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8/27/19 ●

Meinhard v. Salmon o Issue: Does the defendant’s duty to the plaintiff to at least disclose the new business deal involving the same subject matter property? o Holding: Yes (for Meinhard) o Reasoning: joint adventurers, like copartners, owe to one another, while the enterprise continues, the duty of finest loyalty; ● a trustee is held to something stricter than the morals of the market place; ● not honesty alone but the punctilio of an honor the most sensitive is then the standard of behavior ● uncompromising rigidity has been the attitude of courts of equity when petitioned to undermine the rule of undivided loyalty

Who brought what to the partnership? Salmon ● Managerial skill ● Knowledge of commercial real estate ● “Reconstruct, alter, manage, and operate” property

Meinhard ● Capital ● Bore financial risk ○ Agreed to returns based on profits ● Business contacts (maybe)

How did expectations affect outcome? Cardozo ● That Salmon expected (and had reason to think) the relationship did not continue after the 20-year term was not conclusive ● Looked beyond specific relationship ○ Fiduciary duties ●

Andrews

Should expectations matter?

Risk Allocation in the Firm - nature, allocation and management What is a corporation? ● Two or more investors come together ● Seek common management ● Attributes ○ Perpetual life ○ Centralized management

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Free transferability of shares Limited liability ■ Risk is limited to your contribution Types of partnerships Risk ●

Controllable Active Investors ● Minimize

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Passive Investors ● Diversify

Non-controllable

Active Investors ● Risk of Flood → buy insurance ● Increase in steel price → buy futures

Passive Investors ● Real estate market crash → invest in other markets ● Economic meltdown → SOL

8/29/19 Risk Management ● ●

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Insurance: if something happens, you get paid for it; use premiums to pay for it whether you use the insurance or not Diversification: different ventures with difference risks so that your risk essentially evens out and your returns are relatively consistent, even if the returns aren’t huge ○ If you want a huge return, you put all of your eggs in one basket, but then you also risk a lot Internal risk allocation: Externalization: insurance is one form, but a limited liability the the most common way because it limits the risk to a company, not to the individual so you can’t be personally liable for whatever the company would be liable for ○ Owners of a something are shareholders ○ Owners of an LLC are members ○ Owners of a partnership are partners Risk management in M&S ○ Internal risk allocation

Agency in the Firm - Introduction ● Agent wants to get the most out of their time with a minimum of effort (because time is money)

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○ Minimum effort would be just enough that your boss isn’t all over you Monitoring: P making sure that A fulfills their responsibility by essentially watching over them Shirking: A not doing what they need to do What could they have done differently in M&S? ○ Principal-Agent (?double check this on slides); Owner-Lender; Joint Ownership;

Role of Law in Business Firms ● Agency law, partnership law, corporate law ○ Some are MANDATORY - does not allow a business to not follow it ■ Minimum wage ○ Some are DEFAULT - not mandatory, but assumed unless the parties agree otherwise ■ At will employment ■ THREE types ● Majoritarian ○ Most parties would bargain for it but it can be changed ■ EX: At-will employment ● Tailored ○ Varies on the specific relationship ■ EX: an agent, as a fiduciary, must use reasonable efforts to give his principal information relevant to affairs entrusted to him and which, as the agent has notice, the principal would desire to have ● Penalty ○ Encourages parties to bargain and specify their relationship ■ EX: a rule that permits employees to compete with employers after employment ends ● Fiduciary duties ○ Gap-filling function to fill in the gaps in a relationship and serve to control agency costs ○ Golden rule of business organizations - this is how we want people to behave and treat business partners → put your business and partner’s interests ahead of your own ○ Mostly judge-created duties; not clear if they are implicit in the parties’ agreement (suggesting they can be waived or modified) OR if they arise as a matter of law (can’t be changed or modified) ○ Based on symmetry of information because it assumes that one party will have a better opportunity to get information and knowledge that they would have to share with the other party ○ Cardozo would not allow you to waive fiduciary duties ■ What Salmon did wrong: ● Opportunity arose stemming from his position as agent, so there

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should have been a loyalty and because he was the visible manager of the operation (only because Meinhard paid half of this) and then he took advantage without sharing the opportunity with his partner Andrews would assume that the duty arises from the specific agreement Remedy ■ Context-specific, but idea is to put the plaintiff in the position they would have been in without the breach...