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188 Cards in this Set
- Front
- Back
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Principal/Agency Relationship - Rstmt. 2nd §1 |
An Agency relationship exists where: 1. one person (the principal) consents that another (the agent shall act on principal's behalf 2. Subject to the principal's control 3. The agent consents to so act
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Three Prong Test |
1. Manifestation of consent by Principal 2. Subject to Principal's control 3. Consent by Agent |
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Gorton v. Doty |
Football coach drove teacher's car. Car was in accident and player was hurt. Issue: Whether coach was acting as an agent of teacher Held: Yes, because P/A relationship was established when agent coach consent to act on behalf of teacher to drive her car and teacher asked coach to drive the car. Teacher also instructed that only the coach drive so there was control by teach, principal in this case. |
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Lessons from Gorton |
* No contract or consideration is required to form a P/A relationship *Intent to form a P/A relationship not required *Potential for P/A relationships in many circumstances |
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Advice for Doty |
1. Enter into an agreement describing the arrangement as a loan 2. Exert either more (drive the car yourself) or less (don't tell coach only he can drive) control over the coach 3. Don't lend the car at all
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Gary Jense Farms v. Cargill |
Warren purchased grain from farmers for re-sale. Cargill financed Warren. Cargill had significant control over Warren and it's operations (approval over large expenditures, approval over stock sale, approval over large withdrawals). Warren sold majority of its grain to Cargill. Warren had financial problems which worsened until P's questioned Warren's ability to make payments. P's brought suit against Cargill claiming they were a Principal or Warren. Issue: Whether Cargill, through it's control and influence over Warren, became liable as a principal Held: Yes. Cargill consent to be a principal once Warren agreed to implement the changes and policies Cargill suggested. Cargilll's subsequent internal operations further established relationship |
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When Does a Creditor Become a Principal? Rstmt. §14 O: |
At the point at which it assumes de facto control over the conduct of the debtor. Ex. Cargill's behavior became de facto when: - Cargill made recommendations via telephone - Cargill's right of first refusal on grain - Warren's inability to make financial decisions without Cargill's permission - Cargill's right of entry onto Warren's premises - Cargill's financing and power to stop financing Warren
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Supplier or Agent? Rstmt. §14 K |
On who contracts to acquire property from a third party and convey it to another is the agent of the other only if it is agreed that he is to act primarily for the benefit of the other and not for himself. Fact Indicating Supplier: that he is subject to a fixed price for the property irrespective of the price paid by him |
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Advice to Cargill |
- Draft documents so they do not suggest de facto control - Never make loans to operators you are purchasing from - Take more or less control over the operators you lend to - Keep the status quo, and recognize that law suits like this are a cost of doing business |
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Principal Liability in Contract Rstmt. 2nd §144 & Rstmt. 3rd 6.01-6.03 |
2nd: A principal is subject to liability upon contracts made by an agent acting within his authority if made in proper form and with the understanding the principal is a party
3rd: agent with authority can bind a principal to a contract |
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Actual Authority |
Focuses on Agent's reasonable interpretation of Principal's manifestations |
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Actual Express Authority |
Rstmt. 3rd §2.01: An agent acts with actual authority when the agent reasonably believes that the principal wishes the agent so to act |
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Actual Implied Authority: Rstmt. 2nd §35 |
Unless otherwise agreed, authority to conduct a transaction includes authority to do acts which are incidental to it, usually accompany it, or are reasonably necessary to accomplish it. |
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Actual Implied Authority: Rstmt §2.02(1) |
An agent has actual authority to take action designated or implied in the principal's manifestations to the agent and acts necessary or incidental to achieving the principal's objectives. |
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Mill Street Church or Christ v. Hogan |
Bill Hogan was hired on several occasions by the church to paint. During prior occasions Hogan would hire his brother to help. The church asked Hogan to hire Gary Petty instead this time, but warned he was hard to get a hold of. Hogan tried to reach Gary to help with a particularly difficult portion of the church to paint and couldn't reach him. Hogan then hired his brother instead. His brother fell and broke his arm. The church paid both of them and said they had insurance. Issue: Whether Hogan was an agent of the church such that he had implied power to hire his brother. Held: Yes. Bill Hogan was an agent and could hire his brother because doing so was "incidental" and usually accompanied Hogan's work. He had hired his brother before. It was also reasonably necessary because this portion of the church could not be paid alone and Petty was not reachable. |
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Apparent Authority |
Focuses on 3rd party's reasonably interpretation of Principal's intent traceable to Principals manifestations |
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Apparent Authority: Rstmt. 2nd §8, 27, 159 |
§8: Apparent authority is the power arising from the principal's manifestations to such third person §27: Apparent authority is created by written or spoke words or other conduct of the Principal which, reasonably interpreted, causes 3rd person to believe Principal consents to have acts done on his behalf §159: A disclosed or partially disclosed Principal is subject to liability upon contracts made by agent acting within his apparent authority |
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Apparent Authority: Rsmt. 3rd §2.03 |
Apparent authority is the power held by an agent to affect Principal's legal relations with third parties when a third party reasonably believes the actor has authority to act on behalf of the principal's manifestations. (Focus is on 3rd party's interpretation of Principal's intent traceable to his manifestations) |
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Types of Principals |
Rstmt. 2nd §4 & Rstmt. 3rd §1.04(2) 1. Disclosed 2. Partially Disclosed (2nd)/Unidentified (3rd) 3. Undisclosed
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Manifestations that reveal apparent authority |
1. Principal says "wear this hat with the company named on it because you are my agent" 2. Principal says to 3rd party "Deal with X they're my agent" 3. Agent says to 3rd party "I'm X Company's agent, look at my company hat" |
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Three-Seventy Leasing Corporation v. Ampex Corp. |
P was a leasing company that approached D company's representative, Kays, to purchase computer hardware. P was going to act as middle-men between D and a second purchaser of the hardware that P found. D's submitted an unsigned purchasing agreement to P, and P signed the agreement. Kays followed the exchange with a letter indicating part of P's order would be shipped directly to the second purchaser. Issue: Whether Kays entered D intro a contract with P under an apparent authority? Held: Yes. It was reasonable for P to rely on Kays, a salesman, to conduct a sales transaction with P/ D agreed to continue negotiations through Kays and any evidence to demonstrate Kays did not have that authority was never relayed to P. |
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Advice for Ampex |
- Train your agents to and give notice to potential third parties - Require approval from contract manager on all form contracts |
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Inherent Agency Power |
Rstmt. 2nd §8A: IAP is a term used in the restatement of this subject to indicate the power of an agent which is derived not from authority, apparent authority or estoppel, but solely from the agency relationship that exists for the protection of persons harmed by or dealing with a servant or other agent. |
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Inherent Authority in an "Undisclosed Principal" |
Rstmt 2nd §195: An undisclosed principal is subject to liability to third persons with whom the agent enters into transactions with usual in such business |
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Inherent Authority in an "Undisclosed Principal" |
Rstmt 3rd §2.06(1): An undisclosed principal is subject to liability to a third party who is justifiably induced to make a detrimental change in position by an agent acting on principal's behalf and without actual authority if the principal, having notice, did not take reasonable steps to notify them of the facts. |
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Policy Rationales for IAP |
1. Prevent Mischievous consequences 2. Shift loss to low cost avoider |
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Watteau v. Fenwick |
D owned a hotel/pub that employed Humble to manage the establishment. Humble was the exclusive face of the business, his name was on the bar and license of the pub. D explicitly instructed Humble not to make any purchases outside of bottled ales and waters, but Humble contracted to buy cigars and bovril. P discovered that D was the actual owner and brought an action to collect from D. Issue: Whether D is liable for damages resulting from an agreement between P and Humble who is knowingly acting outside his actual authority as an agent for D. Held: Yes, D liable. Humble was acting with an authority that was inherently reasonable for an agent in that position. Policy: Watteau reasonably expected that she was dealing with an entity that owned and operated a bar, not just with a bartender on his own. There would have been no liability under Rstmt. 3rd though because Fenwick had no notice. |
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Ratification: Rstmt 2nd |
§82: Ratification is the affirmance by a person of a prior act which did not bind him but which was done or professedly done on his account, whereby the act is given effect as if originally authorized by him. §89 If the affirmance of a transaction occurs at a time when the situation has so materially changed that it would be inequitable to subject the other party to liability thereon, the other party has an election to avoid liability. |
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Ratification: Rstmt. 3rd |
§4.01: Ratification is the affirmance of a prior act done by another whereby the act is given effect as if done by an agent acting with actual authority. §4.03: A person may ratify an act if the actor acted or purported to act as an agent on the person's behalf. |
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Estoppel |
Rstmt. 2nd §8B: A person who is not otherwise liable as a party to a transaction purported to be done on his account, is nevertheless subject to liability to persons who has changed their positions if: 1. He intentionally or carelessly caused such belief, or knowing of such belief he did not take steps to notify them of the facts 2.Change in position indicates payment of money, expenditure of labor, suffering a loss or legal ability |
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Agent Liability of the Contract |
Rstmt. 2nd §320: Unless otherwise agreed, a person making or purporting to make a contract with another as agent for a disclosed principal does not become a party to the contract -Comment a: the agent does not become a party to the contract merely because he is not authorized to make the contract and does not have the power to bind the principal, but it may in an indication of liability if contract is otherwise ambiguous and parties unknown.
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If there is a disclosed principal, no agent liability w/ two exceptions: |
1. Clear intent of all parties that agent be bound 2. Agent made contract but without authority and contract ambiguous |
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Atlantic Salmon v. Curran |
D held himself out to P as a representative for one or more principal's, all of them nonexistant or dissolved at some point. D gave false information regarding the princpal, but also maintained false titled, falsely advertised and did not properly maintain corporate filings. P's brought this action after D owed P's over $250k. D maintained that he was acting as an agent of a now dissolved corporation, Marketing Designed, Inc. Issue: Whether agent can be held personally liable if he does not disclose the principal to the other party Held: Yes, D personally liable. It is the duty of the agent to inform the other party who the actual principal is, or else the agent is liable (directly contradicts Watteau). |
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Atlantic Salmon Questions |
1. What if Market Designs, Inc. was a lawful corporation re-named? No liability to agent because principal was then disclosed and existed 2. Did the P get more than they bargained for? Yes, they get a claim against the agent, if P had existed and was disclosed they wouldn't have been able to sue Curran. 3. What should Curran have done? Operated under a valid corp., then no liabiliy |
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Liability of Principal to Torts Committed by an Agent |
Rstmt. 2nd §219(1): A master is subject to liability for the torts of his servants committed while acting in the scope of their employment |
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Master/Servant Relationship |
Rstmt. 2nd §2(2): A servant is an agent whose physical conduct is controlled or subject to the right of control by the master Rstmt. 2nd §2(3): An independent contractor is a person who contracts with another but is not controlled or subject to control of physical conduct. He may or may not be an agent. |
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Independent Contractor Types |
Agent Type: Subject to limited control by P with respect to the chose result but A has power to act on P's behalf
Non-Agent Independent Contractor: Less control on P's part, but A has not power to act on P's behalf |
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Factors to consider in determining whether agent is also a servant |
Rstmt. 2nd §220(2) 1.Control the master may exercise over the details of the work 2. Whether or not the one employed is engaged in a distinct occupation or business; 3. the kind of occupation (usually done as a servant or independent contractor); 4. Skill required; 5. Who supplies the instrumentalities, tools and the place of work; 6. Length of time employed; 7. Method of payment; 8. Whether the work is part of the regular business of the employer; 9. whether the parties believe they are master and servant; 10. Whether the principal is or is not in business |
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Servant |
Rstmt, 2nd §220: a person employed to perform services in the affairs of another and who with respect to the physical conduct in the performance of the services is subject to the other's control or right to control |
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General Definition of Scope of Employment |
Rstmt. 2nd §228: w/in scope if and only if: kind of conduct he is employed to perform; within the authorized time and space; by a purpose to serve the master, at least in part; and if force is intentionally used by the servant against another, the use of force is not unexpected by the master |
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Factors to Consider if Unauthorized conduct is in scope of employment |
Rstmt. 2nd §229: consider whether: 1. The act is commonly done by such servants 2. time, place and purpose of the act 3. previous relations between master and servant 4. outside master's enterprise or not entrusted to servant 5. would master expect such as act, 6. similar in quality to authorized acts 7. instrument of harm furnished by master 8. extent of departure from normal authorized methods 9. whether or not the act is seriously criminal
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When is Principal Liable even if Outside the Scope of Agent's Employment? |
Rstmt. 2nd §219: when the master intended the conduct or the consequences, or the master was negligent or reckless, or the conduct violated a non-delegable duty of the master, or the servant purported to act or to speak on behalf of the principal and there was reliance upon apparent authority. |
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Humble Oil v. Refining Co. V. Martin |
Love left her car at a service station to get the brakes repaired. The station was operated by W.T. Schneider through a Commission Agency Agreement with Humble. Love did not correctly secure the car before handing control to the station, and the station did not check her car to secure it. Love's car rolled downhill, out of the station lot and into P's property, striking P and his two children. Humble maintained that they were not liable because Schneider was an independent contractor. Issue: Whether Schneider is an independent contractor or whether master/servant relationship existed. Held: Master/Servant relationship existed between Humble. Humble maintained considerable control over schneider by dictating several important aspects of schneider's business. Humble had significant financial control and supervision, rendering Schneider's station a retail marketing enterprise for Humble's products. |
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Hoover v. Sun Oil Company |
P's entered Barone's service station to fill their vehicle with gas. Smilul, an employee of Barone, negligently sated a fire while filing P's car. P's brought an action against the three D's to recover damages from the fire. Sun Oil contended that the facts indicate that Barone is an independent contractor and so Sun Oil was not responsible. Issue: Whether Barone is a servant of Sun Oil or whether he operated his own station as an independent contractor Held: Sun oil is not responsible for the negligence of Smilyk becuase he is an employee of Barone, who in turn in an independent contractor. No evidence to support master/servant. Barone controlled all day to day operations of the station. Although Sun Oil worked closely with Barone in several day to day operations, Barone was not required to follow Sun Oil's advice. Barone was also able to sell competing products if he wanted. |
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Humble vs. Sun Oil |
Sun Oil similar to Humble except the station owner in this case was considered to have more day to day control, such as setting station hours, and had the option to sell other products. Most assistance offered by Sun Oil was voluntary. Te court emphasized there was no evidence of a master servant relationship in the signed agreement between Barone and Sun Oil. |
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Arguello v. Conoco |
P's all alleged that they were discriminated by employees of Conoco gas stations. Incidents happened at Conoco gas stations and also at stations not owned by but branded as Conoco stations. Discriminatory behavior done by the station's employees to customers. There was a Petroleum Marketing Agmt in place between Conoco and the Conoco branded stores which made reference to treatment of customers and allowed Conoco to terminate the relationship. Issue: 1. Whether D established an agency relationship with the independently owned stations that would make D liable for employees actions; 2. Whether employees at D owned gas stations acted outside the scope of their employment when they discriminated Held: D did not estbalished master/servant relationship with Conoco branded, independently owned stations. The PMA was not ambiguous, there was plain language that described the relationship between D and franchisees as separate of any agency relationship. D never controlled day to day operations of the stores, Employees at D owned stores could have been working within the scope of their employment when they discriminated the customers. There was evidence employees were on the job performing transactions they normally handle. Extent of their departure from that is question for the jury. |
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Agent's Liability in Tort |
2nd §343: an agent who does not act otherwise is not relieved from liability by the fact that he acted at the command of the principal or on account of the principal
3rd §7.01: an agent is subject to liability to a third party harmed by the agent's tortious conduct |
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Agent's Fiduciary Duties to Principal |
Rstmt 2nd §376: The existence and extent of the duties of the agent to the principal are determined by the terms of the agreement between the parties. |
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Duty of Care and Skills |
Rstmt. 2nd §379: Unless otherwise agreed an agent is subject to a duty to the principal to act with standard care and with the skill which is standard |
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Duty to Give Information |
Rstmt 2nd. §381: Unless, otherwise agreed, an agent is subject to a duty to his principal to act solely for the benefit of the principal |
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Duty of Loyalty |
Rstmt. 2nd §387: Unless otherwise agreed, an agent is subject to a duty to his principal to act solely for the benefit of the principal |
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General Automotive Manufacturing v. Singer |
D was well respected in the field of work that he was engaged. P hired D, offering a salary plus a 3% commission. D helped P's business grow, but D reasonaed that P's shop was unable to fill some orders that required different machinery or larger capacity. D did not notify P of these orders and instead filled these orders himself through other machine shops, keeping all the profits from this sideline business. Issue: Whether he violated fiduciary duties? Held: Yes. Although P may not have been able to fill the orders under the shop's current capacity, D owed a duty to P to make P aware of the orders. The P could then decide whether they wanted to modify their shop to fill those orders. D agreed to act solely for P when he contracted with P. |
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Revocation and Renunciation |
Rstmt. 2nd: Authority terminates if the principal by revocation or the agent by renunciation manifests to the other dissent to its continuance |
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Effect of Termination on Apparent Authority |
Rstmt. 2nd §124A: Does not terminate apparent authority |
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Notification of Termination of Apparent Authority |
Rstmt. 2nd §136: Apparent Authority terminates when the third party has notice |
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Agent's Fiduciary Duties to Principal After Termination |
Rstmt. 2nd §396: Using confidential information after termination of agency, unless otherwise agreed, after termination of agency, the agent: 1. Has not duty to not compete 2. Has a duty not to use or disclose trade secrets, the agent is entitled to use general information, and the names of customers retained in his memory |
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Partnership Sources of Law |
UPA (1914) and RUPA (1997) |
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Differences between UPA and RUPA |
1. Mandatory v. Default Fiduciary Duties 2. Financial Consequences of Wrongful Termination |
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Partnership Definition |
UPA §6(1): A Partnership is an association of two or more persons who carry on as co-owners of a business for profit
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Formation |
UPA §7: In determining whether a partnership exists: 1. the sharing of gross returns does not establish a partnership 2. the receipt by a person of a share of the profits is prima facie evidence that he is a partner, but no such inference shall be drawn if profits were received in payment as wages of an employee |
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Revenues |
The amount of money that results from selling products or services to customers. Also know an sales, or more colloquially, Gross. |
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Profit |
Revenue less expenses (where expenses include taxes). Net, the bottom line. |
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Fenwick Factors of Partnership |
1. The Intention of the parterns 2. The right to share in profits 3. Obligation to share in losses 4. Ownership and control of partnership property 5. Contribution of capital 6. Right to capital on dissolution 7. Control on management 8. Conduct toward third parties 9. Right on dissolution |
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Fenwick v. Unemployment Compensation Commission |
Appellant, the Unemployment Compensation Commission, sought a review of the SC of NJ's decision to designate Respondent and Chesire partners. Chesire, a receptionist for Respondent's beauty salon, repeatedly asked for a raise from her fifteen dollars per week. Respondent was not certain if the amount of business would generate enough revenue to pay Chesire a higher salary. Respondent wanted to retain Chesire, so they entered into an agreement wherein Respondent would pay Chesire her salary plus 20% of the profits. In the agreement, the parties are designated "partners", but Chesire's duties never changed post-agreement. Issue: Whether Chesire is a partner or an employee in Respondent's shop Held: Chesire is an employee despite Respondent and Chesire's agreement that termed her a partner. The sharing of the profits is but one factor in determining whether a partnership exists. Court looked at other factors (Fenwick factors) . When court weighed those factors against against the parties' intent and the sharing of profits, the scales weighed in favor of employee. |
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Liaibilities of Partners to Third Parties |
UPA §15: All partners are liable, jointly for all debts and obligations of the partnership |
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Liability of Partners in Contract |
UPA §9: Every partner is deemed to be an agent of the partnership and the act of every partner carrying on in the usual way of the business binds the partnership, unless the partner has no authority and the person with whom he is dealing has knowledge of the that fact |
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Liability of Partners in Tort |
UPA §13: Where wrongful act or omission of any partner acting in the ordinary course of business of the partnership, the partnership is liable. |
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Fiduciary Duties Among Partners: UPA |
UPA §9: Default: Every partner is deemed to be an agent of the partnership. Rstmt. 2nd §376-396 apply.
Mandatory: - §20: Obligation to render true and full information on demand - §21: Must account for profits from any transaction connected with the partnership - §22: Each partner has a right to formal accounting |
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Fiduciary Duties Among Partners: RUPA |
Duty of Care, Duty of Loyalty, Information Duties, Ability to Modify Duties |
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Duty of Care: RUPA §404 |
(a) The only fiduciary duties a partner owes to the partnership and other partners are the duty of loyalty and the duty of care set forth in (b) and (c)
(c) Gross negligence, reckless conduct, intentional misconduct, or a knowing violation of the law is a violation of duty of care |
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Duty of Loyalty: RUPA §404 |
(b) A Partner's duty of loyalty to the partnership and the other partners is limited to: - account and hold as trustee any property, profit, or benefit derived by the partner in the conduct of the partnership, including a partnership opportunity - refrain from dealing as or on behalf of a party with an interest adverse to the partnership, and - refrain from competing with the partnership in partnership business before dissolution
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Information Duties: RUPA |
*Not fiduciary duties under the RUPA §403(a): maintain books and records §403(b): provide access to books and records §403(c): Furnish information unless not required to exercise rights and unreasonable
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Ability to Modify Duties under RUPA |
§103: Relations between partners are governed by agreement. Agreement may not: - unreasonably restrict access to books and records under §403(b) - Eliminate Duty of Loyalty under §404(b), but may identify types that do not violate duty of loyalty, as long as not manifestly unreasonable - Unreasonably reduce duty of care under §404(c) |
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Meinhard v. Salmon |
D, Salmon, entered into a lease for a hotel. D, while in the course of treaty with the lessor as to the execution of the lease, was in course of treaty with P, Meinhard, for the necessary funds. P and D were involved in a joint venture in regards to the property, for better or worse. D was the manager of the property. Near the end of the lease, Elbridge Gerry because the owner of the reversion, and he approached D. The two entered into a new lease, which is owned and controlled by D. D did not tell P about it. When P found out about the new lease, he demanded that the lease be held in trust as an asset of the venture between D and P, which D refused. Issue: When a partner appropriates the benefit of the partnership without making any disclosure to the other partner, will that act be a breach of loyalty? Held: Yes. Joint adventurers owe to one another the duty of the finest loyalty, while the enterprise continues. D held the lease as a fiduciary, for himself and another, sharers in a common venture. If he had revealed this fact to Gerry, Gerry would have laid before both of them his plans of a new lease. The preemptive opportunity that was an incident of the enterprise, D appropriated for himself in secrecy and silence. The fact that D was in control as the manager charges him with the duty of disclosure, since only through disclosure could opportunity be equalized. For him, the rule of undivided loyalty is relentless and supreme. |
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What was Cordozo's solution? |
Cordozo adds an extra share for Salmon. Cordozo says that the two were coadventurers, subject to fiduciary duties akin to those of partners, as to this we were all agreed. Joint adventurers, like co partners, owe to one another, while the enterprise continues, the duty of the finest loyalty. Not honesty alone, but the punctillio of an honor most sensitive, is the standard of behavior. |
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What could Salmon have done to satisfy Cordozo? |
Salmon might have warned Meinhard that the plan had been submitted, and that either would be free to compete for the award, the trouble about this conduct is that he excluded Meinhard from any opportunity to compete |
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Would disclosing the opportunity to Meinhard have allowed Salmon to proceed under RUPA default? |
RUPA 103(b)(3)(ii): all of the partners or a specified number in the partnership agreement may authorize or ratify, after full disclosure of all material facts, a specific act or transaction that otherwise would violate the duty of loyalty. |
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Meehan v. Shaughnessy |
P's were long time partners at D's firm. Both were very successful lawyers within the firm but because dissatisfied. Once P's decided to leave, they gave thirty days notice, took other attorney's from the firm with them and contacted referring attorney's and clients about their imminent departure and provided forms to clients to switch to P's new firm. P's denied their intentions to leave on several occasions. However, P's maintained their usual standard of performance during their entire association with the firm. When P's left, tey took 142 of 350 pending contingent fee cases. The partnership agreement provided for rights for each of the parties after dissolution that resolved allocation of business immediately. Departing attorney's were entitled to receive their share of capital contribution and net income currently entitled, as well as a right to a portion of the firm's unfinished business. Issue: Whether the conduct of P's violated fiduciary duty owed to the remaining partners of the firm Held: P's conduct regarding their secret planning for their new venture after their departure from the firm was not completely unacceptable. P's would have to engage in some initial planning for the new firm to ensure that they would have the necessary resources and know-how to start their own firm. Pre-departure planning would also be required to ensure that the needs of the clients were met with their new firm. However, P's conduct went too far concerning their retention of former clients. P's left D's at a disadvantage when they denied they were leaving and when they secured clients while D's were initially trying to game plan for P's departure. |
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Partnership Roles |
see next card |
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UPA §9 |
§9: Every Partner is an agent of the partnership §9(1): Every partner is an agent of the partnership for purposes of its business, and the act of every partner, including the execution in the partnership named of any instrument, for apparently carrying on in the usual way the business of the partnership of which he is a member binds the partnership, unless the partner so acting has in fact no authority to act for the partnership in a particular matter, and the person with whom he is dealing has knowledge of the fact that he has no such authority |
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UPA §18 |
§18(a): Each partner shall be repaid his contributions, and share equally in the profits and surplus remaining after all liabilities, including those to partners, are satisfied; and must contribute capital or otherwise, sustained by the partnership according to its share of the profits §18(b): Every partner can spend partnership money if reasonably incurred in ordinary and proper conduct of business §18(e): Partner's have equal rights to management §18(h): Difference in ordinary matters decided by majority |
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National Biscuit Co. v. Stroud |
Stroud and Freeman decided to dissolve their business 2/25/56. Several months prior, Stroud informed P that he was not going to be held liable for any deliveries made by P. P still made the deliveries to the business through Freeman's consent. After the business dissolved, Stroud agreed to liquidate the business's assets and discharge the debts, and Stroud ened up losing his own personal money in the process. Stroud disputed the money owed to P becuase he specifically requested that P not make any deliveries or else he would not be liable. Issue: Whether Stroud can be held liable for the deliveries that Freeman consented to but Stroud declined. Held: Yes. Partners are jointly and severally liable for the actions of the partnership. Freeman's conduct in allowing the deliveries was within the scope of business and he has a right to make decisions unless a majority of the partners vote to deny him of these rights. Since Stroud is only 1/2 of the partnership and not a majority, he is unable to precent Freeman from exercising his rights.
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Is Freeman personally liable to Nabisco for the cost of the bread? |
All partners are jointly and severally liable for everything chargeable to the partnership under §13 and §14. Authority would have to have been taken away by vote and Nabisco put on notice. If Freeman had only been an agent of Stroud's he would not be liable because there was no ambiguity, agent was working for a disclosed principal. |
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What could Stroud have done to protect himself> |
Gotten more votes to outvote Freeman or gotten an attorney to advise him to agree ahead of time with Freeman. |
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Day v. Sidley & Austin |
P was a senior partner with a long, distinguished career. P worked for D out of Washington D.C. D's executive committee inquired into merging with another firm, but partners not on the committee were not aware of deliberations. However, once the firm decided the merge, the proposed merger was brought to a vote for the partners at D firm. P voted in favor of the merger but was not aware that the firm intended on merging the Washington offices wherein her would share the chairmanship title with the former chair of the other firm. P argued that he had a contractual right to the title of chair of the washington office, and that title was intentionally kept from him when he voted in favor of the merger - and therefore would not have been a unanimous vote to merge - and no merger would have taken place. p argued that he was professionally humiliated by the title change. Issue: Whether D violated a fiduciary duty by changing P's title without his consent Held: D did not violate a fiduciary duty to P by their merger and subsequent title change for P. The partnership agmt that P signed authorized the executive committee to appoint members and chairpersons, so P was aware of the possibility of a co-chair. Also, D's decisions were not made to personally profit at the expense of the firm, and their fiduciary duty does not extend to what P proposes. Finally, even if P was aware of the title change, his vote against the merger would not have affected anything becuase a proposed merger only requires two majority vote unless specifically stated otherwise in the partnership agreement |
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Two Main claims of Day v. Sidley & Austin |
Fraud: Firm said no one would be worse off, dismissed because 1) not deprived of any legal right, and 2) could not have believed there would be no changes - GUTTENTAG SAYS THIS IS WRONG
Breach of Fiduciary Duty: Secrecy about merger consequences |
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How do you reconcile Sidley & Austin with Meinhard v. Salmon |
In Meinhard secrecy was working to disadvantage a partner, here secrets being kept as a matter of agreement - Day never had any right to control the merger
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What should either Day or Sidley & Austin done differently? |
- Day should have become an executive committee member - Sidley could have avoided litigation by not promising anything - Sidley partnership agreement not well drafted because of "provided however" language. |
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Termination of Partnership |
You always have the power to dissolve but not necessarily the legal right to dissolve. |
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Dissolution with power and right |
UPA §31: Dissolution is caused: 1) Without violation of the agreement between the partners (w/ power and right) (a) Termination of definite term (b) Express will of a partner when not definite term is specified (c)Expulsion of any partner in accordance with the powers conferred by the agreement between the partners
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Dissolution with power but not right |
UPA §31: In contravention of the agreement, where the circumstances do not permit dissolution under any other provision |
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Dissolution by Decree of Court |
UPA §32: On application by or for a partner the court shall decree a dissolution whenever: 1. A partner has been declared a lunatic 2. A partner becomes in any other way incapable of performing his part of the partnership 3. A partner so conducts himself in matters relating to the partnership business that is not reasonably practicable to carry on this partnership business with him 4. The business of the partnership can only be carried on at a loss |
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When dissolution is caused in contravention of agreement |
UPA §38(2): (a) Right to damages for breach - other partners may continue the business (a)(II): Partner who causes dissolution gets: - if terminated, remaining cash less damages - if continued, value of interest less damages, but value of good will not considered |
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UPA v. RUPA on Dissolution |
Terminology: UPA = Dissolution, RUPA = Diassociation
Good Will: Not deducted after wrongful dissolution in RUPA |
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Goodwill |
an intangible balance sheet asset. Goodwill may also represent intangible things such as an acquired company's excellent reptutation, its brand name, or its patents, all of which have real value |
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Dissolution |
UPA §29: The dissolution of the partnership is the change in the relation of the partners caused by any partner ceasing to be associated in carrying on. |
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Disasscociation |
RUPA §601: A Partner is disassociated from a partnership upon occurrence of any of the following events: 1) the partners express will 2) the event agreed in the partnership agreement |
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RUPA §801: How Partnership can Disassociate |
A Partnership is dissolved and its business must be wound up only upon occurrence of the following events: 1. in an partnership at will, the partner's express will 2. an event agreed in the partnership agreement |
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RUPA §701: Partner Buyout when Business Continues |
Business Continued and Buyout of disassociated partner: §701(b): buyout price is greater of liquidation value OR sale of entire business as going concern (includes good will value) §701(c): good will not deducted §701(h):buyout may be delayed |
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Order of Dissolution/Rules for Distribution: UPA |
§40(b): the following order is to be observed: 1. pay claims of the firm's creditor's 2. pay claims of a partner other than those for capital or profits (e.g. salary) 3. Pay claims of a partner for capital 4. Pay claims of partner for profits §40(d): Partner's shall contribute, as provided by 18(a), the amounts necessary to satisfy all liability in §40(b). |
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Repayment |
UPA§18(a): Each partner shall be repaid his contributions, and share equally in the profits and surplus remaining after all liabilities, including those to partners, are satisfied; and must contribute capital or otherwise, sustained by the partnership according to his share in the profits |
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Owen v. Cohen |
Respondent and Appelant agree to operate a bowling alley together. Respondent lent the business almost 7k to be repaid through profits of the business. As soon as the business started the partners had a poor working relationship. Appellant in particular contributed to the disharmony with numberous slights and constant badgering over the business affairs. Appellant went so far as to challenge the salary withdrawals from the business. Issue: whether Respondent offered a level of proof that would warrant a dissolution of the business Held: The evidence presented did support a dissolution of the business. A partner may move for a dissolution of the business when another partner's conduct negatively affects the business or another partner willfully or repeatedly breaches the partnership agreement. Appellant refused to do his share of the work required and talked of pressuring Respondent out of the business. Appellant also took money from the business above and beyond the agreed amounts. |
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What there an implied term in Owen v. Cohen? |
Owen was concerned his request for dissolution was in contravention of the agreement because he wanted to dissolve before the 7k could be repaid. Court finds their was an implied term but allows because of §32(1): partner conducts himself in a way that makes it not reasonably practicable to carry on |
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Implied Term |
When a partner advances a sum of money to a partnership with the understanding that the amount contributed was to be a loan to the partnership and was to be repaid as soon as feasible from the prospective profits, the partnership is for the term reasonably required to repay the loan. |
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Collins v. Lewis |
Appellant and Appellee agreed to form a partnership to run a cafeteria business together. The agreement stipulated that Appellant would provide the financial backing while Appellee would manage the business. Startup costs were twice as much as originally estimated, but evidence presented by Appellee showed that must of the overrun was due to unforeseeable external circumstances. Once the business was up and running, it failed to turn a profit, but Appellee presented proof that Appellant's interference in the management of the business played a significant role in the non-profitability. Appellant argued that because the business was unprofitable and because they were in hopeless disagreement that a dissolution of the business should be granted. Issue: Whether Appellant stated a cause for granting dissolution of the partnership. Held: The petition for dissolution should not be granted because the party petitioning for the dissolution is the only party that is not abiding by the partnership agreement. The agreement provided that Appellee would manage the business while Appellant would provided the financial support. Appellee convinced a jury that he was providing sound management, and any problems affecting the business were due to unforseen circumstances or due to Appellant's meddling in management. The court did not want to reward Appellant's behavior is granting dissolution - Since failed to get court dissolution Collins now has the power but NOT the right to dissolve |
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Where does courts refusal to grant dissolution leave Collins? |
He will have to sell the assets and then figure out damages he is liable for, repayment under §40(b) |
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What protection should Collins have requested? |
Should have set a limit on funds/budget |
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Collins vs. Owen |
In Collins, Collins was the bad guy and wanted out so the court didn't grant it to him, in Owen case Cohen was the bad guy so court let Owen out |
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Page v. Page |
The Page brothers each contributed $43,000 and started a linen supply business. For the first 8 years or so, the business was unprofitable and lost around $62,000. Just when business started to pick up, the plaintiff wanted to terminate the partnership. * D is arguing that the partnership was for a term, because if so, his brother wouldn’t have the power to dissolve at will.* “The understanding to which defendant testified was no more than a common hope that the partnership earnings would pay for all the necessary expenses. Such a hope does not establish even by implication a ‘definite term or particular undertaking’.” However, the court also noted that even though the Uniform Partnership Act provides that a partnership at will may be dissolved by the express will of any partner, this power, like any other power held by a fiduciary, must be exercised in good faith. |
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Debt v. Equity |
Owev v. Cohen dealt with debt which created an implied term, Page v. Page deal with Equity which does not create an implied term |
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Why didn't H.B.'s loan of $47k to the partnership in Page v. Page create an implied term? |
1. Third party loan 2. laon made after partnership had already began 3. payable on demand, no term |
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Prentiss v. Sheffel |
Sheffel and Iger sue for dissolution. Trial court finds partnership dissolved by freeze out, no bad faith, appoints receiver, and orders sale of property. Sheffel and Iger buy property for 2.25M. Prentiss appeals Sheffel and Iger purchase of partnership property. Held: Court said basis for dissolution was that a partnership at will was dissolved as a result of freeze out or exclusion of the D from the management and affairs of the partnership |
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Pav-Savor Corporation v. Vasso |
P had the intellectual property and know how for designing the machines, and D was responsible for the financing. The partnership agreement stipulated that P would contribute the relvant trademarks and patents, and that the agreement was permanent unless there is a mutual agreement between the two parties to terminate the partnership. The agreement also stated that in the event of termination, the terminating party would pay four times the amount the company made in 1974 fiscal year, with equal payments over a ten year period. The business operated at a profit, but an economic downturn made the business unprofitable. P moved to terminate the agreement. D took over the business, continued the use the patents and trademarks, and refused to reimburse P for the use of the property. P moved to reacquire the patents and trademarks, or alternatively to receive the value of the patents and trademarks. P also contested the liquidated damages as being unenforceable. D countered that the liquidated damages should be paid immediately rather than over 10 years. Issue: 1) whether P is entitled to intellectual property, or the fair market value of said intellectual property 2) whether P should be required to pay the liquidated damages immediately or over a 10 year period. Held: * 1) that the partnership agreement contemplated a permanent partnership, terminable only upon mutual approval;* 2) that the corporation's unilateral termination violated the agreement; * 3) upon the corporation's notice terminating the partnership, the attorney was entitled to continue the business pursuant to Ill. Rev. Stat. ch. 106 1/2, para. 38(2)(b); * 4) that the trial court did not err in refusing to return the patents and trademark to the corporation or assigning a good-will value; * 5) that the amount of the liquidated damages was not unreasonable and was a legitimate matter bargained for between the parties; and * 6) that the liquidated damages payout formula was enforceable and the doctrine of equitable setoff did not apply |
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Kovacik v. Reed |
Defendant labor partner appealed from a judgment of the Superior Court of the City and County of San Francisco (California), which ruled plaintiff financial partner was to recover from the labor partner one half of the losses of the venture. Held: * The court concluded that inasmuch as the parties agreed that the financial partner was to supply the money and the labor partner the actual work required to carry on the venture, the labor partner was correct in his contention that the trial court erred in holding him liable for one half the monetary losses.* The financial partner lost only some $ 8,680 - or somewhat less than the $ 10,000 that he originally proposed and agreed to invest. * The court concluded that the evidence to support the essential findings and conclusions had to be found in the settled statement, or the judgment must fall. It followed that the conclusion of law upon which the judgment in favor of the financial partner for recovery from the labor partner of one half the monetary losses was untenable, and that the judgment should be reversed |
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Is Kovacik holding consistent with statutes? |
No, Kovacik says a person who did the work doesn't have to bear the losses, only the person who put in the money. §18(a). Creates 2 possible rules: - Kovacik: All capital losses were to be borne by the capital partner alone - Statute: sharing of capital losses in accordance with sharing profits. |
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Corporations: Sources of Law |
1. Individual State Law - Deleware - Model Business Corporations Act (MBCA) 2. Federal Law - Securities and Exchange Acts - Sarbanes Oxley Act of 2002 - JOBS Act of 2012 - Primarily cover "public" corporations |
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Corporations: Legal Personality |
1. Separate legal existence from owners 2. Possesses some constitutional rights (freedom of speech but not privacy) 3. Separate taxpayer (corporate tax rate lower than personal) 4. Requirement of formal creation |
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Corporations: Limited Liability |
MBCA 6.22(b): Unless otherwise provided in the articles of incorporation, a shareholder of a corporation is not personally liable by reason of his own acts or conduct. |
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Unincorporated Limited Liability Company's |
1. Partnerships 2. Limited Partnerships 3. Limited Liability Partnerships 4. Limited Liability Limited Partnerships 5. Limited Liability Company's 6. S-Corp
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Limited Liability Partnerships |
General partnership with limited partner liability -Formed by filing a "statement of qualification" -Can convert to LLP |
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Limited Partnerships |
General and Limited Partner Must file documents to form Limited Partner Liability - only limited partners who participate in control can be held liability General partner has full personal liability - but a corporation can be a general partner |
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Limited liability limited partnerships |
Limited partnership in which general partners get limited liability |
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Limited Liability Company's |
File with state to form Most aspects of management and sharing dictated by operating agreement Two types: 1)member managed, all members are managers 2)manager managed, owners not managers and no right to vote |
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S-Corp |
Creation by tax code (actually a corp.) Advantage of pass through taxation and limited liability Disadvantages of constraints on number of shareholders, source of corporate income tax, types of shareholders, deductions on pass through losses. |
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Separation of Ownership and Control |
MBCA 8.01(b): All corporate powers shall be exercised by or under the authority of and the business and affairs of the corporation managed by or under the direction of its board of directors
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Capital Structure |
claims on the corporations assets and future earnings issued in the form of securities. - Debt securities + Equity Securities = capital structure |
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Securities |
Permanent, long term claims on the corporations assets and future earnings issued pursuant to formal contractual instruments |
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Enterprise Value |
Measure of the total value of the firm's assets implied by the trading value of the firm's stock (calculated by adding the market value to the firms obligations) |
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Two views of Equity Value |
Book Value: Measure of the equity value of the firm provided by the financial statement
Market Capitalization: Measure of equity value of the firm implied by the trading value of the firm's stock (determined by multiplying the trading value of one share of stock times the total number of shares outstanding) |
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Liquidity |
Secondary trading markets (E.G. NYSE, NASDAQ)
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Debt v. Equity in Corporate Funding |
- Have to pay back debt - Equity is when people invest money in the business your don't have to pay back - Investors usually expect some kind of interest in the profits/to own a large share of the company - Must have interest on any loan but it's tax deductible Equity + Debt = Firm Assets |
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Financial Statements |
Income statement: indicates results of operations over a specified period
Balance Sheet: Summarized the Company's financial position at a given point in time, normally at the end of each month or quarterly. - Describes assets of the business, and the claims on those assets, either of creditors or in the form of debt, or owners in the form of equity
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Authorized Shares |
Number of shares the corporation can offer |
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Outstanding Shares |
Number of shares the corporation has sold and not repurchased |
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Authorized but unissued shares |
shares that are authorized but not yet sold |
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Treasury shares |
shares issued and then repurchased by the firm |
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What is a share of stock worth? |
1. Determine firm's total value - liquidation value - value of future cash flows 2. Determine the firm's equity value - subtract obligations and liabilities from firm value 3. calculate equity per share - divide firm's equity value by the number of shares outstanding |
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What is the firm worth? |
One share of stock times the number of outstanding shares plus debt and other liabilities = value of firm assets |
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Efficient capital market hypothesis |
the price of stock reflects all available information |
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Steps to form a corporation |
MBCA 2.06 1. Pick a state 2. Draft Articles of Incorporation and By Laws 3. Organizational meeting/finalize directors 4. Adopt by-laws |
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Liability to third parties |
MBCA 6.22: a shareholder corporation is not personally liable for the acts or debts of the corporation except that he may become personally liable by reason of his own acts or conduct - shareholder losses limited to the amount invested - the corporation incurs the debt or commits the tort, they are the legal person |
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Piercing the Corporate Veil: Van Dorn Test |
1. Unity of Interest: - Lack of corporate formalities - Commingling of funds and assets - Treating Corporate assets as one's own - Severe under capitalization 2. Refusing to allow PCV would: - Sanction Fraud - Fail to promote justice |
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Walkovszky v. Carlton |
D was a shareholder in ten separate corporations wherein each corporation has two cabs registered in its name. A single shareholder for multiple corporations is a common practice for the cab industry. A cab from one of the D's corps hit P, and P brought this cause of action to recover. Each cab has only 10k worth of insurance coverage, which is the statutory minimum. P contends that D was fraudulently holding out the corporations as separate entities when they actually work as one large corporation. Issue: Whether D can be held personally liable for the acts of a corp. through the doctrine of respondeat superior if it can be shown that the individual used his control of the corporation for personal gain. Held: The P did not state a correct cause of action to recover from D. D would be held liable under the respondeat superior doctrine if he controlled the corp for his personal benefit at the expense of the corps benefit. P did not offer proof to make that claim, and instead offered proof that the ten corps operated as one large corp. The fact that the corps may have been one large corp, however, does not prove that D was controlling the corporations for his own benefit. *shows difference between enterprise liability and PCV |
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Enterprise Liability v. Piercing Corporate Veil |
To show piercing would have to show that Walkovszky and his associates are actually doing business in their individual capacities, shuttling their personal funds in and out of the corporations without regard to formality and to suit their immediate convenience.
To show enterprise liability that Carlton did not respect the separate identities of the corporations (assignment of drivers, use of bank accounts, ordering supplies etc.). In enterprise liability, the larger corp. is held financially responsible. |
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Sea-Land Services, Inc. v. Pepper Source |
Plaintiff delivered a shipment of peppers for Pepper Source, but they were not paid. Marchese was the sole shareholder of Pepper Source. Marchese was also the sole shareholder of several other corps, and he was a co-owner of an additional corp. P asserted the corps were shells wherein Marchese shifted money around the different entities to avoid creditors collecting from the corps. Evidence presented that shows Marchese treated the corporate accounts as his own personal accounts, and he frequently shifted money around Issue: Whether P can hold Marchese and each of his corps. liable Held: Yes, but P has yet to offer evidence to completely demonstrate that the corporate veil should be pierced. P satisfied first part of van dorn test but not second. |
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Limited Liability with Defective Formation |
De Facto Corporation: Treat improperly treated entity as corp. if organizers: - tried to incorporate in good faith - Had a legal right to do so; and - acted as if a corporation
Incorporation by Estoppel: Treat as proper corporation if person dealing with the firm: - Thought firm was a corporation - A windfall if allowed to argue that firm was not a corporation |
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Role and Duties w/r/t creditors |
Governed by Contract Law Legal Analysis Turns on: - interpretation of express terms - the implied duty of good faith and fair dealing No fiduciary duty to debtholders |
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Stakeholder Theory |
Argues that there are parties other than shareholders (employees, customers, supplies, financiers etc.) to be considered. |
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Shareholder Theory |
only owners are the shareholders of the company and they are the only important ones, the company has a binding fiduciary duty to put their needs first, to increase value for them. |
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Dodge v. Ford Motor Co. (not acting in shareholder's best interest) |
D corporation was the dominant manufacturer of cars when this case was initiated. At one point, the cars were sold for $900 but the price was slowly lowered to $440 - and finally, D lowered the price to $360. The head of D corporation, Henry Ford, admitted that the price negatively impacted short term profits, but Ford defends his decision altruistically saying that his amibition is to spread the benefits of the industrialized society with as many people as possible. Further, he contends that he has paid out substantial dividends to the shareholders ensuring that they have made a considerable profit, and should be happy with whatever return they get from this point forward. Instead of using money to pay dividends, Ford decided to put the money into expanding the corp. Rule: purpose of a corp, is to make money for its shareholders but a court will not interfere with the decision of a company's directors unless there is evidence of fraud or dishonest practice dishonest dealing. Holding: P are entitled to a more equitable sized dividend but court will not interfere. What relief were Dodge bros. seeking? to require Ford to issue special dividends and to enjoin construction of the River Rouge plant. * Shareholder theory is law so why do people argue for stakeholder? some argue it's for normative claim, rather than as a descriptive claim, courts give boards of discretion to determine means, and man times benefiting other stakeholders benefits shareholders; some state statutes incorporate stakeholder theory. *This case supports shareholder theory |
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Efficient Market Hypothesis |
Asserts that financial markets are informationally efficient. In consequence of this, one cannot consistently achieve returns in excess of average market returns on a risk adjusted basis, given the information available at the time the investment is made. |
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Kamin v. American Express Company (BJR) |
Defendants are the directors of the American Express Company. The complaint was brought derivatively by 2 minority stockholders asking for a declaration that a certain dividend in kind is a waste of corporate assets, directing the defendants not to proceed w/ the distribution, or, in the alternative for monetary damages. Issue: Whether P's can bring derivative action challenging the business decision of the director's corporation Holding: The court will not overrule a business decision of the director's of a company unless there is evidence of fraud or some other Standard of Care? Business Judgment Rule |
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Smih v. Van Gorkom |
Trans Union had large investment tax credits (ITCs) coupled with accelerated depreciation deductions with no offsetting taxable income. Their short term solution was to acquire companies that would offset the ITCs, but the Chief Financial Officer, Donald Romans, suggested that Trans Union should undergo a leveraged buyout to an entity that could offset the ITCs. The suggestion came without any substantial research, but Romans thought that a $50-60 share price (on stock currently valued at a high of $39 ½) would be acceptable. Van Gorkom did not demonstrate any interest in the suggestion, but shortly thereafter pursued the idea with a takeover specialist, Jay Pritzker. With only Romans’ unresearched numbers at his disposal, Van Gorkom set up an agreement with Pritzker to sell Pritzker Trans Union shares at $55 per share. Van Gorkom also agreed to sell Pritzker one million shares of Trans Union at $39 per share if Pritzker was outbid. Van Gorkom also agreed not to solicit other bids and agreed not to provide proprietary information to other bidders. Van Gorkom only included a couple people in the negotiations with Pritzker, and most of the senior management and the Board of Directors found out about the deal on the day they had to vote to approve the deal. Van Gorkom did not distribute any information at the voting, so the Board had only the word of Van Gorkom, the word of the President of Trans Union (who was privy to the earlier discussions with Pritzker), advice from an attorney who suggested that the Board might be sued if they voted against the merger, and vague advice from Romans who told them that the $55 was in the beginning end of the range he calculated. Van Gorkom did not disclose how he came to the $55 amount. On this advice, the Board approved the merger, and it was also later approved by shareholders. Issue. The issue is whether the business judgment by the Board to approve the merger was an informed decision. The Delaware Supreme Court held the business judgment to be gross negligence, which is the standard for determining whether the judgment was informed. The Board has a duty to give an informed decision on an important decision such as a merger and can not escape the responsibility by claiming that the shareholders also approved the merger. The directors are protected if they relied in good faith on reports submitted by officers, but there was no report that would qualify as a report under the statute. The directors can not rely upon the share price as it contrasted with the market value. And because the Board did not disclose a lack of valuation information to the shareholders, the Board breached their fiduciary duty to disclose all germane facts. Dissent. The dissent believed that the majority mischaracterized the ability of the directors to act soundly on the information provided at the meeting wherein the merger vote took place. The credentials of the directors demonstrated that they gave an intelligent business judgment that should be shielded by the business judgment rule. Discussion. The court noted that a director’s duty to exercise an informed business judgment is a duty of care rather than a duty of loyalty. Therefore, the motive of the director can be irrelevant, so there is no need to prove fraud, conflict of interests or dishonesty. |
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Management Buy Out |
A form of acquisition where a company's existing managers acquire a large part or all of the company from either the parent company or from the private owners |
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Leveraged Buy Out |
When a company or single asset (e.g. a real estate property) is purchased with a combination of equity and significant amounts of borrowed money, structured in such a way that the target's cash flows or assets are used as the collateral (or "leverage") to secure and repay the money borrowed to purchase the target-company/asset. Since the debt has a lower cost of capital that the equity, the returns on the equity increase as the amount of borrowed money does until the perfect capital structure is reached. Debt effectively serves as a lever to increase returns on investment |
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Duty of Care |
MBCA 8.30: provides standard of conduct: - Aspirational - (a) each member of the board of director's, when discharging the duties of a director, shall act (1) in good faith, and (2) in a matter the director reasonably believes to be in the best interests of the corporation - (b) Director's shall disclose material information |
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Standard of Liability |
MBCA 8.31: Director may be found liable if: (a)(1): Corporate character indemnification or cleansing does not preclude liabilityl and (a)(2)(i): Director did not act in good faith (a)(2)(ii)(A): Director did not believe she was acting in the best interest of the corporation, or (a)(2)(ii)(B): Director was not informed, or (a)(2)(iii): a lack of objectivity due to director's lack of independence (a)(2)(iv): Director failed to devote ongoing attention to oversight, or devote timely attention when particular facts arise |
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Delaware's Duty of Care |
Limited by the business judgement rule |
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Business Judgment Rule |
A court will defer to the board or director's unless their actions: 1. are not in honest belief that action is in the best interest of the corporation (Dodge v. Ford failed this test, Amex won), or 2. Are not based on informed investigation, or 3. Involve a conflict of interest
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Rationale for BJR |
Shareholder's can elect new Directors Competition will lead to the failure of poorly managed firms Do not want to discourage risk taking |
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Francis v. United Jersey Bank (Inaction of a Director) |
P&B was a broker between ceding insurance companies and reinsurance companies. They earned a commission on the transactions between the two entities. Typically, brokers in the reinsurance business hold funds from the ceding and reinsuring companies in a separate account and pay each party from that account. The former CEO of P&B, Charles Pritchard, Sr. (the husband of Lillian Pritchard) did not practice this method, but he still ensured that the funds deposited by third parties were never used as personal funds. Charles Pritchard, Sr., eventually stepped down and his two sons controlled the business. Once the sons had control they took out personal loans from the account but never paid back the loans or any interest. This practice of misappropriating funds continued until P&B could no longer meet their obligations, and they went into bankruptcy. During the entire period that the sons controlled P&B, Lillian was the majority shareholder and sat on the Board as a director Issue. The issue is whether Lillian Pritchard is personally liable for negligently failing to prevent the misappropriation of P&B funds by her sons. Held. Lillian Pritchard, as a director on the Board, had a duty of care in managing the business. She did not have to know every detail of day-to-day operations, but she needed to have a baseline understanding of the finances and important activities. If she did not understand the activities, then she was obligated to consult counsel for advice. Her absence from the business did not excuse her duties. The court determined that if she did intervene in the dubious financial decisions of her sons, or at least consulted an attorney or expert, it may have prevented her sons from fleecing the company. Therefore, her lack of care was a proximate cause of the damages to the company and the third parties who relied upon the company. Because of the nature of the business (holding assets of third parties), she was liable to the third parties for any damages. Discussion. The decision makes it impossible for directors to hide their head in the sand to avoid liability. The amount of oversight required will depend on the nature of the business, so it will be very fact-specific. |
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Smith v. Van Gorkem (information gathering process flawed) |
Underlying transaction: a management buyout of Trans Union Corp. Facts: Trans Union had large investment tax credits (ITCs) coupled with accelerated depreciation deductions with no offsetting taxable income. Their short term solution was to acquire companies that would offset the ITCs, but the Chief Financial Officer, Donald Romans, suggested that Trans Union should undergo a leveraged buyout to an entity that could offset the ITCs. The suggestion came without any substantial research, but Romans thought that a $50-60 share price (on stock currently valued at a high of $39 ½) would be acceptable. Van Gorkom did not demonstrate any interest in the suggestion, but shortly thereafter pursued the idea with a takeover specialist, Jay Pritzker. With only Romans’ unresearched numbers at his disposal, Van Gorkom set up an agreement with Pritzker to sell Pritzker Trans Union shares at $55 per share. Van Gorkom also agreed to sell Pritzker one million shares of Trans Union at $39 per share if Pritzker was outbid. Van Gorkom also agreed not to solicit other bids and agreed not to provide proprietary information to other bidders. Van Gorkom only included a couple people in the negotiations with Pritzker, and most of the senior management and the Board of Directors found out about the deal on the day they had to vote to approve the deal. Van Gorkom did not distribute any information at the voting, so the Board had only the word of Van Gorkom, the word of the President of Trans Union (who was privy to the earlier discussions with Pritzker), advice from an attorney who suggested that the Board might be sued if they voted against the merger, and vague advice from Romans who told them that the $55 was in the beginning end of the range he calculated. Van Gorkom did not disclose how he came to the $55 amount. On this advice, the Board approved the merger, and it was also later approved by shareholders. Issue: whether the business judgment by the Board to approve the merger was an informed decision. Holding: whether the business judgment by the Board to approve the merger was an informed decision. `Dissent: The dissent believed that the majority mis-characterized the ability of the directors to act soundly on the information provided at the meeting wherein the merger vote took place. The credentials of the directors demonstrated that they gave an intelligent business judgment that should be shielded by the business judgment rule. |
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Legal Issue in Smith v. Van Gorkem |
1. Was the board informed on Sept. 20th 2. Did the board's subsequent action cure? 3. Did the shareholder vote cure? |
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Deleware Indemnification |
§145(a): A Corporation shall have power to indemnify a person who is or was a director against expenses (inlcuding attorneys fees), judgments, fines, and amounts paid in settlement if the person acted in good faith and no reasonable cause to believe conduct was unlawful. Termination by settlement does not create a presumption not in good faith or conduct was unlawful. (b) No indemnification if person shall have been adjudge liable to the corporation unless Court of Chancery permits (c) If successful on the merits such person shall be indemnified
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Deleware Insurance Provision |
(g) a corporation shall have power to purchase and maintain insurance on behalf of a director for any liability whether or not the corporation would have the power to indemnify such person against such liability |
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Protecting Director's From Liability |
§102(b)(7): May include in certificate of incorporation a provision eliminating or limiting the personal liability of a director for monetary damages for breach of fiduciary duty, provided such provision shall not eliminate or limit liability of a director; (i) for breach of director's duty of loyalty; (ii) for acts or omissions not in good faith or which involve intentional misconduct
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Broz. v. Cellular Information Systems, Inc. (corporate opportunity doctrine) |
Facts: Defendant was presented an opportunity by Mackinac Cellular Corp. that targeted RFBC as a potential buyer of a cellular license, Michigan-2, which was adjacent to another license held by RFBC. At the time of the offer, CIS was undergoing a Chapter 11 reorganization after they came into financial straits from being overaggressive in other acquisitions. Another company, PriCellular, was also bidding for the license while also trying to purchase CIS. PriCellular was eventually successful at acquiring CIS, but only after several delays and shaky financing. Meanwhile, Defendant outbid PriCellular for the Michigan-2 license. CIS, now owned by PriCellular, brought this action against Defendant, claiming he usurped a corporate opportunity belonging to Plaintiff. Plaintiff also argued that Defendant had a fiduciary duty to PriCellular since they were trying to acquire CIS. Defendant countered that he held a fiduciary duty only to CIS, and they did not have the resources or the desire to bid for Michigan-2. Rule: The corporate opportunity doctrine holds that an officer or director of a corporation can take a corporate opportunity if the opportunity is presented to them in their individual capacity, the opportunity is nonessential to the corporation, the corporation has no expectation for the opportunity, and they have not wrongfully utilized corporate resources to take advantage of the opportunity. Issue: whether Defendant usurped a corporate opportunity from Plaintiff when he outbid them for the Michigan-2 license.
Holding: Defendant did not personally take advantage of a corporate opportunity for Plaintiff. Mackinac did not consider CIS to be a legitimate bidder for the Michigan-2 license due to their financial condition, and when Mackinac approached Defendant about the purchase, they were approaching him in his capacity as the president of RFBC. Defendant never hid the transaction from other CIS board members, and they testified that CIS would have no interest in the license. CIS was actually selling the licenses it already had. Defendant did would have been better-served if he formally presented his purchase to the Board, but the omission was harmless error. CIS’ interest only came about after PriCellular acquired CIS, but PriCellular also had financial troubles. Defendant also had no fiduciary duty to a company that had yet to acquire CIS at the time of his purchase of the license. Discussion: The speculative nature of PriCellular’s acquisition of CIS, and the uncertain future business strategy of CIS after it reorganized under Chapter 11, were strong factors in Defendant’s favor. Businesses and their officers would be severely limited in their capacities if they had to consider how every present-day decision could adversely affect future dealings with the company they owe a fiduciary duty. This holding balances the interests of both sides.
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Affirmative Duties of a Director (from Francis v. United Jersey Bank) |
-Obligation of basic knowledge and supervision -Read and understand financial statements -Object to misdconduct and, if necessary, resign |
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Duty of Loyalty |
- Regulates self dealing transactions - No BJR shield - Mandates that the best interests of the corporation and its stockholders takes precedence over any interest possessed by a director and not shared by the stockholders generally (Technicolor quoting Guth v. Loft) |
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Duty of Loyalty: two step analysis |
Step 1: Does the transaction involve a conflict of interest? - Is a director or shareholder receiving a benefit from the firm not received by all? Step 2: Has the transaction been properly "cleansed"? - Approval by disinterested directors or disinterested shareholders or the transaction adjudged fair |
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Conflict of Interest Deconstructed |
1. Is the fir on one side of the transaction? 2. Is a director or shareholder on the other side of the transaction? 3. Is the transaction providing a benefit from the firm not received by all? |
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Duty of Loyalthy transaction is okay if: |
§8.61(b) 1. Qualified Director's cleanse 2. Independent shareholders ratify 3. Transaction is judged fair |
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Duty of Loyalty: Deleware |
§144 No Contract or transaction between a corporation and 1 or more of its directors or officers shall be void or voidable if: 1. Informed, disinterested directors approve; or 2. Informed shareholders ratify; or 3. Transaction is substantively fair to corporation |
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Corporate Opportunity Doctrine |
A Corporate Opportunity Exists where (Guth): 1. Corporation is financially able to take the opportunity 2. Opportunity is in the corporation;s line of business 3. Corporation has an interest or expectancy in the opportunity 4. Embracing the opportunity would create a conflict between director's self interest and that of the corporation |
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Guth v. Loft |
Facts: Mr. Guth was the president of Loft, Inc. which manufactured a cola drink. Loft's soda fountains purchased cola syrup from Coca-Cola Ltd., but then Mr. Guth decided it would be cheaper to buy from Pepsi after Coke declined to give him a larger jobber discount. Pepsi went bankrupt before Mr. Guth could inquire about obtaining syrup from Pepsi. Mr. Guth bought the company and its syrup recipe (which he then had Loft chemists reformulate) and then purported to sell the syrup on to Loft. He was alleged to have breached his fiduciary duty of loyalty to the company by failing to offer that opportunity to Loft, instead appropriating it for himself. Holding: On the other hand, it is equally true that, if there is presented to a corporate officer or director a business opportunity which the corporation if financially able to undertake, which is, from its nature, in the line of the corporation’s business and is of practical advantage to it, is 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 will be brought into conflict with that of his corporation, the law will not permit him to seize the opportunity for himself.” So where a corporation cannot take an opportunity because (1) it lacks finances (2) it is not in the same line of business (3) it has not "interest or reasonable expectancy" then a director will be found to have legitimately taken an opportunity for itself. Layton felt that there was no real standard for loyalty and it depends on the facts of the case. The court may enquire and will decide upon the fairness of any transaction. |
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Requirements for Formal BOD Action |
§8.20-8.24 |
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Sinclair Oil v. Levien |
Sinven was a subsidiary of Defendant with operations exclusively in Venezuela. Defendant, as the majority shareholder of Sinven, caused Sinven to pay dividends that were so large that the amount exceeded the earnings of Sinven. The dividends provided cash to Defendant as well as minority shareholders, but it left no resources fro Sinven to expand its operations. Defendant also neglected to meet the terms of the contract between them and Sinven. The agreement required Sinven to sell all of its products to Defendant at specified prices, but Defendant was late in payments and did not fulfill their minimum purchasing obligations. Plaintiff therefore brought this action, claiming the dividends were excessive and that Defendant breached the contract with Sinven. Issue: hether Defendant was improperly engaging in self-dealing when they issued excessive dividends and breached their contract with Sinven. Holding: efendant did not engage in self-dealing by issuing large dividends but it did engage in self-dealing when they breached the agreement. Defendant complied with Delaware statute 8 Del.C. Section: 170, concerning the payment of dividends, and Defendant’s motives are not a factor when all shareholders benefit from the transaction (not self-dealing). However, the contract breach was to the detriment of Sinven and its minority shareholders with the positive effect being exclusive to Defendant, so the breach is self-dealing. Discussion: Majority shareholders are held to a different standard than officers or directors such as in Lewis v. S.L & E, Inc. In Lewis, any conflict of interest between a director and the corporation is voidable unless the transaction is proven to be fair. In this case, a plaintiff has to prove that the majority shareholders enjoyed an exclusive benefit to the detriment of the minority shareholders before the burden is shifted to the defendants. - Minority Objected to 3 aspects of Sinclar-Sinven realtionship: 1. Sinven's large dividends 2. Sinven prevented from expanding 3. Contract between Sinven and International breached |
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Duty of Loyalty and Controlling Shareholders |
- Shareholders acting as shareholders owe one another NO fiduciary duties - Controlling shareholders owe fiduciary duties to the minority |
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Stone v. Ritter |
In 2004, AmSouth paid $50M in fines and penalties to settle charges that the bank had failed "to file 'suspicious activity reports'" - A classic "caremark" complaint against directors of AmSouth, a DE corp. that owns commercial banks "although good faith may be described colloquially as part of a 'triad' of fiduciary duties of care and loyalty, the obligation to act in good faith does not establish an independent fiduciary duty that stands on the same footing as the duties of care and loyalty |
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In re Caremark |
Director's obligation includes a duty to attempt in good faith to assure that a corporate information and reporting systems exists and that failure to do so may, in theory at least, render director liable for losses caused by non-compliance with legal standards |
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Cede & Co. v. Technicolor, Inc. |
DE SC stated, to rebut the rule, a shareholder P assumes the burden of providing evidence that directors, in reaching their challenged decision, breached any one of the triads of their fiduciary duty - good faith, loyalty or due care. |
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Shareholder Roles |
1. Sue - Direct Suits (suit alleging a direct loss) - Derivative Suits (compel corp. to sue another) 2. Vote 3. Sell |
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Direct Suits: Bases for Claims |
1. Force payment of promised dividend 2. Enjoin activities that are ultra vires; 3. Claims of securities fraud 4. Protect participatory rights for shareholders |
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Derivative Suits: Bases for Claims |
1. Breach of duty of care 2. Breach of duty of loyalty |
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Two Suits in a Derivative Suit |
1. A suit by the corp against the directors for their failure to carry out fiduciary obligations 2. A suit by the P arguing that he or she should substitute for the directors in managing this particular aspect of the corps business |
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Remedies in Derivative Suit |
Shareholder is suing "in right" of the corp. so: - Remedy from principal suit goes to corp. - Corp is required to pay shareholder attorney's fees if suit is successful or settles |
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Three procedural hurdles to the derivative action |
1. Bonding Reuirements if low stakes must post security for corps legal expenses 2. Demand Requirement (Grimes v Donald) - must demand BOD pursue legal action, unless can claim a valid excuse 3. Special Litigation Committees (Zapata Corp. v. Maldonado) |
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