the partners and the partnership. b) A partnership agreement may not: 5) eliminate the duty of loyalty under Section 408, but the partnership agreement may: a) identify specific types or categories of activities that do not violate the duty of loyalty, if not manifestly unreasonable; and b) specify the number or percentage of partners which may authorize or ratify, after full disclosure to all partners of all material facts, a specific act or transaction that otherwise would violate the duty of loyalty; 6) unreasonably reduce the duty of care under Section 408(c); 7) eliminate the obligation of good faith and fair dealing under Sections 305(b) and 408(d), but the partnership agreement may prescribe the standards by which the performance of the obligation is to be measured, if the standards are not manifestly unreasonable;
Your preview ends here
Eager to read complete document? Join bartleby learn and gain access to the full version
  • Access to all documents
  • Unlimited textbook solutions
  • 24/7 expert homework help
Limited Partnerships – fiduciary duties Can duties be contractually modified? (yes in some states – see Delaware) Can they be modified under RULPA (1985) or ULPA (2001)? When a general partner of a limited partnership is a business entity, do managers of the entity personally owe fiduciary duties to the limited partners and the limited partnership? Fiduciary Duties: fiduciaries of a limited liability entity GP may be held to have fiduciary duties to LPs (USA Cafes) In re USACafes, L.P. p. 1138 USACafes, Inc. was reorganizing into a LP with USACafe’s General Partner, Inc., as General Partner and a number of limited partners. GP was owned solely by Sam & Charles Wyly who also sat on the Board. The Wyly brothers were also limited partners who owned 47% of the LP units. The Wyly brothers approved a buy-out of substantially all of the assets of the LP for $72.6M (or $10.25 per unit). The other LP investors sued the LP as well the corporate GP for breach of fiduciary duty. They also sued the Wyly brothers individually due to their status as shareholders and directors of the corporate GP. Plaintiffs claim D sold LP’s assets at a low price in a transaction in which Wyly brothers allegedly had received substantial side payments from the buyer, Metsa. The Wyly brothers move to dismiss based on the rather straight-forward proposition that, though the GP does owe fiduciary duties, they (as shareholders and directors of the GP) owed no such duty. According to the Wyly bros., to whom do they owe a duty? To the General Partners (themselves as shareholders). So the court is faced squarely with the question of whether the directors of a corporation of a GP have superseding duties to the LP itself. What does court find here? Yes, owe duty to LPs because of control. Ct looks to trust law when you control some of the property you cannot use it to the detriment of the person who actually owns it Upon what area does the court look to make its decision? Trust law—it is the basis of fiduciary duty. When you control some of the property you cannot use it to the detriment of the person who actually owns it. What if this wasn’t a corporation solely owned by the Wyly Bros.? What if they were directors of the board but only minority shareholders? Different result? Seems more difficult b/c there can be legit conflict btwn both GPs & LPs and fiduciary duties of BOD of GP to SH of GP and limited partners in the LP….
Your preview ends here
Eager to read complete document? Join bartleby learn and gain access to the full version
  • Access to all documents
  • Unlimited textbook solutions
  • 24/7 expert homework help
Fiduciary Duties: limited partners might owe fiduciary duties if they gain control, managerial discretion Limited Partners and Fiduciary Duties Limited partners might owe fiduciary duties sometimes. When will a limited partner owe such duties? When they have control and they are acting like a general partner. When they have control/discretion/or are a manager (think back to trust law obligation to be nice when you control someone else’s property) Limited Partners and Fiduciary Duties KE Property court stated that, “to the extent that a partnership agreement empowers a limited partner discretion to take actions affecting the governance of the limited partnership, the limited partner may be subject to the obligations of a fiduciary.” Villa West notes that a fiduciary relationship exists when “there has been a special confidence reposed in one who, in equity and good conscience, is bound to act in good faith and with due regard for the interests of the one reposing the confidence.” Comes from trust law: When someone gives you their property, then you are a fiduciary. Ownership Interests Transferability: can’t generally transfer non-financial partnership rights; might avoid this through transfer/merger of limited liability entity GP Can transfer the right to receive money (financial interests), but can’t transfer management rights. RULPA (1985) § 702. Assignment of Partnership Interest.  Except as provided in the partnership agreement, a partnership interest is assignable in whole or in part. An assignment of a partnership interest does not dissolve a limited partnership or entitle the assignee to become or to exercise any rights of a partner. An assignment entitles the assignee to receive, to the extent assigned, only the distribution to which the assignor would be entitled. Except as provided in the partnership agreement, a partner ceases to be a partner upon assignment of all his [or her] partnership interest. RULPA (1985) § 704. Right of Assignee to Become Limited Partner. An assignee of a partnership interest, including an assignee of a general partner, may become a limited partner if and to the extent that (i) the assignor gives the assignee that right in accordance with authority described in the partnership agreement, or (ii) all other partners consent.
Your preview ends here
Eager to read complete document? Join bartleby learn and gain access to the full version
  • Access to all documents
  • Unlimited textbook solutions
  • 24/7 expert homework help
ULPA (2001) § 701. Partner's Transferable Interest. The only interest of a partner which is transferable is the partner's transferable interest. A transferable interest is personal property. § 702. Transfer of Partner's Transferable Interest. (a) A transfer , in whole or in part, of a partner's transferable interest: (1) is permissible; (2) does not by itself cause the partner's dissociation or a dissolution and winding up of the limited partnership's activities; and (3) does not, as against the other partners or the limited partnership, entitle the transferee to participate in the management or conduct of the limited partnership's activities , to require access to information concerning the limited partnership's transactions except as otherwise provided in subsection (c), or to inspect or copy the required information or the limited partnership's other records. (b) A transferee has a right to receive , in accordance with the transfer:   (1) distributions to which the transferor would otherwise be entitled; and   (2) upon the dissolution and winding up of the limited partnership's activities the net amount otherwise distributable to the transferor . UPLA (2001) § 102 (22) “ Transferable interest ” means a partner's right to receive distributions. ULPA (2001) ULPA § 301. Becoming Limited Partner. A person becomes a limited partner: 1. as provided in the partnership agreement; 2. as the result of a conversion or merger under [Article] 11; or 3. with the consent of all the partners. RULPA (1985) RULPA § 401. Admission of Additional General Partners. After the filing of a limited partnership's original certificate of limited partnership, additional general partners may be admitted as provided in writing in the partnership agreement or , if the partnership agreement does not provide in writing for the admission of additional general partners , with the written consent of all partners. ( ULPA (2001) has a similar provision.)
Your preview ends here
Eager to read complete document? Join bartleby learn and gain access to the full version
  • Access to all documents
  • Unlimited textbook solutions
  • 24/7 expert homework help
Dissociation: under RULPA (1985), limited partners are more restricted than general partners in ability to withdraw; due to 2704(b), some states eliminate that default rules Dissociation What if, in our prior example (wherein Kima, McNulty, and DeAngelo are the limited partners and TG, Inc., is the general partner), TG or DeAngelo want to leave? Upon withdrawal, what does the withdrawing partner get? Fair value of their interest. RULPA (1985) § 604. Distribution Upon Withdrawal. Except as provided in this Article, upon withdrawal any withdrawing partner is entitled to receive any distribution to which he [or she] is entitled under the partnership agreement and, if not otherwise provided in the agreement, he [or she] is entitled to receive , within a reasonable time after withdrawal, the fair value of his [or her] interest in the limited partnership as of the date of withdrawal based upon his [or her] right to share in distributions from the limited partnership. Dissociation What if, in our prior example (wherein Kima, McNulty, and DeAngelo are the limited partners and TG, Inc., is the general partner), TG or DeAngelo want to leave? Upon withdrawal, what does the withdrawing partner get? RULPA says “fair market value.” Note —that many state statutes have amended this to eliminate this default exit right. Partnership agreement controls here. Why? Estate planning—when you have LP’s and you die, those interests go to someone else and they get taxed. When you die you want to drive down your asset value so you don’t get taxed as much. So you can put the assets in an LP and your GP and LP interests have to go someone. Example: $10M house, put it in LP, you keep GP, 3 kids get LPs interest and you put a clause that says LPs can’t control the asset, only you can. Dissolution: understand the basic rules of RULPA (1985) and ULPA (2001) regarding when dissolution occurs and distribution of assets upon dissolution Dissolution Let’s return to the LP we’ve been looking at throughout the chapter. When can it be dissolved? Below
Your preview ends here
Eager to read complete document? Join bartleby learn and gain access to the full version
  • Access to all documents
  • Unlimited textbook solutions
  • 24/7 expert homework help
RULPA § 801. Nonjudicial Dissolution. A limited partnership is dissolved and its affairs shall be wound up upon the happening of the first to occur of the following: (1) at the time specified in the certificate of limited partnership; (2) upon the happening of events specified in writing in the partnership agreement; (3) written consent of all partners; (4) an event of withdrawal of a general partner unless at the time there is at least one other general partner and the written provisions of the partnership agreement permit the business of the limited partnership to be carried on by the remaining general partner and that partner does so, but the limited partnership is not dissolved and is not required to be wound up by reason of any event of withdrawal if, within 90 days after the withdrawal, all partners agree in writing to continue the business of the limited partnership and to the appointment of one or more additional general partners if necessary or desired; or (5) entry of a decree of judicial dissolution under Section 802. i.e. if nothing in partnership agreement this is the route you take. Actions for deadlock or maybe not making any money. RULPA § 802. Judicial Dissolution. On application by or for a partner the [designate the appropriate court] court may decree dissolution of a limited partnership whenever it is not reasonably practicable to carry on the business in conformity with the partnership agreement. RULPA § 804. Distribution of Assets. Upon the winding up of a limited partnership, the assets shall be distributed as follows: (1) to creditors , including partners who are creditors, to the extent permitted by law, in satisfaction of liabilities of the limited partnership other than liabilities for distributions to partners under Section 601 or 604; (2) except as provided in the partnership agreement, to partners and former partners in satisfaction of liabilities for distributions under Section 601 or 604; and (3) except as provided in the partnership agreement, to partners first for the return of their contributions and secondly respecting their partnership interests , in the proportions in which the partners share in distributions.
Your preview ends here
Eager to read complete document? Join bartleby learn and gain access to the full version
  • Access to all documents
  • Unlimited textbook solutions
  • 24/7 expert homework help
ULPA (2001) § 801. Nonjudicial Dissolution. Except as otherwise provided in Section 802, a limited partnership is dissolved , and its activities must be wound up, only upon the occurrence of any of the following: (1) the happening of an event specified in the partnership agreement; (2) the consent of all general partners and of limited partners owning a majority of the rights to receive distributions as limited partners at the time the consent is to be effective; (3) after the dissociation of a person as a general partner: (A) if the limited partnership has at least one remaining general partner, the consent to dissolve the limited partnership given within 90 days after the dissociation by partners owning a majority of the rights to receive distributions as partners at the time the consent is to be effective; or (B) if the limited partnership does not have a remaining general partner, the passage of 90 days after the dissociation, unless before the end of the period: (i) consent to continue the activities of the limited partnership and admit at least one general partner is given by limited partners owning a majority of the rights to receive distributions as limited partners at the time the consent is to be effective; and (ii) at least one person is admitted as a general partner in accordance with the consent; ULPA (2001) § 802. Judicial Dissolution. On application by a partner the [appropriate court] may order dissolution of a limited partnership if it is not reasonably practicable to carry on the activities of the limited partnership in conformity with the partnership agreement. ULPA (2001) § 812. Disposition of Assets; When Contributions Required. a) In winding up a limited partnership's activities, the assets of the limited partnership, including the contributions required by this section, must be applied to satisfy the limited partnership's obligations to creditors , including, to the extent permitted by law, partners that are creditors. b) Any surplus remaining after the limited partnership complies with subsection (a) must be paid in cash as a distribution.
Your preview ends here
Eager to read complete document? Join bartleby learn and gain access to the full version
  • Access to all documents
  • Unlimited textbook solutions
  • 24/7 expert homework help
Chapter 19: LLP Recapitulation Introduction: LLP is a general partnership that has elected to become an LLP Different from LP “Limited liability partnership” means a partnership that has filed a statement of qualification under Section 1001 and does not have a similar statement in effect in any other jurisdiction. This means LLPs are governed by the law of general partnerships – NOT LPs! Formation: must vote to change from GP to LLP LLP Formation § 1001. Statement of Qualification a. A partnership may become a limited liability partnership pursuant to this section. b. The terms and conditions on which a partnership becomes a limited liability partnership must be approved by the vote necessary to amend the partnership agreement except, in the case of a partnership agreement that expressly considers contribution obligations, the vote necessary to amend those provisions. *Guided by state statute, if none go to p-ship agreement, if none default.* Formation: must meet technicalities, though there is “substantial compliance” What information must be in the statement of qualification that is filed with the state? LLP Formation § 1001. Statement of Qualification (a) After the approval required by subsection (b), a partnership may become a limited liability partnership by filing a statement of qualification . The statement must contain: (1) the name of the partnership; (2) the street address of the partnership's chief executive office and, if different, the street address of an office in this State, if any; (3) if there is no office in this State, the name and street address of the partnership's agent for service of process who must be an individual resident of this State or any other person authorized to do business in this State; (4) a statement that the partnership elects to be a limited liability partnership; and (5) a deferred effective date, if any. The status of a partnership as a limited liability partnership is effective on the later of the filing of the statement or a date specified in the statement. The status remains effective, regardless of changes in the partnership, until it is canceled pursuant to Section 105(d) or revoked pursuant to Section 1003.
Your preview ends here
Eager to read complete document? Join bartleby learn and gain access to the full version
  • Access to all documents
  • Unlimited textbook solutions
  • 24/7 expert homework help
What is the effect if an LLP has errors in its filing or fails to monitor compliance with state requirements? LLP Formation § 1001. Statement of Qualification e) The status of a partnership as a limited liability partnership and the liability of its partners is not affected by errors or later changes in the information required to be contained in the statement of qualification under subsection (c). f) The filing of a statement of qualification establishes that a partnership has satisfied all conditions precedent to the qualification of the partnership as a limited liability partnership. g) An amendment or cancellation of a statement of qualification is effective when it is filed or on a deferred effective date specified in the amendment or cancellation. § 1002. Name The name of a limited liability partnership must end with “Registered Limited Liability Partnership,” “Limited Liability Partnership,” “R.L.L.P.,” “L.L.P.,” “RLLP,” or “LLP.” VARIES BY STATE Limited Liability: understand RUPA 306(c) RUPA § 306 (c) An obligation of a partnership incurred while the partnership is a limited liability partnership, whether arising in contract, tort, or otherwise, is solely the obligation of the partnership. A partner is not personally liable, directly or indirectly, by way of contribution or otherwise, for such an obligation solely by reason of being or so acting as a partner. *If other partners know of wrongdoing, maybe a negligence case* Note: § 152.801(a) of the Texas Business Organizations Code was amended effective September 1, 2009 to make clear that, under the Texas statute, partners are protected from LLP obligations to other partners as well as to third parties. Limited Liability: rules vary by jurisdiction, but focus is on torts – can generally be liable for your own torts Limited Liability: partners may still be liable to each other LLLP: recognize its existence
Your preview ends here
Eager to read complete document? Join bartleby learn and gain access to the full version
  • Access to all documents
  • Unlimited textbook solutions
  • 24/7 expert homework help
Chapter 20 Limited Liability Companies-Recapitulation LLCs The limited liability company is a non-corporate business structure that provides its owners, known as "members," with a number of benefits: (1) limited liability for the obligations of the venture, even if a member participates in the control of the business; (2) pass-through tax treatment; and (3) tremendous freedom to contractually arrange the internal operations of the venture. Flexibilities in LLCs are a lot like partnerships. *ULLCA and RULLCA not widely adopted* Formation: formed by publicly filing articles; most issues will be governed by internal operating agreement SECTION 202. ORGANIZATION. a) One or more persons may organize a limited liability company , consisting of one or more members, by delivering articles of organization to the office of the [Secretary of State] for filing . b) Unless a delayed effective date is specified, the existence of a limited liability company begins when the articles of organization are filed. c) The filing of the articles of organization by the [Secretary of State] is conclusive proof that the organizers satisfied all conditions precedent to the creation of a limited liability company. What information must be in the articles? Articles of organization of a limited liability company must set forth : 1) the name of the company; 2) the address of the initial designated office ; 3) the name and street address of the initial agent for service of process ; 4) the name and address of each organizer ; 5) whether the company is to be a term company and, if so, the term specified; 6) whether the company is to be manager-managed , and, if so, the name and address of each initial manager; and 7) whether one or more of the members of the company are to be liable for its debts and obligations under Section 303(c). Don’t have to file who the members are or management; just an organizer (this could just be the lawyer).
Your preview ends here
Eager to read complete document? Join bartleby learn and gain access to the full version
  • Access to all documents
  • Unlimited textbook solutions
  • 24/7 expert homework help
What is the purpose of the articles? The articles serve primarily a notice function and generally do not reflect the substantive agreement of the members regarding the business affairs of the company. MOSTLY SO PEOPLE KNOW. So what does govern the business affairs of the company? Those matters are generally reserved for an operating agreement , which may be unwritten. Comment to 203 Owners of LLC’s are called members People who run LLC’s are managers Operating agreement outlines the affairs of the company; can be unwritten. Should be unwritten though so you can resolve disputes. How people are going to react with their investment. Pomeroy—Just a great big contract. Does an LLC have to have an operating agreement? No. If controversy arises without one, a court will find what you were subject to. This will be left up to the finder of fact. Can an LP or GP convert into an LLC? Yes. Explicit under the ULLCA. b) Articles of organization of a limited liability company may set forth : (1) provisions permitted to be set forth in an operating agreement; or (2) other matters not inconsistent with law. c) Articles of organization of a limited liability company may not vary the nonwaivable provisions of Section 103(b). As to all other matters, if any provision of an operating agreement is inconsistent with the articles of organization: (1) the operating agreement controls as to managers, members, and members' transferees ; and (2) the articles of organization control as to persons, other than managers, members and their transferees , who reasonably rely on the articles to their detriment. Management and Operation: Default Rule is member-managed; LLC may be member- managed or manager managed SECTION 101. DEFINITIONS. In this [Act]: -"Manager" means a person, whether or not a member of a manager-managed company, who is vested with authority under Section 301. -"Manager-managed company" means a limited liability company which is so designated in its -articles of organization. -"Member-managed company" means a limited liability company other than a manager- managed company. Why choose manager-managed over member-managed? Maybe they will have more expertise in the business operation, or maybe there are a lot of members and you just want to designate a few people to manage the venture. Management and Operation: default – per capita voting
Your preview ends here
Eager to read complete document? Join bartleby learn and gain access to the full version
  • Access to all documents
  • Unlimited textbook solutions
  • 24/7 expert homework help
What is the rule under ULLCA regarding voting rights? Manager-managed=majority vote (per capita); Member-managed=per capita or pro rata (on the basis of contribution). Management and Operation: authority depends on member-managed scheme vs. manager- managed scheme ULLCA §404 In a member-managed company: (1) Each member has equal rights in the management and conduct of the company's business; and (2) Except as otherwise provided in subsection (c), any matter relating to the business of the company may be decided by a majority of the members. In a manager-managed company: (1) each manager has equal rights in the management and conduct of the company's business; (2) except as otherwise provided in subsection (c), any matter relating to the business of the company may be exclusively decided by the manager or, if there is more than one manager, by a majority of the managers; and (3) a manager: (i) must be designated, appointed, elected, removed, or replaced by a vote, approval, or consent of a majority of the members; and (ii) holds office until a successor has been elected and qualified, unless the manager sooner resigns or is removed. ULLCA §404 In a member-managed company: (1) Each member has equal rights in the management and conduct of the company's business; and (2) Except as otherwise provided in subsection (c), any matter relating to the business of the company may be decided by a majority of the members. In a manager-managed company: (1) each manager has equal rights in the management and conduct of the company's business; (2) except as otherwise provided in subsection (c), any matter relating to the business of the company may be exclusively decided by the manager or, if there is more than one manager, by a majority of the managers; and (3) a manager: (i) must be designated, appointed, elected, removed, or replaced by a vote, approval, or consent of a majority of the members; and (ii) holds office until a successor has been elected and qualified, unless the manager sooner resigns or is removed.
Your preview ends here
Eager to read complete document? Join bartleby learn and gain access to the full version
  • Access to all documents
  • Unlimited textbook solutions
  • 24/7 expert homework help
ULLCA §404 c) The only matters of a member or manager-managed company's business requiring the consent of all of the members are: 1) the amendment of the operating agreement under Section 103; 2) the authorization or ratification of acts or transactions under Section 103(b)(2)(ii) which would otherwise violate the duty of loyalty; 3) an amendment to the articles of organization under Section 204; 4) the compromise of an obligation to make a contribution under Section 402(b); 5) the compromise, as among members, of an obligation of a member to make a contribution or return money or other property paid or distributed in violation of this [Act]; 6) the making of interim distributions under Section 405(a), including the redemption of an interest; 7) the admission of a new member ; 8) the use of the company's property to redeem an interest subject to a charging order; 9) the consent to dissolve the company under Section 801(b)(2); 10) a waiver of the right to have the company's business wound up and the company terminated under Section 802(b); 11) the consent of members to merge with another entity under Section 904(c)(1); and 12) the sale, lease, exchange, or other disposal of all, or substantially all, of the company's property with or without goodwill. *If you don’t like it, you can change it in the operating agreement* LLCs – Authority ULLCA § 301. AGENCY OF MEMBERS AND MANAGERS. a) Subject to subsections (b) and (c): (1) Each member is an agent of the limited liability company for the purpose of its business, and an act of a member, including the signing of an instrument in the company's name, for apparently carrying on in the ordinary course the company's business or business of the kind carried on by the company binds the company, unless the member had no authority to act for the company in the particular matter and the person with whom the member was dealing knew or had notice that the member lacked authority. (2) An act of a member which is not apparently for carrying on in the ordinary course the company's business or business of the kind carried on by the company binds the company only if the act was authorized by the other members. b) Subject to subsection (c), in a manager-managed company:
Your preview ends here
Eager to read complete document? Join bartleby learn and gain access to the full version
  • Access to all documents
  • Unlimited textbook solutions
  • 24/7 expert homework help
(1) A member is not an agent of the company for the purpose of its business solely by reason of being a member. Each manager is an agent of the company for the purpose of its business, and an act of a manager, including the signing of an instrument in the company's name, for apparently carrying on in the ordinary course the company's business or business of the kind carried on by the company binds the company, unless the manager had no authority to act for the company in the particular matter and the person with whom the manager was dealing knew or had notice that the manager lacked authority. (2) An act of a manager which is not apparently for carrying on in the ordinary course the company's business or business of the kind carried on by the company binds the company only if the act was authorized under Section 404. c) Unless the articles of organization limit their authority, any member of a member- managed company or manager of a manager-managed company may sign and deliver any instrument transferring or affecting the company's interest in real property. The instrument is conclusive in favor of a person who gives value without knowledge of the lack of the authority of the person signing and delivering the instrument. Inspection and Information Rights: jurisdictions likely vary; pay attention to what can be reviewed and any constraints on review rights (i.e., reasonableness) ULLCA § 408. Member’s Right to Information. a) A limited liability company shall provide members . . . access to its records , if any, at the company’s principal office . . . . The company shall provide former members . . . access for proper purposes to records pertaining to the period during which they were members. The right of access provides the opportunity to inspect and copy records during ordinary business hours . The company may impose a reasonable charge , limited to the costs of labor and material, for copies to records furnished. b) A limited liability company shall furnish to a member . . . : 1) without demand, information concerning the company’s business or affairs reasonably required for the proper exercise of the member’s rights and performance of the member’s duties under the operating agreement or this [Act]; and 2) on demand, other information concerning the company’s business or affairs, except to the extent the demand or the information demanded is unreasonable or otherwise improper under the circumstances. c) A member has the right upon written demand given to the limited liability company to obtain at the company’s expense a copy of any written operating agreement. Records, proper purpose, and information—each statute is different as to how these are defined. You may also look to see if the Operating Agreement lays out what type of information can be disclosed. Financial Rights and Obligations: default rule for distribution – per capita SECTION 405. SHARING OF AND RIGHT TO DISTRIBUTIONS.
Your preview ends here
Eager to read complete document? Join bartleby learn and gain access to the full version
  • Access to all documents
  • Unlimited textbook solutions
  • 24/7 expert homework help
a) Any distributions made by a limited liability company before its dissolution and winding up must be in equal shares. b) A member has no right to receive , and may not be required to accept, a distribution in kind. c) If a member becomes entitled to receive a distribution, the member has the status of, and is entitled to all remedies available to, a creditor of the limited liability company with respect to the distribution. LLCs – Financial Rights & Obligations What are the default rules for distributions? Share equally (per capita) or by contribution (pro-rata). If the operating agreement provides for pro rata distributions, what problems could arise from allowing additional contributions? Someone may want to contribute way more money in order to get more of the distribution. This could affect members with little money. Can a member in a member-managed LLC compel the LLC to distribute some of its profits before dissolution? No. If you put money in to an LLC do you have the right to get it out? Short of withdrawing, no you cannot. Pomeroy typically all LLC agreements have provisions for interim tax distributions to allocate share of profits for pass through taxation Pg. 1233 Distribution are for tax purposes—Understand allocations and distributions Entity Status: distinct entity, though courts sometimes mistakenly undertake partnership- type aggregate analysis Entity Status: SECTION 201. LIMITED LIABILITY COMPANY AS LEGAL ENTITY. A limited liability company is a legal entity distinct from its members. BUT NOTE: for federal diversity jurisdiction purposes, the LLC is treated as the aggregate of its members. Chapter 20—LLC Recapitulation Limited Liability -Simply means that you are not liable for the obligations of an entity, but you are liable for your own personal acts. Limited Liability: generally not liable due solely to membership (vicarious vs. individual liability) Pepsi case— not liable just bc a member in LLC LLCs & Limited Liability ULLCA SECTION 303. LIABILITY OF MEMBERS AND MANAGERS. Except as otherwise provided in subsection (c), the debts, obligations, and liabilities of a limited liability company, whether arising in contract, tort, or otherwise, are solely the debts, obligations, and liabilities of the company. A member or manager is not personally liable for a debt,
Your preview ends here
Eager to read complete document? Join bartleby learn and gain access to the full version
  • Access to all documents
  • Unlimited textbook solutions
  • 24/7 expert homework help
obligation, or liability of the company solely by reason of being or acting as a member or manager. DLLCA SECTION 303. LIABILITY TO 3 rd PARTIES. a) Except as otherwise provided by this chapter, the debts, obligations and liabilities of a limited liability company , whether arising in contract, tort, or otherwise, shall be solely the debts, obligations and liabilities of the limited liability company, and no member or manager of a limited liability company shall be obligated personally for any such debt, obligation or liability of the limited liability company solely by reason of being a member or acting as a manager of the limited liability company. YOU CAN STILL BE HELD LIABLE FOR YOUR OWN PERSONAL ACTIONS. YOU ARE ONLY NOT LIABLE FOR ENTITY-LEVEL OBLIGATIONS Limited Liability: piercing the LLC veil is similar here, except for focus on formalities Is the piercing analysis the same as in the corporate context? No How is it different? The formality requirement is excised and doesn’t really apply. Fraudulent transfer- can be one way to get to LLCs assets. Charging order— if the owner gives assets to LLC, you sue owner, win, you may get charging order that says that if any money goes to owner, it must go to the party that won. ULLCA SECTION 303. LIABILITY OF MEMBERS AND MANAGERS. b) The failure of a limited liability company to observe the usual company formalities or requirements relating to the exercise of its company powers or management of its business is not a ground for imposing personal liability on the members or managers for liabilities of the company. Fiduciary Duties: generally, comes from common law and can be found in statutes; duties look roughly similar to what we’ve seen ULLCA § 409. GENERAL STANDARDS OF MEMBER'S AND MANAGER'S CONDUCT. a) The only fiduciary duties a member owes to a member-managed company and its other members are the duty of loyalty and the duty of care imposed by subsections (b) and (c). b) A member's duty of loyalty to a member-managed company and its other members is limited to the following: (1) to account to the company and to hold as trustee for it any property, profit, or benefit derived by the member in the conduct or winding up of the company's business or derived from a use by the member of the company's property, including the appropriation of a company's opportunity; (2) to refrain from dealing with the company in the conduct or winding up of the company's business as or on behalf of a party having an interest adverse to the company; and (3) to refrain from competing with the company in the conduct of the company's business before the dissolution of the company.
Your preview ends here
Eager to read complete document? Join bartleby learn and gain access to the full version
  • Access to all documents
  • Unlimited textbook solutions
  • 24/7 expert homework help
c) A member's duty of care to a member-managed company and its other members in the conduct of and winding up of the company's business is limited to refraining from engaging in grossly negligent or reckless conduct, intentional misconduct, or a knowing violation of law. d) A member shall discharge the duties to a member-managed company and its other members under this [Act] or under the operating agreement and exercise any rights consistently with the obligation of good faith and fair dealing. Is the standard the same for a non-managing member in a manager-managed LLC? NO ULLCA § 409. GENERAL STANDARDS OF MEMBER'S AND MANAGER'S CONDUCT. (h) In a manager-managed company: 1) a member who is not also a manager owes no duties to the company or to the other members solely by reason of being a member; 2) a manager is held to the same standards of conduct prescribed for members in subsections (b) through (f) Fiduciary Duties: can limit duties by contract, though there are generally limits – see governing statutes, precedents Fiduciary Duties and the Role of Contract: DLLCA § 1101(e) e) A limited liability company agreement may provide for the limitation or elimination of any and all liabilities for breach of contract and breach of duties (including fiduciary duties) of a member, manager or other person to a limited liability company or to another member or manager or to another person that is a party to or is otherwise bound by a limited liability company agreement; provided, that a limited liability company agreement may not limit or eliminate liability for any act or omission that constitutes a bad faith violation of the implied contractual covenant of good faith and fair dealing. Fiduciary Duties and the Role of Contract: ULLCA § 103 a) Except as otherwise provided in subsection (b), all members of a limited liability company may enter into an operating agreement , which need not be in writing, to regulate the affairs of the company and the conduct of its business, and to govern relations among the members, managers, and company. To the extent the operating agreement does not otherwise provide, this [Act] governs relations among the members, managers, and company.
Your preview ends here
Eager to read complete document? Join bartleby learn and gain access to the full version
  • Access to all documents
  • Unlimited textbook solutions
  • 24/7 expert homework help
ULLCA § 103. EFFECT OF OPERATING AGREEMENT; NONWAIVABLE PROVISIONS. The operating agreement may not : . . . . (2) eliminate the duty of loyalty under Section 409(b) or 603(b)(3), but the agreement may : (i) identify specific types or categories of activities that do not violate the duty of loyalty, if not manifestly unreasonable; and (ii) specify the number or percentage of members or disinterested managers that may authorize or ratify, after full disclosure of all material facts, a specific act or transaction that otherwise would violate the duty of loyalty; (3) unreasonably reduce the duty of care under Section 409(c) or 603(b)(3); (4) eliminate the obligation of good faith and fair dealing under Section 409(d), but the operating agreement may determine the standards by which the performance of the obligation is to be measured, if the standards are not manifestly unreasonable; Ownership/Transferability: keep in mind difference between financial rights and full membership rights; recall conversations regarding charging orders Under ULLCA, can a member transfer his full ownership interest to another person? No, only the financial rights, not ownership rights. Kind of like partnership rights. SECTION 501. MEMBER'S DISTRIBUTIONAL INTEREST. (a) A member is not a co-owner of, and has no transferable interest in, property of a limited liability company. (b) A distributional interest in a limited liability company is personal property and, subject to Sections 502 and 503, may be transferred in whole or in part. SECTION 502. TRANSFER OF DISTRIBUTIONAL INTEREST. A transfer of a distributional interest does not entitle the transferee to become or to exercise any rights of a member . A transfer entitles the transferee to receive, to the extent transferred, only the distributions to which the transferor would be entitled. SECTION 601. EVENTS CAUSING MEMBER’S DISSOCIATION. A member is dissociated . . . upon the occurrence of any of the following events: (3) upon transfer of all of a member’s distributional interest , other than a transfer for security purposes or a court order charging the member’s distributional interest which has not been foreclosed. **Idea is that once you give up your financial rights, you no longer SECTION 503. RIGHTS OF TRANSFEREE. a) A transferee of a distributional interest may become a member of a limited liability company if and to the extent that the transferor gives the transferee the right in accordance with authority described in the operating agreement or all other members consent.
Your preview ends here
Eager to read complete document? Join bartleby learn and gain access to the full version
  • Access to all documents
  • Unlimited textbook solutions
  • 24/7 expert homework help
b) A transferee who does not become a member is not entitled to participate in the management or conduct of the limited liability company's business , require access to information concerning the company's transactions, or inspect or copy any of the company's records. SECTION 503. RIGHTS OF TRANSFEREE. e) A transferee who does not become a member is entitled to: (1) receive, in accordance with the transfer, distributions to which the transferor would otherwise be entitled; (2) receive, upon dissolution and winding up of the limited liability company's business: (i) in accordance with the transfer, the net amount otherwise distributable to the transferor; (ii) a statement of account only from the date of the latest statement of account agreed to by all the members; (3) seek under Section 801(5) a judicial determination that it is equitable to dissolve and wind up the company's business. Can a third party creditor of a member in his or her individual capacity force the sale of membership units in the LLC to satisfy a judgment? No, you cannot take partnership or membership interests; you have to get a charging order, where Charging Orders SECTION 504. RIGHTS OF CREDITOR. a) On application by a judgment creditor of a member of a limited liability company or of a member's transferee , a court having jurisdiction may charge the distributional interest of the judgment debtor to satisfy the judgment . The court may appoint a receiver of the share of the distributions due or to become due to the judgment debtor and make all other orders, directions, accounts, and inquiries the judgment debtor might have made or which the circumstances may require to give effect to the charging order. b) A charging order constitutes a lien on the judgment debtor's distributional interest. The court may order a foreclosure of a lien on a distributional interest subject to the charging order at any time. A purchaser at the foreclosure sale has the rights of a transferee. *** e) This section provides the exclusive remedy by which a judgment creditor of a member or a transferee may satisfy a judgment out of the judgment debtor's distributional interest in a limited liability company. Dissociation / Dissolution: this should be provided for in parties’ contractual agreement; if not, look to statute; see ULLCA for an example of a statute that grants rights on dissociation (not all statutes do so) SECTION 101. DEFINITIONS. In this [Act]:
Your preview ends here
Eager to read complete document? Join bartleby learn and gain access to the full version
  • Access to all documents
  • Unlimited textbook solutions
  • 24/7 expert homework help
(2) "At-will company" means a limited liability company other than a term company. (19) "Term company" means a limited liability company in which its members have agreed to remain members until the expiration of a term specified in the articles of organization. SECTION 601. EVENTS CAUSING MEMBER'S DISSOCIATION. A member is dissociated from a limited liability company upon the occurrence of any of the following events: 1) the company's having notice of the member's express will to withdraw upon the date of notice or on a later date specified by the member ; 2) an event agreed to in the operating agreement as causing the member's dissociation; 3) upon transfer of all of a member's distributional interest, other than a transfer for security purposes or a court order charging the member's distributional interest which has not been foreclosed; 4) the member's expulsion pursuant to the operating agreement. SECTION 602. MEMBER'S POWER TO DISSOCIATE; WRONGFUL DISSOCIATION. a) Unless otherwise provided in the operating agreement, a member has the power to dissociate from a limited liability company at any time, rightfully or wrongfully, by express will pursuant to Section 601(1). b) If the operating agreement has not eliminated a member's power to dissociate, the member's dissociation from a limited liability company is wrongful only if: (1) it is in breach of an express provision of the agreement; or (2) before the expiration of the specified term of a term company: (i) the member withdraws by express will; (ii) the member is expelled by judicial determination under Section 601(6); (iii) the member is dissociated by becoming a debtor in bankruptcy; or (iv) in the case of a member who is not an individual, trust other than a business trust, or estate, the member is expelled or otherwise dissociated because it willfully dissolved or terminated its existence. SECTION 602. MEMBER'S POWER TO DISSOCIATE; WRONGFUL DISSOCIATION. e) A member who wrongfully dissociates from a limited liability company is liable to the company and to the other members for damages caused by the dissociation. The liability is in addition to any other obligation of the member to the company or to the other members. f) If a limited liability company does not dissolve and wind up its business as a result of a member's wrongful dissociation under subsection (b), damages sustained by the company for the wrongful dissociation must be offset against distributions otherwise due the member after the dissociation. SECTION 603. EFFECT OF MEMBER'S DISSOCIATION. a) Upon a member's dissociation: (1) in an at-will company, the company must cause the dissociated member's distributional interest to be purchased under [Article] 7; and
Your preview ends here
Eager to read complete document? Join bartleby learn and gain access to the full version
  • Access to all documents
  • Unlimited textbook solutions
  • 24/7 expert homework help
(2) in a term company: (i) if the company dissolves and winds up its business on or before the expiration of its specified term, [Article] 8 applies to determine the dissociated member's rights to distributions; and (ii) if the company does not dissolve and wind up its business on or before the expiration of its specified term, the company must cause the dissociated member's distributional interest to be purchased under [Article] 7 on the date of the expiration of the term specified at the time of the member's dissociation. SECTION 701. COMPANY PURCHASE OF DISTRIBUTIONAL INTEREST. a) A limited liability company shall purchase a distributional interest of a: (1) member of an at-will company for its fair value determined as of the date of the member's dissociation if the member's dissociation does not result in a dissolution and winding up of the company's business under Section 801; or (2) member of a term company for its fair value determined as of the date of the expiration of the specified term that existed on the date of the member's dissociation if the expiration of the specified term does not result in a dissolution and winding up of the company's business under Section 801. SECTION 801. EVENTS CAUSING DISSOLUTION AND WINDING UP OF COMPANY'S BUSINESS. A limited liability company is dissolved, and its business must be wound up, upon the occurrence of any of the following events: 1) an event specified in the operating agreement; 2) consent of the number or percentage of members specified in the operating agreement; 3) an event that makes it unlawful for all or substantially all of the business of the company to be continued, but any cure of illegality within 90 days after notice to the company of the event is effective retroactively to the date of the event for purposes of this section;
Your preview ends here
Eager to read complete document? Join bartleby learn and gain access to the full version
  • Access to all documents
  • Unlimited textbook solutions
  • 24/7 expert homework help
Problem page 1336 (b) only. Ask the following questions: Can A & B do this under 404? Under 409? Can C compel a distribution? Can C sell his interest in the LLC (see ULLCA 502-503)? Can C dissociate and if so what effect does that have? Can C force a dissolution? Poore v. Fox Hollow Enterprises— Court here says that an LLC is more like a corporation and held that a corporation cannot appear or conduct business in a court without representation by licensed counsel. Regulatory Issues: LLCs can be treated as either corporations or partnerships, which may affect regulatory regime
Your preview ends here
Eager to read complete document? Join bartleby learn and gain access to the full version
  • Access to all documents
  • Unlimited textbook solutions
  • 24/7 expert homework help

Related Documents

5132020121036PM_4._Assessment_CPPREP4124_Project_21.0 (1).pdf
5132020121057PM_5._Assessment_CPPREP4124_Project_31.0.pdf
CPD last.pdf
2152021105836AM_3._Assessment_CPPREP4124_Project_11.0.pdf
Week 4 Seminar Questions.docx
Week 3 Seminar Questions.docx
LAW122 Final Note (2).docx
Screenshot 2024-02-12 135214.png
CYB 260 Module Four Worksheet Tyler Riggs.docx
CYB 260 Project One Tyler Riggs.docx
Week 4 Assignment - Journal Ethics.docx
Week 10 Assignment - Inmates' Rights corrections .docx