Business Associations Outline PDF

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Table of Contents I.

AGENCY..................................................................................................................................................... 1 A. B. C.

II.

AGENCY LIABILITY (RELATIONSHIP WITH 3RD PARTY)......................................................................................................1 AUTHORITY..........................................................................................................................................................2 AGENCY COST.......................................................................................................................................................2 GENERAL PARTNERSHIPS............................................................................................................................ 2

A. B. C. D. E. F. G.

FORMATION OF GENERAL PARTNERSHIPS...................................................................................................................3 PARTNERSHIP AGREEMENTS.....................................................................................................................................3 PARTNER DECISION MAKING....................................................................................................................................3 PROFITS AND LOSSES..............................................................................................................................................3 LIABILITY..............................................................................................................................................................4 FIDUCIARY DUTIES..................................................................................................................................................4 PROPERTY AND OWNERSHIP....................................................................................................................................5 Property.................................................................................................................................................................5 Ownership.............................................................................................................................................................5 H. DISSOLUTION........................................................................................................................................................5 III.

CORPORATIONS..................................................................................................................................... 6 A.

B.

C.

D.

E.

F.

FORMATION AND BASIC STRUCTURE.........................................................................................................................6 Development of Corporation Law in the United States........................................................................................6 Formation of a Corporation..................................................................................................................................7 Decline of Ultra Vires............................................................................................................................................7 Premature Commencement of Business (promoter liability)................................................................................8 Corporate tax........................................................................................................................................................9 Limited Liability.....................................................................................................................................................9 Piercing the Corporate Veil.................................................................................................................................10 FINANCIAL MATTERS............................................................................................................................................11 Financial Structure..............................................................................................................................................11 Debt vs. Equity.....................................................................................................................................................11 Types of Equity Securities....................................................................................................................................12 Issuance of Shares...............................................................................................................................................14 Corporate Finance...............................................................................................................................................14 Preemptive rights................................................................................................................................................17 Distributions........................................................................................................................................................18 MANAGEMENT AND CONTROL...............................................................................................................................20 Traditional Roles of Shareholders and Directors.................................................................................................20 Shareholder Voting.............................................................................................................................................21 Share Transfer Restrictions.................................................................................................................................23 Proxy Regulation.................................................................................................................................................25 FIDUCIARY DUTIES...............................................................................................................................................25 Duty of Care........................................................................................................................................................26 Duty of Loyalty....................................................................................................................................................29 Indemnification...................................................................................................................................................32 Insurance.............................................................................................................................................................32 SECURITIES LAWS................................................................................................................................................33 Rule 10b-5...........................................................................................................................................................33 Insider Trading....................................................................................................................................................34 TAKEOVERS........................................................................................................................................................37

IV.

ALTERNATIVE BUSINESS TYPES............................................................................................................. 39 A.

LIMITED PARTNERSHIP (LP)...................................................................................................................................39 Formation............................................................................................................................................................39 Decision Making..................................................................................................................................................40 B. LIMITED LIABILITY PARTNERSHIP (LLP)....................................................................................................................40 C. LIMITED LIABILITY COMPANY (LLC)........................................................................................................................41

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Business law: Law of how people come together to form a business

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Agency

Agency law is the law of delegation o P delegates to A Agent: Person who acts on behalf of principal Principal: Person for whom agent acts Agency relationship: Legal relationship between the principal and the agent o Ex: Employer/employee, A-C, doc-patient o Elements/formation of an agency relationship: 1. Consent by both parties  Mutual. Must opt in, can’t be forced 2. Action by the agent  On behalf of the principal for the benefit of/at the direction of principal 3. Control by the principal  P has to have some control over agent o P must have ultimate responsibility to control the end result of his/her agent’s action  Requisite level of control: can be the fact that P has specified task that A should perform, even if no details on how should be done given Agent is a fiduciary of the principal o Fiduciary: a person or organization that acts on behalf of another person or persons, putting their clients' interest ahead of their own, with a duty to preserve good faith and trust Agent’s duties to the principal 1. Loyalty 2. Care Agents can be divided into employees and independent contractors based on the principal’s degree of control over the agent o Employee: The principal has control over the agent’s means of achieving a particular result o Independent contractor: The principal has control over results but not means

A. Agency liability (relationship with 3rd party) 

Tort liability: The principal is liable for an employee’s torts within the scope of the agency, but not an IC’s torts o Tort liability occurs if A acting on behalf of P creates a tort. Founded on control o The issue of P’s liability is whether A is an employee or IC  ANALYSIS here is about control  IC: P controls outcome  Employee: Employer controls means and objective

B. Authority  

Contract liability: Here, issue is A’s degree of authority. Whether A had authority o ANALYSIS: (1) actual authority? If not, (2) apparent authority? The agent can contractually bind the principal with a third party if the agent has authority o Ask: would a reasonable person in A’s shoes think they had authority or if reasonable 3rd party thinks A has authority (incidental/apparent) o Actual authority: Based on P’s words/conduct with respect to the agent  P gives authority when P says/does/writes something that a reasonable person understands as giving authority  Authority flows from P to A o Apparent authority: Based on P’s words/conduct with respect to the third party  A reasonable person in T’s place would believe apparent authority exists  A is liable to P, A violated actually authority but K still valid  Ex: T, camera person, calls P to ask for job, P says A does the hiring. P tells A T sucks, don’t hire. All T knows is that A does hiring. If T hired by A, the K is binding because A had apparent authority o Incidental authority: Authority to take an action that is incidental / relates to an already authorized action  Flows from another type of authority  Ex.: hiring camera person is duty given by P. Incidental= interview, solicit resumes, etc. (actions related to hiring camera person)

C. Agency Cost 

Agency costs: The costs associated with aligning the incentives of the principal and the agent and any costs associated with divergent interests 1. Any costs that have to be expended to realign interest (monitoring, punishment) 2. Any costs that arise from remaining divergent interests between employer/employee o Total cost is sum of 1+2

II. 

General Partnerships

The choice of business form affects: o Formation

Decision-making Liability (personal or not?) Financing Compensation (how do people get paid? Take profits? Ownership via shares to sell?) Taxes  Pass-through taxation: flows to owners  Entity taxation: business itself gets taxed o Termination (how’s it done) Common business forms: o Sole proprietorship o General partnership o Corporation o Limited partnership (LP) and limited liability partnership (LLP) o Limited liability company (LLC) o o o o o

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A. Formation of General Partnerships 

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General partnership: An association of two or more persons to carry on as co-owners a business for profit o Ex: Law partnerships o Partners are co-owners Formation: Whether a partnership has been formed depends on the totality of the circumstances o Partnership formation does not require intent, K o Profit-sharing is prima facie evidence of a partnership (UPA § 7(4) and RUPA § 202(3))  Exceptions for payments: wage of employee, debt installments, interest on load o Ask: Whether running business together and splitting profit, if so=GP  Profit sharing/splitting is key

D. Partnership agreements 

Rule: Partnership agreements can “contract around” default rules but not mandatory rules

E. Partner decision making 

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Default rule: Ordinary partnership matters must be decided by a majority of the partners (UPA § 18(h) and RUPA § 401(j)) o Applies to actions that change the status quo of the partnership o Whether the decision is one that changes status quo is a matter of degree based on facts  Ex: painting trash trucks is not normal but not important to trash business In 50/50 partnership governed by default rules: every decision has to be made unanimously to reach majority

F. Profits and losses 

Net profits: revenue – cost = net profits

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o Revenue: money brought in o Cost: money spent to produce revenue Net loss: revenue < loss Default rule: Partners share equally in profits and losses (UPA § 18(a) and RUPA § 401(b)) o Doesn’t apply to capital-labor/capital-skill partnerships  One loses money, the other time, not fair to make time loser pay Default rule: Partners share in losses equal to their share of profits (UPA § 18(a) and RUPA § 401(b))

G. Liability  

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Rule: Liability rules are mandatory o 3rd party rules are mandatory Liability of partnership o K liability: A partnership is liable for Ks entered into on its behalf by a partner with authority (UPA § 9 and RUPA § 301)  Ask: was there authority (actual/apparent)? o Torts liability: A partnership is liable for the torts of its partners committed in the ordinary course of business of the partnership (UPA §§ 13-14 and RUPA § 305)  Ask: was tort in the ordinary course of business? Liability of partners o Personal liability: Partners have unlimited personal liability for the obligations of the partnership (UPA § 9)  Ps liable personally for debts o Partners have “joint and several” liability for obligations under §§13-14 (torts) and “joint” liability for all other partnership obligations (Ks) (§15) Indemnification: It is the responsibility of the partnership to reimburse a partner for expenses incurred by the partner in the ordinary course of partnership business o If P incurs a personal expense on behalf of partnership, partnership is required to reimburse if considered to be in the ordinary course of partnership Contribution: Responsibility of the partners to contribute to the partnership (in proportion with their share of losses) if the partnership cannot meet its obligations o By default, losses are split according to the split of profits. o If partnership ends up with more debts than assets, Ps have to contribute to fill gap of unpaid debts in accordance with share of profit Ex: A and B 50/50 partners in bakery. Partnership has $500 o A personally pays $700 bill for flour (an ordinary purchase for a bakery) and would get reimbursed by partnership  A indemnifies partnership, which pays $500 o A+B must still contribute to fill the gap of $200  50/50 share of profits, so 50/50 share of loss

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Therefore A and B must contribute $100

H. Fiduciary duties 

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Rule: Partners are fiduciaries of the partnership and therefore owe fiduciary duties to the partnership and (by extension) each other o Fiduciary duties of care and loyalty Meinhard v. Salmon Rule: Co-adventurers, like partners, have a fiduciary duty to each other, including sharing in any benefits that result from the parties’ joint venture.

I. Property and Ownership Property  UPA treats a partnership as an aggregation of the individual partners o Does not treat a partnership as a separate legal entity  RUPA treats a partnership as a separate legal entity  Ownership of partnership property o UPA § 25(1): The partners own the property in a “tenancy in partnership”  Partners only have right to possess/use property only for partnership, not personal (UPA § 25(2)) o RUPA: The partnership owns the property (entity approach)  Partners have right to use property as agents of the partnership  Partners can vote and approve to use property for personal reasons, can’t contract around entity aspect Ownership  New partner default rule: adding a new partner requires the consent of all existing partners o Transferring an interest in the partnership that includes voting rights is equivalent to adding a new partner. o ANALYSIS: Show consent of all partners, include partner suggesting adding new partner clearly consented o Rapaport v. 55 Perry Co (p92)  Unilateral transfer default rule: the only interest a partner can unilaterally transfer is their interest in profits/losses o The transferee receives financial rights only, not control rights o If the partner only transfers a financial interest to someone else, the partner retains the voting interest.

J. Dissolution 

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Dissolution is the change in relationship caused by a partner ceasing to be associated with the business (UPA § 29) o Referred to as “disassociation” under RUPA § 601 Grounds for dissolution o Death of any partner o Bankruptcy of any partner or the partnership

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 Default rule for automatic disassociation  P can get kicked out of partnership if P goes bankrupt o Court order o Two most common/important:  Express will of any partner in an at-will partnership  Termination of the definite term or undertaking in a term partnership At-will partnership default rule: Partners have not specified any definite term or particular undertaking for the partnership o Default type of partnership under UPA o A partner can withdraw at any time without liability because they left  Liability still exists for actions at time of partnership, can’t escape liability by disassociating o Can be modified, ex: 60-day notice requirement before leaving Term partnership default rule: Partners have agreed that the partnership will have a definite term or particular undertaking o A premature withdrawal is a breach of contract creating liability for the withdrawing partner o Under RUPA § 701, a partner in a term partnership can demand a buyout o Partner has power to leave, not right o Collins v. Lewis (p98), cafeteria case What follows from disassociation: winding up and termination Winding up: The process of selling off the partnership’s assets, paying off creditors and settling up profits and losses between the partners o Default rule: During the winding up of a partnership, the assets are sold, and the cash proceeds are distributed to the partners  Partners can agree to do in-kind distribution, but not at detriment of creditors o Dreifurst v. Dreifurst Termination: Once the partn...