I. Chapter 1 Agency Chart of different types of agency:

1. Who is an Agent?Groton v. Doty

A. Gay Jenson Farms Co v. Cargill

2. Liability of Principal to Third Parties in Contract A. The Agent’s Authority

Mill Street Church of Christ v. Hogan

Three-Seventy Leasing Corporation v. Ampex Corporation

Watteau v. Fenwick

B. RatificationBotticello v. StefanoviczUltimately ended up with 85,000 for lease with option to purchaseDeed shows co-owners: Husband/Wife—husband is doing all of the negotiating.P wanted to act on his option to purchase. Husband/Wife say no.

TCP. Husband was acting on behalf of wife. AgencyAC what do they say about marital status? Marital Status alone does NOT create agency.

How is this different fan Mrs. Dee (car case). There’s no ACTUAL agency. No manifestation here.

P argues, even if no agency, wife recognized the K by accepting payment.But does this conduct “ratify” the agency?. She was unaware of the full details.

1. Knowledge/action that shows knowledge; AND2. Benefit requirement.

Court says $ going in to marital account is not enough by itself.

Bottom of page 27 is a good definition for ratification, just need conduct to match.“Ratification is a means by which the principal can say, “my agent didn’t have the right to enter into this contract, but I’m glad she did so. Accordingly, I’ll affirm the transaction and agree to be bound by the Contract”

C. EstoppelHoddeson v. Koos BrosWoman goes into furniture store. Buys furniture from someone who wasn’t a salesman! No actual agency. No manifestation.

2 “innocents”The StoreThe Customer

Agency is IMPOSED.Estoppel Theory. Store is estopped from denying agency. Store was in best position to prevent this type of harm.

D. Agent’s Liability on the ContractAtlantic Salmon A/S v. Curran1977 – Marketing Design Corp Formed. Original Purpose, sell motor vehicles.

1983 – marketing design corp Dissolved.

1987 – DBA MD d/b/a Boston Seafood.

Contracts: 1985/1987 Atlantic Salmons <---> Boston Seafood. OR Boston Seafood Exchange. (Used both names).

When Curran (Defendant) signed checks, he signed as treasurer for Boston Seafood – Agent.Gave Business Cards w/ his name, his position and “Boston Seafood exchange”

Defendant argues, don’t sue me individually, I’m acting as an agent of MD!

*If agent is acting on behalf of principal, agent has duty of disclosing.

Even if it’s on public record, it’s the agent’s duty to disclose, NOT the other’s duty to find out.

**Aside: DBA – Doing Business As

3. Liability of Principal to Third Parties in TortA. Servant Versus Independent Contractor

Franchisors: Making a system – Dominos/Dunkin Donuts etc.

Sometimes a Franchisor exerts enough control over the franchisee, it’s an agency.

Go to franchise agreement and see how much control the franchisor has over franchisee.

DD controlling how HOT the coffee is…agency.

Humble Oil and Refining Co v. MartinSchneider (owner of gas station) <----> Humble Oil.Terms of K:S: Paid operator expenses; hiringH: Required reports

Pays 75% of utilitiesFinancial Control

Car rolls off lot. Hits Martin and 2 kids.Only Financial Control? Or day to day control?

Not just that Humble controlled but had the right to control!

Hoover v. Sun Oil CompanyBarrone <----> SunocoBarrone to purchase oil from Sun.

Sun ProductsCOULD sell other productsSell Sun Products only under SUNOCO nameSet hoursBears the risk

SUNOCO: Advertising costsSupplied equipmentReportsRequires things to makintain identity

Fire starts at rear of car while gas was being put in. John Smilgh – employee starts fire.

Court: Finds NO AGENCYIndependent K!

Factors:Barone bears all of the risk of loss.

Contra Humble: only bore 75% of risk.Barone sets hours of operationThe reports that are requires are NOT of the like that control day to day

operation/management.

Murphy v. Holiday Inns, Inc.Bettsy-Linon Ltd d/ba Holiday Inn <----> Holiday InnIs this independent K or AGENCY?

Control?Color SchemeArchitectureSignage

Slip and Fall!

All of the things listed under control only go to protect the brand. **Not going to day to day operation.

Difference: “Need Hot Coffee” vs “Need Coffee at 142.3 degrees”

B. Tort Liability and APPARENT AgencyDifference between apparent authority and apparent agency:Apparent Authority: holding out with title (“Law Professor”).Apparent Agency: DIFFERENT.

Trying to figure out about if there’s an agency. When you walk into a store…is there a holding out of agency?

Miller v. McDonald’s Corp p 47P eating Big Mac, bit into a stone!McDonald’s franchise agreement with “3K”Did franchise agreement give McDonalds right to control “3K”.

Look and feel of McDonalds? YesFollow “McDonald’s system” VERY MUCH

Methods for food/bev and prep/handling

P wants to sue McDonalds.Person who sold the burger is 3K! (not McDonalds).

Have to prove AGENCY between 3K and McDonalds.

When P walked in, it LOOKS/APPEARS as an agency!Franchise agreement says NO AGENCY, but, this is NOT determinative. It’s a facts and circumstances test.

DC Defendant, no agency.AC Found for P, YES AGENCY

Remember, apparent agency creates an agency where there otherwise isn’t one. Apparent Authority expands the authority of an actual agent.

Problem page 51:25 Motels want to come together under trade name.

StationaryRoom rates similarUniformsRemodel Lobbies

Form “Finest Motels”Required to make payments for advertising and for policy compliance.Hires Hilton executive, wants to line up to Hilton’s standards.

Is there agency relationship?Is there sufficient control?Remember: standards to protect tradename will NOT be enough for control.**If not enough control, is there apparent agency.

To avoid apparent agency: frame certificate D/B/A and put it on the wall. Still a balancing act. Can’t Hide it!!!

Servant vs Independent ContractorEx. Hire roofing co. to redo roof.

If Roofer does something, am I liable as principal?

Look at K. Time/Price, independent K.

If one of his helpers falls/hurts, they could make claim against your homeowners insurance.

Make sure the independent K has worker’s comp.

Servant RelationshipEmployer/EmployeeEmployer usually dictates a lot of control

C. Scope of EmploymentEmployer/Employee(little chart)

Servant

Ira s. Bushey and Sons, Inc v. United StatesBushy allowing boat to be dry dock.Sailor gets drunk, comes back and turns some valves etc. Floods the dry dock. Ship keels over!Sailor does NOT have actual authority to turn the wheels, NOR does he have apparent authority.

US Gov. says yes agency, BUT what he did was NOT authorized by the US.Bushy argues, OK but if it was w/in scope of employment then can imply authority.

Reasonably foreseeable by the US government. They were in the best position to stop it!

Engaging in course of conduct subject to Employer’s control.The wider the diversion, the more likely it will be held outside of scope. (I drove

50 miles out of my way…)

Manning v. GrimsleyPitcher for Baltimore Orioles.Ross Grimsley was being heckled in Bullpen at Fenway, he turns and fires a ball at the bleachers.Orioles never gave actual authority to throw ball at fans. No Apparent authority either BUTThis was w/in scope.

AGENCY CHART

D. Statutory ClaimsArguello v. Conoco, Inc.

E. Liability for Torts for Independent ContractorsMajestic Realty Associates v. Toti ContractingDemolition, city is paying. Independent K for demolishing.

Is City controlling? – NO, non-agent, independent K.,

Typically: If independent-K screws up, principal is NOT liable. BUT, this action (taking down a building) is inherently dangerous! Cannot exculpate your liability.

City should make sure independent-K has big insurance policy that ALSO covers the city.

4. Fiduciary Obligation of AgentsAgent has a duty to deal openly with employer and to fully disclose to the employer information about matters affecting the company’s business.

Do not act on account of adverse party. No Compete.

A. Duties During Agency

Reading v. RegenBritish soldier helps smuggle goods through security in Cairo – while wearing his uniform.No question of agency here.Breaches Fiduciary duty – now agent is liable to principal.Consequence: Has to give up any profits he made to the principal…but here the profits were from illegal activity.

Rash v. JV Intermediate Ltd(Agent) Rash--(run division)--> TV (principal)

<--(pay)--

Rash owns scaffolding and other companies.(TIPS) Scaffolding was actually K by JV! A sub-K.KV now gets OWN scaffolding division.

TIPS still in business (in competition) and doing well.

Rash says, I’m an agent but this is outside the scope at the time JV ad no scaffolding division.

Written K therminates BUT employment/conduct continues.Not acting solely for the benefit of the principal.Rash needed to disclose.Not enough that P said “you CAN do this”. Agent has to say “I DID this”

B. Duties During and after termination of agency: herein of “Grabbing and Leacing”Town and Country House and Home Service Inc v. Newbury. P75What if agency is terminated: what happens to fiduciary duty?Here, they create the exact same business after terminating agency.Using customer lists and trade secrets that they acquired as an employee.

Basically stealing someone else’s intangible property.Not really a breach of fiduciary duty, but the misappriortion of property.

IP: non-tangible idea/process.Trade Secret: most all states have statute.

McShane Case (TWEN)Cluck-U UniformsWas McShane dressed in a cluck-u uniform? NOThe Court uses the word “apparent authority” but mean “apparent agency”.

The uniform gives the impression of “apparent agency”The perception of agency!

Car accidentCan definitely sue the driver, McShane. But want to sue Cluck-U!

What did the Court look at?Franchise agreement!What did this agreement provide for?

Control factors: Uniforms, Décor, Signage.They did not grant SJ, let go to trial.

Marriott CaseToppel v. Marriott Int’l

Franchisor----FranchiseeFranchise agreement

In this K, the actual “mama” (franchisor) was NOT a party to the K. But in the agreement there are a # of duties that run to the Franchisor.

Denied SJ –need more facts on the day to day inferences under the franchise agreement.

Argue: actual agency and then in the alternative apparent agency.

Subaru CaseFacts and circumstances test. Just because K says “independent – K” does not mean it is!

Leasing Co ---> Dealership.Wants wife to be authorized driver. She gets into accident.

Look to the K between leasing Co and Dealership.Look to see if dealer is leasing Co’s agent.

Control over day to day operations? (or right to control).

K says Dealer was limited to titling the vehicle. That is dealer’s one function.BUT look to facts and circumstances. Buyer ONLY talks to car dealer.

How does Court hold? Agency did not exist. Kind of a bad case. Doesn’t really get decided on facts and circumstances test.

Edible ArrangementsBad fruit poisoning.

Actual agency?Look to control in KStandardsAppearancePerformance

Right to control too: right to enter, right to inspect.Computer system controlRight to terminate

Apparent AgencyStill argue actual but then would argue apparent agency in the alternative.How deeply do they control delivery?

II. Chapter 2 Partnerships1. What is a Partnership? And who are the Partners?

Uniform Partnership Act § 6No intent neededNo writing needed

Partners are joint and severally liable.Partnership Chart

A. Partners Compared With EmployeesFenwick v. Unemployment Compensation CommissionBeauty ShopArline is employee. Written AgreementProfit sharing. Call it a “partnership”

Sharing of profits (in lieu of giving raise)Employee = 0 riskEmployer = control

Written agreement says “partnership”, filed a partnership tax return. BUTWhat it says is not outcome determinative. Just a factor.It’s whether or not partnership is established from the facts and circumstances.

B. Partners Compared With LendersMartin v. Peyton

PPF - - - - - - (Lend good securities) -- - - -> KNK [borrower, financial difficulties]<----Speculative Securities - - - |4% profits |Option to buy into KNK |Veto Powers on other secs (owes money)Ability to look at books -> third partiesHall = ManagerResignations in Escrow

Writing never used the term “partnership”KNK goes underLabled as “loan agreement” but again, this is NOT outcome determinative.

2 partiesSharing profitsEngaged in similar business No shared losses/investment of capital.

NO PARTNERSHIP HERE!

All of the provisions here are to PROTECT/SECURE the loan!Could also argued agency.

Veto power, hall as manager, resignations in escrow.--Control, unimportant in partnership but important in agency! Still could be seen as protecting the lending interest though.

Southex Exhibitions Inc v. Rhode Island Builders AssociationSEM in the business of putting on trade/expo shows.RIBA Ks w/ SEM for SEM to produce shows

-Sponsor-Use RIBA brand-SEM -> get all license

LossesCapital

Sharing Profits 55% SEM, 45% RIBA

SEM assigns their position to SouthexRIBA terminatesSouthex assets partnership

RIBA says independent contractor

Court finds: No partnership! It’s an independent-K. SEM using RIBAs name. If 3rd party was suing, could try to use apparent agency.

C. Partnership by Estoppel p93*Need a holding out plus reliance

Young v. JonesEquitable remedy here!

NY: big cheese P&W

Price Waterhouse <--(licenses name)--> Accounting firm can use their name.Licensing agreement: is there no actual agency. Apparent agency.

Investor…investment tanks.

There was a holding out BUT there was no reliance. (Don’t have this in agency estoppel)Is there apparent Agency? Well there’s a holding out, but is it enough? Not by itself.

Partnership chart

2. Fiduciary Obligations of PartnersA. Introduction

Meinhard v. SalmonM+S <----(lease 20 years)--- Gerry (landlord)M-capitalS-Manager

Now it’s a profitable venture

Salmon<----(lease)-----LandlordProposes Salmont to take on sky scraper project at that location (after 20 yr lease).S does not tell M!

Remember, partners owe “The Duty of Finest Loyalty” to another.Issue: how long does a partner owe a fiduciary duty to co-partner?Only have to disclose opportunities that go towards the purpose of the partnership.

*Partnership opportunity Doctrine: question of fact.When I become a partner, am I excluded from being a partner in any and all other business?

Most partnerships: “no outside work at ALL”Some say: “just no compete”

[jumping ahead to Limited Partnership]1. Filing2. Written Limited P agreement.

Parties are called “limited partners”Enjoy limited personal liabilityCannot participate in Management

Who does the management?The general partner! Unlimited personal liabilitySometimes see this general partner formed as a corporation or LLC.

*what duties does a general partner owe a limited partnership? Fiduciary duty of loyalty.

**Can you modify this, waive this, fiduciary duty by K? Set a standard if it’s met, then it’s deemed that the fiduciary duty is fulfilled?

Some jurisdictions can waive totally by KMost say no, no waiver BUT can define/modify it by K.

Should have provisions defining purpose of partnershipMaybe even define what a partnership opportunity is.

Sandvick v. LaCrosse

Empire Oil<----(purchase)-----Oil and Gas leases||-Lacrosse-H

H and L buy Top-Off Leases (extending) the above leases.Did not disclose to other partners in Empire Oil

Making a distinction between partnership and join venture4 factors on page 105

1. Contribution by the parties of money, property, time, or skill in some common undertaking, but the contributions need not be equal or of the same nature.2. a proprietary interest and right of mutual control over the engaged property;3. an express or implied agreement for the sharing of profits, and usually, but not necessarily, of losses; and4. an express or implied contract showing a joint venture was formed.

Here they needed to disclose it.

B. Grabbing and LeavingMeehan v. ShaughnessyMeehan and Boyle are partners at law firm

[Partnership]| | | | |M B other partners

Things they do pre-notice1. Recruit associates2. Contact Clients3. Send Letters to clients

That they’re going to be leaving and starting new firm.Used partmer letter head, employees, postage.

First meeting – not candid.Second meeting – they disclosed.

Non-disclosure = an evasion/lack of candor.

Went to NY and had convo with clientPursuant to written agreement – 3 mos notice for transition

Did M and B breach their fiduciary duty?Yes

When?**When asked if they are leaving and they did not disclose this is when breach of duty occurs.

The stuff BEFORE was NOT in violation of duty of loyalty.But what about contacting clients and sending letters to clients? Not fair to firm. No Opportunity to compete.

Court says poaching employees is OK though.SRF disagrees w/ this.

[In MA, letter sent out by firm stating “lawyer is leaving, where do you want your file to go]

C. ExpulsionLawlis v. Kightlinger and Gray (the boozer case).

[Partnership, law firm]| || |Lawliss Other partners

Lawliss was an alcoholicMew w/ Dr.Retained title of Senior Partner butReduced case load/salary

Said “no more chances” but gave him a 2nd chance

Wampler –oral notice--> Lawliss “you’re not going to make it”

Senior partner meeting: expel Lawliss. 7 to 1 vote.

Issues: Wampler telling him was the expulsion and there was no vote.Court says no, this was not expulsion.

2. Expulsion was violation of good faith/fair dealing.Alleges it was for a “predatory purpose”… “partner to associate ratio”

Court disagrees, that was NOT the purpose of his expulsion.

3. Partnership PropertyUPA § 24Each partner has an equal right in use/possession of partnership property but ONLY for the purpose of the partnership (no title interest).

Putnam v. ShoafMap out partnership by hand:

Shoaf then discovers embezzlement occurred while Putnam was partner. Sues

Putnam wants to share in recovery, but is NO LONGER a partner

When she sold to Shoaf, she gave up that right.

4. The Rights of Partners in Management§18(h) Majority vote, but to modify partnership agreement, need unanimity.

(can K around this)

National Biscuit Company v. Stroud

[Straud’s Food Center] -------($$$)------> NABISCO| | <------(bread)----| |Freeman Stroud50% 50%

If partnership doesn’t pay, they are both jointly and severally liable.

Stroud tells NABISCO “no more bread”Both partners have a say. Majority Vote. BUT here 2 people are 50/50. Need unaminity.

Freeman says “send more bread!”Pship doesn’t pay…NABISCO sues Stroud alone.

Step 1: try to get partner to agree.Step 2: If no, going to have to dissolve partnership.

Because, so long as partnership exists . . . either one can bind the partnership.Could alsos et up 3rd party arbitrator

__

Ethical issues when 2 or more people come to you. Cam either represent ONE. Get in writing!Or represent neither. Merely scrivener – parties give business deal

Strongly urge each of them to get separate counsel.

K around meinhart problem/issue.

Summers v. Dooley

[General Partnership Trash]| || |S (50%) D (50%)

-> Disabled, hired replacement at own expense CSO doesn’t offset summers

4 yrs later, S wants to hire 3rd EE. D says no.[Drafter should have thought about deadlock!]

Summers sues D to pay expenses of EESummers LOSES

Doesn’t control majority.

What if 3rd employee isn’t getting paid?Can sue summersCan also sue partnership/Dooly (Summers is an agent of Pship, and Dooley is

Joint/severally liable)

Day v. Sidley and AustinDay establishes Wash DC office for S&A. Has corner office.S&A want to merge w/Lieberman firm –a small upstart.

“No S&A partner would be worse off”

Day loses his corner officeDay doesn’t like this, resigns, sues.

Fraud/Misrepresentation.How does Court interpret?Only meant “legal rights”! Not his physical stature in the firm.

Fiduciary DutyBy resigning, Day diminishes his rights.Duty to disclose LEGAL RIGHTS, not the trappings of your office!

___

UPA §§ 29,30-39§29 Dissolution Defined*§30 Partnership not Terminated by Dissolution

Continues through “winding up”.

§31 CausesDeath, buy out, resignation, disability, mental, end of Pship term.Pship for specific undertaking

Good idea to have “whereas” clauses, otherwise Parol Evidence rule bars it. (What is it that made parties enter into K).

5. Partnership DissolutionA. The Right to Dissolve

Owen v. Cohen[General Partnership, bowling ally]| || |O (50%, P) C (50%, D)

Oral K. Cohen being a dick.Owen gave $7K…now he wants out

Owen files for Judicial dissolution w/ Court.Wants judicial Decree so that he doesn’t have a fiduciary duty to Cohen anymore.Appoint receiver.

If I load $$ to Pship. I can only be paid back by Pship.Judicial Decree…means Owen hasn’t breached K, can still collect loan.

Collins v. Lewis[General Pship]| || |L C – puts 600,000 in.|Manages, oversees construction

Collins says no more $! Files for Judicial DissolutionWritten agreement, specified 30 years.

You agreed to pay $, you stopped paying.Collins should sue lawyer. Lawyer should have realized that 30 yrs is a LONG time to be the money guy.

When you stop being a partner you may have breached your K

Page v. Page

B. The Consequences of DissolutionPrentiss v. Sheffel

Pav-Saver Corporation v. Vasso Corporation

C. The Sharing of LossesKovacik v. Reed

D. Buyout AgreementsG & S Investments v. Belman

6. Limited partnershipsLimited partnership agreement writing is MANDATORY

If you want to enjoy limited liability of limited partnership, you need CERTIFICATE and a WRITING.

Certificate:Name of limited partnershipGet name from client “XYZ”Check sec state site to see if name is taken or not prior to filing.But also check TRADEMARKS nationwide! Could get a surprise cease and decist letter.

Holzman v. De Escamilla

III. Chapter 3 The Nature of the CorporationSeparates ownership from control.Draw little chart:

Need to file certificate of formation. In MA called “articles of organization”

Owners enjoy limited personal liability.Limited Partners CANNOT participate in management. BUT not the case in corps.Owners CAN manage and it won’t destroy limited liability.

Delaware General Corp Law§102 – Contents of “birth” certificates (SRF term)§ 141(a) – The business and affairs shall be managed by the board of directors.

“the inmates are running the asylum”

“Closely Held” Small number of shareholders

C Corp vs S. Corp

S.Corp= small number of shareholders. $ flows to the shareholders who THEN report on their taxes.

Closely Held Privately Held Publically traded[Duty of shareholders changes depending on which one you’re classified as]

Privately HeldNo fiduciary duty. Just need to show “legitimate business purpose” and not solely to

oppress other shareholders.

Closely HeldShareholders have fiduciary duty to other Shareholders (Not in DE tho)

MA recently enacted benefit corp—see handout?? Huh?But typically going to be looking at for-profit corp statutes.

What happens if you agree /K with a corp before they file?[Southern-Gulf of Main v. Camcroft] – these business deals prior to incorporation are called promoters.

1. Promoters and the Corporate EntityIf you have done pre-incorporation contracting. There are ways to make these into Corp dealings.

1. NovationSlim chance…the big guy in contract will want to keep you signed under personal.

2. Indemnification: indemnify person as promoterCan be done by a board vote, by the corporation

What if Corp doesn’t have money? You can still go after person.

Southern-Gulf Marine Co No 9 v. Camcraft, IncBarrett Boat - - - CamcroftSouthern Gulf to be formed in TexasAt time of K, no corp. Barett DBA so. Gulf.

- would have individual liabilityBarrett signs personally AND as “president”

De Jure CorpAt time of K, SoGulf was NOT a de jure corp. BUT maybe Corporation by ESTOPPEL

SoGulf eventually incorporates in Caymans. No objection from Camcroft.Shit goes down.Camcroft NOW says “this entity didn’t exist! This is not who we Kd with”Also: there is such a thing as a “de facto corp”

Not going to let some third party ministerial error be used to deny corp status.

Once we’re in equity court…under the discretion of the judge.

2. The Corporate Entity and Limited Liability

Why would you want to separately incorporate something? Risk Management!Chart:

Walkovsky v. CarltonCarlton owned 10 corps, 100%*Shareholder can only lose what they put into corporation.

They are all engaged in the same business. 2 cabs, minimum insurance.Corp1 ----- tort claimant. Clear that he can sue this corp 1, but how about the other 9 corps? Can they get to Carlton personally?

If this was partnership…tort claimant would be golden.

Have to pierce the corporate veil.But state statute sets public policy as to what happens

But if you find shareholder treats corp as private piggybank, then you can pierce.

P wants to look at all 10 corps as a single enterprise.

But no single bank account, no single accounting records, etc etc

Sea-Land Services v. Pepper Source (REVERSE PIERCE)Pepper Source stiffs sea land on freight cost.Diagram!

Marchese has basically rolled his entire life into the corporation.OK…even if we pierce down to him, he’s got nothing! Now reverse pierce back

up.

How to reverse pierce?1. Unity of interest and ownership that the separate personalities of the corp and the individual (or other corps) no longer exist.2. If we don’t reorganize them as one, then there is fraud/injustice.

_____

Liability of Owners (of a business)Draw chart:

Roman Catholic Archbishop of San Francisco v. SheffieldREAD

In re Silicone Gel Breast Implants Products Liability LitigationPossible for a corp to own the shares of another corp.

If one owns 100%, then we have a “parent corp” and a “subsidiary corp”NOT REQUIRED to own 100%....sometimes parent and subsidiary can file

together even if Not 100%. For tax/accounting purposes. Called “consolidated return”Need 50% or more tho.

Long periods w/o board meetings. Didn’t even do its own deals. Bristol did in its name. Same minutes.Parent Co also set employment policies

Facts and circumstances test 195Common directors

Common business departmentsConsolidated financial statementsParent finances the subParent caused the incorporation of subGrossly inadequate capital of the subParent pays the salaries and expensesSub gets all business from the parentParent uses the sub’s property as ownDaily operations are co-mingledNo separate books, minutes, etc.

*general rule: courts are more sympathetic to piercing the corp veil with tort claims than K claims.

Tort claimants don’t pick who injures them.

Frigidaire Sales Corporation v. Union PropertiesMap out chart:

P says M and B can’t be both General Partners AND Ltd Partners!Court says: NO, that’s OK.Here the Ltd partners did NOT ACTUALLY engage in Management in their Ltd partnership capacity._________

Rights of Owners: Chart!

What tool is available to shareholders to encourage Directors to do or not do certain things?Voting yes…but what else?? (voting is not all that powerful).Shareholder suits! (direct and Derivitive)

3. Shareholder Derivative SuitsDirect and DerivitiveDirect: Shareholder has sued a director – you have harmed me specifically.

Derivitive: No alleged specific harm for himself.“I’m stepping into shoes of corp. and I’m suing ON BEHALF of corp”

- Any recovery goes to corp.this “encourages directors to do the right thing”

DE Corp StatuteAbility of shareholders to sue derivatively sometimes incorporated into corporate. Statute.Sometimes in Civ. Pro.

Success is very very rare

Policy: 1. Management authority is restored in Directors- Shareholder suits intrude on this2. Shareholders are viewed as putting $ in

Right to get information – inspectionRights are Very Limited.

Have to plead with particularity (more than notice pleading) . Hard to w/o info.

[One requirement of filing derivitive suit—NEED to plead w/ particularities. NOT notice pleading]

DE Law §220Inspection of books and recordsHow do shareholders find out info so that they can plead with particularity.

(a)(1) Stockholder(b) What rights stockholder has in order to get access and make copies of various docs.“other books and records” how does your state define this??

For a long time MA “records” did NOT include financial information.Need “proper purpose” how s THIS defined?

Hurdles: 1. Sue w/ particularity2. Limited rights to access to books/records/info

Model Business Corp (IS NOT a statute, like a restatement)§16 (p263)Gives broader rights to shareholders, but some of it is still vague.

DE Corp Law§141 Directors Powers

Conduct/manage affairs of corp.Remember, derivative suits are brought on behalf of corp. So these essentially are intruding on role of directors.

[MA, in closely held corp. shareholders can elect NOT to hire directors have a democracy—has its problems. Not many of these entitites)

DE Corp: Standard imposed on directors? has been developed through case law.ContraMBC §8.30

Statutory duty for directors.GOOD FAITHReasonably believes to be in the best interest of the corp.

Directors:Decision making function + Oversight FunctionBoards have a preference to mentor instead of monitoring.

A. IntroductionCohen v. Beneficial Industrial Loan Corp

Eisenberg v. Flying Tiger Line, IncMerger: Like a marriage

[Corp A] <--(merge)--> [Corp B]| | | | |Shareholders <------ Shareholders (go to corp A)

Shareholders of B are issued shares of A.P here is arguing that Merger was a “power play” move to dilute shareholder’s (Ps) voter rights.CHART:

Shareholders are “residual claimants”…creditors get paid BEFORE shareholders.Having real assets in the company is good—something to liquidate. But now that it’s just a holding company…shareholders (Eisenberg) are pissed.

Directors can recommend merger but need shareholder approval…they got it! 2/3 vote. Via proxy document…that’s OK.

Derivative Suit chart (again):

Test p207: Whether object of lawsuit is to recover on action belonging directly to stockholders OR to whether it is to compel the performance of corp. acts which good faith requires the directors to take in order to perform their duty.

Post a bond: Many states require Ps to post a bond.

Strike Suits: Hippies in the 60s would buy 1 share and start filing derivative suits. Professor: “Legislature says ‘Get out of here you damn hippies’”

Legislature 1. Who is a “shareholder”2. Post a bond.

B. The Requirement of Demand on the Directors

Grimes v. Donald

[DSC communication - - - - - Board of DirectorsPublically traded CO] - - - - - CEO Donald| | || Shareholders|K with Donald

DSC in K w/ Donald:- K to go until his 75th bday, some provisions to nice benefits if he is unfairly

terminated.- * Can activate these benefits if he feels he’s being unfairly treated.

K says: Donald is responsible for managementStatute says “the BOARD” is responsible for management! [oh-oo]

Huge economic disincentive to monitor…because as soon as they say “ya but…” Donald is going to do something to them?

Grimes is shareholder:Sees this and says “I’m unhappy” because

1. Board has abdicated their management role(direct);2. Waste (the compensation package) (derivative).

Should there be brought as direct? Or Derivative?Boards do AND CAN delegate management power

BUT, grimes says that it’s complete abdication. Because if there is any monitoring…Donald is going to say “terminate them!”

[Is this direct or derivative?]Court says it’s a direct claim.

Waste, due care, excessive compensation are derivative/Abdication is direct.

Court: Grimes did not plead with enough particularities. (Bottom p 213)“The Business Judgment Rule!”

1. Courts give great deference to directors; courts feel ill equipped.From this flows “The business judgment rule”

So long as you have made a judgment that s not tainted by fraud, bad faith, or illegality, self interest….then it’s OK!So abdication fails.

2. Waste (excessive comp)This is a derivative action.“Demand Requirement”Shareholders must put demand on directors.

Why? Better to solve disputes w/in corp first…maybe directors “didn’t know”.

If they fail to make demand: must allege w/ particularity that demand is futile.1. Maj of board has material financial or material interest;2. Maj. Of board is incapable of acting independently;3. Underlying the action is not the product of a valid exercise of business

judgment.

Once you do that, you’re arguing that the decision is not protected by Business Judgment Rule.

Need to prove fraud/illegality.

Who’s Corp is this anyways?2 schools of thought.1. Shareholder Primacy School – shareholders are true owners

2. Director Primacy School (majority of jurisdictions). If shareholders don’t like it, they can get off the bus.

§220 of DCL:

Shareholder suits chart (again):

By making demand, you are saying that there is no personal interest.[rare that shareholders make demand]

Marx c. Akers[IBM] - - - - - - - - - - - - - - Board of Directors 18(pub traded) __________|___________

| |Outside (15) Inside (3)

Inside Directors: People who ALSO serve as executive managementThey know a LOT about the co.

Outside Directors: People who only serve directorilyNot serving as management AT THAT company…but could be serving as management somewhere else

What is shareholder complaining of here? Dervative. Excessive compensation to: Executives and Directors.

No demand by Shareholder: argue that it would be futile – majority of directors have an interest.

Purposes of Demand:1. Maybe directors didn’t know it2. Protection from harassment suits3. Discourage strike suits.

If outside directors say “in favor” they don’t have self interest.

Demand 2 prong test:1. Demand was excused (outside director voting) – so OK lower court was wrong to dismiss.

2. But now have to prove that actions that directors took constitutes “corporate” waste.Assume shareholder survives both prongs of Demand test…not have to deal with THIS.???wtf

Role of Special Committees

C. The Role of Special CommittesAuerback v. Bennett[GTE(pub traded) ] - - - - - Board

| - - - - - Executive Management|

Plaintiff – Auerbah Shareholder? Alleging that directors committed bribes/kickbacks

Management begins report – supply that to board.Board – they do their own using William Cutter and Arthur Anderson

- publically traded company.-- This is how Auerbach learns of the doings, institutes derivative action.

Board is 15 members.Action is only brought against 4 directors.

NO demand is given – files complaint. Successful.

Board forms a Special Litigation Committee3 people – outside the original 15 + outside counsel.They found kickbacks etc. But nonetheless, they decided to dismiss.

What does P say?

The 3 SLC members are NOT disinterested because they were appointed by board.

court says No. Taint does not flow from tainted group to new group.

What is the standard?-Court CAN look at reasonableness of methods/Procedures also can look into the prejudice/bias of members; but-Substantive decision of Committee is protected by the Business Judgment Rule.

Zapata Corp v. Maldonado[Zapata Corp] - - - - - Board| | | - - - - - Executive ManagementShareholders

Breach of Fiduciary Duty – No demand.All directors are named as Defendants and Participate in Acts alleged.

How many directors at time of bad acts? 10 DirectorsSLC – 2 new directors (No taint per Auerbach case)

Committee says dismiss (shocker)p.236 Adds 3rd element to SLC.

The Court reserves the right to determine whether or not a reasonable person could come to same decision.

Seemed to be doing away w/ BJR.

_______

Chart!

In Re Oracle Corp v. Derivative LitigationSee book notes.

DE corp Law 141(e). Direcotrs allowed to rely on managerial reports.

4. The Role and Purposes of CorporationsA.P. Smith Mfg. Co. v. Barlow

[Corp] - - - - - - Board of Directors||Shareholders – want corp to use their money to make money (shareholders in general)

1930 Statute: allows board to make judgments including philanthropic.Justh as to be in furtherance of corp. ----VERY BROAD.

“Corporate Social Responsibility”“Benefit Corps” give even stronger protection to boards who are donating $$ - puts shareholders on notice.

Dodge v. Ford Motor Co[Ford Motor Co] - - - - - - - - - - - - - - - - - - Board| | | (paying Dividends is decided by the board)| | Shareholders| Henry Ford (58%)Dodge Bros (10%)

Board decides:1. No Special Dividends2. Increase Worker’s Salaries3. Expand their plant AND lower cost of Model T

Dodge Bros are pissed, they sue.Saying that these actions are inconsistent with mission/purpose of organization.

Doge wins: - That dividend has to be paid BUT the rest they lose on! Henry’s purposes are good.

Shlensky v. Wrigley (baseball)Whatever board decided, we uphold. Unless Fraud, illegality or self dealing.Decided not to electrify lights.

OK. Business Judgment Rule

IV. Chapter 4 The Limited Liability Company1. Formation

Water, Waste, and Land d/b/a Westec v. Lanham

2. The Operating AgreementElf Atochem North America inc v. Jaffari

Fisk Ventures, LLC v. Segal

3. Piercing the “LLC” veilKaycee Land and Livestock v. Flahive

4. Fiduciary ObligationMcConnell v. Hunt Sports Enterprises

5. Additional CapitalRacing Investment Fund 2000, LLC v. Clay Ward Agency, Inc

6. DissolutionNew Horizons Supply Cooperative v. Haack

V. Chapter 5 The Duties of Officers, Directors, and Other Insiders1. The Obligations of Control: Duty of Care

Kamin v. American Express CompanyDiagram:

Board decides not to sell these new shares from DLJ…but distributes them down to shareholders in form of dividend.

Shareholders have a problem with this. Better NOT to sell. If you sold shares…it would be a loss…could use it as a tax deduction.

So they sue derivatively.

Court: No cause of action! No fraud alleged, self dealing, illegality, etc.The decision is protected by the Business Judgment Rule.

Why BJR?Court not in right place to manage corpsIf directors are always successfully sued…not going to get qualified people to serve in that capacity.

__________

Leverage Buy Out:Could be any 3rd party

Management Buy Out:LBO being lead by Sr. Management

Both are essentially the same kind of Transaction.

Put own cash down, then borrow $ from the assets of the company they’re using to secure loan.

Using assets to secure loan from Bank…it’s a secured transaction…great deal!

Smith v. Van Gorkom

Trans Union corp diagram.

Publically traded stock prce is value for a minority share. Majority position is going to be more $!

Outside directors were CEOs elsewhere—do they have a bias for their CEO? “He’s like me”

Gorkom is 65 and is reaching mandatory retirement age. 38$/sh, maybe I can structure a better deal.Talks to senior management

- initially wants to do a management buy out. 38-50/share.- Van G wants 55

Van G meets with social acquaintance – Pritzer.At this point, no discussions with board about putting company up for sale (maybe just a few in Management)

Van G is the one who decided 55….no real appraisal.Just a # that’s good for him.

“Stocking Horse”: Pritzer worried about someone else coming in and saying …56 a share!

Solution: Give me the option to buy at Market Price (38!) Right before the deal goes down. Then I’ll sell it to the guy who bout at 56.

VG and P have met 3x – really decided what deal would be.Then calls special meeting of Board. (Sr. Management reaction was completely

negative). At board meeting, no memo or info, just 20 minute oral presentation.

Not even a copy of the merger agreement OR summary thereof.Board doesn’t know details of writings (there are none)

No methodology for arriving at 55 or the fact that he proposed the amount.

Meet again next day.Board approves the merger. Signs the agreement at formal social gathering.

1st merger agreement did not provide that transunion could continue to accept offers…amended so that they could.

Is this protected by Bus Judgment Rule?Presumption that Directors acted on informal basis in good faith and in the honest belief that the action taken was in the best interests of the co.

P317: Board did NOT adequately inform themselves on price and why co. was up for sale.

Accused of “Rubber Stamping”.-uninformed as to intrinsic value of co.

advisable to get someone to appraise?-at minimum, grossly negligent

DE corp law 141(e): can rely on reports from management and outside experts.OK, what is “report from management”Here VG lacked substance, uninformed about same doc that he wanted board to sign.

This Court is a little more strict than most DE Courts. Can’t follow management blindly, holds directors liable.

By Submitting it to shareholders (Ds thing good argument) they are abdicating their responsibility. – no excuse for not inquiring into the deal more.

*After case: Legislature acted! DE Corp Law: §102(7)Exculpates directors for any personal liability for breaking their duty of care!

Really, all this case did was set forth PROCEDURES..if you follow them you’re golden.Get outside expertBoard meeting for longer than 20 minutes

Francis v. United Jersey BankOn call

2. Duty of LoyaltyA. Directors and Managers

Directors have duty of care and duty of loyalty

Bayer v. Beran[Calanese Corp] - - - - - - Board| - - - - - Senior Management|Wife—Senior management

K for advertisement…who might be singing - - The wife!Shareholder alleges…breach of loyalty.

Husband approving the K $--> wife*Self dealing?

Duty of loyalty claims:(1) heightened scrutiny;(2) Have to prove inherent fairness/good faith

- that K is normal, no different than it would be with anyone else

Court holds: This is OKLegitimate interest, and terms are inherently fiar (any other 3rd party would get no less/no more).

This was very informal…not really collective approval.But still allow it. The informal action of talking around bubbler is OK..

Why? Look at the nature of corp...very informal, everyone knows eachother.

Standard for Law firm, Chart:

Fiduciary Duty Chart

Benihana of Tokyo v. Benihana, IncDiagram:

Hire someone – investment banker – “here are your financing options” * recomments issuance of convertible preferred stock.Also issues a “board book”

Abdo – serves on board of Benihana AND Beneficiary Finance Corp. – sold to him (BFC)

*Now, instead of BOT owning 50.96%...they own 36.5%

Rocky/Stepmom are pissed. They sue.

1. Fiduciary DutiesHere, had outside expert, AND board books etc.

(unlike smith v. van gorkom)

So OK!

OK how about Abdo serving on Board of Benihana and BFC?Court looks at: Majority of Disinterested directors voted for it.1. Full board knew it (disclosure)2. Disinterested directors approved!

C – corp equity chart

Common vs Preferred StockPrioritizes residual between shareholders.After creditors then to preferred then to common.

You can give preferred certain heightened voting rightsLook to articles of org.Section on capitalization

B. Corporate OpportunitiesBroz v. Cellular Information Systems, Inc

In re eBay inc Shareholders Litigation

C. Dominant ShareholdersSinclair Oil Corp v. Levien

Zahn v. Transamerica Corp

D. RatificationFliegler v. Lawrence

In re Wheelabrator Technologies inc Shareholders Litigation

3. The Obligation of Good FaithA. Compensation

In re The Walt Disney Co Derivative LitigationB. Oversight

Stone v. Ritter

SKIP!!!!!!!! A bunch of stuff!

VI. Chapter 6 Problems of Control1. X2. X3. Control in Closely Held Corporations

Ringling Bros – Barnum and Bailey Combined Shows v. Ringling

McQuade v. Stoneham

Clark v. Dodge

Galler v. Galler

Ramos v. Estrad

4. Abuse of ControlWilkes v. Springside Nursing Home

Ingle v. Glamore More Motors Sales Inc

Brodie v. Jordan

Smith v. Atlantic Properties

Jordan v. Duff and Phelps Inc

5. Control Duration and Statutory DissolutionAlaska Plastics v. Coppock

Haley v. Talcott

Pedro v. Pedro

Stuparich v. Harbor Furniture

6. Transfer of ControlFrandsen v. Jensen-Sundquist Agency

Zetlin v. Hanson Holdings

Perlman v. Feldmann

Essex Universal Corporation v. Yates

VII. Chapter 6 Problems of Control