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Business Associations, PART 3 CORPORATIONS, PART 1 :THE PRACTICE OF…

- - - - ATR-Kim Eng Financial Corp. v. Araneta,
        
        It is fundamental that a director cannot act loyally toward the corporation unless she makes a genuine, good faith effort to discharge her duties as a director.
    - - In order for a stockholder to divest the directors of their authority to [file a lawsuit] the stockholder must
        
        (1) make a demand on the company's board of directors or
        
        (2) show that demand would be futile.
      - The issue the court was in determining the second prong, as to whether the demand here is excused as futile. The purpose of the demand-futility analysis is to assess whether the board should be deprived of its decision-making authority because there is reason to doubt that the directors would be able to bring their impartial business judgment to bear on a litigation demand.
      - Accordingly, ... Courts should ask the following three questions on a director by-director basis when evaluating allegations of demand futility:
        
        (i) whether the director received a material personal benefit from the alleged misconduct that is the subject of the litigation demand;
        
        (ii) whether the director faces a substantial likelihood of liability on any of the claims that would be the subject of the litigation demand; and
        
        iii) whether the director lacks independence from someone who received a material personal benefit from the alleged misconduct that would be the subject of the litigation demand or who would face a substantial likelihood of liability on any of the claims that are the subject of the litigation demand.
      - If the answer to any of the questions is “yes” for at least half of the members of the demand board, then demand is excused as futile.
      - “A plaintiff seeking to show that a director was not independent must satisfy a materiality standard.” The plaintiff must allege that “the director in question had ties to the person whose proposal or actions he or she is evaluating that are sufficiently substantial that he or she could not objectively discharge his or her fiduciary duties.”
  - - - Officers do not benefit from exculpatory provisions!
  - - - 1) the defendants are interested in the transaction;
      - 2) defendants face a substantial risk of personal liability on the asserted claims; or
      - 3) where defendants are not independent
  - - - b. Background and Context
        
        i. A Note on Shareholder Ratification
        
        SHAREHOLDERS CAN RATIFY AS WELL
      - 514
        a. The Current Setting
        
        iii. The Effect of Compliance with the CoI Safe Harbor
        
        THINGS CAN BE REMEDIED BY HAVING AN UNBIASED OUTSIDE BOARD OF DIRECTORS AND SPECIAL COMITTES APPOINTED
        
        ii. Prerequisites to Being Affected by the CoI Safe Harbors
        
        The CoI Safe Harbor statutes provide three avenues for affecting covered transactions. First, the transaction can be approved by certain directors. Second, the transaction can be approved by certain shareholders. Finally, the transaction can be found to be “fair” to the corporation. These are disjunctive; only one need be met
        
        i. Transactions Eligible to Be Affected
        
        The MBCA §8.60 provides a more detailed description of the transactions covered, which it defines as “director’s conflicting interest transactions.” Those are:
        a transaction effected or proposed to be effected by the corporation . . .
        
        to which, at the relevant time, the director is a party; [i.e., classic self-dealing]
        
        respecting which, at the relevant time, the director had knowledge and a material financial interest known to the director; or
        
        respecting which, at the relevant time, the director knew that a related person was a party or had a material financial interest.
    - - In re Cornerstone Therapeutics Inc., S'holder Litig.
        
        When the independent directors are protected by an exculpatory charter provision and the plaintiffs are unable to plead a non-exculpated claim against them, those directors are entitled to have the claims against them dismissed.
    - - a. The Current Setting
        
        i. Advancement of Expenses
        
        ii. When Must the Corporation Indemnify?
        
        iii. Procedural and Substantive Prerequisites to Indemnification
    - - D and O insurance
        
        Director and officer insurance that covers personal losses if they are sued by the orgs employees vendors customers or other parties
- - - - a. The Current Setting
        
        • Basic rule: The law of the state of incorporation apply to matter's related to the corporation's internal affairs.
        
        • Distinguish "internal affairs" and matters where a particular state may have a compelling interest.
        
        Compare:
        
        (all apply local state's law];
        
        consumer protection, employee safety, environmental laws
        
        (all apply the state of incorporation laws).
        
        and election and appointment of directors / officers, adoption of bylaws, issuance of corporate shares, preemptive rights, rights of different classes of shares, cumulative voting, shareholder inspection rights, payment of dividends, purchase and redemption of shares
        
        In most settings, the choice of state of incorporation has no effect on the black letter, corporate, law since most are similar. Many follow the Model Business Corporation Act (which we will NOT be reading).
        
        The internal affairs doctrine is a conflicts of law rule that corporate governance matters are to be controlled by the laws of the state of incorporation.
      - b. Background and Context
        
        • Internal affairs doctrine will not be applied in unusual cases where some other state has a more significant relationship to the occurrence and parties. Restatement (Second) of Conflict of Laws, $302.
        
        • Commerce clause likely limits ability of individual states from changing this rule. CTS Corp. v. Dynamics Corp. of America, 481 U.S. 69 (1987). Under the Commerce Clause, a state has "no interest in regulating the internal affairs of foreign corporations." CB 145-146
        
        Note: A "domestic" corporation is a corporation incorporated in the subject state. A "foreign" corporation simply means a corporation incorporate in some other state.
    - - Widespread familiarity with Delaware Corporation Law
      - Large body of Delaware law construing their Corporation Law
      - Extremely experienced and efficient Chancery Courts designed to handle corporate matters
      - Relatively fast resolution of corporate law questions
      - Direct appeals to the Delaware Supreme Court (no intermediate appellate courts)
  - - - State statutes typically provide that a corporate name may be reserved, usually for 120 days, with the payment of a small fee. See DGCL §102(e), MBCA §4.02. Reserving the name allows clients to prepare to do business immediately following incorporation and ensures that the incorporation will not be delayed because an unavailable name has been selected. Under both Delaware and the MBCA the name must be distinguishable from the name of every other corporation on file with the secretary of state.
      - Under the law of most states a corporate name must contain some evidence that the entity is a corporation
    - - The document that creates and governs the corporation is called the Certificate of Incorporation in Delaware and the Articles of Incorporation under the MBCA.
      - In virtually every state the information required in the Articles is relatively minimal. See Del. §102(a), MBCA §2.02(a). The Articles must contain the corporation’s name and the name and address of each person who is incorporating the new entity. Often the lawyer or a member of his or her staff acts as the incorporator. The Articles must also name a person, or other corporation, who will act as the corporation’s agent upon whom service of process may be made and must identify an address within the state where the registered agent may be served. These requirements exist so that personal jurisdiction may be properly asserted over the corporation. The registered office need not be a place where the corporation does business, nor the registered agent need have any other connection to the corporation. Typically, when a corporation has incorporated in a foreign jurisdiction, it will engage a corporation service company to act as its registered agent and to provide the registered office.
      - The Articles must also state the maximum number of shares the corporation may issue (the actual number issued may be far fewer than the maximum stated in the Articles) and, if the shares are to have different management or economic rights, a statement as to how the shares will differ from one another. Finally, many states require the Articles to state the purpose for which the corporation is being formed. This requirement has become largely a dead letter, because in every state the Articles may simply state that the corporation may engage in any lawful business. See DGCL §102(a)(3). Indeed, at least one state requires the Articles to contain such a provision! See Cal. Corp. Code §202(b). The MBCA does not require the Articles to state the corporation’s purpose. The number of directors, or a process for determining the number of directors, must be stated in the Articles or bylaws. See DGCL §141(b), MBCA §8.03(a).
      - States also permit the Articles to contain certain optional provisions. Perhaps the most practically important of these is the ability to name the initial directors in the Articles. SeeMBCA §2.02(b)(1)
      - § 2.02. ARTICLES OF INCORPORATION
        
        (a) The articles of incorporation must set forth:
        
        (1) a corporate name for the corporation that satisfies the requirements of section 4.01;
        
        (2) the number of shares the corporation is authorized to issue;
        
        (3) the street and mailing addresses of the corporation’s initial registered office and the name of its initial registered agent at that office; and
        
        (4) the name and address of each incorporator.
    - - Filing is the action by which the state accepts the Articles. Filing is of great importance because it is through filing that the corporation comes into p. 150existence. See DGCL §106, MBCA §2.03(a). The statutes contain surprisingly detailed requirements for filing. The secretary of state (the official usually in charge of corporations) may promulgate additional requirements. A lawyer who fails to follow both the statutory and administrative requirements for incorporating a new venture will find that the Articles are rejected for filing, which will, at best, cause a delay and, at worst, present a large obstacle to the success of the new business venture.
      - The MBCA has a similar process. Anyone may form a corporation by delivering the Articles of Incorporation to the secretary of state. See MBCA §2.01. Among other requirements, the Articles must be executed by an incorporator. The Articles (and one copy of them if the incorporator is filing paper documents rather than filing electronically), and the required fees and taxes must be delivered to the secretary of state, who will file them if they are in order by recording them as filed and returning a copy of the Articles to the corporation. See MBCA §§1.20, 1.25. The corporation comes into existence as of the date and time of filing. See MBCA §1.23.
    - - Once the corporation has been formed, the lawyer must ensure that it is properly organized. Even if the initial directors were named in the Articles, the corporation has no officers or bylaws, nor has it taken any action. It does not, as yet, even have any owners. The organizational meeting is designed to complete these tasks. In most states, the minimum actions to be accomplished are electing directors (if they are not named in the Articles), adopting bylaws, and appointing officers. Under most statutes, an actual meeting is unnecessary if the incorporators (or initial directors) act by unanimous consent. Acting by consent is the typical method of effecting these tasks, because it is usually easier than convening an actual meeting. See DGCL §108(c), MBCA §2.05. Note that the statutes do not require the corporation to issue stock at the organizational meeting. Nevertheless, case law in most jurisdictions provides that a corporation cannot engage in business until it has received valid consideration in exchange for shares.
  - - - de jure corporationIf company has filed all the paperwork is supposed to have filed and it is stamped filed by the receiving gov entity--
      - de facto corporation If company does not pay taxes and gets status suspended or does not have all paperwork filed correctly but attempted to --
      - corporation by estoppel-If company does not file at all but parties acted as if a corp existed -- you have corporation by estoppel
      - Personal Liability-- if you do not have any of the options above you have personal liability
    - - a. Corporations by Estoppel
        
        Brown v WP media Inc
        
        The corporation-by-estoppel doctrine prevents a party who dealt with or recognized an organization as a corporation, or participated in holding it out as a corporation, from denying a corporation existed.
        
        Payer v. The SGL Carbon, LLC
        
        A party who dealt with an entity as a corporation may not avoid contractual liability based on a technicality such as defective incorporation without prejudice or detrimental reliance, if allowing avoidance would conflict with general principles of applicable law and the parties’ intent when forming the agreement or result in a windfall.
        
        The court applies three part test to consider whether or not a set of facts constitutes corporation by estoppel:
        
        (1) Would permitting the defendant to avoid liability under a contract based upon a technicality be contrary to the general principles of law?
        
        (2) Would accepting the defendant's argument be contrary to the parties' intent at the time of the agreement or result in a windfall? And,
        
        (3) Has the defendant relied on plaintiff's misrepresentations regarding its corporate status to its detriment?
      - b. De Facto Corporations
        
        Duray Development, LLC v. Perrin
        
        Under Michigan law, the de facto corporation and corporation by estoppel doctrines are applicable to limited liability companies.
        
        The de facto corporation doctrine provides that a defectively formed corporation-that is, one that fails to meet the technical requirements for forming a de jure corporation may attain the legal status of a de facto corporation if certain requirements are met as discussed later in this opinion. The most important aspect of a de facto corporation is that courts perceive and treat it in all respects as if it were a properly formed de jure corporation. The court examined if the good faith element was met. There was no evidence to suggest that Perrin formed Outlaw in anything other than good faith so all elements of a de facto corporation were present.
        
        In the Matter of the Estate of Hausman
        
        Organizers must make a colorable(GOOD FAITH per DURAY ) attempt to comply with statutory filing requirements for a de facto entity to exist.
        
        Christmas Lumber Co., Inc. v. Valiga
        
        Under the Model Business Corporation Act (MBCA), a corporation does not exist before its charter is filed with the state. Tennessee follows the MBCA, which specifies that “corporate existence begins when the charter is filed” unless the charter sets a delayed effective date. Therefore, no corporation existed when Waddell signed the contract to build Valiga’s house. Waddell’s claim that he thought a corporation existed is also suspect given his testimony that he and Graves were partners.
      - c. The Effect of Modern Corporation Statutes
  - - - $14. Formation of a Client-Lawyer Relationship
        
        A relationship of client and lawyer arises when:
        
        a person manifests to a lawyer the person's intent that the lawyer provide legal services for the person; and either
        
        (a) the lawyer manifests to the person consent to do so; or
        
        (b) the lawyer fails to manifest lack of consent to do so, and the lawyer knows or reasonably should know that the person reasonably relies on the lawyer to provide the services.
    - - Rule 1.13 Organization as Client
        
        A lawyer employed or retained by an organization represents the organization acting through its duly authorized constituents.
        
        In dealing with an organization’s directors, officers, employees, members, shareholders or other constituents, a lawyer shall explain the identity of the client when the lawyer knows or reasonably should know that the organization’s interests are adverse to those of the constituents with whom the lawyer is dealing.
        
        A lawyer representing an organization may also represent any of its directors, officers, employees, members, shareholders or other constituents, p. 182subject to the provisions of Rule 1.7. If the organization’s consent to the dual representation is required by Rule 1.7, the consent shall be given by an appropriate official of the organization other than the individual who is to be represented, or by the shareholders.
  - - - A promoter may be personally liable for breach of a preincorporation agreement unless the other party looked only to the subsequently formed corporation for performance or the parties agreed to release the promoter from liability.
- - - - In the normal course, shareholders vote on only one matter: the people to serve as directors.
      - Shareholders are also required to vote on certain fundamental changes (Organic Changes) before they are tobecome effective. All of these changes must be initiated by the board. These changes are:
        
        a. Amending the Articles of Incorporation;
        
        b. Selling all or substantially all of the corporation's assets;
        
        C. Merging with another business entity;
        
        d. Dissolving or terminating the corporation.
      - The Board may also present other matters to the shareholders even if not required under the corporate statues. These may involve instances where:
        
        1) some of the Board have conflicts of interest;
        
        2) indemnification payments to directors or officers;
        
        3) engagement of independent auditors; or
        
        4) approve management compensation plans.
        
        PHG: Remember Ratification?
      - Statutes usually permit a certain quantum of the shareholders (10% under MBCA §7.02(a)(2)) to force the board to call a special shareholders meeting, but those statutes, by themselves, do not expand the power of shareholders to take p. 533action beyond what has been described so far.
    - - a. The Current Setting
        
        i. Call
        
        I. Meeting must be properly called by selecting a proper time and place (and sometimes a proper reason). Annual meetings are usually where the directors are elected and other shareholder actions may be taken. Remember, directors hold office until their successors are elected;
        
        ii. Notice
        
        ii. Unlike notice to the board, notice to shareholders is regulated by statutes (requiring 10 to 60 days
        prior notice of meeting time, place, and sometimes purpose);
        
        Corporations must strictly comply with statutory timing requirements for setting record dates unless precedent allows otherwise (61 days not allowed) . McKesson Corp. v. Derdiger
        
        iii. Quorum
        
        iii. Necessary quorum, the minimum amount of share voting power (NOT shareholders) present for the
        meeting to be valid; and
        
        Quorum is the minimum amount of voting power that must be present at a meeting for actions to be valid. This is intended to prevent a collective body of shareholders to act when there are too few votes present. A Quorum for shareholder meetings is defined by the percentage of voting power represented at the meeting and not the number of shareholders. Quorum, for shareholder meetings, once established is valid for the remainder of the meeting. Quorum cannot be broken by some shareholders leaving.
        
        Under both the Delaware statute and the Model Act, the default rule is that a quorum for shareholder meetings is a majority of the voting power. That number may be raised or lowered under either statute. In Delaware, however, the quorum may not be lowered below one-third of the total voting power. See DGCL §216 and MBCA §7.25.
        
        One strategic difference between a quorum for board meetings and a quorum for shareholder meetings is that a shareholder quorum once established is valid for the remainder of the meeting. This means that dissident shareholders cannot prevent unfavorable action by leaving the meeting and breaking the quorum. Strategically, they must decide in advance of the meeting whether adverse action is likely to be taken and decide whether to stay away in hopes that a quorum will not be present. It is typical practice for the chair of a shareholder meeting to declare the presence of a quorum as the very first item of business because, until such a declaration is made, shareholders can leave and possibly stymie any further action. See MBCA §7.25(b) (Delaware has a similar rule via case law).
        
        iv. Sufficient Vote
        
        iv. Sufficient vote. The vote must be approved by either the majority of the votes present at the meeting (Delaware) or a simply majority of the votes cast (MBCA Act)... the difference is if some votes present abstain.
        
        We use simple majority for class--> if 1000 shares and 500 absent, if 300 vote yes and 200 vote no that is enough to pass.... only look at votes present
        
        Note: election of directors is made based upon a plurality of the votes - the directors with the largest number of votes win. CB 544.
        
        v. The Shift to Simple Majority Vote
        
        Commonly adopted for director votes via either bylaws or Article provisions. CB 546.
        
        vi. The Importance of Being Present
        
        Presence is an important concept in quorum and sufficient vote contexts. A certain percentage of the shareholder voting power must be present to constitute a quorum and the validity of many shareholder votes is measured, in Delaware and other states, by the amount of shareholder voting power present. Under the DGCL the refreshingly intuitive rule is that shares are present when their owner is physically in attendance at the meeting. See DGCL §216. The MBCA speaks in terms of shares being “represented” at a meeting but provides that a shareholder may vote his or her shares in person. MBCA §§7.21(a), 7.22(a).
        
        Shares can be present in two other ways .The first is through a proxy. See DGCL §212(b), MBCA §7.22(a). A proxy is an agency relationship in which a shareholder appoints another person to attend a shareholders meeting on the shareholder’s behalf and to vote the shareholder’s shares.
        
        The second way shares can be present without their owner being physically at the meeting is through a virtual presence. Under the DGCL and MBCA, shares are present if their owner (or a proxyholder) may participate in the shareholder meeting through an electronic medium in which they may read or hear the proceedings in real time and in which they have the opportunity to participate themselves. See DGCL §211(a)(2)b, MBCA §7.09. Certainly, a conference telephone call meets the requirements and many kinds of computer linkages may, as well.
      - Means by which shareholders take action is through the "shareholder meeting.” In order for actions taken at the shareholder meeting to be valid there must be:
    - - • Similar to actions taken by board by consent in lieu of meeting.
      - • Percentage necessary depends upon Articles of Incorporation (usually a simple majority).
      - • If Board proposes, their resolution is essentially a call.
      - • If Shareholders proposes (w/o Board participation), then the call is the beginning to solicit consent.
      - • Because no meeting takes place, the concept of quorum and sufficient vote are the one and the
      - same.
      - • Distinguish "consent" - a vote - from a “proxy" which gives authority to vote.
      - Just as directors may act without holding an actual meeting, so shareholders may act. The DGCL and MBCA permit consents to be obtained and submitted to the corporation electronically. See DGCL §§228(d), 232(c), MBCA §§1.40, 7.04(a), (b). Where the shareholders and the board are at odds, this shareholder power can become important because it permits the shareholders to amove the recalcitrant directors even where the board refuses to call a shareholder meeting.
    - - a. Whose Vote Counts? Only shareholders of record, on the record date, may vote.
        
        This means the corporation must be able to trace each vote to the record holder. This can get complicated when the shares are held by entities or groups of individuals. These are chronic issues in public companies because of the dispersed nature of the shareholders, plus the manner in which shares in public companies are purchased and sold, plus the two day delay in settlement. Note the distinction between the shareholder of record versus the beneficial owners. [Note: relax, this class will not be going down this "rabbit-hole."
      - b. Who Counts the Votes?
        
        Private companies: by shareholder meeting's chair. Public companies are more complex. This involves appointing inspectors of the election. See CB 555 for the details. Again, there are lots more complications with publicly owned corporations. This gets even worse in proxy or takeover contests.
      - Same process regardless of whether the corporation is public or private.
  - - - Transaction Reporting - information sent by corporation regarding a contemplated transactions, usually one requiring shareholder vote.
      - Default: corporations must provide all material information prior to a shareholder vote. (CB557)
      - Periodic Reporting - information distributed annually and/or quarterly. Note, under DGCL and MBCA, shareholders need not be provided periodic reporting. However, publicly traded companies are required to provide annual and quarterly updates via securities laws. (See 10k and 109 reporting).
        PHG NOTE: Just make sure the periodic reporting is addressed in the articles of incorporation.
    - - a. Background and Context
        
        Besides transaction and periodic reporting, shareholders have a
        right (under either common law or statute) to obtain access to the stock ledger, financial books and records of the corporation. However, this is limited to the shareholder having "proper purposes” for the information. The right is status-related to being a shareholder entitled to understand what the management was doing as well as evaluating the condition of the corporation's business and affairs. This is as a matter of “self-protection" of a shareholder protecting their valid interests.
      - b. The Current Setting
        
        Under both DGCL and MBCA, shareholders have "inspection rights." However, unlike transaction and periodic reporting, the shareholder bears the cost of obtaining this information. As a practical matter, unless the shareholder has large holdings, the cost is prohibitive. Moreover, due to diversification of the shareholder's interest (and percentage dilution by virtue of largely diverse shareholdership in the specific corporation), the relative benefit of exercising "inspection rights" is often not worth the effort.
        
        Legal questions - Does the shareholder have inspection rights simply by virtue of ownership [No.]
        
        Legal questions - What information does a shareholder have a right to examine, assuming there is a "proper purpose" for the inspection? [Generally, shareholders are entitled to full information as to the management of the corporation and the manner of expenditure of its funds, and to inspection in order to obtain information.] CB 559
      - Louisiana Municipal Police Employees' Retirement System v. The Hershey Company,
        
        It has long been held that mis-management and subsequent wrongdoing is a proper purpose, but the real question is if wrongdoing can be inferred. Because the reasonable inference in a motion to dismiss goes to the plaintiff, and the test in this instance is a "possible" inference of wrongdoing, the court held for the plaintiff and denied the motion to dismiss.
      - Chitwood v. Vertex Pharmaceuticals, Inc
        
        Under [MBCA] § 16.02 (b) and (c), . . . a shareholder of a corporation, upon written notice, is entitled to inspect and copy various categories of corporate records if the shareholder makes the demand "in good faith and for a proper purpose," and if the particular records sought to be inspected are "directly connected" with that purpose.
        To inspect this second category of corporate records a shareholder not only must provide five days'written notice but also must meet the following three requirements: (1) the shareholder must show that the "demand is made in good faith and for a proper purpose," (2) the shareholder must describe "with reasonable particularity his purpose and the records he desires to inspect," and (3) the shareholder must show that "the records are directly connected with his purpose." [MBCA] § 16.02 (c).
  - - - • Essence is that a shareholder seeks to sue on behalf of the corporation - rather than as an individual. PHG NOTE: This is a critical distinction and one frequently contested.
      - • Derivative Actions implicate the judicial deference to the Board via the Business Judgment Rule.
      - • Therefore, ordinarily, shareholder must implicate Board's failure to meet fiduciary duty.
    - - Have standing by having been a shareholder at the time of the challenged event;
      - 1/2 the states require the plaintiff to post a security bond for small shareholder plaintiffs (less than 5% of outstanding shares); and
      - As a procedural rule, plaintiff must allege that must have made a demand that the Board act, and they must have refused to do so; or the plaintiff mush show that prior demand would have been futile;
      - If approved to proceed as a derivative action, the case cannot be settled without court approval.
    - - received a material personal benefit from the alleged misconduct;
      - • faces a substantial likelihood of liability on any of the claims subject to the demand; OR
      - • lacks independence from someone who received a material personal benefit from the alleged misconduct.
- - - - Our final constraint on board power is a highly conceptual and philosophical one yet one that is of immense practical importance. Simply put, corporations must be operated for the benefit of some group. Boards of directors and other corporate p. 404managers should be prevented from taking actions that deviate from that end. Potentially, identifying the ultimate beneficiaries is a powerful constraint on board actions
  - - - Foreign Corrupt Practices Act-- no public company can pay any foreign official for purpose of influencing a decision
- - - - Sellers -
        
        1) the expected returns, including noneconomic benefits, are no longer sufficient large to retain ownership and/or control;
        
        2) the age of the owners may suggest that it is time to “harvest" the investment;
        
        3) the corporation has reached a particular threshold where exit is timely without additional large investment - or otherwise, the owners have decided to engage in an exit strategy or received and offer to sell above their reservation price.
      - Buyers -
        
        1) Strategic value, operationally, by acquiring the additional assets to combine them with resources already under the buyer's control;
        
        2) Buyer's may also wish to diversify risk.
    - - a. Purchase of Assets
        
        Primary benefit is that the assets are usually acquired (absent a showing of successor liability) without any exposure to purchaser of the liabilities of the target. To purchase, the acquiring board merely needs to approve the purchase. However, to sell, the target board can only approve the sale without shareholder approval if the sale does NOT involve “all or substantially" all of the assets.
        
        Hollinger Inc. v. Hollinger International, Inc.
        
        Courts have rejected the definition of substantially all meaning 50% or more, and now apply a two part test from Gimbel v. Signal Cos., Inc. The Gimbel test focuses on whether the sale of assets which are “quantitatively vital” and which “substantially affect” the existence and purpose of the corporation. Gimbel also emphasized that a vote is not necessary merely because the transaction is out of the ordinary.
      - b. Purchase of Stock
        
        Note, purchasing all the stock of a corporation, by a corporation, creates a wholly-owned subsidiary of the purchaser. Importantly, cooperation of the board of the target corporation is unnecessary. Additionally, the purchaser need not purchase all of the shares of the target company to gain control. For the seller, selling controlling stock may be easier than getting the approval from shareholders to sell all the assets. For the purchaser, the board can still approve the purchase. NOTE, a purchaser can combine a purchase of shares with a forced merger to eliminate minority shareholders if they want.
      - c. Merger
        
        A merger is a third technique. The assets of the target are ‘merged into the other corporation and the shareholders of the target become shareholders in the (other) successor corporation. This means that all assets and liabilities of the target pass to the successor corporation. Operationally, the boards of both corporations must approve a “plan of merger.” The plan will set forth the terms and conditions of the merger and set out the capital structure of the constituent corporations. The plan must also set forth the Articles of Incorporation of the surviving corporation. Once the boards approve, the majority of the shareholders of both corporations must generally approve. See MBCA 11.02, 11.04, 11.06 and 11.07. Note, shareholders of the target who do not agree with the merger are then bought out for the appropriate consideration. Also, note that if the target corporation is already owned 90% by the other corporation, the merger can be achieved via “short form merger” by the parent corporation's Board. The shareholders do not vote. HOWEVER, the acquired shareholder's have appraisal rights. See remainder of info on p. 644.
      - d. Reverse Triangular Mergers
        
        i. The acquiring corp forms a wholly-owned subsidiary;
        
        ii. The subsidiary purchases a majority of the target corporation stock;
        
        iii. The subsidiary merges with the target and the target survives. Target shares not owned by the subsidiary are converted into consideration, eliminating the target shareholders. The subsidiary share are then converted into the target shares. The acquiring corporation then owns all the shares of the target corp.
    - - Considerations:
        
        i.Risk of shareholder rejection
        
        ii. Cost of shareholder vote
        
        iii. Delay in conducting a shareholder vote
        
        iv. Tax Considerations from particular technique (cash versus stock swap) and (high tax basis versus low tax basis)
    - - i.Preliminary negotiation leading to a signed Letter of Intent (not usually enforceable as a contract); then
      - ii. Due Diligence investigation confirming that the target for acquisition actually owns when the acquirer thinks they own and that liabilities are properly accounted for... If there are no surprises; then
      - iii.The definitive agreement that will address: 1) the parties; 2) the transaction form; 3) considerations for both parties; 4) description of the closing; 5) representations and warranties by both parties; 6) covenants and conditions; and 7) termination section
    - - a. Deal Protective Measures
        
        Clauses designed to ensure the transaction closes. Examples are:
        
        i. Break-up fee
        
        A break-up fee is a termination provision that makes the target liable to the acquirer if the transaction fails to close
        
        ii. Topping fee
        
        This provides for an additional payment to the acquirer if the transaction does not close and if, within a specified time such as two years, the target is acquired by another entity.
        
        iii. No shop provisions
        
        A no-shop provision prevents the target board from actively seeking other potential acquirers
        
        iv. No talk
        
        A no-talk clause prevents the target board from negotiating with, or providing nonpublic information to, any other party.
      - b. Sale of Control
        
        No sale to a “looter"; Realize, there is a control premium.
      - c. Appraisal
        
        i. Which Transactions Trigger Appraisal Rights?
        
        The MBCA, but not the DGCL, provides appraisal rights to shareholders of a corporation that sells substantially all its assets under §12.02.
        
        ii. What Is “Fair Value”?
        
        First, where the target corporation had a controlling shareholder, should the fair value of the dissenting shareholders’ shares be discounted (reduced) to reflect the fact that those shares have little management power? This is the minority discount question
        
        Matthew G. Norton Company v. Smyth
        
        The fair-value standard requires corporations to value dissenting shareholders’ shares without marketability discounts absent extraordinary circumstances.
        
        Second, where the target corporation is not publicly traded, should dissenting shareholders’ shares be discounted to reflect the fact that the shares are illiquid? This is the marketability discount question.
        
        Right of appraisal, or dissenter's rights, is the right to surrender shares to the corporation in return for "fail value.” MBCA, where there is a sale of substantially all the assets... interesting!
  - - - -Shark Repellants
        
        Several corporate governance structures, sometimes called shark repellents, keep unwanted suitors from effecting a takeover. One technique is to require a supermajority shareholder vote for takeover transactions. This requirement must appear in the Articles of Incorporation. A second device is to stagger the board so that a raider must, in theory at least, wait for two annual meetings of target shareholders before being able to elect a majority of directors.
        
        The corporation’s Articles or bylaws can contain an advance notice provision that requires a shareholder to notify management several months in advance of a shareholders’ meeting if the shareholder intends to nominate an alternative slate of directors or to propose an action for shareholder vote.
      - •Poison Pills
        
        The final structural device to thwart raiders is the so-called poison pill, more formally known as a shareholders’ rights plan. Corporate statutes permit corporations to issue options on their stock. A poison pill is implemented by authorizing the issuance of options (usually called “rights”) on the target’s stock. Shareholders receive one right for each share of stock and the rights are not separately tradable; all transfers of stock include the transfer of the associated right. The rights are not represented by separate certificates. The right gives the stockholder the option to buy a new series of preferred stock; the exercise price is set so that no economically rational shareholder would exercise the option.
    - - •Includes Defensive Measures (taken after a move by a potential suitor)
      - At its most elaborate, the Unocal test runs as follows. The defendant board must first demonstrate that it has reasonably perceived a threat to corporate policy and effectiveness. It does so through good faith (in the generalized pre-Stone v. Ritter sense) and reasonable investigation. If the board shows a threat, it must then demonstrate that its response (i.e., the defensive measure in question) was reasonable in relation to the threat posed. This is sometimes called the proportionality prong of Unocal. To be reasonable in relation to the threat, a board action cannot be “draconian,” meaning that it is neither coercive to the stockholders nor preclusive toward third parties. That is, the board’s action must not force the stockholders to accept the board’s preferred outcome, nor must it prevent a third party from a successful (though uninvited) change of control transaction. A board action is preclusive if it makes a change of control realistically unattainable (or mathematically impossible). If the board’s action is neither coercive nor preclusive (and therefore not draconian), the board must demonstrate that its action is within the range of reason. That means, at its core, that the board must demonstrate that its action is a limited defensive response that corresponds in degree or magnitude to the perceived threat.
    - - Lyondell Chemical Co. v. Ryan,
        
        A fiduciary satisfies its good-faith requirement if it cannot be demonstrated that the fiduciary intentionally failed to act in the face of a known duty to act.
- - - - b. Statutory Restrictions
        
        -Insolvency- Corp has a duty to pay debts when payable, rather than issue dividends
      - c. The Mechanics of Paying Dividends
        
        Under every corporations statute, though, the board is given the power to set a different record date between the declaration date and payment date. The reason to provide discretion to set a future record date is to give notice to current (and perhaps to potential) shareholders that an important event—payment of money—will soon occur.
        
        A further complication is that shares may change hands between the declaration and the payment. In a closely held corporation such a transfer may be unlikely, but in a publicly held corporation shares change hands every day. Who is entitled to the dividend: shareholders on the date the dividend is declared or shareholders on the date the dividend is paid? The default rule is that shareholders on the date of the board’s declaration are entitled to the dividend even if they transfer their p. 251shares before the payment date. This record date is simply a way to fix the list of shareholders entitled to a dividend.
      - d. Stock Splits
        
        Mason v. Mason
        
        The right to benefits from a stock split vests in shareholders as of the record date, not the date the dividend becomes effective.
      - a. Board Discretion
        
        The Business Judgment Rule - unless you can show severe oppression or fraud the decision of the Board will stand
        
        MBCA §6.40(a)
  - - - a. Limitations on a Corporation’s Power to Purchase Its Shares
        
        Same limitations as with issuance of dividends: Repurchase cannot leave the corporation insolvent. Separately, there always must be at
        least one share outstanding at all times.
      - b. Motivations to Repurchase Shares
        
        Liquidity to market (enable exit of deceased shareholder, enable termination of exiting shareholder, control of management power,
        change in capital structure, to signal management believes current share prices are undervalued)
      - c. The Metaphysics of Repurchased Shares
        
        Repurchased shares are no longer "outstanding" so they cannot be voted, they become treasury shares, these are NOT counted as outstanding so the proportional interest of remaining shareholders increases without any action by the remaining shareholders.
        
        DEFAULT MBCA rule is that "reacquired shares become "authorized but unissued" - so they CAN be sold by the company - again.
    - - One, although ownership identity is not usually an issue, management of the corporation IS important.
      - Second, regulatory requirements may be relevant. For instance, all owners of Subchapter S corporations must be individuals.
    - - In order for a stockholder to be bound by stock-transfer restrictions that are not noted on the stock certificate, he must have actual knowledge of the restriction before he acquires the stock or must affirmatively assent to the restriction thereafter.
      - that an existing restriction on the transfer of a security is binding on subsequent purchasers of the securities if:
        
        (1) it is noted conspicuously on the certificate representing the security;
        
        (2) the stockholder has actual knowledge of the restriction at the time he acquires the stock; or
        
        (3) the stockholder consents to be bound by the restriction either through a vote or through a subsequent agreement with the stockholders or with the company.
    - - restrictions on share transfers must be reasonable at the time they are adopted
      - Finally, while the intent of the parties to preclude any transfers outside of the family by any means was clear, policy dictates that a creditor cannot be hindered by private agreements from foreclosure on a lien. Any other policy would leave creditors with no recourse.
        Furthermore, creditors cannot acquire more property rights than the assets the debtor use to secure the loan. Therefore, Birchell cannot acquire more property rights than what Linda had because he knew of the restrictions when the lien was used to secure his monetary judgment and when he bid on the property.
  - - - a. Section 16(b)
        
        a. Section 16(b)- Director, Officer, or hold >10% outstanding shareholder, then you must disclose your ownership position
      - b. Rule 144
        
        b. Rule 144--- anti pump and dump -- have to sit on shares for a year
    - - a. Insider Trading
        
        Salman v. United States
        
        Dirks established that when a corporate insider shares confidential information with a tippee who then trades on it, the tippee's actions could violate federal securities laws so long as the tipper receives some personal benefit that makes the tippee's trading attributable to the tipper. Under Dirks, the jury could infer that Salman's tipper personally benefited from making a gift of confidential information to a trading relative, whether or not the tipper had any actual gain. The Court rejected the Newman's requirement that there be a tangible financial benefit to the tipper, concluding that such a requirement is inconsistent with Dirks.
      - 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.
      - Dura Pharmaceuticals, Inc. v. Broudo
        
        Held: The basic elements of a private 10b-5 action are: (1) a material misrepresentation or omission; (2) scienter; (EVIL INTENT) (3) "in connection with"; (4) reliance/transaction causation; (5) economic loss; and (6) loss causation, i.e., a causal connection between the material misrepresentation and the loss.
- - - - Three decisions all corporations must make (CB 189):
        
        i. What goods and services it will provide?
        
        ii. What assets does it need to provide those goods and services?
        
        iii. How will the needed assets be paid for?
      - Options for paying for new assets:
        
        i. Owner equity contributions of cash. But this sometimes presents problems with "Capital Calls"
        
        ii. Addition of new equity owners. But this sometimes presents shareholder dilution problems.
        
        iii. Owners or 3rd parties provide loans to the corporation. But leverage increases corporate risk of failure and requires interest payments.
        
        iv. Allocation of cash flows from operations. But this reduces cash available for dividends, buy-backs or cash-outs.
    - - a. Corporate Securities
        
        i. (Common) Stock
        
        i. Common stock - equity interest representing an ownership interest in the business rather than a loan. CB 191.
        
        Ordinarily, common stock has
        
        1) the right to vote on every matter submitted to the shareholders;
        
        2) right to a proportional amount of any dividend, if any;
        
        3) right to a proportionate amount of the corporation's assets, after payment of all debts, upon dissolution.
        
        ii. Preferred Stock
        
        ii. Preferred stock - equity interest that usually includes
        
        1) a greater than proportional amount of any payment (usually dividends); or
        
        2) a greater priority in receiving payments; or
        
        3) both. CB 192
        
        iii. Other Relative Rights
        
        iii. Other Relative Rights
        
        o Voting Rights
        
        o Put Options for Sale of Shares
        
        iv. Debt
        
        iv. Debt - Lender is entitled to periodic payments, with interest determined at the time loan made.
        
        This often must be negotiated, documented, and possibly filed (UCC Security Interests)
        
        Short-term Debt, CB 196, Secured or unsecured
        
        Long-term Debt, CB 197, Usually secured.
        
        PHG: Be aware of personal guarantees too [in addition to the corporate obligations]
        
        v. More Exotic Securities
        
        v. More exotic securities (CB 199). For instance, Options to purchase or sell shares (call and purchase options).
        
        “Rights" usually issued to an existing security holder.
        
        "Warrants" usually long-term. PHG: Book says usually sold to pubic. That is contrary to my experience - Warrants also "sold" to existing shareholders as sweeteners in funding rounds.
        
        NOTE: CB199,"option" can have different meanings... be careful!
        
        In corporate law and finance parlance, an option can have one of three meanings. At the broadest level, it has its ordinary meaning: the power but not the obligation to do something. In this sense, rights and warrants are both options. Second, an option can connote a power granted by the corporation to a particular person (often a key employee) to purchase securities. Options in this sense are usually granted for services rendered or to be rendered by the employee and are not transferable. Because this sort of option is typically intended to be an incentive to the employee to work diligently, the option may not be exercisable (i.e., may not vest) until several years have passed. Finally, option may connote a standardized right sold by someone (the option writer) other than the corporation to purchase securities of the corporation from the writer (a call option) or sell securities of the corporation to the writer (a put option).
      - b. Planning the Corporate Capital Structure
        
        i. The Consequences of Debt—Leverage
        
        Payment of interest reduces percent of revenues potentially available for dividends.
        
        Payment of interest reduces taxable income (since interest is an additional cost).
        
        ii. The Economic Risks of Excessive Debt
        
        (debt payments can “swamp" all net profits.)
        
        iii. Other Costs of Debt
        
        Payment of interest (usually principal too) is mandatory)
        
        Debt, no matter how long term, must be paid back;
        
        Adding debt has agency costs – it increases the risk that equity owners will take higher risks;
        
        There are overhead and terminal costs to maintaining loans and/or entering bankruptcy.
        
        iv. A Real-World Example of the Dangers of Excessive Debt
        
        Toys “R” Us
        
        v. The Legal Dangers of Excessive Debt
        
        Risk to deductibility if IRS determines that “debt" is really hidden “equity” payments.
        
        Does the debt have the traditional indicia of debt - is there an obligation to pay back, a fixed maturity date, & interest payable regardless of the debtor's income;
        
        Economic Realities Test - would an unrelated third-party have been willing to make a loan of a similar size on similar terms?
        
        Risk of Equitable subordination in bankruptcy (debt is treated as equity on liquidation). CB 209.
        
        Risk of piercing the corporate veil If a large portion of the corporate debt is held by equity holders.
        
        vi.Other Factors That Make Equity Attractive
        
        Owner does not have to sell or declare a dividend when the shares appreciate. Therefore, the shareholder has the ability to time the recognition of profits.
        
        When dividend IS taxed later on, there is a time-value-of-money reality that similar amounts paid later are worth less than the same amount paid currently.
        
        Also, when the shareholder sells equity, it often can be taxed at the long-term capital gains rate.
        
        Note also, founders using “sweat equity" to grow a start-up often get paid below market salaries with increases in share value not taxed... though if a pass-through entity, any profits will still flow through to the S or similarly taxed LLC members. CB 211. Note, the tax rate for different investors may be different with different benefits for different owners.
        
        Note also, holding equity has the benefit of control and/or say-so in the operation of the corporation. Debt does not.
        
        vii. Choosing a Capital Structure for the Startup Corporation
        
        The investor's relative claims on the business's income (and assets on dissolution);
        
        The investor's relative management power;
        
        -The dangers concerning capital structures relying upon too much debt.
        
        Note: in the real world, the three issues above are not considered separately.
        
        viii. Background and Context: A Note on Financing by Going Public and by Venture Capital
        
        Capital structure goes beyond merely selecting the appropriate business entity (CB 200).
        
        Often gives rise to challenges in discussions with promoters/incorporators.
        
        can be competing goals too: maximization of economic wealth versus social value.
        
        A more nuanced question regards how far a business should go in maximizing economic wealth in the face of lax government regulations.
      - c. The Mechanics of Issuing Stock
        
        i. Statutory Authorization
        
        Chapter 5 explained that the Articles of Incorporation must contain a statement of the number and kinds of shares that the corporation may—is authorized to—issue. See MBCA §§1.40, 2.02(a)(2), and 6.01(a),
        
        § 2.02. ARTICLES OF INCORPORATION
        
        (a) The articles of incorporation must set forth:
        
        (1) a corporate name for the corporation that satisfies the requirements of section 4.01;
        
        (2) the number of shares the corporation is authorized to issue;
        
        (3) the street and mailing addresses of the corporation’s initial registered office and the name of its initial registered agent at that office; and
        
        (4) the name and address of each incorporator.
        
        We have seen that a corporation may want to issue stock with different attributes than the default qualities provided in the statute. The attributes of such stock, and the ways in which that stock differs from other stock the company may issue, must be set forth in the Articles of Incorporation so that shareholders are protected by knowing exactly what rights they have as stockholders and how those rights compare to the rights of holders of other kinds of stock.
        
        ii. Issuance of Stock
        
        A. Board Authorization
        
        The requirement that stock must be authorized means not only that the appropriate number of shares must be permitted by the Articles of Incorporation. It also means that the corporation, acting through its board of directors, has approved a particular transaction in which statutorily authorized shares will be exchanged for consideration. See MBCA §6.21(b)
        
        B. Initial Stockholders
        
        C. Subscription Agreements
        
        Subscription agreements are contracts to purchase shares. If the corporation has been formed and is already doing business, a subscription agreement is simply an ordinary contract and thus does not present any legal issues particularly germane to business entities law. See MBCA §6.21(e). Before a new corporation has been formed, investors may contract among themselves and with the new corporation’s promoters to purchase shares after incorporation. These preincorporation subscription agreements pose a basic agency problem of seeking to bind a nonexistent entity. Furthermore, because the investors often have agreed to invest only on the assumption that others will do so, there is a heightened concern with enforceability of such preincorporation subscription agreements. Niceties of contract law may suggest that a preincorporation subscription agreement may be only a revocable offer or may only bind certain of the concerned parties. To increase the certainty of such agreements and to broaden their reach, both the MBCA and the DGCL provide that a preincorporation subscription agreement is enforceable for six months unless another period is expressly agreed to. See MBCA §6.20(a) and DGCL §165.
        
        D. Common Problems
        
        1) Problem Ensuring Equal Payment by Contemporaneous Purchasers
        
        The common law solution to this first problem was the idea of par value. When a corporation is being organized, the number of shares to be issued and the price per share are completely arbitrary. The only economic constraint is that the corporation receive enough assets to enable it to begin its business. So, in the simplest setting of a new corporation with one shareholder who will contribute, say, $100,000, it does not matter whether the corporation issues one share for $100,000 or 100,000 shares for $1 each, or any other such combination. In that sense the shares cannot be underpriced or overpriced.
        
        2) Problem of Corporation Receiving Promised Consideration
        
        When the consideration for shares is something other than cash, there is a danger that the consideration may be overvalued by the board.
        
        3) Problem of Later Issuance at an Inadequate Price
        
        New shares issued at too low a price dilute the value of the existing shares. This danger theoretically leaves the corporation and the new investors liable to lawsuits by existing shareholders to challenge the consideration at which the new shares were issued. Where the corporation’s stock is publicly traded, the market price is, presumably, the price at which new stock should be issued. In privately held corporations, though, there is no reliable objective reference to determine the value of currently outstanding shares. At common law, directors were liable to lawsuits by existing shareholders claiming that a subsequent stock issuance was at too low a price. To cut off this latent liability, modern statutes provide that the board of directors’ judgment that the consideration for newly issued shares is adequate is conclusive. See MBCA §6.21(c) and DGCL §152 (directors’ judgment conclusive in the absence of actual fraud).
        
        4) Problem of Non-cash Consideration
        
        When the consideration for shares is something other than cash, there is a danger that the consideration may be overvalued by the board.
        
        Simply because shares of stock have been authorized in the Articles of Incorporation does not mean that anyone owns them. The process of putting statutorily authorized shares in the hands of investors is called issuance.‍‍22 Issuance comprises two other concepts: the board must approve (authorize) the p. 229issuance of the shares and the corporation must receive appropriate consideration. When this happens, the shares are said to have been validly issued and fully paid and are therefore nonassessable.‍
        
        iii. The Meaning of Outstanding
        
        Shares are said to be outstanding when they have been statutorily authorized, validly issued, and remain in the hands of someone or some entity other than the corporation itself. The shareholder need not be the original shareholder; shares are still outstanding in the hands of a transferee as long as the transferee is not the issuing corporation. See MBCA §6.03(a). The concept of outstanding shares (sometimes referred to in the somewhat redundant phrase, “authorized, issued, and outstanding shares”) has importance in two settings: Only outstanding shares are entitled to vote and only outstanding shares may receive dividends.
        
        iv. Preemptive Rights: The Economic Component
        
        To protect current shareholders from these economic impairments, the courts of equity devised the doctrine of preemptive rights. This was the right of each current shareholder to maintain his or her proportionate interest by purchasing the same percentage of to-be-issued shares on the same terms and conditions as proposed by the board of directors. Preemptive rights were never absolute and were traditionally subject to several categories of exceptions. We will revisit the doctrine of preemptive rights when we discuss shareholder voting because, obviously, shareholders can be hurt in their management rights as well as in their economic rights by a new issuance of shares.
        
        the right of each current shareholder to maintain his or her proportionate interest by purchasing the same percentage of to-be-issued shares on the same terms and conditions as proposed by the board of directors.
        
        Under both the MBCA and the DGCL, preemptive rights do not exist unless granted by the Articles of Incorporation.
  - - - a. Registration Requirements and Exemptions
      - b. The Process of Registration—”Going Public”
- - - - a. Remember, PCV is an equitable remedy so courts are flexible in “seeking to do justice”;
      - b. Give huge central importance of limited liability, default is strongly in favor of maintaining separate entity.
      - C. However, court is free to ignore separate legal entity when it is used to “defeat public convenience, justify wrong, protect fraud, or defend crime." CB 311
      - d. Usually requires such “unity of interest" that the corporation and its shareholders, officers, or directors are indistinct or non-existent; and maintaining the separate legal fiction would sanction fraud, promote injustice or inequitable consequences, or lead to an evasion of legal obligations.
      - e. Typical specific considerations:
        
        i. Undercapitalization
        
        ii. Failure to observe corporate formalities
        
        iii. Absence of corporate records
        
        iv. Payment by the corporation of individual obligations
        
        V. Fraudulent misrepresentation by corporations directors
        
        vi. Use of the corporation to promote fraud, injustice, or illegalities.
      - Lunneborg v My fun Life
        
        In piercing the corporate veil and imposing personal liability, the court applied the following two-fold inquiry:
        
        (1) whether there was "a unity of interest and ownership to a degree that the separate personalities of the company] and individual no longer exist" and
        
        (2) whether the treatment of the acts as acts of the company would lead to an inequitable result.
        
        MFL (the corporation here )
        
        (1) failed to observe any corporate formalities;
        
        (2) did not issue stock certificates;
        
        (3) did not conduct regular meetings;
        
        (4) did not employ a formal process to authorize Carrie to act as MFL's chief operating officer or executive vice president;
        
        (5) and did not pay any dividends.
        
        Additionally, multiple transactions demonstrated the comingling of funds and assets between the Edwards businesses and their personal accounts.
        
        Edwards had taken all of MFL's income and assets to use for themselves while refusing to pay the severance to Lunneborg. Allowing the Edwards to escape personal liability would lead to an inequitable result.
        
        The Court also concluded that the lower court did not err in reaching Carrie's personal assets. The Court noted that the question of whether a non-shareholder could be held liable for the debts of the corporation
        
        Here, although Carrie was not a shareholder, she was involved in MFL's day-to-day financial operations and was active in Lunneborg's hiring. Because of her control over MFL, her separate property could be reached as well.
        PROF: non- shareholder being held liable for debts of corporation due to active control over corp is big deal
    - - Basically, Enterprise Liability is “piercing the corporate veil" when the shareholder is in a parent corporation / subsidiary corporation relationship.
      - Conceptually, enterprise liability should be easier to accomplish than piercing the veil to hold individual shareholders liable, because under enterprise liability the ultimate individuals who own the enterprise retain their limited liability. All that happens is that the individuals’ attempt to apportion risk among separate corporations is disallowed. As you might imagine, courts have not been any better at articulating a consistent view of enterprise liability than they have in approaching piercing the corporate veil. Because enterprise liability has not been as thoroughly critiqued as other corporate law concepts, you should think particularly carefully about whether the courts are using appropriate standards.
      - Forsythe v. Clark USA,
        
        the question we considered is whether a parent company can be held liable under a theory of direct participant liability for controlling its subsidiary's budget in a way that led to a workplace accident
        
        a parent company may be liable where
        
        (1) there is evidence sufficient to prove that a parent company mandated an overall business and budgetary strategy and
        
        (2) the parent company carried that strategy out by its own specific direction or authorization, surpassing the control exercised as a normal incident of ownership in disregard for the interest of the subsidiary.
    - - Fraudulent Conveyances - Company is in trouble, sells assets for value less than full price to a shareholder or other invested party.
      - • Voidable Preferences- Payment of a bill prior to bankruptcy after bankruptcy had been declared, as a result bankruptcy court will set payment aside and bring it back into bankruptcy estate
      - • Equitable Subordination- when someone preferred stock tries to transfer it to debt to get "ahead in line" on other creditors, court can equitably prevent the "line skip" from happening out of fairness
    - - Exists when the assets of a predecessor corporation transfer in such a way that the successor is deemed to be liable for the predecessor obligations.
      - DeJesus v. Bertsch, Inc.,
        
        A successor corporation may be liable for the torts of a predecessor if the same shareholders continued to own or control the business while transferring assets to avoid continued liability.
        
        DEFACTO MERGER
        
        Under the traditional rule of successor liability, the successor corporation is not liable for the predecessor's torts. There are some exceptions to the traditional rule, including de facto merger and mere continuation.
        Massachusetts courts consider the following factors in determining whether to characterize a purported sale of assets as a de facto merger:
        
        (2) There is a continuity of shareholders which results from the purchasing corporation paying for the acquired assets with shares of its own stock, this stock ultimately coming to be held by the shareholders of the seller corporation so that they become a constituent part of the purchasing corporation.
        
        (3) The seller corporation ceases its ordinary business operations, liquidates, and dissolves as soon as legally and practically possible.
        
        (4) The purchasing corporation assumes those obligations of the seller ordinarily necessary for the uninterrupted continuation of normal business operations of the seller corporation.
        
        (1) There is a continuation of the enterprise of the seller corporation, so that there is continuity of management, personnel, physical location, assets, and general business operations.
        
        A de facto merger does not occur absent a showing that there was a continuity of shareholders or other type of transaction that ultimately makes Bertsch's shareholders directly or indirectly constituent owners of Park, the purchasing corporation.
        
        the traditional rule of successor liability that a successor corporation is generally not liable for its predecessor’s torts. However, an absolute rule would allow owners of corporations to avoiding paying creditors by selling the corporation or otherwise transferring its assets without losing control of the business.Most jurisdictions recognize four exceptions to the traditional rule: (1) the buyer agreed to assume the selling corporation’s liability; (2) the transaction consolidates or merges buying and selling corporations; (3) the buyer corporation is a continuation of the seller corporation; or (4) the parties entered the transaction fraudulently to evade liability.
  - - - The court stated that for the participation theory of personal liability to be applicable a plaintiff must show that
        
        (1) commission by the corporation of tortuous conduct,
        
        (2) participation in that tortuous conduct by the corporate officer, and
        
        (3) resultant injury to the plaintiff.
      - PROF: here B of Contract versus Negligence. with Breach of Contract, agents are not liable, but with negligence they could be.
- - - - a. The Current Setting
        
        [A]ll corporate powers shall be exercised by or under the authority of ..., and the business and affairs of the corporation shall be managed by or under the direction, and subject to the oversight, of the board of directors. MBCA $8.01(b)
        This means...
        
        Per MBCA $8.01, this means boards have the responsibility to oversee
        
        Business performance, plans and strategy;
        
        Management's assessment of major risks to which the corporation is or may be exposed;
        
        The performance and compensation of executive officers;
        
        Policies and practices to foster the corporation's compliance with law and ethical conduct;
        
        Management's preparation of the corporation's financial statements;
        
        Management's design and assessment of effectiveness of the corporation's internal controls;
        
        Plans for the succession of the chief executive officer and other executive officers;
        
        The composition of the board and of board committees; and
        
        Whether the corporation has information and reporting systems in place to provide directors with appropriate information in a timely manner.
    - - a. Number and Selection of Initial Directors
        
        a. Number and Selection of Initial Directors - laid out in articles of incorporation or bylaws.
        
        all corps must have at least one board member
        
        corps can be shareholders in other corporations but corps can not serve as board members, must be actual human being.
      - b. Election and Term of Directors
        
        companies routinely forget to have elections of directors- holdover directors
        
        classified board- different board members elected by different classes of shares
        
        staggered terms - where different sets of members have elections in rotations 1/3 of members each year or something like that
        
        At least one director must be elected at every annual shareholder meeting and the default rule is that all directors are elected annually by all the p. 362shareholders. See DGCL §211(b), MBCA §8.03(c).
      - c. Removal of Directors
        
        Shareholders can remove directors at any time - amotion
        
        ???'s of what constitutes cause - look to articles of incorporation for guidance
        
        if looking to remove for cause, must give member notice and chance to respond prior to vote
        
        Shareholders have the power, called amotion, to remove directors during their term. The default rule under both the DGCL and the MBCA is that directors may be removed with or without cause. See DGCL §141(k), MBCA §8.08(a). However, under both statutes directors elected to a classified board may only be removed by the same set of shareholders that elected them. See DGCL §141(k), MBCA §8.08(b). Further, if the corporation permits cumulative voting (see Chapter 14), under which a minority of shareholders have the power to elect at least some directors, the quantum of votes required to amote must be greater than the quantum required to elect a director. See DGCL §141(k)(2), MBCA §8.08(c). Note that the board itself has no power to remove a director or to limit the right of a director to obtain corporate information. Note that under MBCA §8.09 and DGCL §225(c), the court has the power to remove a director, though the court’s powers in this regard are broader under the MBCA than under the DGCL.
    - - The second way in which boards of directors act is at a meeting. Four elements must be met for a board action taken at a meeting to be valid. The meeting must be properly called, the corporation must give each director proper notice, a quorum of directors must be present at the meeting, and the action must be approved by a sufficient vote. If any of these elements is lacking, the board’s action is subject to attack as being ultra vires.
        
        a. The Current Setting
        
        ii. Notice
        
        The directors must obviously become aware that a meeting has been called. Because the directors are presumed to be knowledgeable about the p. 369corporation’s business, the notice requirements for board meetings are minimal
        
        iii. Quorum
        
        The third element for a valid board of directors meeting is the presence of a quorum. A quorum is simply the minimum amount of voting power that must be present at a meeting for actions to be valid. Because each director has one vote, the quorum for board meetings is defined by the number of directors present. The idea behind a quorum requirement is to prevent a collective body, such as the board or the shareholders, from taking action when so few members are present that the action may be thought to be unrepresentative of the whole body’s intent. Under both the Delaware statute and the Model Act, the default rule is that a quorum is a majority of the total number of directors. That number may be raised but may not be lowered below one-third of the total number of directors. See DGCL §141(b), MBCA §8.24(a).
        
        iv. Sufficient Vote
        
        Finally, a board action must be approved by a sufficient vote. Remember that if the board is acting by consent, it must do so unanimously. If the board is acting at a meeting, an action is approved if it receives the assent of a majority of directors present at the meeting. See DGCL §141(b), MBCA §8.24(c).
        
        i. Call
        
        The call of the meeting is simply the decision to hold a meeting at a particular time and place and, often, for a particular reason. Regular meetings, which is to say periodic (e.g., monthly, quarterly, or even weekly or annually), may be provided for in the corporation’s bylaws.
        
        Some corporations may not feel the need to provide for periodic board meetings at all. In such instances, the board may call each meeting as the last order of business at the prior meeting or they may act by consent to call a meeting when they feel the need to do so. The bylaws (or, less frequently, the Articles of Incorporation) may also give the power to call board meetings to the chair or to other key participants in the corporation’s governance.
        
        Klaassen v. Allegro Development Corp
        
        A claimant with full knowledge of his rights and the material facts acquiesces to an act if the claimant recognizes the act, approves the act, or delays taking action against the act.
        
        Acquiescence is an equitable defense that serves to ensure parties may not delay in disrupting seemingly settled matters. In this case, Klaassen’s actions indicate that he recognized and accepted his removal as CEO. Klaassen offered to help the new CEO, Hood, transition. Klaassen was amenable to serving Allegro in a consultant capacity. Klaassen even participated in the review of Hood’s CEO employment agreement. Further, seven months passed before Klaassen attempted to regain his position as CEO and file this action, which is a substantial delay for corporate matters. Therefore, Klaassen acquiesced to his removal because his actions and his delay to reclaim his position would lead a reasonable third party to believe he approved the act.
        
        No Notice Required for Regular Board Meeting
      - The board has no power to remove a director.
      - Board meetings may be called in any manner approved in advance by the board.
      - Each director has one vote on all matters.
      - Directors may not vote by proxy; each must vote in person.
      - Boards take action in two ways. First, if they are unanimous in their intention, they may act without a meeting. This action is effected by having each director execute a consent, which, in Delaware and many states, may be electronic. See DGCL §§141(f), 232(c) and MBCA §8.21(a)
    - - board decisions can be re ratified after the fact if they were initially faulty due to procedural failures --- special committees of the board can check the board
      - Both the DGCL and MBCA allow a corporation to validate corporate actions that were invalid when taken because of a failure of authorization. DGCL §§204, 205, MBCA §§1.45-1.52. A failure of authorization means that the action was not effected in compliance with the statute (or any requirements in the articles, bylaws, or agreements to which the corporation is a party). Generally speaking, this means either (1) that the board failed to take any action as to a corporate act that required p. 378board authorization or (2) that the board’s purported authorization was ineffective because of some procedural failure such as lack of call, notice, quorum, or sufficient vote.
  - - - a. The Current Setting
        
        Remember, "corporate agents" are a subset of the "agents" from Chapter 4! "An agency relationship is a consensual, though not necessarily contractual, relationship in which on person agrees to act on behalf of the other person, and subject to the principal's control.” Agency is terminable at will by either party. Revisit: actual agency, apparent agency, estoppel to deny agency, ratification, and restitution.
        
        Ordinarily, a principal is bound by the agents tortious actions IF the agent is an employee or similar (respondeat superior); and the agent - at the time of the tort - was acting within the scope of the agency. Revisit distinction between frolic and detour.
        
        must have both for principal to be liable
      - Once a corporation's Board of Directors has authorized an act, someone must actually effect the act for the corporation. That person is the corporation's agent. All the corporation's employees are agents. But outside the corporation others may act as agents too. Be sure to distinguish when respondeat superior applies, or does not apply, to these other agents!
      - Unlike directors (whose power is defined by statute), officer's powers are less clear. An officer is a person who holds an office in the corporation and is in a position to which certain kinds of duties or powers are attached. In contrast, ordinary agents have powers that are defined more explicitly and in ad hoc manners (review Chapter 4). Just notice that the definition of officer is more narrow than the definition of agent. CB 383
      - The term officer means a president, vice president, secretary, treasurer or principal financial officer, comptroller or principal accounting officer, and any person routinely performing corresponding functions...
        The term executive officer, ... means ... president, any vice president ... in charge of a principal business unit, division, or function (such as sales, administration or finance), or an officer who performs a policy making function or any other person who performs similar policy making functions....
      - Differences between Agent and Officer (CB 383):
        
        Officers are explicitly held to a fiduciary duties akin to the Board of Directors, Agents duties may be fiduciary but less clearly defined;
        
        Officers may be statutorily entitled to indemnification and/or coverage through D&O Insurance; Agents may be entitled to indemnification but is more amorphous;
        
        Officers are sometimes expressly exposed to liability (e.g. environmental statutes); Agents are ordinarily are not;
        
        Service on a corporation is effected by service on “agents for process” who are usually officers; Ordinary agents are not usually “agents for process” sufficient to serve the corporation
        
        Officers have certain powers to bind the corporation (power of position) that is both actual and/or apparent agency; Agents do not have any power of position.
    - - a. The Current Setting
        
        As a practical matter, how does a 3rd party know that the individual they are talking to has agency authority to bind the corporation? All the usual agency concepts apply: Actual, Apparent, Estoppel, Ratification, and Restitution. However, agency authority is also communicated by virtual of the power of the position: President, Vice President, etc. If there is any question, recall the concept of Warranty of Authority by an agent – if the 3rd party asks, and the putative agent say they Do have the authority, the putative agent will be liable if they in fact do not have the authority. Additionally, you can include a express warranty in the contract that “agent has the requisite authority to bind Corporation ‘A’ in this . transaction... and at all requisite steps have been taken to give the agent such authority."
        
        Dilek v. Watson Ent., Inc.
        
        Agreement limiting power of COO does not change status of COO officer power of apparent agency to 3rd parties
      - b. Background and Context
- - - - if director is being loyal, they should not take an opportunity for themselves that should instead go to the corporation
        
        must be within scope of directors duty
        
        opportunity must be a corporate opportunity in the first place
      - Brewer v. Insight Technology
        
        Corporate officers who misappropriate a business opportunity and compete directly with the corporation violate their fiduciary duty of loyalty.
        
        The court found that the business opportunity was a bona fide corporate opportunity, and determined that Brewer violated a fiduciary duty in appropriating that opportunity.
        
        In determining whether the appropriated opportunity was a business opportunity rightfully belonging to the corporation, the court examined if there was
        
        a business opportunity presented to a corporate officer or director which the corporation was financially able to undertake,
        
        was in the line of the corporation's business and was of practical advantage to it,
        
        was one in which the corporation has an interest or a reasonable expectancy and,
        
        by embracing the opportunity, the self-interest of the officer or director would be brought into conflict with that of his corporation.
      - Grove v. Brown,
        
        (1) An operating agreement that specifies members of a limited-liability company will own equal interests without making the interests contingent creates equal ownership interests even if members do not meet their initial capital-contribution obligations. (2) A fiduciary appropriating a business opportunity that belongs to the business without the business’s consent violates the duty of loyalty.
        
        A corporate officer or director may not take a business opportunity as his own if:
        
        (1) the corporation is financially able to exploit the opportunity;
        
        (2) the opportunity is within the corporation's line of business;
        
        (3) the corporation has an interest or expectancy in the opportunity; and
        
        (4) by taking the opportunity for his own, the corporate fiduciary will thereby be placed in a position inimical to his duties to the corporation.
    - - As the name implies, self-dealing occurs when a director or officer enters into a contract with the corporation, usually to buy something from, or sell something to, the corporation.
      - In the matter of the Estate of Richard C. Poe, Deceased
        
        self dealing looks at fairness of price and also control as a result of action
        
        At common law, not all self-dealing transactions were automatically void. The transaction had to be unfair or fraudulent and could be ratified by a vote by disinterested board members.
    - - In Re The Boeing Company Derivative Litigation
        
        The question here was whether the shareholders had alleged that a majority of Boeing's board of directors were substantially likely to be liable for Boeing's losses and, as such, could pursue their claims against the board.
        
        The plaintiffs alleged that nine of the twelve board members are substantially likely to be liable because they did not satisfy their oversight duties as set forth in Caremark and March.
        
        Caremark provides that the directors are liable if
        
        (1) “the directors utterly failed to implement any reporting or information system or controls” or
        
        (2) “having implemented such a system or controls, [the directors] consciously failed to monitor or oversee its operations thus disabling themselves from being informed of risks or problems requiring their attention.”
        
        The Court concluded that the plaintiffs had satisfied the first prong of the Caremark test, showing that
        
        (1) the board had not established a committee that was responsible for airplane safety;
        
        (2) the board did not regularly address airplane safety during meetings or on a regular basis;
        
        (3) the board had not set up a process or protocol so that management could notify the board of information related to airplane safety;
        
        (4) the board did not have a reporting system so that management within the company could report significant concerns or red flags to the board; and
        
        (5) evidence shows that the board new that had not satisfied their duties of oversight.
        
        The Court also. concluded that the plaintiffs had satisfied the second prong of the Caremark test.
        
        Specifically, the plaintiffs allege that after the Lion Air Crash, the board knew about the Lion Air Crash. Even without adequate reporting or management systems, the board had become aware about the crash, which had been widely reported.
        
        Nevertheless, the board continued to follow management's misrepresentations that the crash had been an “anomaly” and that the planes were safe.
    - - Perhaps the starkest example of director self-dealing is compensation. At common law directors could not award themselves compensation for performing their duties as directors. The theory (often backed up by legal requirements) was that directors were to be shareholders as well and thus would receive their compensation in the form of increased share value or dividends. Once the requirement of share ownership by directors fell away, the statutes were amended to permit boards of directors to provide compensation to themselves. See DGCL §141(h) and MBCA §3.02(k).
      - Compensation of a corporation’s senior officers may also be problematic in a duty of loyalty sense. Some senior executives typically serve on the board of directors of public companies. In closely held companies, all the directors may be officers. In theory, of course, a board’s approval of executive compensation should not raise a conflict of interest problem directly because directors and officers are separate people. When there is an overlap between the two groups, though, a conflict is presented. Typically a direct conflict is avoided because the inside directors abstain from voting on (and often abstain from participating in the discussion of) their own compensation.
  - - - FDIC v. Rippy,
        
        Corporations may exculpate directors but not officers for ordinary negligence in their articles of incorporation.
        
        Default is under MCBA 8,30 which has a "care of a person that would be reasonably appropriate under the circumstances" standard"
    - - a. The Propriety of Analogy to Tort
      - b. Is There a Duty of Care?
- - - - Preemptive rights- rights of shareholders to purchase their proportional ownership when the number of shares sold increases.Must be in Articles of Incorporation or Bylaws
    - - a. Superquorum Provisions
        
        Superquorum Provisions- provision in Articles of Incorporation requiring a larger percentage of ownership present to perform specific actions .
      - Supermajority Provision- provision in Articles of Incorporation setting a larger majority requirements for specific transaction types
    - - Simple concept. Ordinarily, shareholders vote using straight voting aka statutory voting. If three director slots are being voted on, each slot is a completely separate election. As a result, each shareholder votes their shares three completely separate times....
      - So, assume Barb has 100 shares and the only other shareholder, Mary, has 101 shares. The vote would be: Slot 1 - Barb's candidate 100; Mary's candidate 101; Slot 2 - Barb's candidate 100; Mary's candidate 101; Slot 3 - Barb's candidate 100; Mary's candidate 101;
      - As you can see, since privately-held companies often have few shareholders, there is an unusual problem: Mary, with just 1 more share than Barb, gets to select the entire board! This is why many private companies (especially closely-held ones) adopt cumulative voting in the articles of incorporation.
      - So... how does cumulative voting work?
      - Each shareholder can vote the number of their shares X number of slots.
      - So... as before, recall that Barb owns 100 shares and the other shareholder, Mary owns 101 shares.. At the shareholder meeting, there are three (3) slots being filled. Therefore Barb can vote 100 x 3 = 300 shares across any of the three slots and Mary can vote 101 x 3 = 303.
    - - a. The Current Setting*
        
        i. Voting Trusts - must strictly comply with statutory provisions or else unenforceable
        
        MBCA 7.30
        
        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 voting trust beneficial owners, together with the number and class of shareseach transferred to the trust, and deliver copies of the list and agreement to the corporation atits principal office.
        
        Pooling Agreements - Statutorily permitted as long as shareholders vote their own shares (even if subject to
        a pooling agreement).
        
        The legislatures adopted provisions explicitly approving such agreements. The MBCA provides that agreements that determine how the shareholders themselves will vote their own shares are specifically enforceable.
        
        ii. Proxies - generally ok. Just comply with the Articles of Incorporation. CB 591.
      - b. Background and Context
        
        i. Vote Buying
        
        Usually prohibited.
    - - i. Agreements directing specific actions as directors or officers of the corporation. Generally not enforceable unless: 1) all shareholders sign it; or 2) provision is construed to be limited to only those situations where the agreement would further the collective best interests of the corporation; or 3)where the infringement of the director's power was said to be 'slight.' CB 595
      - ii. Agreements effectively having the shareholders operate the corporation similar to a partnership. Thisis effectively having the corporation operate like a member-managed LLC.
    - - Public companies - Virtually unheard of due to size and distribution of shareholders.
      - Private / Close Corporations - Quite common due to smaller size and less diverse shareholders.
        
        Causes... usually good intentions gone bad:
        
        • Often two founders insist on being equal (50/50)
        
        • Problem persists (but is less obvious when more shareholders) (25/25/25/25)
        
        • Less obvious but still a problem with different percentages (20/30/35/15)
      - •PHG Recommendation: Provide for tie-breaker for specific disagreements and Buy/Sell for bigger issues. in Articles of incorporation or bylaws
  - - - a. The Current Setting
        
        Crosby v. Beam, 47 Ohio St. 3d 105
        
        Close corporations bear a striking resemblance to a partnership. In essence, the ownership of a close corporation is limited to a small number of people who are dependent on each 108 other for the enterprise to succeed. Just like a partnership, the relationship between the shareholders must be one of trust, confidence and loyalty if the close corporation is to thrive. While a close corporation provides the same benefits as do other corporations, such as limited liability and perpetuity, the close corporation structure also gives majority or controlling shareholders opportunities to oppress minority shareholders. ** Generally, majority shareholders have a fiduciary duty to minority shareholders. [citations omitted... Courts in sister states and Ohio appellate courts have found a heightened fiduciary duty between majority and minority shareholders in a close corporation. This duty is similar to the duty that partners owe one another in a partnership because of the fundamental resemblance between the close corporation and a partnership.
        
        (1) claims of breach of fiduciary duty alleged by minority shareholders against majority may be brought as individual or direct action, rather than being required to be brought as derivative action pursuant to civil rule, and (2) complaint alleging that majority shareholders acted both separately and collectively to exclude minority shareholders from corporation's profits could be construed as pleading claims that were not wholly derivative in nature, and thus, minority shareholders properly brought action as direct action.
        
        Morrison v Gugle
        
        Ohio places a heightened fiduciary duty between majority and minority shareholders in such a corporation (Closed) ... Majority or controlling shareholders such breach fiduciary duty to minority shareholders when control of close corporation is utilized to prevent minority from having an equal opportunity in the corporation.” Such a breach, absent a legitimate business purpose, is actionable.
        Although plaintiff and Gugle were equal shareholders, this court has imposed the heightened fiduciary duty in cases where the actors are equal shareholders... The critical question is not whether one shareholder is a minority and the other a majority, but rather whether one owner so dominated the corporation that he or she can be said to have been in control to the exclusion of the other.
      - Oppression and Unfairness by Shareholders
        
        a. From a New Remedy for Deadlock . . .
        
        Shawe v. Elting
        
        A court has the discretion to appoint a custodian to sell a deadlocked corporation over the shareholders’ objections.
        
        b. . . . . to a New Cause of Action . . .
        
        Mason v. Mason
        
        determining whether majority shareholders have acted oppressively and unfairly prejudicial based on the circumstances presented in each particular case. It cited the Kiriakides common considerations of: eliminating minority shareholders from directorate and excluding them from employment, failure to enforce contracts for the benefit of the corporation, and withholding information from minority shareholders. All of which were not apparent as applied to the Son. The court further considered any illegal or fraudulent activities that would be unfairly prejudicial or oppressive to any shareholder. However, the Court found that if anyone were to be acting illegally and benefiting from those activities, it was again the Son, choosing to uphold the decision of the special referee.
        
        Judicial dissolution MBCA 14.30
        
        Two judicially-crafted approaches to oppression:
        
        1) whether the reasonable expectations of the minority shareholders have been defeated, or
        
        2) whether the actions of those in control are inequitable in important ways.
        
        c. . . . to More Remedies
      - A.Look to the size of the company and the objective expectations
      - i. Public company - no shareholder fiduciary responsibilities but still limited against oppression
      - ii. Closely-held company - yes, shareholder fiduciary responsibilities related to participation and profit/asset re-direction
      - iii. Private company (not closely held) - it depends.
      - B. Types of abuses
        
        i. Refusing to declare dividends
        
        ii. Draining profits by taking exorbitant salaries and bonuses
        
        iii. Denying minority shareholders corporate offices and employment
        
        iv. Selling corporate assets to majority shareholders at less than market prices.
- - - - Corporate lawyers as counselor (advisor)
      - Corporate lawyers as conciliator (mediator)
      - Corporate lawyers as facilitator (negotiator and communicator)
      - Corporate lawyers as guardian (protector of public)
    - - Corporate lawyers
        
        Generally deal with prospective matters
        
        Goals are more varied than vindication (in litigation)
        
        often deal with other parties and their lawyers but not adversarialy
        
        Usually support (rather than direct/control) the clients decision regarding a business proposal
  - - - Law of Business Ethics
      - Law of Agency
      - Contracts
      - Securities Regulation
    - - Employment and Labor Law
      - Secured Transactions
      - Intellectual Property
      - Smattering of business, econ, and accounting
- - - - Optimal size for particular market
      - Value chains-> start at raw materials, go to manufacturing and production, then distribution and retail.
        
        VERTICAL INTEGRATION- Within value chain
        
        FORWARD INTEGRATION- business expanding and acquiring part of value chain closer to consumer. (see amazon as distributor-> retailer)
        
        BACKWARD INTEGRATION- business expanding and acquiring part of value chain further from consumer. (manufacturer purchasing their own raw material production)
        
        HORIZONTAL INTEGRATION- Across Value Chain
        
        business providing their specific part of chain to different consumers in different value chain (tire company providing for different cars)
      - Some businesses own all parts of chain, others look to deal with other businesses to perform parts of chain
    - - Levi Strauss pg 21 - Jeans being sold in wal-mart
      - Coach goes Younger pg 26- Handbags- purchasing kaite spade to try and bring in younger market
  - - - new forms of energy in coal led to increases in
        
        Transportation
        
        Manufacturing
        
        and communication
        
        Resulting in increased economies of scale
    - - 3 types of corporations
        
        family corporations
        
        finance corporations
        
        managed corporations
  - - - corporate law allows for the accumulation of capital; corporations can survive without the ownership surviving
      - 4 roles of the corporation/ corporate form
        
        accumulation of capital
        
        limited liability
        
        centralization of control
        
        ability to commit capital for an extended period of time
    - - governance and taxes control where companies incorporate
- - - - known knowns -certainty
      - known unknowns - risk / probability
      - unknown unknowns- uncertainty
    - - What you expect might not happen
      - There may be possible alternatives and consequences to what you expect to happen
      - The range of consequences among alternatives may be large or small
      - The number of alternatives and the range of their consequences can sometimes be changed by present actions
    - - Nonperformance- default or counterparty risk
      - Regulatory Risk- e.g. tax laws, FDA
      - Foreign Investment Risk - e.g. embargos
      - Currency Risk - e.g. Euro v $/ different valuations
      - Liquidity Risk - risk that you or other company does not have money available
    - - Negotiated risk allocation
      - Minimum returns
      - Insurance
      - Portfolio of Negatively Correlated Investments
      - Sinking fund -putting away money on a repeating basis for future investments
      - Splitting Gains
  - - - How low would you be willing to go on an offer to accept it today instead of the offer above?
      - factors that affect present value:
        
        amount
        
        duration of delay
        
        risk
  - - - Fancy list that shows the difference between what you own and what you owe
      - Compiled at a specific point in time
      - Therefore, you need to see an opening balance sheet and a closing balance sheet to compare how what you owe and what you own have changed during a period of time
    - - Attempts to track the creation and consumption of value from operations
      - Concerned with a given period of time
      - If done correctly, will indicate the extent to which there has been a new creation of value (as profit) or net destruction of value (as loss)
      - Regardless of cash flows
      - Means much account for non cash consumptions- like depreciation and amortization
    - - As name implies tracks the sources of cash flows during a particular period
      - Addresses the weakness of cash based accounting
      - Explains variations in cashflow that may otherwise be obscure (such as liquidation of inventory at a loss showing up as improved cash balances)
    - - Shows information about capital accounts of investors and other related information
- - - - a. Formation
        
        Ziegler v. Dahl, CB 696
        
        Forming a partnership requires intent to associate in a relationship with all the elements of a partnership and acts that further co-ownership of a business for profit, including sharing profits, losses, and rights to control management of the business.
        
        Ehrhardt v. Abbate
        
        (5) A partnership is defined as an association of two or more persons to carry on, as co-owners, a business for profit.
        
        {6} A written agreement is not required for a partnership to exist.
        
        Generally, in determining whether a partnership existed between the Plaintiff and the Defendant, you must consider the elements of partnership considered critical to the existence of a partnership, which generally include:
        
        An association of persons under a contract or agreement;
        
        Sharing of profits and losses from the business enterprise;
        
        Mutual agency and control; and
        
        Co-ownership of the business.
        
        : It is essential that participation in profits be as profits and not as a payment for services or for the use of property proportioned to profits in order for an inference of partnership to arise.
        Thus, although the receipt by a person of the share of the profits of a business generally constitutes prima facie evidence that he is a partner in the business, no such inference may be drawn if such profits were received in payment as wages of an employee or rent to a landlord, a debt by installments or otherwise, an interest on a loan, though the amount of payment varied with the profits of the business, or the consideration for the sale of goodwill of a business or other property, by installments or otherwise.
        
        Union Savings v Cook,
        
        joint venture v partnership- here joint venture
      - b. Financing and Partners’ Ownership Interests
        
        i. Partner Contributions
        
        Usually requires some consideration, either past, present or future. Can include property, IP, or cash. Can also include present debt with "earn in" paying for interest.
        
        ii. Partnership Property
        
        Belongs to the partnership rather than to the partnership collectively UPA SS 203, 501. Common question is whether a particular piece of property was either purchased by the partnership or otherwise contributed to the partnership - as opposed to a partner agreeing to permit the partnership to use the partner's property.
        Per UPA S 204, presumption is that 1) property acquired from partnership assets is partnership property; and 2) property acquired in the name of a partner, using the partner's assets, is NOT partnership property. Remember, that every partner has the equal right to possess and use partnership property FOR partnership purposes, but not otherwise. CB 705
        
        iii. Partners’ Interest in the Partnership
        
        Per casebook, partner's interest consists of governance rights, information rights, and economic rights. [PHG: this is a safe assumption]. Governance and information rights involve right to participate in management [PHG: but consider, non-voting partners, per contract]. However, the right to information is reciprocal. A partner must supply any information the partner possesses. Partners have the right to inspect the partnership books. Governance also includes the right to use partnership assets for partnership purposes. Economic rights includes the right to receive distributions but not the right to compel them. Ordinarily, this can be transferrable (PHG: though might get sticky if there is a prohibition in a partnership agreement). Note, the rights to distributions are subject to seizure via a charging order (similar to the lien on assets). This economic right can be foreclosed upon and sold at judicial sale.
        
        iv. Allocations and Distributions to Partners
        
        Overland v. Scheper Kim & Harris
        
        The partnership did not have an agreement as to whether Overland was entitled to compensation for his interest. Since there was no such agreement on this issue, the relevant UPA provision applied. Pursuant to section UPA section 701(a) a partnership is to cause a "dissociated partner's interest in the partnership to be purchased for a buyout price determined pursuant to subdivision (b)." Thus, the partnership had an obligation to purchase Overland's interest.
        Using the firm's actual profit share to determine Overland's interest was appropriate because the distributable assets of SKO were based on profits from the firm's collections and not from property, capital accounts or other assets contributed by the partners.
        
        The trial court correctly recognized that a partnership agreement can be written, oral, or implied. [UPA §102(12)] Substantial evidence supported the conclusion that by oral and implied agreement each partner had an individual, unique share of profits largely dependent on his or her financial contribution to the firm. Awarding Overland 25 percent of the partnership value, as he sought, would have been contrary to this agreement.
        
        The UPA default rule for allocating distributions and losses is quite an important one because so many partnerships are formed inadvertently with no explicit agreement for sharing distributions or losses. “Each partner is entitled to an equal share of the partnership distributions and . . . is chargeable with a share of the partnership losses in proportion to the partner’s share of the distributions.” UPA §401(a). Three aspects of this rule are worthy of particular note. First, in keeping with the personal nature of partnership law, each partner is equal, regardless of the amount of money contributed. That is, if one partner puts up 60 percent of the money and the other partner puts up 40 percent, each is entitled to receive 50 percent of the distributions (unless they agree otherwise).
        
        Second, notice that the language describing losses is a bit curious: a partner is allocated losses “in proportion to the partner’s share of the distributions.” The effect of the UPA rule is that if the partners make no agreement as to distributions or losses, both are allocated per capita. If the partners explicitly agree about dividing distributions but not losses, the losses mirror the distributions.
        
        a partner can never assume the debts of the profits of a prior partnership they were not a partner to see UPA 306B
        
        UPA 306(b)
        
        (a) Except as otherwise provided in subsections (b) and (c), all partners are liable jointly and severally for all debts, obligations, and other liabilities of the partnership unless otherwise agreed by the claimant or provided by law.
        
        (b) A person that becomes a partner is not personally liable for a debt, obligation, or other liability of the partnership incurred before the person became a partner.
        
        (c) A debt, obligation, or other liability of a partnership incurred while the partnership is a limited liability partnership is solely the debt, obligation, or other liability of the limited liability partnership. A partner is not personally liable, directly or indirectly, by way of contribution or otherwise, for a debt, obligation, or other liability of the limited liability partnership solely by reason of being or acting as a partner. This subsection applies: * [remainder of 306 omitted)
        
        National Union v. Wuerth
        
        Although a party injured by an agent may sue the principal, the agent, or both, a principal is vicariously liable only when an agent could be held directly liable. As we held in Losito, for example, "[a] settlement with and release of the servant will exonerate the master. Otherwise, the master would be deprived of his right of reimbursement from the servant, if the claim after settlement with the servant could be enforced against the master."
      - c. Personal Liability
        
        Partners in a partnership have unlimited personal liability for the debts of the partnership. Partnerships (and sole proprietorships... and, if you want to be picky, "Syndicates") are the only business organizations that provide unlimited personal liability (that's why they are NOT recommended!). However, as previously explained, the most common issue today is that partnerships can be inadvertently formed. Additionally, per the UPA S 306(a), partners are "jointly and severally liable for all partnership obligations.” This means that a creditor is entitled to proceed against one or less than all partners for repayment of a partnership debt. [Ouch!). The only limitation MAY BE for "new" partners and dissociated" partners.
      - d. Management
        
        Barrett v. Jones, Funderburg, Sessums, Peterson & Lee,
        
        The trial court had the discretionary authority to impose sanctions against SKG based upon the acts of a single partner that occurred in the ordinary course of business of SKG. However, the trial court erred by finding that Richard Scruggs's misconduct occurred in the ordinary course of SKG business. The court reversed the order of sanctions against the appellants. The trial court already has determined that, but for the sanctions, the case is subject to mandatory arbitration, so the case was remanded for the entry of an order compelling arbitration.
        
        The UPA default rule is that every partner has an equal right to participate in the management of the partnership. See UPA §401(h). This management right includes a concomitant right to receive information from the partnership and other partners and a corresponding duty to render information to other partners. See UPA §§408(b), (c), and (d). In keeping with the partnership norm that all partners are equal, the default rule is that matters in the “ordinary course of business” are decided by a majority of partners (regardless of their relative contributions or shares in the profits or losses) but that other matters, including amending the partnership agreement, require unanimity. See UPA §401(k). Where the partners are evenly divided on an issue, courts generally hold that a change from the status quo operation of the partnership has not been approved by a “majority.”
        
        UPA §301(1) reads in part, “Each partner is an agent of the partnership for the purpose of its business. An act of a partner, . . ., for apparently carrying on the p. 723ordinary course the partnership business or business of the kind carried on by the partnership binds the partnership. . . . ” (emphasis added). The italicized portion of the act broadens the power of a partner to bind the partnership beyond that granted under Agency law. Section 301(2) reads, “An act of a partner which is not apparently for carrying on in the ordinary course the partnership’s business or business of the kind carried on by the partnership binds the partnership only if the act was authorized by all the other partners.” Under the UPA, then, a partnership is liable for an action in furtherance of what a paradigmatic partnership of this kind would do, even where this particular partnership explicitly does not do that thing.
      - e. Fiduciary Duties
        
        Meinhard v. Salmon
        
        Co-adventurers, like partners, have a fiduciary duty to each other, including sharing in any benefits that result from the parties’ joint venture.
        
        One of the most controversial aspects of the UPA is its treatment of fiduciary duties. More particularly, many commentators believe the UPA gives too much power to partners to limit or effectively eliminate fiduciary duties. This is the result of UPA §§105 and 409. Under §105(a) and (b), the UPA is a fallback set of rules to fill gaps left by the parties in their partnership agreement. Section 409 imposes specific duties, fiduciary and otherwise, on partners, which some observers believe are too narrow. Section 105(c) allows the parties to further narrow those duties. You should understand that the default rule of fiduciary duties is particularly important. Because so many partnerships are informal or inadvertent and so few of the partners will have agreed on the duties they owe, the default rule is frequently applicable and, as you see from Meinhard, imposes high standards of conduct.
        
        SECTION 409. STANDARDS OF CONDUCT FOR PARTNERS.
        
        (a) A partner owes to the partnership and the other partners the duties of loyalty and care stated in subsections (b) and (c).
        
        (b) The fiduciary duty of loyalty of a partner includes the duties:
        
        (1) to account to the partnership and hold as trustee for it any property, profit, or benefit derived by the partner:
        
        (A) in the conduct or winding up of the partnership’s business;
        
        (B) from a use by the partner of the partnership’s property; or
        
        (C) from the appropriation of a partnership opportunity;
        
        (2) to refrain from dealing with the partnership in the conduct or winding up ofthe partnership business as or on behalf of a person having an interest adverse to the partnership; and
        
        (3) to refrain from competing with the partnership in the conduct of thepartnership’s business before the dissolution of the partnership.
        
        (c) The duty of care of a partner in the conduct or winding up of the partnership business is to refrain from engaging in grossly negligent or reckless conduct, willful or intentional misconduct, or a knowing violation of law.
        
        (d) A partner shall discharge the duties and obligations under this [act] or under the partnership agreement and exercise any rights consistently with the contractual obligation of good faith and fair dealing.
        
        ect
        
        Clancy v. King,
        
        (1) Partnership agreements may limit partners’ fiduciary duty of loyalty by allowing competition with the partnership. (2) Partners always have a duty of good faith and fair dealing in contracts and as fiduciaries.
      - f. Dissociation
        
        Dissociation occurs when a partner ceases to be a co-owner in a partnership. Two main questions: 1) When is a partner dissociated? And 2) What are the consequences of dissociation?
        
        When is a partner dissociated?
        
        i. Upon the happening of an agreed upon event such as the repayment of a debt or the passage of time;
        
        ii. Upon the partner becoming a debtor in bankruptcy;
        
        iii. Upon the partner being expelled from the partnership;
        
        iv. Upon the partner's death; and
        
        V. Upon the partner's individual decision to leave the partnership (note, this power cannot be contracted away)
        
        Determination of the calculation for buyout price, net of partnership debts, is up to the partner agreement.
      - g. Dissolution
        
        Key point, huge distinction between the end of a partnership as a legal entity and the end of the underlying business as a going concern. Typically, partnerships tend to be replaced by successor partnerships (with slightly different membership in the partnership). From the outside, it may appear that the partnership has “continued" - but that technically speaking is not correct. If both the partnership and the business cease, the partnership is staid to "dissolve."
        
        Per the UPA, a partnership dissolves in six instances:
        
        1) when it becomes illegal to continue all or substantially all of the business;
        
        2) if all of the partners agree to dissolve;
        
        3) if the partnership was a "term partnership" - formed for a particular purpose and time (like a joint venture) - and the purpose/time has been achieved;
        
        4) if a partner in a term partnership dies, goes into bankruptcy, or wrongfully withdraws;
        
        5) if a court, in equity, orders the dissolution (for multiple possible reasons such as it it no reasonably practical to continue the partnership or achieve the partnership goal); or
        
        6) if, in a partnership-at-will, any partner may dissolve the partnership at any time, even if it is contrary to an agreement. NOTE: all subject to the terms and liabilities of the partnership agreement.
      - Introduction
        
        a. In essence, a partnership is a business owned by more than one person.
        
        b. Justice Joseph Story wrote Commentaries on the Law of Partnership (1841).
        
        C. Fundamentally, partnership was based upon contract (between partners) and agency (as to thirdparties). What the courts of England and America did was to supply default rules where the parties had failed to expressly agree.
        
        d. Courts created partnership presumptions of symmetry (sharing profits), equality (of ownership), and personal contracts (unanimous consent for joining but individual right to withdraw).
        
        e. As to third-parties, relying upon agency, each owner has the power to bind the other co-owners, and is in-turn bound by his owner principal/agent relations.
        
        f. Evolution of partnership wind-up and continuation.
        
        g. Partnerships ended as the dominant business form in 1890.
        
        h. Partnerships continue to exist for the following reasons:
        
        i. Partnerships are formed inadvertently because no formal agreement is necessary;
        
        ii. Partnerships are sometimes intentionally selected because they do not speak to a lawyer;
        
        iii. Lack of alternative forms (until recently - lawyers and doctors);
        
        iv. Flow-through tax treatment (now available with subchapter S corporations and LLCs) where owners are treated as an aggregate of individuals (receiving form 1065 - and informational return, with owners receiving a K-1... like a W2
        
        i. UPA, Section 102 (11), Definition: "Partnership", except in [Article] 11, means an association of two or more persons to carry on as co-owners a business for profit formed under this (act) or that becomes subject to this [act] under [Article] 11 or Section 110. The term includes a limited liability partnership.
      - two or more people co-owning a business for profit
  - - - Common usage just means a narrowly focused business opportunity undertaken by a handful of established businesses. Don't confuse with common parlance where "joint venture" can also be a jointly owned corporation or LLC with the legal definition is that a "joint venture" is a partnership (two or more people co-owning a business for profit) formed for a limited time or limited purpose. This leads to more limited scope to the enterprise and may, not be subject to all the UPA provisions.
    - - b. The Current Setting
      - Developed before corporations were easily formed (early 1800s). LP are just like general partnerships except that there is an additional class of partner: limited partners. Limited partners invest money only for an economic interest in the outcome of the partnership. The limited partnership interests are freely transferable. However, the limited partners have no management control. At the same time, the limited partners had limited liability exposure
      - A limited partnership is similar to a general partnership but with one or more additional investors called limited partners. Unlike a general partnership, a limited partnership cannot be formed inadvertently but must be created through a simple filing with the secretary of state, much like a corporation is formed. Each limited partnership must have one or more general partners who function just as general partners in a general partnership do. The limited partners have curtailed governance powers and are not agents of the partnership. Their liability is limited to the amount of their investment and, ordinarily, their interests are freely transferable.
    - - Limited Liability Partnerships and Limited Liability Limited Partnerships. LLPs are general partnerships that have elected to be treated as LLPs. LLPs shield partners from liability from "all partnership debts" but remains liable for each partner's liabilities. IF THERE IS LIABILITY IN COURSE OF PARTNERSHIP-> FIRST WOULD GO AFTER INDIVIDUAL LIABLE THEN GO AFTER PARTNERSHIP ASSETS TO PAY. STOPS THERE DOES NOT GO TO OTHER PARTNERS ASSETS LIKE IN A GENERAL PARTNERSHIP
      - The same rule applies to limited partnerships that elect to become "limited liability limited partnerships" - LLLPs. The limited partners continue to have limited liability as well.
        LLPs and LLLPs became popular before the rise of LLCs in the mid 1990s.
      - Brannon v. Rinzler,
        
        Held: In determining Ohio's statutory definition of a security, Ohio case law must be scrutinized, rather than case law interpreting other state or federal statutes. The Court of Appeals for Franklin County adopted the four-prong test set forth in State v. Hawaii Market Ctr. (1971), 52 Hawaii 642, 649, 485 P.2d 105, 109, in determining whether an investment contract, and thus a security, exists. The court found that a security exists when:
        
        "(1) an offeree furnishes initial value to an offeror, and
        
        "(2) a portion of this initial value is subjected to the risks of the enterprise, and
        
        "(3) the furnishing of the initial value is induced by the offeror's promises or representations which give rise to a reasonable understanding that a valuable benefit of some kind, over and above the initial value, will accrue to the offeree as a result of the operation of the enterprise, and
        
        "(4) the offeree does not receive the right to exercise practical and actual control over the managerial decisions of the enterprise."
      - Mahler v. BAGS, Inc., 161 Ohio App. 3d 266
        
        Held: The Ohio Uniform Partnership Law is codified at R.C. Chapter 1775 and sets forth Ohio's laws of partnership. "Partnerships are unique entities in that the involved parties are relatively free to define for themselves the parameters of their relationship. It is not necessary that an agreement of partnership be in any particular form. The cornerstone of a partnership is that the parties, by mutual consent, have the ability to structure their relationship anyway they desire." Where, however, a partnership agreement is loosely structured or incomplete, courts must turn to the provisions of the Ohio Uniform Partnership Law to determine the rights of the parties when various issues arise. Id. In the present case, the only document evidencing the parties' partnership agreement is Mahler's letter of June 11, 1991, which states that the parties are equal partners in Mahler's interest in BAGS and Lucy's Limited Partnership. However, pursuant to O.R.C. 1775.17(g), "No person can become a member of a partnership without the consent of all the partners."
        
        "No person can become a member of a partnership without the consent of all the partners."
      - Globalcor Assoc v Law offce of Soles
        
        "Apparent authority" and "apparent agency" are sometimes referred to interchangeably but are in fact two different theories... Apparent authority is sometimes referred to as the 'holding out theory.” In determining whether an agent is acting with apparent authority, the court must examine the principal's acts, and not the agent's acts.... However, to establish liability premised upon apparent authority, therefore, establishment of a principal/agent relationship is a prerequisite. Soles and Juergensen did not have a principal/agent relationship when Melton retained Juergensen for the bankruptcy proceedings. Thus, as the trial court concluded, the doctrine of "apparent authority” is inapplicable because Soles and Juergensen were separate entities.
        In contrast, to establish liability premised upon apparent agency, a plaintiff must show that (1) the defendant made representations leading the plaintiff to reasonably believe that the wrongdoer was operating as an agent under the defendant's authority, and (2) the plaintiff was thereby induced to rely upon the ostensible agency relationship to his detriment.
      - The principal drawback of partnerships and limited partnerships, at least from the general partners’ perspective, is unlimited personal liability for entity debts. The remaining two entities furnish limited liability to participants who otherwise would be personally liable. Limited liability partnerships (LLPs—NOT to be confused with LLCs) are general partnerships that have made an election to be treated as LLPs and that file a form with the secretary of state. See UPA §901. The effect of becoming an LLP is to shield all partners from personal liability for all partnership debts. Partners remain liable for their own actions as partners. For example, a lawyer who is a partner in a law firm LLP remains liable to clients for his or her own malpractice. The partnership itself also remains liable for such malpractice. If, however, the assets of the malpracticing partner and the assets of the partnership are insufficient to cover the partnership’s debts, the effect of the LLP election is to shield the other partners from liability for the shortfall. See UPA §306(c). The same liability shield is provided to general partners in a limited partnership that elects to become a limited liability limited partnership (LLLP); the limited partners, of course, already have limited liability.
      - LIMITED LIABILITY
        
        LIABILITY FOR PARTNERSHIP ACTIONS STOPS AT INDIVIDUAL LIABLE AND PARTNERSHIP. DOES NOT PASS TO OTHER PARTNERS
      - LIMITED PARTNERSHIP
        
        ALLOWS FOR 2 classes of partners, general and limited. Limited have curtailed governance powers and are not agents. liability limited only to amount of investment and is freely transferable (shareholder)
- - - - LLC's have characteristics of both corporations and partnerships. The formation of LLC is similar to corporations since a filing is required. The name of the filing varies by state. Ohio refers to the Articles of Organization and the Operating Agreement. The ABA Revised Prototype attempts to use different terms (that Ohio changed back to the traditional terms).
      - 2 structures
        
        managed-> run like a corporation
        
        member managed -> run like a partnership
        
        both are subject to modification
      - Most LLC's adopt a management structure similar to corporations that give the owners (members) clearly defined powers but also allocating responsibilities to managers.
      - All states recognize that the members of LLC are to have the broadest possible discretion in drafting their Articles and Operating Agreement (just like general partnerships). So Remember - freedom of association and contract are alive and well in LLC-land! However, always remember that the nuanced differences between an LLC similar to a partnership, versus and LLC similar to a corporation may have a huge impact in the toleration and approach use by a particular court! Also recall, the default statutory provisions are meant to only be gap-fillers. The intention of the members should generally control.
      - ALL LLCS HAVE MEMBERS AND MANAGERS
        
        MEMBERS ARE SHAREHOLDERS
        
        MANAGERS ARE OFFICERS
      - DEFAULT RULE is Member managed aka partnership style
    - - a. Statutory Requirements - Must file Articles of Organization (Ohio) or similar name. Requirement usually follows corporate incorporation statutes. Some states require express election of "managed" or "member manages" [Ohio does not include any election].
      - b. Promoter Liability and Defective Formation - PHG, absent statutory guidance, follow the state's law regarding promoter liability for corporations.
      - c. Operating agreement - A detailed agreement among the members, and sometimes the managers, that sets forth the members, ownership interests, identification of type of LLC (managed or member managed), identification of offices, etc. The operating agreement is the equivalent of the By-laws of a corporation but serves a particularly important role given the ambiguities in specific intended governance structures for LLCs.
    - - a. Capital Contributions
        
        a. Capital Contributions - the members are free to decide how much money, and what types of property, are to be contributed to the LLC. Any form of consideration can be accepted.
      - b. Allocations and Distributions to Membersp. xxiv
        
        allocation relates to the assignment of LLC profits/losses amongst the members. Distribution refers to the transfer of assets (usually cash) to the members. Since most LLC's are flow-through, it is imperative that the Operating Agreement provides for minimum "distributions" each year sufficient to provide the cash necessary for the members to pay any tax liabilities resulting from the "allocation" of profit or loss. At the same time, creditors of the LLC will be concerned if there are excess distributions such that the LLC is unable to "pay its debts when do and payable" [meaning insolvency. See corporations section regarding unlawful distributions].
        
        Remember, unless addressed in the Operating Agreement, members are unable to compel a distribution - even if it is necessary to pay tax liabilities. However, the Operating Agreement CAN require the minimum distribution unless such a distribution would render the LLC insolvent. Got it? Note also that if a distribution is declared, the members only have the right to receive cash - not LLC property.
      - Germano v Beaujean
        
        Held: An Ohio limited liability company is neither a corporation nor a partnership, but hybrid containing attributes of each. Ownership of the L.L.C. rests not in partners or shareholders, but with members. A "member" is statutorily defined as one whose name appears on the records of the L.L.C. as an owner of a membership interest in the company. A "membership interest" in an L.L.C. is a member's share of the profits and losses of the company and the right to receive distributions from that company.
        Members may enter into an operating agreement that defines the agreement of the members with respect to the conduct of the business of the company. Absent an operating agreement, however, certain statutory provisions govern the relationship between the members and the operation of the company.
    - - a. Financial
        
        a.Financial - a member's financial interest consists of the right to receive an allocation of the profits and losses, in accordance with the operating agreement or the statute, and the right to receive assets (after the creditors have been paid) upon the dissolution of the LLC. Sometimes, the operating agreement provides for the initial return of members' initial contribution and only thereafter in proportions to the profit allocation.
      - b. Disregarding the Entity
        
        Every LLC statute provides that the members and managers shall not be personally liable for the LLC's debts. Member's are liable to the LLC and its creditors to pay their contributions. Some operating agreements also have "call provisions" that require members to contribute some additional money in the future. Per equitable principles (which you should assume apply to LLCs), courts may pierce the corporate veil in appropriate circumstances. However, in applying the concepts, remember that most states provide that LLCs may be governed more informally. Therefore, disregard of the entity is available for LLCs but is not just an amalgam of corporate and partnership rules (the extend of fiduciary duties in LLCS is the other unique area.)
        
        Puleo v. Topel
        
        In general, limited-liability-company members and managers are not personally liable for the company’s debts and liabilities, even if incurred after dissolution of the company.
      - c. Managerial
        
        Most LLC statutes contain the default rule that the LLC will be managed by the members. Many of the statutes also provide that the member's managerial power will be exercised in proportion to each member's contribution. However, in every state, the default management scheme can be varied by the operating agreement.
      - d. Additional Members, Transferability, and Dissociation
        
        Most LLC statutes distinguish between the transfer of a member's economic interest (which is freely transferable, but the transferee does not become a member of the LLC), and the member's management interest. Even where both the economic and managerial interests are transferrable, the transferring member remains liable for additional contributions, if any, under the operating agreement - unless and until the member formally dissociates from the LLC. [Note: this is an important point to remember].
    - - a. Statutory Default Rules
        
        a. Statutory Default Rules - Most have member-managed as the default rule. Any variation must be stated in the articles of organization (or perhaps the operating agreement). A majority vote is required to take action. Some states require member meetings and corporate-like provisions regarding call, notice, and quorum (but most are silent). One unsettled issue is whether being a "member" by itself can create questions regarding apparent authority (as to third-parties). If a third-party reasonably believes that the member has authority, then the LLC will be bound regardless of any operating restrictions. This is consistent with the common law agency rules. Right?
      - b. Manager-Managed Structures
        
        Practically speaking, many LLC's provide for manager-managed LLCs. The duties are set forth in the operating agreement. Theoretically, the allocation between members and managers could be made in an infinite number of configurations. However, practically speaking, the overwhelming majority of manager managed LLCs simply adopt a corporate governance structure. In these situations, the members are often placed in an analogous role of the Board of Directors of a corporation. Note that most LLC Statutes state that the managers have the same authority to bind the LLC as the members for any action that relates to carrying on the usual business of the LLC.. Just remember that apparent agency and/or estoppel to deny agency principals may expand the binding nature of actions regarding third- parties - regardless of the express terms of the operating agreement.
    - - The extent and presumptions regarding the duties owed by managers and between members is one of the two areas where LLCs are NOT simply a mish-mash of corporate and partnership standards. The other purpose that is not to be taken for granted are the LLC rules for ignoring the corporate entity (recall, the court keeps equitable jurisdiction - but the standard will be different since most states do not require the same formalities for LLCs as for corporations - right?). As for fiduciary duties, you should be very careful about possible variation state-by-state. As a starting point, assume that the state courts retain equitable jurisdiction. So, absent a specifically contrary piece of legislation, assume that there IS a fiduciary duty - UNLESS it has been limited or modified by clear and unambiguous language in the operating agreement. OK?
    - - Dissolution means the end of the LLC as an entity. Be careful to distinguish between the dissolution of the LLC-entity and cessation of the business that the LLC operates. When an LLC dissolves, it ceases to operate as a business and its assets are often sold off, usually for cash. Typically, statutes provide for dissolution in three instances: 1) where the members vote to dissolve; 2) where the operating agreement specifically provides for dissolution; and 3) where a court orders the dissolution. Courts usually order dissolution of LLCs where: 1) an LLC's creditor petitions the court; 2) where a member petitions the court based upon illegality, waste or oppression; 3) where a member shows that it is "not reasonably practicable" to continue the LLC. Reasons for the business no longer being practicable are: 1) where the business has become regulated or otherwise prohibited; 2) members have taken actions that make it impractical (even if it is not illegal, waste or oppression); or 3) the relationship between the members has deteriorated so far that continuing the business has become impractical.
- - - - Distinguishing between Agent's capability versus motivation
      - Risk of Adverse Selection
      - Role of Signaling
      - Moral Hazards
      - Ratcheting
      - Shirking
      - Private Benefits
      - Incentive Compensation
      - Monitoring
      - Bonding Actions
  - - - Agency is the fiduciary relationship that arises when one person (a "principal") manifests assent to another person (an "agent") that the agent shall act on the principal's behalf and subject to the principal's control, and the agent manifests assent or otherwise consents so to act.
      - Agency Rules are among the most important sets of rule concerning business entities since corporations, partnerships and LLCs cannot take actions except through the humans who act for them
        
        Because agency relationships are formed consensually, but not necessarily contractually, the arise in a wide variety of settings
        
        the person who, as a favor, agrees to drive a friend to the airport may be an agent
      - A valid contract is not required to create an agency relationship- therefore children can be either principals or agents
      - As per the restatement 3rd of Agency, the parties do not need to intend to create an agency and courts will find an agency relationship even if the parties specifically disclaim any intention to create such a relationship
      - Once created the agent is a fiduciary to the principal and therefore has higher duties to the principal that include the implied duties of good faith and fair dealing 8.01
      - Employees of a business are agents
        
        Businesses may also have non-employee agents, such as accountants
      - Corp. officers are agents
      - Directors of a corporation are not agents since they act directly as a group
      - Similarly, it is unlikely that managers of a manager-managed LLC would be agents either
      - In both director and manager settings, there can still be an agency relationship created if there is an additional agreement
      - General partners in general and limited partnerships are agents since these are unincorporated associations. This is determined through partnership law rather than agency law
      - Restatement 2nd of Agency § 220 Definition of Servant
        
        (2) In determining whether one acting for another is a servant or an independent contractor, the following matters of fact, among others, are considered:
        
        (a) the extent of control which, by the agreement, the master may exercise over the details of the work;
        
        (b) whether or not the one employed is engaged in a distinct occupation or business;
        
        (c) the kind of occupation, with reference to whether, in the locality, the work is usually done under the direction of the employer or by a specialist without supervision;
        
        (d) the skill required in the particular occupation;
        
        (e) whether the employer or the workman supplies the instrumentalities, tools, and the place of work for the person doing the work;
        
        (f) the length of time for which the person is employed;
        
        (g) the method of payment, whether by the time or by the job;
        
        (h) whether or not the work is a part of the regular business of the employer;
        
        (i) whether or not the parties believe they are creating the relation of master and servant; and
        
        (j) whether the principal is or is not in business.
      - Relevant caselaw confirms that the employer need not actually exercise control over the employee’s performance for the employee to be considered a servant. The mere right of the employer to control the details of an employee’s activities is usually sufficient to establish a master-servant relationship.
    - - Rezac Livestock Comm'n Co., Inc. v. Pinnacle Bank CB93 (REZAC #1]
        
        Rezac held an auction for the sale of cattle. Dinsdale directed Mr. Leonard to attend the auction and provided Mr. Leonard with instructions on what cattle to purchase and where to send the cattle after the purchase. Mr. Leonard bought 668 cattle and wrote a check to Rezac for the full price of the cattle. Mr. Leonard told Rezac to send the cattle to Colorado, like Dinsdale requested, and Rezac complied. Before Dinsdale wired funds to Pinnacle Bank to cover the check that Mr. Leonard had written, however, Dinsdale provided Pinnacle Bank with information about Mr. Leonard's financial status. He owed more than $1 million to Pinnacle Bank. Dinsdale knew about this information because the same family owned both Dinsdale and Pinnacle Bank. Dinsdale and Pinnacle Bank made plans to time the wire so that it would occur when Rezac brought Mr. Leonard's check to Pinnacle Bank. Nevertheless, Pinnacle Bank used Dinsdale's wire to pay off some of Mr. Leonard's debts and close his account, leaving no money to pay the plaintiff. As a result, when Rezac tried to cash the check, Pinnacle Bank did not provide the money. Rezac then tried to get the cattle back, but Dinsdale did not give them back, so Rezac brought this suit.
        
        Ruling: Dinsdale Motion for SJ denied. The court found that Rezac had alleged sufficient facts to support all three elements required for a principal-agent relationship.
        
        First, the plaintiff's allegations sufficiently support the claim that Dinsdale and Mr. Leonard had assented to a principal-agent relationship. According to the plaintiff's complaint, Dinsdale had sent Mr. Leonard to purchase lifestock for Dinsdale, and Mr. Leonard indeed attended the auction for Dinsdale.
        
        Second, the plaintiff alleged sufficient facts to support an inference that Mr. Leonard acted for the benefit of Dinsdale. He attended the auction for the purpose of buying cattle for Dinsdale, not for himself.
        
        Third, the plaintiff's complaint supports the inference that Mr. Leonard was under the control of Dinsdale. Dinsdale not only directed Mr. Leonard to attend the auction, but also provided Mr. Leonard with clear orders about what kind of cattle to purchase and where to have the cattle sent.
    - - a. Actual Authority
        
        Actual Authority - When there is an actual agreement between the Principal and agent
      - b. Apparent Authority
        
        Apparent Agency - When the principal "holds out" the agent as an agent when they are not, and the 3rd party reasonably relies on that holding out then there is apparent authority
        
        Keep in mind that apparent authority must be created at least in part by the principal. It cannot be created by the agent alone. That makes sense. We hold the principal liable because of what the principal did. Recall that apparent authority is an equitable doctrine based on principles of fairness. It would not be fair to hold the principal liable on the ground of apparent authority if the principal did nothing to create the impression in the mind of a third party that another person was authorized to act for the principal.
      - Udall v. T.D. Escrow Services, Inc. CB 104. Decision.
        
        An agent has apparent authority when (1) a third party reasonably believes the agent has authority to act on behalf of the principal and (2) that belief is traceable to the principal's manifestations. A principal may make an indirect manifestation to a third party by placing an agent in charge of a transaction in such a manner that is known to the third party. T.D. conveyed such a manifestation when it publicly issued the Notice of Trustee's sale.
        
        T.D.'s manifestations also provided Udall with an objectively reasonable basis to conclude that ABC, through Hayes, had authority to act for T.D. where T.D. employed ABC to conduct its nonjudicial foreclosure sale, issued the notice of trustee's sale, and Hayes read the standard script announcing the opening bid as $59,421.20. Hayes thus acted with apparent authority when she accepted Udall's high bid and as a consequence, T.D. was bound by that acceptance. T.D. must deliver the deed of trust to Udall.
      - CSX Transp., Inc. v. Recovery Express, Inc. Recovery Express, Inc. (“Recovery")
        
        Apparent Authority is not established by the putative agent's words or conduct, but by those of the principal. The question presented is whether an e-mail domain name, by itself, cloaks a purported agent with authority sufficient as a matter of law to be called "apparent." Because apparent authority depends on that knowledge held by CSX of Arillotta's authority, the only relevant conduct by Recovery is issuance of a common email domain to Arillotta. Because this was the only manifestation conveyed by Recovery prior to contracting with Arillotta, the court must determine if the domain name alone conveys apparent authority to act on behalf of Recovery.
        The Court holds that CSX was unreasonable, as a matter of law, in their reliance solely on an email domain name. Granting an email domain name, by itself, does not cloak the recipient with carte blanche authority to act on behalf of the grantee. Were this so, every subordinate employee with a company email address could bind a company to the same contracts as the president. No reasonable person could conclude that apparent authority was present. Recovery's motion for summary judgment is granted
      - A principal will be liable to a third party on a contract entered into by an agent if the agent had actual or apparent authorityto bind the principal when the agent executed the contract or if the principal ratified or adoptedthe contract later on.
      - APPARENT AGENCY V APPARENT AUTHROITY
        
        APPARENT AGENCY IS WHEN THE PRINCIPAL HOLDS OUT AN AGENCY RELATIONSHIP THAT DOES NOT EXIST
        
        APPARENT AUTHORITY IS WHEN AN AGENCY RELATIONSHIP DOES EXIST BUT THE PRINCIPLE HOLDS OUT AN AUTHORITY WITH THAT RELATIONSHIP THAT DOES NOT EXIST
  - - - An independent contractor generally has a task to complete, but it is up to the contractor to determine how to accomplish that task. In that sense, an independent contractor is relatively free of the employer’s control. Thus, although the employer may dictate
      - A servant, by contrast, is subject to the principal’s control. The principal can dictate both the end goal and the means to get there. In that sense, a servant is not independent of the master.
  - - - The primary difference between ratification and adoption is that, unlike ratification, adoption isnot retroactive to the time of the original contract. The adopting party is liable on the contract only from the moment of adoption forward. In this respect, adopting a contract is a lot like adopting a child. The adoptive parents are not responsible for what happened to the child before the adoption, but they are responsible for what happens to the child afterwards
  - - - The principal’s right to control the manner and means of an agent’s work determines whether an employer-employee relationship exists between them, even if someone else employs and pays the agent.
    - - precedent treats an employee’s conduct as within the scope of employment if (1) of the kind the employee is employed to perform, (2) substantially within the authorized time and space limits, and (3) motivated at least partially by a purpose to serve the employer.
    - - An employer is subject to liability for torts committed by employees while acting within the scope of their employment.
    - - (1) An employer is subject to vicarious liability for a tort committed by its employee acting within the scope of employment.
      - (2) An employee acts within the scope of employment when performing work assigned by the employer or engaging in a course of conduct subject to the employer's control. An employee's act is not within the scope of employment when it occurs within an independent course of conduct not intended by the employee to serve any purpose of the employer.
      - (3) For purposes of this section,
        
        (a) an employee is an agent whose principal controls or has the right to control the manner and means of the agent's performance of work, and
        
        (b) the fact that work is performed gratuitously does not relieve a principal of liability.
    - - an employer has possessed a duty to control his employee and prevent harm to others in two limited situations. First, an employer will be held liable for the tortious conduct of its on duty employee if the employee is acting within the scope of his employment when the harm occurs. Second, it is generally accepted that an employer will be held liable for the off-duty torts of its employee if the employee committed the tort while on the employer's premises or while using the employer's chattel and the employer had the ability to control the employee and knew of the necessity of exercising such control.
  - - - a. Agent’s Liability on Contract
        
        An agent for a disclosed principal is not thereby liable on the contract. Restatement (Third) $ 6.01(2).
        
        An agent to contracts on behalf of an undisclosed principal ordinarily IS liable on the contract. Restatement (Third) $ 6.03(2).
        
        An agent to contracts on behalf of an unidentified principal ordinarily IS liable on the contract. Restatement Third) $ 6.02(2). A principal is unidentified when the third party has notice that the agent is acting for a principal but does not have notice of the principal's identity. Restatement (Third) $1.04(2)(c). [PHG: best to check specific state laws on this one).
        
        If the third-party does not know whether an entity is a limited liability one, then the principal is unidentified and the agent is ordinarily liable on the contract. Restatement (Third) $ 6.02, comment d.
        
        Ordinarily, it is the agent who provides notice of the principal's identity. However, the source of the third-party's knowledge is irrelevant to the legal relationships between the parties. Restatement (Third) $ 6.02, comment d. [PHG: Note CB 134, some states would likely agree with the author's question as to why the agent should be personally liable where the third-party is aware of an unidentified principal. Check you state for their rule.
      - b. Other Sources of Agent’s Liability to Third Party
        
        Agents who purport to act for a principal implicitly warranties that the agent is authorized to do so. If not, the agent may be liable on the contract AND, if there is affirmative misrepresentation, the agent may be liable in tort as well.
        
        An entity, acting as an agent does not confer any immunity on the agent from any direct tort liability. Restatement(Third) $ 7.01 and 7.02
        
        AGENTS WHO CAUSE TORTS DO NOT GET IMMUNITY TO LIABILITY --HUGE
    - - a. Duties of the Agent
        
        The agent owes the principal duties of obedience, care, and loyalty.
        
        The duty of obedience requires an agent to follow the principal’s reasonable instructions. We saw earlier that an agent is subject to the principal’s control, so it should come as no surprise that the agent is obliged to follow the principal’s reasonable instructions. That obligation comes with the territory.
        
        The agent:
        
        o Owes a fiduciary duty to act loyally for the principal's benefit,
        
        o May not receive a material benefit from the relationship not approved by the principal,
        
        o May not compete with the principal, and
        
        o May only use the principal's property for agency purposes.
        
        An agent is also obligated to use due care in performing his required tasks. Due care is usually described as the degree of care that a reasonable person would exercise in a similar position. In this regard, the duty of care standard is on a sliding scale that varies with any special skill or experience an agent may have. It is safe to say that the greater an agent’s expertise in the subject matter of the agency, the greater the degree of care the law will require the agent to exercise in fulfilling his duties to the principal.
        
        The duty of loyalty obligates an agent to put the principal’s interests above the agent’s own interests. For example, an agent cannot profit from the agency at the principal’s expense (for example, by getting a kickback from a supplier) or taking advantage of (“usurping”) an opportunity arising out of the agency without the first getting the principal’s consent. (In the cases, agents never get permission!) In short, the agent is viewed as a fiduciary who must
      - b. Duties of the Principal
        
        The principal’s duties to an agent are much less formidable.
        
        First, a principal must pay his agent the agreed-upon compensation, unless of course the agent has agreed to serve gratuitously. In that respect, the principal is treated like any other contract obligor—he must do what he promised to do.
        
        Second, the principal is obligated to reimburse the agent for any costs the agent incurs in carrying out the agency. This sensible result ensures that the principal bears any expenses the agent incurs while doing the principal’s bidding.
        
        Finally, the principal has to indemnify the agent against any losses the agent suffers during the course of the agency. As between the principal and the agent, the principal is better placed to absorb those losses.
        
        -The principal :
        
        o is Not a fiduciary and has typical contract duties to the agent.
        
        o Must deal fairly and in good faith.
        
        o Must honor any contract duties between the principal and the agent.
        
        o Must indemnify the agent for out-of-pocket expenses in performing agency duties or whenever it would be fair and appropriate.
    - - Because the agency relationship is consensual, ordinarily either the agent or the principal has the power to end the relationship at will, even though termination may give rise to contract liability.
      - o An agent my renounce the agency; a principal may revoke the agency.
      - o An agency coupled with an interest may be made irrevocable. [PHG: NOTE, this course will NOT cover agencies coupled with an interest).
      - o For business entities, a proxy is an agency relationship in which the agent has actual authority to either vote the shares as directed by the principal (a limited proxy) or as the agent thinks best in the principal's interest (a general proxy).
      - o The principal's death or incapacity terminates the agent's actual authority. [PHG: NOTE, question as to whether or not notice to the agent is necessary, see CB 136, Restatement (Third) $ 3.07 and 3.08
      - § 3.07 Death, Cessation of Existence, and Suspension of Powers
        
        (1) The death of an individual agent terminates the agent's actual authority.
        
        (2) The death of an individual principal terminates the agent's actual authority. The termination is effective only when the agent has notice of the principal's death. The termination is also effective as against a third party with whom the agent deals when the third party has notice of the principal's death.
        
        (3) When an agent that is not an individual ceases to exist or commences a process that will lead to cessation of existence or when its powers are suspended, the agent's actual authority terminates except as provided by law.
        
        (4) When a principal that is not an individual ceases to exist or commences a process that will lead to cessation of its existence or when its powers are suspended, the agent's actual authority terminates except as provided by law.
      - § 3.08 Loss of Capacity
        
        (1) An individual principal's loss of capacity to do an act terminates the agent's actual authority to do the act. The termination is effective only when the agent has notice that the principal's loss of capacity is permanent or that the principal has been adjudicated to lack capacity. The termination is also effective as against a third party with whom the agent deals when the third party has notice that the principal's loss of capacity is permanent or that the principal has been adjudicated to lack capacity.
        
        (2) A written instrument may make an agent's actual authority effective upon a principal's loss of capacity, or confer it irrevocably regardless of such loss.
        
        (3) If a principal that is not an individual loses capacity to do an act, its agent's actual authority to do the act is terminated.
- - - - Client choices that require or eliminate certain forms (1 of 2):
        
        Will the owners be restricted to 100 or fewer individuals (or certain trusts)?
        
        If not, an S corporation is unavailable.
        
        Is it important to control the timing of income receipt and recognition for the owners?
        
        (Relatedly, is income anticipated with such certainty and magnitude that the timing question is genuinely important?)
        
        If so, a C corporation or LLC electing to be taxed under Subchapter C is required.
        
        Is it important for the owners to recognize losses?
        
        (Relatedly, are losses anticipated with such certainty and at such a magnitude that the question of recognizing losses is genuinely important?)
        
        If so, an S corporation, partnership, or LLC is required.
        
        Is the possibility of uninsurable tort liability such that the owners must be protected from personal liability?
        
        If so, a partnership is unavailable.
        
        Do the owners anticipate that there will be multiple transfers of ownership interests?
        
        If so, a C corporation or LLC electing to be taxed under Subchapter C are the only realistic entities.
      - Client choices that militate toward or away from certain forms (1 of 3):
        
        Do the owners anticipate raising capital from many owners?
        
        If so, a C corporation or LLC electing to be taxed under Subchapter C is more appropriate.
        
        Do the owners anticipate that their financial rights will not be proportional to their investment or managerial interests?
        
        If so, a partnership or LLC is more appropriate.
        
        Will management of the entity be permanently allocated with little or no owner power to change that management?
        
        If so, a limited partnership or LLC is more appropriate.
        
        Will management of the entity be allocated with some (e.g., annual) owner power to change that management?
        
        If so, a corporation or LLC is more appropriate.
        
        5 Will management of the entity be shared among the owners?
        
        If so, a partnership or LLC is more appropriate.
        
        Will the owners have the power to bind the entity?
        
        If so, a partnership or LLC is more appropriate. If not, a corporation is more appropriate.
        
        Is free transferability of economic and managerial ownership important?
        
        If so, a corporation is more appropriate.
        
        Do the owners want to ensure they may exit the business?
        
        If so, a general partnership or LLC is more appropriate.