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296 Cards in this Set
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Problem 2: P orally tells her friend A to sell her car for her while P is overseas for a few weeks. A agrees to do this as a favor. Does A need written authority from P to bind P? Does the fact that A is not being paid prevent her from binding P?
Assume A places an ad in the classified section of the paper and sells the car. When P returns, she discovers the bill from the newspaper. Is P obligated to pay the bill? |
A does not need written authority from P to bind P. Agency relationships do not require consideration.
A probably had incidental authority to place the ad in the paper in order to sell the car. (ad is incidental, usual, or necessary) |
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Problem 1: P hires A to watch his house and feed his fish while he is on vacation. While feeding the fish, A notices that the carpet is badly stained. A has the carpet cleaned. Will P have to pay the bill?
What if instead A called the plumbers to fix a leaky pipe? |
As to the carpet, A probably didn’t have any authority to act. As to the leaky pipe, however, A probably had agency by necessity or emergency authority, which can arise under unforeseen or emergency situations. In such a case, the amount or extent of authority will depend upon the circumstances, including the nature and extent of the emergency and the availability of the principal.
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Hypo: Miller hires me as her assistant. She tells the cleaners, “Devon is my new assistant, so she will act on my behalf from now on.” I go to the cleaners, and they talk me into a special sale. Did I have the authority to accept the special sale?
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Even if Miller specifically told me not to act on special sales, I had apparent authority to do what I did. Why? Because she told the cleaners that I would be acting on her behalf.
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Hypo: Agent tells a store that they are authorized to charge a person’s account. The person whose account he is charging has not manifested anything to the store. The agent tells the principal what he is doing, thus the principal knows he is being misrepresented.
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If the principal does nothing to notify the store, the ct. will say the agent had apparent authority.
Not doing anything is a reasonable manifestation of intent. |
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Hypo: Someone signs a document on behalf of ABC, Inc. before the company is technically formed.
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ABC, Inc. cannot later ratify the signature because ABC, Inc. was not in existence at the time the document was signed.
Conditions that must be satisfied for a ratification to be effective: 1. Absence of actual or apparent authority 2. Party (agent) intends to or purports to act for another (principal) 3. Principal is in existence at the time of the act as well as at the later time of ratification (must have capacity at time of ratification and at least partial capacity at the time of transaction) Conditions that must be satisfied for a ratification to be effective: 1. Absence of actual or apparent authority 2. Party (agent) intends to or purports to act for another (principal) 3. Principal is in existence at the time of the act as well as at the later time of ratification (must have capacity at time of ratification and at least partial capacity at the time of transaction) Conditions that must be satisfied for a ratification to be effective: 1. Absence of actual or apparent authority 2. Party (agent) intends to or purports to act for another (principal) 3. Principal is in existence at the time of the act as well as at the later time of ratification (must have capacity at time of ratification and at least partial capacity at the time of transaction) 4. Principal must have knowledge of all material facts at time of ratification unless he chooses to ratify knowing he is without all the facts 5. Ratifying act must be a manifestation of principal’s consent to be bound (express/implied) 6. Principal must ratify before third party withdraws 7. Principal must ratify in full or not at all (cannot ratify provisions that confer benefit and repudiate those that impose burdens) 8. Ratification cannot operate to cut off intervening rights of innocent third parties |
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Hypo: Bates hires me to sell his puppies while he’s out of town. I cut a good deal with someone, on the condition that the puppies can come back to Bates for training. Bates didn’t give me actual authority to make this deal. Bates didn’t say anything to the buyer, so apparent authority doesn’t apply either. When Bates comes back, I say, “I sold the ugliest puppy for $1,000,” but I don’t tell him about the puppy training. Bates says, “Great job!!”
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Bates will say, “I didn’t ratify this. I didn’t have all the material facts at the time of ratification.”
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Hypo: Bates wants the $1,000, but he doesn’t want to train the puppy. Is this ok?
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No. Bates must ratify in full or not at all.
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Hypo: A Bates admirer – who has no authority to sell Bates’ dog – wants to help Bates. She finds someone who might be interested in buying Bates’ dog. She nails down a deal for $1,000. Bates has no idea what happened and contracts to sell the same dog for $500. When the admirer tells Bates what she did, Bates wants to ratify the better deal. Would this work?
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No. A ratification cannot operate to cut off intervening rights of innocent third parties.
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conditions that must be met for a ratification to be effective
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1. Absence of actual or apparent authority
2. Party (agent) intends to or purports to act for another (principal) 3. Principal is in existence at the time of the act as well as at the later time of ratification (must have capacity at time of ratification and at least partial capacity at the time of transaction) 4. Principal must have knowledge of all material facts at time of ratification unless he chooses to ratify knowing he is without all the facts 5. Ratifying act must be a manifestation of principal’s consent to be bound (express/implied) 6. Principal must ratify before third party withdraws 7. Principal must ratify in full or not at all (cannot ratify provisions that confer benefit and repudiate those that impose burdens) 8. Ratification cannot operate to cut off intervening rights of innocent third parties |
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When is an agent's power terminated?
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1. Expiration of a term (or in the absence of a specified term, a reasonable time)
2. Purpose of the agency is completed by the agent (or another upon notice to agent) 3. Occurrence of specified event or fulfillment of condition 4. Mutual consent of principal and agent 5. Revocation by principal or renunciation by agent (power always exists, regardless of right) 6. Death, bankruptcy, or mental incompetency of principal or agent (sometimes statutory exception, i.e., durable power of attorney) 7. Destruction of subject of the agency or other change in circumstances from which agent would reasonably infer that principal no longer consents to exercise of the agent’s authority |
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Problem 3: P hires A to manage P’s business. They sign an employment K in which they agree to a term of employment for 2 years and a salary of $4,000 per month. What is the effect on A’s authority if P fires A after three months?
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Because P always has the power to revoke A’s authority, he was justified in doing so (although he might run into breach of K trouble). Therefore, A no longer has the authority to act on P’s behalf.
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When does apparent authority terminate?
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Apparent authority terminates automatically with the death or incapacity of the principal. Otherwise, the agent’s apparent authority terminates only when the third party’s reasonable belief in the agent’s authority is terminated (i.e., third party learns from principal or someone else that the agent is not authorized to act).
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When does T bind P to a contract?
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(Whether DP, UP or PDP) When a acted with actual authority, apparent authority or P ratified a's authority.
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P hires A to manage P’s business. They sign an employment K in which they to a term of employment for 2 years and a salary of $4,000 per month. P fires A after three months? If A signs a K on P’s behalf after A has been fired, how might P be bound on the K?
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Unless P told a third party that A could act on his behalf, and then never informed the third party that A had been fired (apparent authority), P will not be bound to the K.
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When does P bind T to a contract?
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T is bound to P (whether DP, UP, or PDP) in contract if A acted with authority, or there is an applicable substitute for authority
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Quiz question: Joe is building a deck and asks Bob to buy paint by charging it to Joe’s account at the local hardware store. Joe does not call the store to tell them Bob is coming, and Bob has never purchased paint for Joe in the past. Joe tells Bob to get redwood stain, but Bob finds that the store is having a sale on a discontinued brand of paint that does not come in redwood stain, and Bob buys this paint in forest green. Bob charges the paint to Joe’s account, and the store takes Bob’s word that he is authorized to make the purchase for Joe because Bob is a longtime customer trusted by the store. Joe is furious when he sees the paint and insists that the store take back the paint and credit his account. The store refuses to take back the paint because it is being discontinued. Is Joe liable for the charge on his account?
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Actual authority? No. Ratification? No. Joe was furious.
Apparent authority? No. Joe didn’t contact the store. Inherent agency power? Weak argument. |
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What are some excptions that relate to the binding Tin contract to UP's and DP's?
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1. K expressly excludes liability to that particular P or any PDP or UP.
2. Fraud by A in failing to disclose P. For T to avoid K, failure to disclose the identity of P must amount to a fraudulent concealment. if A is aware that T would not deal with P at any price and misrepresents P’s identity or existence, the misrepresentation rises to the level of fraud. 3. Identity of UP materially changes terms of the K. (i.e., requirements or output K, K for personal services) 4. UP takes subject to defenses available to T against A. |
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Hypo: Bates has some real estate and puts it up for lease. A law student asks Bates how much he’s charging for rent. The rate Bates quotes is too much for the student. Bates has a soft heart, and he agrees to rent to the student for cheaper. It turns out that the student was acting on behalf of a Bush press corps member, X. X heard that Bates hates the media, so he convinced the law student to act on his behalf. Bates is furious and says he won’t rent to X.
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P-media guy
A-student T -Bates Does Bates fit into one of these exceptions? Miller says no, because X’s money is the same as the law student’s money. Thus, the deal would not be changed materially. (Note: If the law student knew that Bates wouldn’t deal with X at any price, his misrepresentation would rise to the level of fraud.) |
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I contract with the agent, who is a famous artist. I’m later told that the principal, who can only draw stick figures, will be working for me.
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Identity of UP has materially changed terms of the K.
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When is A liable to T on a contract?
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1. When P is a UP or a PDP; or
2. When P is known to be non-existent A must fully disclose P to escape liability |
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A goes into a computer shop and says, my brother and I are going to start a company called geeks computers. He signs a contract to buy 62 computers from store in name of geeks. Is A liable?
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Yes, because the P (geeks computers) is known not to be in existance at the time of the contract.
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A is liable to T on some bases other than K?
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misrepresentation:
A intentionally misrepresents facts regarding the agency (i.e., the extent of his authority, identity of P) and the other elements of tortious misrepresentation or deceit are present breach of implied warranty of authority, agency status: When a person purports to act in an agency capacity and enters a K, the law implies a warranty that the person is authorized to act. This rule applies even if the agent is mistaken and there is no intent to deceive the third party. (i.e., unbeknownst to A, the principal dies). |
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Hypo: Adam is hired to be the manager of a store called Sure Shots. The store is owned by Guinn. Adam orders hunting vests from Theresa, knowing they’ll be perfect for the store. The vests are great sellers, but Theresa notices that her invoice hasn’t been paid. She goes to Adam, and Adam isn’t sure what happened – He gave the invoice to Guinn and told him to pay. Theresa runs out of patience and says she’s going to sue Adam. Adam says, “I just work here, you need to deal with Guinn.” Theresa goes to Guinn, and he won’t pay up. Is Adam (A) liable to Theresa (T) for the vests?
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Adam says he made it clear to Theresa that he worked for someone else. This information, however, didn’t tell Theresa the identity of the principal. Did the name “Sure Shots” inform Theresa that Guinn was in charge? No. “Sure Shots” is simply a trade name. Adam is out of luck.
Note: Adam doesn’t necessarily have to be the one to disclose Guinn’s identity to Theresa. If Theresa knew that Guinn was in charge because every law student knows that information, Adam’s ok. As a lawyer, you must consider every possible way that T could have discovered P’s identity. |
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Hypo: Same, but Adam got concerned that Theresa needed to know who she was dealing with. He writes Theresa a letter explaining Sure Shot’s ownership. Theresa later says that she received the letter but never opened it.
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Theresa might not have actual knowledge, but she had a direct reason to know. Consider the standard:
The Test of Disclosure is T’s actual knowledge, or his REASONABLE GROUNDS TO KNOW, of the corporation’s existence or identity. |
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Hypo: Same, but Guinn has on file an assumed name certificate, identifying Sure Shots as Guinn Corporation.
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The Assumed Business or Professional Name Act is silent on this issue. Assumed name certificates are a matter of public record, but they do not operate to put persons dealing with the company on notice of the company’s actual name, there being no duty to check the records. Wynne and A to Z provide authority on this point.
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A to Z Rental Center v. Burris
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Rule: Disclosure of an agency is incomplete for the purpose of relieving an agent from personal liability unless it includes the name of the principal. Further, the use of a trade name is generally an insufficient disclosure of the principal’s identity and the fact of agency so as to protect the agent against personal liability.
Rule: An agent cannot claim immunity from personal liability merely because the party with whom the agent dealt had a means of discovering the agent’s representative capacity. Rental had no knowledge of Burris’ true principal, Burris & Inscore Construction, Inc. That is, Burris neither named his principal, nor notified Rental that Burris & Inscore Construction, Inc. was doing business as B & S Construction, Inc. He thus failed to disclose sufficient information concerning the identity of his principal to escape personal liability. (Even if Rental had a duty to investigate, he wouldn’t have found anything.) |
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Wynne v. Adcock Pipe and Supply
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Adcock did not have a duty to investigate the corporate status.
Rule: The test of disclosure is Adcock’s actual knowledge, or his reasonable grounds to know, of the corporation’s existence or identity. Rule: A business name meets the requirements of the Business Corporation Act for a corporate name if it uses the terms “incorporated,” “corporation,” or “company.” The name, J.W. Drilling, gives no indication that a corporate entity is involved. Rule: If an agent would avoid personal liability, he has the duty to disclose not only that he is acting in a representative capacity but also the identity of his principal |
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Hypo: What if Guinn failed to file a certificate? Could Theresa still enforce the K?
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Yes. (§ 36.25) However, Guinn must file a certificate for service purposes.
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Hypo: Assuming Guinn didn’t file the certificate, could he enforce the K against Theresa?
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Yes. (§ 36.25) However, Guinn must file a certificate before he can maintain an action.
Penalties for not complying with the ABPNA: expenses incurred, including attorney’s fees, in locating and effecting service of process on such person. A person conducting business under an assumed name who intentionally violates the Act is guilty of a misdemeanor. Knowing or intentional violations involving misrepresentation, material false statements, or forgery are punishable under the Penal Code. |
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Hypo: I sign the K, “Sure Shot, Inc.” and it’s actually “Sure Shot Corp.”
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I’ve used a designator, just the wrong one. Some courts will let this fly; others are very strict.
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Assuming that Paula Pringle has engaged Arthur Adams as her agent, consider the effect of the following forms of signature on a K:
(a) Arthur Adams (b) Paula Pringle, By: Arthur Adams, agent (c) Arthur Adams, agent |
(a) Arthur Adams → This form appears to personally obligate Adams. Unless the K contains other terms that at least create an ambiguity as to Arthur’s liability, Arthur is a party to the K and parol evidence is inadmissible to disestablish his obligation
(b) Paula Pringle, By: Arthur Adams, agent → This form unambiguously indicates both Arthur’s representative capacity and the identity of the principal. Arthur is not a party to the K. (c) Arthur Adams, agent → This form is ambiguous unless there are terms in the K clarifying that the K obligates Paula and not Arthur. Parol evidence would be admissible to establish that Paula’s identity was disclosed to the third party and Arthur was not intended to be obligated on the K. |
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Hypo: I sign a written K for a company, and at the signature line, I sign it “Devon Sharp.” However, in the course of dealings, I make it clear to the company that I was signing and doing business on behalf of Sure Shot.
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Problem – If they bring suit against me personally, I will run into trouble with the parol evidence rule.
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Hypo: I sign the K “Devon Sharp, president.”
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This is not enough by itself to get me off the hook, but it’s enough to create an ambiguity and defeat the parol evidence rule. I would then be able to present evidence that the other party knew I was representing Sure Shot.
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Hypo: If Theresa’s basis for holding Adam liable is that he is contracting for a PDP, and her basis for holding Guinn liable is that Adam was contracting for him, can Theresa hold them j&s liable?
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Wynne tells us that when a principal and agency are both liable, the third party must elect from which to take judgment, rather than holding both j&s liable. However, the third party can sue both.
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Hypo: There is a check with Sure Shot’s logo on it. The check is made out to Theresa. Adam has signed the check (on behalf of Sure Shot). The check bounces. Theresa sues.
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Under the common law, this would be enough to create an ambiguity. However, the UCC rule above changes that. The UCC commentary says, “This change in terminology is intended to reject decisions under former § 3-403(2) requiring that the instrument state the legal name of the represented person.
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What are A's duties to P?
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If the P-A relationships is contractual, applicable rules of K come into play. Additionally, A is a fiduciary and owes fiduciary duties to P.
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Hypo: Miller authorizes Adam to sell her car and gives him a permissible price range. As it turns out, Adam is in the market for a new car, and he wants to buy Miller’s car. Now, he is essentially negotiating with himself.
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Problem with this situation: There’s a conflict of interest. As Miller’s agent, he’s trying to get the highest price. As a buyer, he’s trying to get the lowest price. If Adam buys the car, Miller will be able to rescind.
A is potentially breaching his fiduciary duty to P. |
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Hypo: Same, but Adam comes to Miller and express his interest in the car. Miller says it’s fine for Adam to buy it.
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This is ok, because Miller consented.
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Hypo: I’m a new associate for a firm. One night, I run into my old college roommate. She has a great, entrepreneurial idea and wants to set up a new business. She wants to hire me to help her set up the business. She says she’ll pay me a little bit now, and a lot later. I agree, and I work on the project late at night after I’m done with my firm work. My roomie pays me a little up front a lot later. My firm hears about my work on the side, and wants me to turn over the fee.
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I can’t do this. As an agent of the firm, I have a fiduciary duty to the firm. My fiduciary duty includes a duty not to compete.
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Hypo: Same, but I do the work for free.
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In this hypo, I didn’t engage in self-dealing. In other words, I didn’t personally benefit from my work. On the other hand, I’m supposed to act in the best interest of the firm, and it would be in the firm’s best interest for me to charge my roommate…
Holding in Johnson: An associate may participate in referring a client or potential client to a lawyer or firm other than his or her employer without violating a fiduciary duty to that employer as long as the associate receives no benefit, compensation, or other gain as a result of the referral. I could analogize my situation to Johnson. It would certainly have been in B&P’s best interest for Chang to charge his friend. However, the court held that an associate may refer a potential client to another firm as long as he doesn’t receive any compensation for doing so. |
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Hypo: I go in-house with a company. As in-house counsel, I have the responsibility of hiring outside firms to do work for my company. I’ve looked at the proposals of several firms, and I’ve already decided to hire XYZ firm. Before you notify them of your decision, XYZ contacts me and tells me that they will cut me a personal check if I choose them. I take the check. Does my company have a claim against me for breach of fiduciary duty?
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I’m not directly competing – XYZ isn’t going to charge my company any more than it would have otherwise. As a fiduciary, however, I’m not allowed to benefit personally from a transaction. But my company can’t prove any direct damages! In cases like this, courts will often impose liability (fee forfeiture) anyway. This is clearly a windfall to my company, but courts often permit it.
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What duties does P have to A?
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If the P-A relationship is contractual, look to the K. Compensation is often due the agent under an express or implied-in-fact agreement.
In the absence of a contractual right, the law may imply the right(quantum meruit or unjust enrichment). P will generally have the duty to REIMBURSE A for out of pocket expenses incurred in the scope of A’s actual authority and to INDEMNIFY A from liabilities rightfully incurred. Note: P is not a fiduciary to A!! |
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If a person gives notice to A is P put on notice?
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Generally, notification received by an agent AUTHORIZED to receive it constitutes notification to the principal, and knowledge of an agent concerning matters within the agent’s scope of authority is imputed to the principal. Exceptions can arise where the agent is acting adversely to the principal’s interests, where A and T collude to keep information from P, or where A clearly could not be expected to communicate the information to P.
An agent that contracts for an UP will be personally liable. If the signature on a K is unambiguous, the parol evidence rule cannot come into play to show that the third party knew of the principal. |
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When will a P be held liable for the torts of the A?
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To impute liability to the employer under this RS, the tortious conduct must occur within the scope of employment and the tortfeasor must be a servant/employee rather than an independent contractor.
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Exceptions
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1. The employer is negligent in hiring an IC.
2. The IC is retained to perform a non-delegable duty of the employer. 3. One other than an employee of the IC is injured by the IC’s negligent performance of work constituting an inherently dangerous activity. 4. The employer is negligent with respect to an aspect of the IC’s work over which the employer retained “some control.” 5. There is an ostensible agency relationship between the employer and the IC. |
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Complete departure or frolic and detour
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Conduct of a servant is not within the scope of employment if it is different in kind from that authorized, far beyond the authorized time or space limits, or too little actuated by a purpose to serve the master.
When a servant completely departs from his work to accomplish some purpose of his own not connected with his employment, the relation of master and servant is thereby temporarily suspended and the master is not liable for his acts during the period of such suspension. |
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Rosales v. American Buslines, Inc.
-Rosales and Herren were employed as ticket agents by American Buslines at its El Paso bus station. -Rosales, while off duty, was on his way to a Union meeting, and stopped at the bus station to find out where the meeting was to take place. -He was on terminal property, and was talking to two female employees, who were also off duty and who were planning to complain about Rosales at the union meeting regarding his selling insurance while not on duty. -Herren was on duty and was returning to the terminal after moving his car when he encountered Rosales. -A fight ensued between the two men, and Rosales was badly beaten. Issue: Was Herren acting within the scope of his employment when he fought with Rosales? |
Scope of employment test: The test of the master’s liability is whether the act complained of arose directly out of and was done in the prosecution of the business that the servant was employed to do. Under this rule, a plaintiff is denied recovery where the employee at the time of the assault was not acting within the scope of his employment but was furthering his own interest.
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GTE v. Bruce
-Shields constantly harassed employees in two different GTE locations. -Employees claimed that Shields repeatedly yelled, screamed, cursed, and even “charged” at them. -GTE investigated the incidents and sent Shields a “letter of reprimand,” but Shields continued his misconduct. Issue: Can GTE be held vicariously liable for the intentional tort of its employee? |
A master can be held vicariously liable for the intentional tort of its servant when the tort, although not specifically authorized by the employer, is closely connected with the servant’s authorized duties. If the intentional tort is committed in the accomplishment of a duty entrusted to the employee, rather than because of personal animosity, the employer may be liable.
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King v. McGruff
-King contracted with the McGruffs to clean their kitchen floor. -King’s employees used gasoline for the purpose without first turning off the pilot light of a water heater in the same room. -This resulted in an explosion which damaged the McGruffs’ house so as to reduce the value by about nine tenths. -King was not present or otherwise in immediate direction of the work when the misconduct occurred. Issue: Is King responsible in exemplary damages without need of any jury finding of previous authorization or subsequent ratification thereof on King’s part? |
Exemplary damages are not imputed to the employer – even for acts done in the course and scope of employment – unless special circumstances exist. Why not? Because the purpose of exemplary damages is to punish, and we’re already punishing the employer for something he didn’t do.
UNLESS RST § 909: Punitive damages can properly be awarded against a master or other principal because of an act by an agent if, but only if, (a) the principal authorized the doing and the manner of the act, or (b) the agent was unfit and the principal was reckless in employing him, or (c) the agent was employed in a managerial capacity and was acting in the scope of employment, or (d) the employer or a manager of the employer ratified or approved the act. |
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Acts of vice principles are seen to be acts of the corporation for exemplary damages. Who are vice principles?
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1. corporate officers
2. those with ability to hire and fire 3. those engaged in performing non-delegable duties 4. managers of whole or department or division |
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Does the fact that someone is a vice principle automatically make P liable for A's actions?
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NO. thre must be a nexus between the act and the scope of the agent;s duties or the corporations authorization.
NO exemplary damages if the vice principles misconduct occured while he was acting in a personal capacity unrelated to his Uthority as a vice principle. |
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Partnerships
What are the three statues and how do the dates overlap |
TUPA : 1962-1999
TRPA: 1994-2010 BOC: 2006- |
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Hypo: A conflict occurs and lawsuit is filed in 2005. It doesn’t go to trial until 2006. Does the timing of the trial matter?
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No. The timing of the conflict matters. TRPA controls unless the partnership has elected BOC.
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Hypo: Partnership is formed in 2005. Conflict occurs in 2009. Lawsuit is filed in 2011.
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TRPA controls unless the partnership has elected BOC.
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Hypo: Partnership is formed in 1993. Conflict occurs in 1998. Suit is filed in 2001.
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TUPA controls unless the partnership has elected TRPA.
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What is a partnership?
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It is an association of two or more people carrying on as owners of a business for profit that is not another business under another statute.
No Formalities or declarations are req'd. Can arise inadvertantly Even if you call yourslef a partnerhsip, you may not be one. |
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What are the facotrs that will be considered in determining if a partnership is created?
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A totality of the circumstances will determine whether or not a parthership is created. The following five factors will be considered:
(1) receipt or right to receive a share of profits of the business; (2) expression of an intent to be partners in the business; (3) participation or right to participate in the control of the business; (4) agreement to share or sharing; (A) losses of the business; or (B) liability for claims by third parties against the business; and (5) agreement to contribute or contributing money or property to the business. Traditionally, profit sharing and right of management have been most important, but it is TOC. |
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Hypo: Assume Matt and Lauren refer to themselves as partners all over the place (business card, credit application, etc.). However, no other evidence suggests they are an actual partnership. Now, a creditor wants to hold Matt liable as a partner. What result?
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BOC
§ 152.052 clearly states that an expression of partnership is not dispositive of the business’ classification. Is there any way that Matt could be held liable as a partner even though he’s not a partner? Yes, partnership by estoppel. When a person either holds himself out as being a partner or consents to being held out as a partner, and another party relies on this representation, he is estopped from denying the partnership. Further, there is no duty on that person to seek out all those who may represent to others that he is a partner. Whether there is a duty to deny partnership status is a case by case analysis |
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When is a partnerhip bound by the act of a partner?
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When the act is for carrying on in ordinary course of the partnersip business or business of the kind carried on by the partnership
UNLESS 1. the partner does not have authority to act for the partnership in the matter; and 2. the person with whom the partner is dealing knows the partner doesn't have the authority to act. |
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Hypo: Assume that Matt and Lauren are partners. They have a clear understanding that Lauren is the managing partner, and Matt doesn’t have the power to make any administrative decisions. Lauren leaves town for an extended period of time, and Matt decides that he wants to exercise a bit more decision-making power. First, he orders a player piano for the waiting area. Next, he buys a set of books on environmental law from a salesman. When Lauren comes back, she’s furious. She tells both vendors to take their products back. The vendors don’t want to take their products back, and they tell Lauren that her partner made valid purchases from them. Lauren says, “I’m the managing partner, and Matt didn’t have the authority to make those purchases.” Did Matt’s purchases bind the partnership?
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The vendors will say, “Matt may not have had the authority, but we didn’t know that!” Which vendor would you want to represent – the player piano salesman or the law book salesman? Probably the law book salesman, because it’s more likely that the purchase of law books falls into the “apparently carrying on in the ordinary course of the partnership business” category. Whether the player piano falls into this category will be a fact question.
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What if a law partner goes out and buys a piano for an office? Is the partnership bound?
What if the partners told the partner to go out and buy a piano? |
An act of a partner that is not apparently for carrying on in the ordinary course a business described by Subsection (a) binds the partnership only if authorized by the other partners.
If the player piano does not fall into the “apparently carrying on in the ordinary course of the partnership business” category, the purchase will only bind the partnership if it was authorized by both Lauren and Matt (which it wasn’t). |
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Hypo: Assume Matt and Lauren are 50/50 partners. When the environmental law book salesman comes by, Matt says to Lauren, “I think we should buy these books.” Lauren disagrees and says that they don’t need the books. This argument takes place in front of the salesman. Matt orders the books, despite Lauren’s protests.
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§ 152.203: Rights and Duties of Partner
(a) Each partner has EQUAL RIGHTS in the management and conduct of the business of a partnership. § 152.209: Decision-Making Requirement (a) A difference arising in a matter in the ORDINARY COURSE OF THE PARTNERSHIP BUSINESS may be decided by a MAJORITY IN INTEREST of the partners. (b) An act OUTSIDE THE ORDINARY COURSE OF BUSINESS of the partnership may be undertaken only with the CONSENT OF ALL PARTNERS. But in the Matt/Lauren hypo, there can’t be a majority! The vote is 1-1. What result? Those who forbid change get their way. |
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Hypo: Lauren and Matt agree to buy the environmental law books. Each year, the publisher sends an updated pocket part, and the firm has 30 days to decide if they want to purchase it. The 2005 update comes, and Matt wants to buy it. Lauren says it’s too expensive, and she thinks they can find the same information online. They both call the publisher and say contrary things.
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If the disagreement comes to a head (i.e., Partner 1 and Partner 2 get in a fight), we look to National Biscuit and Summers. A popular way to look at National Biscuit – and a way that can reconcile it with Summers – is that the partners were already ordering bread from the supplier. Thus, the proposed change was termination. Partner 1 voted continuation, and Partner 2 voted termination. Result: The partner forbidding change (Partner 1) won. This is consistent with Summers: The Partner 1 voted hire, and Partner 2 voted don’t hire. Result: The partner forbidding change (Partner 2) won.
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Hypo: Same, but Matt orders the pocket part without knowing that Lauren is opposed to it.
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If the disagreement is latent (i.e., Partner 1 doesn’t know that Partner 2 disagrees), we can look to §152.301 (“Each partner is an agent of the partnership for the purpose of its business.”) and §152.203 (“Each partner has equal rights in the management and conduct of the business of a partnership.”). We will determine whether Partner 1 had actual or apparent authority to do what he did. This will always be a fact-sensitive inquiry.
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Revised Uniform Partner Act v. Texas Revised Partnership Act:
Feature present in RUPA but not in TRPA regarding authority |
Permits a partnership to file a statement of authority with a state official. This statement describes the extent of a partner’s authority. What result? Ordinarily, the statement does not equal “constructive knowledge” to third parties. If a third party checks the statement of authority, they are charged with knowledge, but knowledge won’t ordinarily be imputed on them. Exceptions:
(1) Real estate transactions (not usually a problem because you always to a title search) (2) If a partner withdraws from the partnership and the withdrawal form has been on file for 90 days, it constitutes constructive notice to the world |
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Hypo: Matt orders the book, despite Lauren’s protests (no actual authority). Seller is standing right there when the argument takes place (no apparent authority). After Lauren uses the books for a while, she decides they’re not so bad. Thus, the seller says, “Pay up! Both of you have ratified this transaction!”
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It seems like the common law doctrine of ratification should apply. However, the statute doesn’t specifically address this situation. Instead, it says that other law should fill the gaps to the extent that the BOC isn’t contradicted. Thus, ratification would apply.
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Partner's Wrongful Conduct
Hypo: A lawyer in a firm deides to help a client with investments. He takes from her some money and then proceeds to pay her the interest. Later it is disocvered that he had pocketed the cash and was gulty of embezzlement. Is the law firm liable for the acts of the criminal partner? |
No beacause investing is not something lawyers at that firm normally do for theri clients.
If the partner is commiting an act within the ordianry scope of business, the partnership is bound. If the transaction is outside the partnership business, the partnership will not be bound. Where one partner, by fraudulent promises made in a transaction within the scope of the partnership business, obtains money from a third person and misappropriates it, the other partners are liable. If the transaction is outside the partnership business, the other partners are not liable and they are not bound by a statement of the partner who conducts such transaction that he is acting on behalf of the firm. |
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Hypo: a lawyer represents a client in a divorce. His client asks him if he knows anyone whom they can talk to about real estate investments. He says that he is a partner in a real estate firm and would invest the money for her. THe investment goes bust. Is the law firm liable?
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it must be established that the atty was not carrying on in the ordinary course of business -- a fact question. If the atty signed as an atty, the T could reasonably he was acting in the ordinary course of business.
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Hypo: What if the atty gave the plaintiffs swimming lessons on the side, and they actually believed he was acting as an attorney when he gave the lessons. Would the court still find that attorney was “apparently acting in the ordinary course of business”?
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No. That would be too far. It’s like the apparent authority analysis: The principal must make some manifestation to a third party, and that manifestation must be such that a reasonable person would understand that the agent has the authority to act on the principal’s behalf. In this hypo, a reasonable person would not think that Lyon had the authority to give swimming lessons on the firm’s behalf.
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What if instead of being a partner in the firm, the lawyer was merely an associate? Would his actions bind the partnership?
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The actions of an employee bind a partnership under respondeat superior when the employee is acting within the course and scope of his employment.
For a partner, we refer to “the ordinary course of business.” For an employee, we refer to “the course and scope of employment.” Generally, “the ordinary course of business” is broader than “the course and scope of employment.” Thus, a partner could be sweeping the floors or negotiating a big business deal, and he would likely be in “the ordinary course of business.” |
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Partnership and Partner Liability
MOM partnership defaults on a loan of 100k it took out and declares bankruptcy. Are the parthers liable to the creditor? |
Yes. All partners are J and S liable for debts or obligations of the partnership unless agreed to by the party or provided by law.
But a peson is not liable for obligations that: 1. arise before they become a partner 2. relate to an acto or omission occuring before they were a partner 3. arises under a K that was enterred into before they were a partner. |
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What if Molly withdrew from the partnership before they defaulted on their loan?
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She is still liable. and even if she dies her estate is still liable.
§ 152.505: Effect of Withdrawal on Partners Existing Liability (a) Withdrawal of a partner does not by itself discharge the partner’s liability for an obligation of the partnership incurred before the date of withdrawal. (b) The estate of a deceased partner is liable for an obligation of the partnership incurred while the deceased was a partner to the same extent that a withdrawn partner is liable for an obligation of the partnership incurred before the date of withdrawal. (c) A withdrawn partner is discharged from liability incurred before the date of withdrawal by an agreement to that effect between partner and a partnership creditor. (d) If a creditor of a partnership has notice of a partner’s withdrawal and without the consent of the withdrawn partner agrees to a material alteration in the nature or time of payment of an obligation of the partnership incurred before the date of withdrawal, the withdrawn partner is discharged from the obligation. See class problem |
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LLP's
What makes an LLP so desirable? |
A partner in a LLP is not personally liable for a debt or obligation of the partnership incurred while the Parntership is an LLP
UNLESS 1. supervising/directing 2. was directly involved 3. had notice or knowledge |
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How do you become an LLP?
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File an application with the secretary of state, including:
1. name of partnership 2. federal tax ID number of the partnership 3. the street address of the partnership’s principal office 4. the number of partners at the date of application. 5. brief statement of the partnership’s business. Pay Filing Fee Change the name of your business to contain the designator, LLP. Carry at least $100,000 of liability insurance or provide $100,000 bond specifically designated to cover error, omission, negligence, incompetence, or malfeasance. NOTE - not for K claims - phone bills, etc. so if K claim arises and LLP registration had lapsed, they are still on the hook. |
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What if someone forgets to renew their filing fee?
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Tough shit. Then the partners are liable for everything during the time the partnership was not registered.
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Hypo: What if an LLP enters into a K in 1996 for a ten year lease, and then they break it?
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The partners would be personally liable because §152.801(a) would not apply to this K.
Before the addition of (a) in 1997 partners only had personal liability protection for errors, omissions, negligence, incompetence or malfeasance. That meant they were liable for overdue rent, phone bills, etc. This amendment changed the rule, so that now, partners don’t have personal liability for anything, even overdue rent, phone bills, etc. As a lawyer, you must remember this!!! |
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Hypo: What if an LLP is registered in another country? What is their status under Texas Law?
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An LLP from another state is called a foreign nonfiling entity.
Forreign LLPs doing business in TExas must register, BUT even if they do not or it lapses, it doesn't change their status as an LLP, it only subjects them to fines. |
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What laws govern a foreign LLP?
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§ 1.103: Entities Not Formed by Filing Instrument
If the formation of an entity does not occur when a certificate of formation or similar instrument filed with the secretary of state or with a foreign governmental authority takes effect, the law governing the entity’s formation and internal affairs is the law of the entity’s jurisdiction of formation. If a foreign LLP does business in TX, it is required to file a certificate with TX’s secretary of state. However, this certificate is obviously not the same certificate you would file if you were registering as an LLP. That is what the above statue is referring to. When a foreign LLP files such a certificate in TX, the law that will govern that entity is its jurisdiction of formation. §1.104: Law Applicable to Liability The law of the jurisdiction that governs an entity as determined under §1.103 applies to the liability of an owner, member, or managerial official for an obligation, including a debt or other liability, of the entity for which the owner, member, or managerial official is not otherwise liable by K or under provisions of the law other than this code. |
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Hypo: Ernst & Young is a Delaware LLP acting in Texas. How do we determine which LLP law applies – Delaware or Texas?
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To answer this question, you must determine which jurisdiction bears a reasonable relation to the owners or members or to E&Y’s business and affairs.
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How much must a foreign LLP pay to register and What if an Foreign LLP refuses or forgets to file?
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When foreign LLPs doing business in Texas file the necessary registration papers (explained above), they must pay a filing fee of $200/partner/year, subject to a cap of $750. In addition, if they fail to file this Texas registration, their LLP status is not gone. Their registration in their home state is the only thing that can affect their LLP status. Rather, if they don’t file the appropriate registration in Texas, they will simply not be in compliance with the Texas registration requirement.
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Hypo: Assume Melhart & Harris is just a general partnership (not an LLP). They breach a K with my company, so I sue them. I get a favorable jury verdict, but they won’t pay. Can I get a judgment against the partnership and its 10 partners personally?
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You can get a judgment against:
1. Partnership if served by serving a partner (serving a partner authorizes judgment agains the partner served and the partnereship). 2. Partner who was individually served TCPRC §31.003: Judgment Against Partnership If a suit is against several partners who are jointly indebted under a K and citation has been served on at least one but not all of the partners, the court may render judgment against the partnership and against the partners who were actually served, but may not award a Personal Judgement or execution against any partner who was not served. Rules: -A partner may be sued for a partnership obligation without joining the other partners. (The plaintiff doesn’t have to join other partners, but he must join the partnership in order to get any money!) -A partnership may be sued in the partnership name alone without joining any of the partners (But how do you do this without suing at least one of the partners? A partnership is its partners!) -A judgment may be entered against a partner who appeared despite lack of service. -Cases say that if you get a judgement against a partnership, and then you sue the individual partners, you do not have to relitigate elements of liability. |
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If i get a judgement against a partnership does that mean I can go after the personal assets of a parther?
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Maybe not. A judgment againt a partner is not by itself a judgement against a partner.
a creditor can only go afer a partner's assets in a judgement against a partnerhsip ONLY if 1. a judgement is also obtained against a partner; and 2. the judgement against the partner is A. based on the same claim as the judgment against the partnership B. has not been reversed or vacated; and C. has remained unsatisfied for 90 days after the date on whish the judgement was enered. UNLESS: 1. the partnership is a debtor in bankruptcy OR 2. the creditor and the Partnerhip agree that they can go after partners regardless of judgemnts. 3 a court orders otherwise 4.the partner is liable by law independantly of the person's status as a P (ex. agency (didn't disclose) ex. tort liability) |
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Hypo: We sue the 10 partners, prove they’re in a partnership, and prove they breached our K. Now we have a judgment against the 10 partners. We didn’t sue the firm because we know they’re broke. What result?
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For a creditor to get a judgment against a partner individually, both TRPA and the BOC require that the partnership be served. What about the case law that says you can do what we did? It’s old, pre-TRPA case law that doesn’t apply anymore.
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Hypo: This time, we’ve served the partnership and the 10 partners. But we don’t really want to get at the partnership – we were just trying to follow the rules. What result?
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If the partnership is in bankruptcy, we can go ahead and get at the partners personally (see subsection (c)). If not, we must wait 90 days until the judgment is left unsatisfied by the partnership.
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Hypo: Assume Partner A entered into a K stating that the other party can go directly after the partners without a judgement against the partnership. A dispute arises, and when the other company files suit, it says to Partner A, “You signed the K with this provision, so now we can go after you and your partners personally.” The other partners say, “We didn’t agree to this!”
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Hypo: Assume Partner A entered into a K with the above boilerplate provision. A dispute arises, and when the other company files suit, it says to Partner A, “You signed the K with this provision, so now we can go after you and your partners personally.” The other partners say, “We didn’t agree to this!”
We would analyze whether Partner A had actual/apparent authority to enter into the K (the analysis we’ve already learned). |
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So do I have to wait 90 days to go after a partner's assets? Do i have to get a judgement against the partner?
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No!
Subsection (c) doesn’t just contemplate not having the wait the 90 days before going after the partner(s) individually. It suggests that you might not even have to seek a judgment against the partnership before going after the partner(s) individually. Read carefully to work through fact patterns on this issue. |
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Do i have to sue everyone at once?
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No.
§152.305: Remedy An action may be brought against a partnership and any or all the partners in the same action or in separate actions. |
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Partners RIghts Inter Se
Hypo: Amanda, Eric, and Claire decide to go into business together. Amanda contributes $9,000, Eric contributes $3,000, and Claire contributes $6,000. Things don’t go so well, and they decide to “wind up” the partnership. They’ve paid all the partnership debts, and they have $30,000 left over. Eric wants to split up the money evenly. Is that the correct result? |
each partner is cretited in the amount they contribited plus share of profits
each partner is charged with distributions and the partner's share of the losses. each partner will share in the profits and losses equally unless the partnership says otherwise in an agreement. says we should credit each partner with an amount equal to their contribution to the partnership. (c) says that each partner is entitled to an equal share of the partnership profits. Consider, though, that if you subtract their contributions from the $30K, you’re only left with a $12K profit: Amanda = 9k + 4k = 13K Claire=6K +4K = 10K Eric = 3K + 4K = 7K This is the correct result. But Amanda and Claire might not think this is very fair. Is there any way to get around this in the statute?... |
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A, C, & E are partners. are they bound by the terms of the BOC provisions? What if they don't have a formal agreemen but have always split profits 20/20/60?
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The partnership agreement controls. The BOC provisions (except non-waivables in 152.002) are just gap-fillers. The agreement does not have to be formal. It can be evidenced in writing, orally or even through the course of dealing.
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Hypo: Same, but now there’s only $6,000 left. Eric (again) wants to split the money evenly. There is no partnership agreement. What result?
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This time there’s no profit. In fact, there’s a loss of $12,000. (b) says that the partners are chargeable with a share of the partnership’s losses in proportion to the partners’ share of the profits. If there’s an agreement about profits, we’ll plug that in for losses. But there’s no agreement here!
Amanda = 9k - 4k = 5k Claire = 6k-4k = 2k Eric= 3k-4k= -1K = He owes money to claire and amanda! Thus, Eric has to pay the others $1,000. |
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Hypo: This time, the partnership is happily in business. They’ve contributed the same amounts as listed above, but the partnership agreement says that Amanda will take 2/3 of the profits, and Claire and Eric will each take 1/6 of the profits. A disagreement arises about where to buy cleaning supplies. Claire and Eric say they should order from Company X, and Amanda says they should order from Company Y. Who wins?
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ordinary course of business? A majority in interest
Outside Ordinary course of business? Unanimity What's a maj in interest? A majority in interest are the parners who own more than 50% or partnerhsip profits Thus, Amanda would represent a majority-in-interest, and the partnership would use Company Y. |
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Hypo: Same, but no agreement as to profit sharing. What result?
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There’s a deadlock in interest (50/50), so we apply the rules we learned before (Summers).
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Hypo: Eric and Claire want to bring in a new partner. Amanda disagrees. What result?
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§152.201: Admission as a Partner
A person may become a partner only with the consent of all partners. |
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Hypo: Eric and Claire want to diversify the business and open a restaurant. Amanda disagrees. What result?
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Amanda will argue that this isn’t in the ordinary course of business, and so it can only be done with the consent of all partners.
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Hypo: Claire keeps the business going day to day – she essentially runs the show. Amanda and Eric check in periodically. One day, Amanda and Eric are checking the books and find checks written to Claire every couple of weeks. They ask her about it, and she says it’s her salary. They say they never agreed to a salary for Claire. What result?
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§152.203: Rights and Duties of Partner
(c) A partner is not entitled to receive compensation for services performed for a partnership other than reasonable compensation for services rendered in winding up the business of the partnership. Recall: The statute serves as a gap filler. The drafters set out to provide a rule in case the partners didn’t agree with regard to compensation. Thus, the drafters decided that if the partners haven’t agreed otherwise, they only receive a share of the profits – not a salary. Lesson: If you want to provide for salaries, put it in your partnership agreement (oral, written, cod). |
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Hypo: Eric and Claire are talking about financial matters. Claire says she’s paid a few partnership debts out of her personal checking account (because the partnership didn’t have the funds at the time). Eric says, “Amanda and I didn’t agree to pay you back for something like this. What a nice gift!” What result?
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(d) A partner who, in the proper conduct of the business of the partnership or for the preservation of its business or property, reasonably makes a payment or advance beyond the amount the partner agreed to contribute, or who reasonably incurs a liability, is entitled to be repaid and to receive interest from the date of the:
(1) payment or advance; or (2) incurrence of the liability. As long as these payments were “in the proper conduct of the business” or “for the preservation of its business or property,” Claire can be reimbursed with interest. What interest rate? §152.005: Applicable Interest Rate If an obligation to pay interest arises under this chapter and the rate is not specified, the interest rate is the rate specified by §302.002, Finance Code. Right now, that rate is 6% (which is much better than the low interest rates you would otherwise earn). |
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Hypo: Claire – still the managing partner – has entered into an advertising K on behalf of the partnership. This venture drains the last of the partnership funds. The only spot she can get with the meager funds is a late-night TV spot. This spot isn’t successful at all, and Claire and Amanda are mad. Assume that this action was in the ordinary course of business. What result?
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A partner owes a dut of care and a duty of loyalty.
a partner shall dischrge duties in good faith and in a manner the P reasonably belives is in the best interst of the parties. A partner's duty of care is to act with the care of an ordinary prudent person under the circumstances. An error in judgment is not by itself a breach of DOC A P is presumed to meet the DOC if they act on an informed basis In light of the partnership’s meager funds, a reasonably prudent person would have researched this business decision. Thus, Claire’s actions probably constitute more than an “error in judgment.” If she had researched this decision like she should have, she would not have “reasonably believed [it] to be in the best interest of the partnership.” Note: Historically, courts have been lenient on this issue. Unless a partner’s choice was horrendous, the court won’t usually assign liability. |
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Hypo: Eric and Amanda want Claire to be managing partner. But Claire is concerned – She says the only way she’ll take the job is if they agree to never second-guess her judgment. What result?
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A parnership agreement may not waive certain provisions of the BOC 152.002
Including: elimination of the duty of care, EXCEPT that they may determine the standard by which the DOC is measured as long as it is not manifestly unreasonable. Non Waivable Provisions: 1. right of access to the books 2.eliminate the duty of loyalty (but can set standard as long as not unreasonable) 3. Eliminate the DOC (but can set standard . . unreasonable (gross negligence is OK). 4.Elimiante GF same as above 5. Vary power to W/D (except writing req) 6. vary right to expel 7. Restrict rights of 3rd party 8. select a gov law not permitted 9. UGH go to 152.002 |
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Hypo: The partnership has been hired for a repair job involving electrical wiring. Claire is out on the job, but she doesn’t know anything about electrical wiring. She simply duct tapes the wires, tucks them in, and hopes everything turns out ok. Later, the house catches fire and burns down. Assume Claire was negligent, but she wasn’t grossly negligent. The partnership agreement provides that she won’t be held liable unless she’s grossly negligent. Does this prevent the homeowner from being able to sue the partnership?
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No. A partnership agreement cannot limit the rights of third parties.
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Assume the homeowner gets judgment against Claire. Claire says to Eric and Amanda: “You guys should indemnify me, because I incurred this liability on the job.” What result?
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A partner who, IN THE PROPER CONDUCT OF THE BUSINESS OF THE PARTNERSHIP OR FOR THE PRESERVATION OF ITS BUSINESS OR PROPERTY, reasonably makes a payment or advance beyond the amount the partner agreed to contribute, or who reasonably incurs a liability, is entitled to be repaid and to receive interest from the date of the:
(1) payment or advance; or (2) incurrence of the liability. This will turn on whether Claire’s actions were in the proper conduct of the business or for the preservation of the business. |
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Hypo: Same, but assume that the homeowner sues the partnership. The partnership has to pay a huge judgment, and now Eric and Amanda want to hold Claire liable. What result?
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Because the partnership provides that Claire won’t be held liable unless she’s grossly negligent, Eric and Amanda can’t hold her liable. (IF THE STANDARD FOR DUTY OF CARE SET OUT IN THE AGREEMENT IS GROSS NEGLIGENCE)
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Hypo: Same, but this time there’s no partnership agreement.
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Claire will try to argue that her actions were merely an error in judgment. This will be shaky.
also, if she made the decision based on information, she wil be presumed to have met the DOC. |
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Hypo: Claire is out on the job again. The customer owns an apartment complex and is impressed with Claire’s work. Customer says, “I’ve been needing to contract with someone to do the repair work at my complex.” Claire is very interested and signs a K in her own name. She conducts business and the venture is very lucrative. When Eric and Amanda find out, they’re mad.
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Claire has a duty of loyalty that cannot be waived.
It includes giveing to Pship profits or benefits derived from the conduct of winding up or from the use of the P property refraining form dealing with those that are adverse to the P refraining from competing or dealing with the Pship in a manner adverse to the Pship. If its competition, then she has breached duty of Loyalty |
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Can one partner sue another?
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§152.211: Remedies of Partnership and Partners
(b) A partner may maintain an action against the partnership or another partner for legal or equitable relief, including an accounting of partnership business… (d) A right to an accounting does not revive a claim barred by law. you can sue with or without an accounting |
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volere (imperf)
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volevo,-i,-a
volevamo volevate volevano |
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Hypo: Eric has not paid his personal Mastercard bill. Mastercard’s lawyers have obtained a judgment against Eric, and now they’re looking for property to satisfy the judgment. The partnership has a bank account with $30,000 and some valuable equipment worth several thousand. Except for some cheap furniture, Eric doesn’t personally own anything of value.
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Partnership property is not property of the partners. A partner or partner’s spouse does not have an interest in partnership property.
ALSO A partner does not have an interest that can be transferred, voluntarily or involuntarily, in partnership property. |
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Can a creditor go after Eric's Partnership interest?
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Yes. a in interest in a partnership is an interest in property, BUT
“Partnership interest” means a partner’s interest in a partnership. The term includes the partner’s share of profits and losses or similar items and the right to receive distributions. The term DOES NOT include a partner’s right to participate in management. |
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Hypo: Eric transfers his partnership interest to his cousin. What exactly has he transferred?
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the cousin only gets Eric’s share of profits/losses and Eric’s right to receive distributions.
He has no managerial power: In order for the cousin to become a partner, all the other partners must agree: A transfer if all or part of the partner's interest: --is not an event of withdrawl --does not by itslef cause a winding up of the partnership -does not entitel the transferee to magage the partnership. In Texas: A transferee doesn’t have managerial rights, but he does have information rights. |
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What is Eric’s status after the transfer?
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After a transfer, the partner continues to have the rights and duties of a partners other than the interst transferred.
Thus, Eric is still a partner. Same result if Eric and his wife divorce and the court grants his wife an undivided ½ interest in partnership property. Eric’s ex is a transferee, but Eric is still a partner. |
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Hypo: Eric dies. The only thing he owns in the world is his partnership interest. His partnership is only made up of real estate (Blackacre). In his will, he leaves personal property to his cousin and real property to his wife. His wife thinks, “Great! I get rights to Blackacre!”
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No. The partnership interest is personal property for all purposes (see §154.001). Thus, the cousin gets the partnership interest and the wife gets nothing.
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Hypo: Eric buys a painting for $50 at an estate sale and hangs it in his office. It turns out to be a very valuable painting and is worth millions of dollars. Claire and Amanda say it belongs to the partnership, and Eric says it belongs to him.
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Property is parthership property if it is acquired in the name of the partnership OR one or more partners if the instrument conveying title indicates the person's capacity as a partner or the existence of the partnership.
Presumptions: Presumed to be Pship prop if acquired with P property regardless of whether it was acwuired in Pship or P's name indicating existence of P. Property acquired in the name of one or more partners is presumed to be the partner’s property, if the instrument transferring title to the property does not indicate the person’s capacity as a partner or the existence of a partnership, AND if the property is not acquired with partnership property. |
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Assume that Eric paid for the painting with a partnership check
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(a) speaks to a transfer where title is put in someone’s name (like real property, etc.). That isn’t the case here, since there was no document transferring title of this painting. (b) tells us that if property is purchased with partnership property, it’s presumed to be partnership property. Eric can try to rebut this presumption (perhaps with evidence that he used a partnership check because it was all he had with him, and then he immediately reimbursed the partnership).
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Now assume that Eric paid for the painting with his own money.
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. Is (c) is mirror image rule of (b)? No. Property is presumed to be a partner’s property only if:
-the partner’s funds are used and -the instrument transferring title does not indicate the partner’s capacity as a partner or the existence of a partnership. |
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We’ve already established that there was no document transferring title of this painting. This will make it more difficult for Eric to prove that the painting is his. Now assume that the bill of sale says, “This painting is hereby conveyed to Eric Rhine, partner in Ace Repair Company.” Eric then takes the painting and hangs it in his home.
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This is partnership property, and Eric is out of luck.
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Remember, however, that the statutes are gap fillers.
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If Eric and the partners had an understanding that the painting was his personal property, despite evidence to the contrary, that’s ok.
There’s only one exception: §152.002: Nonwaivable and Variable Provisions (b) A partnership agreement or the partners may not: (7) restrict rights of a third party under this chapter or the other partnership provisions… If a creditor was trying to claim the painting to satisfy a judgment against the partnership, Eric and the partnership could not bring up their “agreement” that the painting was Eric’s personal property. |
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E/WD vs E/WU
TUPA vs. BOC |
TUPA - said that when a partner withdrew it was dissolution. and dissolution lead either to termination or a buyout and a reformation as if a new partnership
BOC - we have events requiring winding up and events of witdrawl |
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When is a domestic entity required to wind up?
When are there other events that req a g partnership to wind up? |
1. expiration of the period of duration, if its not perpetual
2. a voluntary decision to WU 3. an event in the governing docs that indicates winding up, termination or dissolution. 4. an event in the code requiring winding up 5. a court decree Yes. 1. on the express will of a maj in interest 2. if for a DEFINITE TERM OR UNDERTAKING: express will of ALL the partners or the expiration of the term or completion of undertaking 3. if agreement provides that W/U happens on a specified event = unanimous decision or the occurance of the event. 4. an event that makes it illegal 5. the sale of all or almost all of the p Prop outside the course of busnies 6. if not term or specification upon notice of a partner. -- if notice given and no rebuttal within 60 days, W/U. |
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Can a court order an E/WU
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yes. on application by a partner if:
(A) the economic purpose of the partnership is likely to be unreasonably frustrated; or (B) another partner has engaged in conduct relating to the partnership’s business that makes it not reasonably practicable to carry on the business in partnership with that partner; OR on application of an owner if the court determines that it is not reasonably practicable to carry on the entity’s business in conformity with its governing document. |
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Hypo: Amanda, Claire and Eric are equal partners and have formed a partnership without agreeing to a particular term. Eric later decides that he no longer wants to be a partner. He wants to end the business to pay off creditors so he won’t be liable for any debts. Amanda and Claire don’t want to end the partnership.
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It takes a majority-in-interest vote to wind up the business. Eric is not a majority-in-interest, so he can’t cause the winding up of the business.
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Hypo: If Eric is a 45% partner and Amanda and Claire are 55% partners (collectively), is there anyway that Eric can force the winding up of the partnership?
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No, but he can withdraw as long as it is not a wrongful withdrawl.
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Can the partners change the winding up rules via their partnership agreement?
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a partnership can't waive two W/U rules in 11.057(a)
(a) 3 - when the agreement provides for the winding up of the partnership on an event the partnerhsip is required to wind up on unanimous decision to or on the occurance of the event in the agreement (a) 4 - an event that makes it illegal to cary on the partnership Focus on for our purposes. |
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Hypo: When Ace Partnership starts to wind up, it has $75,000 in assets and $21,000 in debts. What is the partnership supposed to do?
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Liquidate the assets and pay the debts (§152.706). Once they do that, $54,000 is left. How do they distribute this?
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After a Pship intending to W/U liquidates its assets and pays its debts, how is the rest of the assets distributed?
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A surplus shall be applied to pay in cash the net amount distributable to partners in accordance with their right to distributions under §152.707.
The profits and losses that result from the liquidation of the partnership property must be credited and charged to the partners’ capital account. If there is a surpluss, then the cash amount is deposited into an account for P. If there is a negative balance, P must contribute that amount of money to his capital account |
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What is a P's capital account?
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(1) “Capital account” means the amount computed by:
(A) adding the amount of a partner’s original and additional contributions of cash to partnership, the agreed value of any other property that that partner originally or additionally contributed to the partnership, and allocations of partnership profits to that partners; and (B) subtracting the amount of distributions to that partner and allocations of partnership losses to that partner. |
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Hypo: Same ($54,000 in assets are left). Assume Amanda contributed $9,000, Claire contributed $6,000, and Eric contributed $3,000. What result?
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The partnership, then, is $36,000 ahead ($54,000 - $18,000 in contributions). How should this be divided? Recall the rule we learned before: Profits are allocated equally in the absence of an agreement.
A: $9,000 + $12,000 = $21,000 C: $6,000 + $12,000 = $18,000 E: $3,000 + $12,000 = $15,000 |
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Hypo: This time, the partnership is only left with $6,000 after paying debts.
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Now, the partnership is $12,000 in the hole ($6,000 - $18,000 in contributions). Recall: Losses are to be divided equally as well (in the absence of an agreement). How is this divided up?
A: $9,000 - $4,000 = $5,000 C: $6,000 - $4,000 = $2,000 E: $3,000 - $4,000 = <$1,000> |
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REMEMBER - however, some losses and liabilities are not attributable to some partners.
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§152.304: Nature of Partner’s Liability
(b) A person who is admitted as a partner into an existing partnership does not have personal liability under (a) for an obligation of the partnership that: (1) arises before the partner’s admission to the partnership (2) relates to an action taken or omission occurring before the partner’s admission to the partnership; or (3) arises before or after the partner’s admission to the partnership under a K or commitment entered into before the partner’s admission. §152.801: Liability of a Partner (a)…a partner in a LLP is not personally liable, directly or indirectly, by contribution, indemnity, or otherwise, for a debt or obligation of the partnership incurred while the partnership is a LLP. Thus, if a debt arose before a partner’s admission to the partnership, or if the partner is in an LLP, he doesn’t have to contribute to the partnership for debts. |
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Hypo: This time, the partnership is left with <$6,000> after paying debts. In other words, Ace doesn’t have enough assets to pay off all debts.
Taking into consideration each partner’s contribution, there’s a $24,000 loss. How is this divided up? |
A: $9,000 - $8,000 = $1,000
C: $6,000 - $8,000 = <$2,000> E: $3,000 - $8,000 = <$5,000> According to the exceptions above: If these liabilities arise in the context of an LLP, and Eric and Claire don’t have personal liability, they don’t have to contribute. Some mischief can arise in this situation, however…. |
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Hypo: For a while, Ace operated as a plain general partnership. Later, they registered as an LLP. One debt was incurred before registration, and another was incurred after. Now that they’re winding down, they have $10,000. Which creditor should they pay?
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Ace will naturally try to pay off the debt for which they are personally liable. The other creditor might think this is unfair, but the partnership doesn’t set forth any rules about order of payment. The creditor must look to other laws for remedies.
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Hypo: What if in ACE, E had lent the partnership money?
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They will have to liquidate the partnership to pay him back like any other creditor.
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Hypo: Ace is winding up. Amanda goes to the hardware store and sees some tools on sale. She buys them for the partnership. Can the seller hold the partnership liable for this debt?
Amanda’s actions were inappropriate in the winding up context. |
§152.704: Binding Effect of Partners’ Action After Event Requiring Winding Up After occurrence of an event requiring winding up of the partnership business, a partnership is bound by a partner’s act that:
(1) is appropriate for winding up; or (2) would bind the partnership under §§152.301 and 152.302 before the occurrence of the event requiring winding up, if the other party to the transaction does not have notice that an event requiring winding up has occurred. §§152.301 and 152.302 are the provisions stating that each partner is an agent for the partnership, and that an act of a partner binds the partnership if the act is apparently for carrying on in the ordinary course of the partnership business. Since Amanda’s actions – although inappropriate for winding up – were in the ordinary course of business, Ace can be held liable for this act. |
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So how can a partneship give notice of winding up?
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§151.003: Notice of Fact
(a) For purposes of this title, a person has notice of a fact if the person: (1) has knowledge of the fact; (2) has received communication of the fact as provided by (c); or (3) reasonably should have concluded, from all facts then known to that person, that the facts exist. (b) A person notifies or gives notice to another person of a fact by taking actions reasonably required to inform the other person of the fact in the ordinary course of business, regardless of whether the other person actually has knowledge of the fact. (c) A person is notified or receives notice of a fact when the fact is communicated to: (1) the person; (2) the person’s place of business; or (3) another place held out by the person as the place for receipt of other communications. (d) Receipt of notice by a partner of a fact relating to the partnership is effective immediately as notice to the partnership unless fraud against the partnership is committed by or with the consent of the partner receiving the notice. |
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So what about a general ad in the paper?
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Courts would probably not deem this notice. The only way it could possibly be notice is if there was evidence that the seller received the paper at his house and read that section regularly.
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What about a letter to the seller’s place of business that was never opened?
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This would serve as notice under (c). All that is required is communication.
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How do you “hold out” a place as “a place for the receipt of communications?”
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By putting your name/address/phone number in the phone book, for example.
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Hypo: We know that the partnership can be held liable for Amanda’s actions, but can the partnership then hold Amanda personally liable?
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§152.705: Partner’s Liability to Other Partners After Event Requiring Winding Up
(b) A partner who incurs, with notice that an event requiring winding up of the partnership business has occurred, a partnership liability under §152.704(2) by an act that is not appropriate for winding up is liable to the partnership for a loss caused to the partnership arising from that liability. If Amanda had notice that the partnership was winding up, the partnership can hold her personally liable. If she didn’t have notice, she’s off the hook. |
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Hypo: Eric decides to withdraw from the partnership. Can the partnership agreement restrict Eric’s power to withdraw?
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No. See §152.002(b)(5)-(6):
(b) A partnership agreement or the partners may not: (5) vary the power to withdraw as a partner under §152.501(b)(1), (7), or (8), except for the requirement that notice be in writing… (6) vary the right to expel a partner by a court in an event specified by §152.501(b)(5) What are these cross referenced sections? What can’t the partnership agreement restrict? (1) receipt by the partnership of NOTICE OF P'S EXPRESS WILLl to withdraw as a partner on: (5) the partner’s EXPULSION BY JUDICIAL DECREE, on application by the partnership or another partner, if the judicial decree determines that the partner: (7) if a partner is an individual;death, guardian, incapacity (8) termination of a partner’s existence… |
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Hypo: Assume the partnership agreement doesn’t speak to Eric’s withdrawal. What now?
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his interest is redeemed if he w/d and the pship doesn't w/u within 61 days
or the event of withdrawl is based on his request to w/u. |
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What is the redemption price?
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the fair value of the Iinterest on the date of withdrawl.
This isn’t as simple a valuation as it sounds. Fair value is not defined anywhere in the statute! It’s only spoken to in one context (wrongful withdrawal). From Cauble v Handler FFMV → What a willing buyer would pay and what willing seller would charge for something. FV → What a willing buyer would pay and what a willing partner would charge for a p’ship interest. What is the effective difference between “fair market value” and “fair value”? When someone buys Eric’s partnership interest, what are they getting? No management rights, no control rights, etc. Thus, Eric’s partnership interest would not be deemed very valuable on the market. In the cases that have attempted to interpret “fair value,” courts have generally said that the term refers to the naked value of the partnership interest, not the value of the partnership interest on the market. This the analysis we’ll go through when we value a partnership interest on the test. Under the BOC, P would have to let the business continue and claim s a creditor the value of P's interest at dissolution. P would also get interest on this amount. |
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Hypo: Assume Eric withdraws but is still alive. Ignore the buyout process. The partnership continues to exist. The other partners order some supplies on credit. The bill does not get paid and the creditor wants to go after anyone and everyone. Who has liability for the contract?
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Amanda and Claire are liable (if not an LLP). The partnership is liable if there was actual or apparent authority. Eric thinks he is off the hook – But there are some situations where he could be held liable even though he is no longer a partner…
A W/D partner is liable for two years after W/D if 3rd party did not have notice of P's withdrawl AND reasonably believed that the W?D partner was a partner at the time of the transaction. Thus – In order to hold Eric liable, the third party must have no notice of his withdrawal AND reasonably believe that he was a partner at the time of the transaction. |
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Hypo: Same situation, but the transaction was entered into 5 years after Eric withdrew.
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The statute clearly says that this liability can only last for two years after the partner’s withdrawal.
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Hypo: Eric orders supplies from a third party after he is no longer a partner. He then charges them to the partnership. The creditor wants to hold the partnership liable for this purchase. He also wants to hold Amanda and Claire liable under their personal liability. What result?
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§152.504: Withdrawn Partner’s Power to Bind Partnership
WITHIN A YEAR, The action of a withdrawn partner binds the partnership if it would have before the withdrawl and the other party to the transaction: (1) does not have notice of the person’s withdrawal as a partner (2) had done business with the partnership within one year preceding the date of withdrawal; and (3) reasonably believes that the withdrawn partner was a partner at the time of transaction (b) A WITHDRAWN PARTNER IS LIABLE to the partnership for this loss Eric could bind the partnership. However, notice that this standard is a little higher than the one before. In this case, the third party would have to have done business with the partnership in the last year. Also—there is only a one-year period in which the partnership could be held liable. To avoid this, many partnerships send out friendly letters informing all of the people that they have done business with in the last year that Eric is no longer a partner. This would give the customers notice and then the partnership could not be held liable. claimant could argue under CL authority that there was apparent authority after the one year cut-off; as in the partnership continues to use letterhead with withdrawn partner’s name; or otherwise creates the impression that the withdrawn partner is still a partner → third party still has to meet requirements in (a) |
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152.707: Settlement of Accounts
A partner that withdraws before winding up (but less than 60 days before winding up), they will get liquidation value. When the accounts are settled, that partner will get credited with any portion of the profits from the period after withdrawal. However--- they will only be charged with losses to the extent of profits. The partner is then somewhat protected from being charged with operating losses that occurred after he withdrew. |
Ex: Partner withdrew. Remaining partners continue to try to run the business but realize that the withdrawn partner was the brains of the business and they cannot make the business succeed. They make some horrible decisions and the business incurs some losses.
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Corporations
When is a shareholder liable for the debts and obligations of a corporation? |
Generally, they are not liable.
However, there are exceptions: 1. When a shareholder commits a tort within the course of business both the shareholder and the corporatin may be held liable. 2. When there is a need to pierce the corporate Veil 3. When a shareholder binds himself to a K as an agent of the company (when there is a PDP or UP) |
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How are corporations treated for tax purposes?
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A C corporation pays taxes according to established corporate rates. Additionally, the shareholders must pay taxes on any dividends distributed to them. Thus, the same dollars are taxed twice.
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Hypo: ACE is a C corporation. How can they avoid double taxation?
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Employee salaries are not taxed to the corporation. Thus, ACE could zero out its income by paying everything out to its employees in the form of salaries and bonuses. This works up to a point (If Eric received $6 million during a year when he didn’t do very much, people will start to wonder).
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How do taxes work for an S corp?
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An S corporation is a flow-through entity, so the shareholders pay taxes on any income distributed to them. Thus, those dollars are taxed only once. Not every corporation can qualify as an S corporation. Very strict requirements must be met:
1. Corporation must have 100 or fewer shareholders (families = 1) 2. SHs must be natural persons, estates, certain trusts, or certain non-profits 3. Natural persons must be U.S. citizens or resident aliens 4. Corporation must have only one class of stock A S-Corp is a flow-through entity A C-Corp is not a flow-through TAXATION – • a partnership can choose partnership tax, C-Corp, or S-Corp taxation; • a corporation can only choose C or S, depending on which criteria they meet |
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how is a corporation filed?
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A COF is filed with the sevcretary of state. In this COF you must have:
1. name w designator (cannot be deceptively similar) 3. purpose - usually broad boiler plate - any and all lawful purposes. 4.Shares - # of authorized shares and par value or absence of par value 5. Cap structure of the cop - 6 regestered office or agent - consent to be an agent must be in writing. must have an adress, cannot be a po box not exclusive list. see 3.005 |
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are ther any prohibited purposes?
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Yes, you cannot hav a purpose that is:
1. Unlawful 2.Cannot be engaged in by an entity 3. an activity that requires licensing and an entity can't get a license. |
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When does a filing take effect?
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statute says that a business entity exists when the filing become "effective" When is that? we have no definitve case law. In TExas, when the certificate of incoportation is issued, it is called aknowledgement and the acknowledgement is conclusiive evidence of existentce agains everyone but the state. Best we can say is that this is the law.
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Are there any types of entities available to professionals that want to form organizations but don't want to form corporations (doctors, etc?)
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YES
There are two kinds of entities available for professionals: PC – professional corporation (all professionals other than medical doctors) PA – professional association (medical doctors) but now, no tax advantages due to the franchise tax, which is an income tax for corps. |
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other restrictions on corps
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raising cattle and a host of others:
§2.007: Additional Prohibited Activities of For-Profit Corporation [Things that a for-profit corporation can’t do] (1) operate a cooperative association, limited cooperative association, or labor union; (2) transact a combination of the businesses of: (A) raising cattle and owning land for the raising of cattle other than operating and owning feedlots and feeding cattle; and (B) operating stockyards and slaughtering, refrigerating, canning, curing, or packing meat (3) kind of ridiculous. These provisions don’t prohibit people from doing both activities – they just provide that you can’t do both in one corporation. How can a person easily get around this? Start another corporation to do the second task prohibited by the statute. |
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What is a non profit coporation?
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a corporation formed for the purpose of operating a nonprofit institution, including an institution devoted to a charitable, benevolent, religious, patriotic, civic, cultural, missionary, educational, scientific, social, fraternal, athletic, or aesthetic purpose, may be formed and governed only as a nonprofit corporation under this code and not as a for-profit corporation under this code
Note: There are other provisions that set forth the requirements of formation for non-profits. these corporations do make profits; but they must be dedicated to the purpose of the organization |
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Hypo: Columbus Avenue Baptist Church is incorporated. Why doesn’t it have Corp. in its name?
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The Non-Profit Act doesn’t require Corp. in the name
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Non-profits don’t have to incorporate, so what is a church or other non-profit?
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At common law, these organizations were seen as aggregates, such that the church couldn’t own property. Someone would have to own it for the church. All the members would be liable for the actions of the church.
A few years ago, TX adopted an act for this situation → TUUNAA (Texas Uniform Unincorporated Non-profit Association Act) (1) This statute says that a non-profit association can hold title to property. (2) It also says that being a member or a governing party of a non-profit does not create liability. |
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Hypo: Can a business that is located in Texas and does all its business in Texas incorporate in Delaware?
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Yes. That is perfectly acceptable. Thus, Delaware law will apply to the corporation.
Why is Delaware so advantageous? -cutting edge business law -knowledgeable judges -favorable to businesses However, consider that incorporating in another state can generate extra costs, etc. You must weigh the pros and cons of incorporating in Texas v. incorporating in Delaware. |
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ULTRA VIRES
What is ultra vires |
a select situation where a corporation has exceeded its powers.
Historically, businesses had to list all powers in the articles of incorporation. Courts would enforce these power boundaries very stringently, but this narrow scope of corporate power allowed corporations to weasel out of contracts whenever they went sour by stating the requirements of the K exceeded the corporation’s powers. Today, corporations don’t have to list all of their powers, and courts aren’t as willing to rule that corporations have exceeded their powers. Those select situations are called ultra vires. |
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When does Ultra Vires apply?
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As a general rule, ultra vires doctrine only applies when –
1. the articles restrict corporate activities 2. the corporation engages in activities not directly related to profit seeking, such as charitable giving 3. the board of directors takes actions that undermine shareholder power As a general rule: The fact that a corporation doesn’t have the power to act doesn’t allow either party to dodge a K. This effectively overrules the common law doctrine of ultra vires…….but see the rest of §20.002 below: The fact that an act or transfer is beyond the scope of the expressed purpose or purposes of the corporation or is inconsistent with an expressed limitation on the authority of an officer or director MAY BE ASSERTED IN A PROCEEDING: 1. by a shareholder or member to enjoin the performance of an act or the transfer of prop. 2. by corp itself in suit against an officer, director, or former officer 3. By the AG |
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Hypo: ACE has a narrow purpose clause in their agreement: “To provide
repair services to homeowners.” Amanda and Claire vote (as a majority of the board) to open a restaurant. What can Eric do? |
As a shareholder, Eric can assert a claim against ACE (opening a restaurant is beyond the scope of ACE’s expressed purpose).
The court is not required to enjoin the transaction if Eric asserts a claim under (c)(1). It can do so if such an action would be equitable. |
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DON’T confuse Ultra Vires with violation of Corporate Duties
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• fiduciary breaches: the corporation enters into a contract with a director on terms that significantly favor the director. Unless the articles disable the corporation from entering into self-dealing transactions, the corporation has the power to do this; the transaction is not ultra vires. The corporation, however, may avoid the transaction if its terms are unfair and the director has breached his fiduciary duties.
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DON’T confuse Ultra Vires with violation of Corporate Duties
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• fiduciary breaches: the corporation enters into a contract with a director on terms that significantly favor the director. Unless the articles disable the corporation from entering into self-dealing transactions, the corporation has the power to do this; the transaction is not ultra vires. The corporation, however, may avoid the transaction if its terms are unfair and the director has breached his fiduciary duties.
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If a for-profit corporation’s primary purpose is to make money for its constituents – is charitable giving an act of ultra vires?
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• no, as long as the gift is not unreasonable. General rule is that if the gift is tax deductible, corporate law treats it as a reasonable exercise of corporate powers.
• if gift is excessive, can attack as ultra vires, or corporate waste (a fiduciary breach) |
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What is a promoter?
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Someone who is engaging in transactions toward corportate formation and organization.
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Parties entered into a K. At the time, both parties knew that a corporation had not been formed. The K was signed by the promoter. He signed it “as an agent for the corporation to be performed who will be the obligor.” The business began to fail and the third party wanted to hold The promoter liable for the amount of the Ks. What result?
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The default rule under the restatement is that the promoter is personally liable on a preincorporation conract absent a contrary intent.
If both parties know that there is no principal capable of entering into a contract, THERE IS A REBUTABLE INFERENCE that, although the contract is nominally in the name of the nonexistent person, the parties intended that the person signing as agent should be a party, unless there is some indication to the contrary. |
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When a promoter makes an agreement with another on behalf of a corporation to be formed, the following alternatives may represent the intent of the parties:
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see page 87, outline
1. They may understand that the third party is seeking to make a revocable offer to the nonexistent corporation which will result in a K if the corporation is formed and accepts the offer prior to withdrawal. This is the normal understanding. Ex: Boss is a mere messenger. There is no K unless the company is incorporated and adopts the K. The third party has no recourse against Boss even if for whatever reason the company never adopts the offer. 2. They may understand that the third party is making an irrevocable offer for a limited time. Consideration to support the promise to keep the offer open can be found in an express or limited promise by the promoter to organize the corporation and use his best efforts to cause it to accept the offer. Ex: Boss agrees to use his best efforts to bring the corporation into existence and have it accept the third party’s offer. There is no K until the company is incorporated and adopts the K. Boss is liable only if he fails to use his best efforts to incorporate the company and have it accept the offer. 3. They may agree to a present K by which the promoter is bound, but with an agreement that his liability terminates if the corporation is formed and manifests its willingness to become a party. There can be no ratification by the newly formed corporation, since it was not in existence when the agreement was made. Ex: Boss accepts liability to the third party under the K until the company is incorporated, adopts the K, and is substituted in Boss’ place. Upon such contractual substitution (novation), the third party discharges Boss. novation: a release of a party to a contract and a substitution of a third party 4. They may agree to a present K on which, even though the corporation becomes party, the promoter remains liable either primarily or as a surety for the performance of the corporation’s obligation. Ex: Boss is liable under the K, even if the corporation later adopts the K. Under this arrangement, Boss is severally liable along with the corporation. His liability is “primary” if the third party can look to him first, or “secondary” if the third party must first exhaust recourse to the corporation. |
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Assume a promoter enters into a K for a non-existent corporation and the company never adresses the contract once the company is incorporated. What result?
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This time, the third party wants to hold the corporation liable.
The simple fact that the company later incorporates does not mean that the corporation has adopted the K. Rather, the corporation must explicitly adopt the K in order to be bound. This adoption cannot relate back to the date of K execution. It can only relate back to the date of incorporation. Note: Some courts say that the corporation has “ratified” the K (instead of “adopted”). This isn’t technically correct, so use “adopted.” |
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Defective Incorporation
Hypo:Everyone thinks a corporation has been formed but through an error, the corp is not actually fomed. |
Courts have viewed the tough luck approach when dealing with incorporations as too harsh. in response they have the doctrines of De facto corporation and corporation by estoppel.
De jure corporation: properly incorporated – conformity with the mandatory conditions precedent established by the statute. De facto corporation: defectively incorporated, but still considered a corporation. Requirements: 1. a valid law under which a corporation can be lawfully organized, 2. a good faith attempt to organize thereunder; and 3. actual use of the corporate powers |
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In Texas, do we recognize the concept of a defacto corp?
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§3.001: Formation and Existence of Filing Entities
(d) Except in a proceeding by the state to terminate the existence of a filing entity, an acknowledgement of the filing of a certificate of formation issued by the filing officer is conclusive evidence of: (1) the formation and existence of the filing entity; (2) the satisfaction of all conditions precedent to the formation of the filing entity; and (3) the authority of the filing entity to transact business in this state. One case recognizes a negative inference from this statute: Unless you’ve filed a certificate of formation, your corporation won’t be recognized. Thus, in TX, de jure isn’t really different from de facto. De facto only on an acknowledgement - when you receive the certificate from the State |
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What is corporation by estoppel and is it recognized in Texas?
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Corporation by estoppel is a when those who deal with a corporation on the assumption that it exists are estopped form denying the existnece of the corp (and this imputing liability).
No case law definitelvey answereing whether this exists in Texas |
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What is the purpose of Veil piercing?
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To impose liability for corporate Obligation on shareholders or others when
the business has been properly incorporated the corporation is obligated to the creditor distributions to shareholders have been statutorily proper |
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Here, Creditor has a K with Flemming Fruit. Flemming Fruit fails to pay a bill to Creditor. Creditor files suit against Flemming Fruit and Flemming (principal shareholder).
How can Creditor prove that Flemming Fruit is a mere “instrumentality” of Flemming?... |
The following factors must combine to paint a picture of unfairness.
1. Grossly undercapitalized? ---If the capital is “trifling” when compared to the corporate undertaking, the corporation will be deemed “grossly undercapitalized.” 2. Failure to observe corporate formalities? Lack of shareholder meetings; Only one director; Lack of records; Sloppy books 3. Non-payment of dividends? If a company is insolvent, it’s not supposed to make dividend payments. So wouldn’t it be worse if the company was paying dividends despite insolvency? Point of this factor: In a typical instrumentality situation, the dominant shareholders take out money at will for whatever they want. This shouldn’t be allowed. Conclusion: By itself, non-payment of dividends doesn’t mean anything. There are all sorts of legitimate reasons for not paying dividends. We must look at the surrounding circumstances and determine why dividends aren’t being paid. 4. Insolvency of the debtor corporation at the time? Just like the last factor: Insolvency by itself is not enough to pierce the veil. If it were, what good would the corporate liability protection be? Rather, we must determine why the corporation is insolvent (i.e. dominant shareholders are sucking funds out of the corporation). 5. Siphoning of funds of the corporation by the dominant stockholder? “Siphoning” has a very negative connotation. It suggests that the dominant shareholders are sucking funds out of the corporation whenever they want. Note: This doesn’t mean that the shareholders aren’t entitled to a salary. It simply means that they can’t suck funds out at will. 6. Non-functioning of other officers or directors? No meetings; It’s unclear who the officers/directors are; No minutes or records from meetings; One person controls everything; etc. 7. Absence of corporate records? No minutes or records from meetings; Sloppy books; etc. 8. Corporation is merely a façade for the operations of the dominant shareholder(s)? This factor isn’t very helpful. It’s a conclusory label that sums up all of the other factors. |
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Castleberry - sham to perpetrate a fraud
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Court said it would disregard the corporate fiction in six circumstances:
sham to perpetrate a fraud doctrine 1. when the fiction is used as a sham to perpetrate a fraud; 2. where a corporation is organized and operated as a mere tool or business conduit of another corporation (alter ego); 3. where the corporate fiction is resorted to as a means of evading an existing legal obligation; 4. where the corporate fiction is employed to achieve or perpetrate monopoly; 5. where the corporate fiction is used to circumvent a statute; and 6. where the corporate fiction is relied upon as a protection of crime or to justify wrong. Court uses the “sham to perpetrate a fraud” theory to pierce the corporate veil (which is distinct from the “alter ego” theory). But the plaintiff pled the alter ego theory! How did the court make this work? Court says: “Plaintiff – You haven’t submitted enough evidence to prove alter ego, but you have submitted enough evidence to prove sham to perpetrate a fraud. You pled alter ego instead of sham to perpetrate a fraud, but the defendant didn’t object to your defective pleading. Therefore, it’s ok.” |
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Alter-ego
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Alter-ego applies when there is greater unity between the corporation and the shareholder, such that holding one accountable and not the other would cause an injustice (look this up)
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Castleberry standard for sham to perpetrate a fraud
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Court’s standard for sham to perpetrate a fraud:
Recognized in cases of actual or constructive fraud where the separate corporate existence would bring about an inequitable result; Constructive fraud is the breach of some legal or equitable duty which, irrespective of moral guilt, the law declares fraudulent because of its tendency to deceive others, to violate confidence, or to injure public interests. |
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After castleberry, there was a backlash and the leg tried to codify some rules for veil piercing.
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Conclusion from Castleberry:
For alter ego, you have to prove several factors + injustice. For sham to perpetrate a fraud, you apparently only have to prove injustice. Doesn’t this make the alter ego theory superfluous from a plaintiff’s standpoint? Castleberry is stil good law in torts |
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So what was the tex leg response to castleberry?
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21.223 now, to pierce the corporate veil in a contract action, you must prove actual fraud.
also a(3) no liability fo obligations for simply failing to observe corporate formalites The legislature thought that observance of corporate formalities had been getting undue emphasis in case law (i.e., it’s not as important as the courts were making it). Note: This provision isn’t limited to the K setting. It applies to tort cases, too. |
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Fraudulent Conveyance
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Other theories that could have helped castleberry - Uniform Fraudulent Transfer Act.
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Hypo: Doctor negligently performs surgery on a patient. He knows that he
screwed up, and he knows that he will be held liable in a matter of time. Consequently, he gifts away all of his assets to friends, Tootsie, etc. |
Court will recognize fraud here. The doctor, knowing that his patient would have a claim against him, fraudulently gave away everything. Thus, the friends and Tootsie must give up the gifts, even if they didn’t know what the doctor was trying to do. (§24.004, §24.005)
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Hypo: This time, the doctor doesn’t yet realize that he performed the surgery in a negligent way. By coincidence, he gifts away all of his assets to friends and Tootsie
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Court will still recognize fraud as a matter of public policy.
Castleberry could have used this theory, but it’s not technically a means of piercing the corporate veil. Rather, it would allow Castleberry to get at the true assets of Texan Transfers. This remedy might be less favorable. |
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Mancorp
Was there more than a scintilla of evidence to support the finding that Culpepper Properties, Inc. was the alter ego of John Culpepper, Jr.? |
Recall – Elements of alter ego:
1. Such unity between corporation and individual that the corporation ceases to be separate 2. Holding only the corporation liable would promote injustice How would the §21.223 affect the analysis? This case was based on a contract. The statute requires actual fraud to hold someone liable on the alter ego theory in cases rising out of a contract. The jury would have to find actual fraud in order to hold Culpepper personally liable. Thus, in the PJC there should be lack of separateness/unity; injustice; and fraud However the courts in other cases are not sticking to a rigid actual fraud standard! Recall: The statute also says that a failure to observe corporate formalities cannot be a basis for holding an individual liable. As a defense lawyer for Culpepper, what things would you argue were simply corporate formalities (and thus not admissible)? The personal checks and the change order. Argument for plaintiff’s lawyers: The statute just says that no corporate formalities can’t be a basis for liability, not that it can’t be introduced as a factor in the totality of the circumstances. Unfortunately for plaintiff’s lawyers, the courts have said that failure to observe corporate formalities is no longer a factor. They have not explained why. If this was a tort claim, the plaintiff would not have to prove actual fraud, but he still couldn’t introduce evidence that the defendant didn’t observe corporate formalities. What about “sham to perpetrate a fraud”? A plaintiff still has to show actual fraud in a contract case but doesn’t have to prove lack of separateness. This seems to swallow the alter ego theory, but everyone still pleads alter ego. |
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Alter Ego and Veil Piercing in other contexts
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actual fraud: involving dishonesty of purpose or intent to deceive
Alter-Ego: applies when there is such a unity between corp and individual that the corporation has ceased to be a separate entity, and allowing the individual to avoid liability through the use of the corporate form would work an injustice. Evidence relevant to prove Alter-Ego: (1) payment of alleged corporate debts with personal checks or other commingling of funds (2) representations that the individual will financially back the corporation (3) diversion of company profits for the individual’s personal use (4) inadequate capitalization, and (5) other failures to keep corporate and personal assets separate Alter-ego in personal jurisdiction Specifically, the court stated that fraud – which is vital to piercing the corporate veil under BOC § 21.223 – has no place in assessing contacts to determine personal jurisdiction. Alter-ego in Marital Property Arises when H enters marriage with business (corporation) and stock in that business, then divorce – this is separate property. But, when H enters marriage with sole proprietorship (not separate entity), then his business is the alter ego of H and property becomes community. Benefits of maintaining corporate formalities (despite the TX statute stating that maintenance of corporate formalities cannot be submitted as evidence in a veil piercing case): -Formalities are crucial if you get sued in another state or under federal law -Marital property ramifications -Formalities can deflect claims (if you can show that you’re extremely organized, etc.) -Organization is a plus for the business |
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Veil Piercing for Foregin Corps.
Hypo: ACE (a Texas corporation) is harmed by a Michigan corporation that does all of its business in Texas. |
This type of lawsuit is governed by the laws of the state of incorporation of the corporation being sued. Thus, whether the dispute is about internal affairs or liability/veil-piercing, Michigan law controls.
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Tolling
Hypo: ACE Inc, a tort is committed by ACE Inc. on 1/02. 6 months later a suit is brought against ACE for employee's tort. the trial lasts 18 months. A judgemnte is entered agains ACE inc in January of 2004. six months pass and the victim plaintiff brings suit using alter ego against shareholders/officers ACE. THE SOL FOR TORTS IN TEXAS IS TWO YEARS. WHAT RESULT? |
A, C, and E claim that the alter ego suit on 6/04 is time-barred because it has been more than 2 years since the tort was committed. Plaintiff claims that the suit is timely. Why? Because he is suing A, C, and C as the alter egos of the ACE, Inc. – effectively suing ACE, Inc.’s “other self.”
Why? Because the underlying suit against the corporation has concluded. According to the court: The SOL is tolled (clock stops) for the time period that the underlying suit against the corporation is pending. In the above hypo, then: The SOL is tolled for 18 months – the time period when the suit against ACE, Inc. was pending. The court also made clear: Alter ego is not an independent cause of action. It’s simply a means to enforce a judgment against the corporation. |
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Equitable Subordination
Equitable Consolidation?? |
In the bankruptcy context, there are piercing doctrines and doctrines akin to piercing. Bankruptcy courts have a lot of latitude to made decisions in equity.
Common situation → The shareholders are also creditors of the corporation. When the corporation declares bankruptcy, the shareholders get in line with the other creditors, and they sometimes claim to have higher priority than the other creditors. Equitable subordination: The bankruptcy court can disregard the shareholders’ technical place in line if the shareholders acted fraudulently to put themselves in a better position than the other creditors. |
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Par Value
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Par value is an arbitrary label which constitutes the minimum price at which shares of stock can be issued. Once the shares of stock are sold to shareholders, the shareholders are not bound by the par value if they choose to resell their shares.
Par value does not necessarily represent the actual value of the stock. At any point in time, the actual value could be more or less than the par value. |
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With Regard to stock, what is the minimum amount of information that can be put on the COF?
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The par value of the stock or the fact that it has no par value and the amoutn of authorized shares.
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How can a company finance itself?
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Issue shares of stock - Equity financing
taking out loans - debt financing corporate earnings |
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Pre-emptive Rights
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Pre-emptive rights allow shareholders to acwuire shares when the coporation issues new shares. This protects existing shareholders' proportional interest in the coporations shares already issued and outstanding.
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Hypo: Amanda, Claire, and Eric each own 75 shares in ACE, Inc. Amanda, Claire, and Eric make up the board of directors. Amanda and Claire believe that the company could enter into new business and raise some capital. They also talk to Lesley about buying into the corporation. She agrees to buy 75 shares of stock for $15K. Eric doesn’t want Lesley to be a shareholder, and he is not in favor of the issuance of the new shares. He can’t block the decision of Amanda and Claire. Is there anything that Eric can do?
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If Eric has preemptive rights, he has the right to acquire 1/3 of the amount of the newly issued shares in order to maintain his proportional interest in the corporation.
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How do we know when a shareholder has preemptive rights?
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the right to pre-emptive rights must be in the COF.
§21.203: No Statutory Preemptive Rights Unless Provided by Certificate of Formation (a) Except as provided in §21.208, a shareholder of a corporation does not have a preemptive right under this subchapter to acquire the corporation’s unissued or treasury shares except to the extent provided by the corporation’s certificate of formation. Shareholders who sell the shares they already own; cannot be preempted by other shareholders – preemptive right is only the right to maintain your pro rata ownership, and another shareholder selling some of their shares does not affect another’s ownership interest. |
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What is the significance of Sept. 1, 2003?
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Sept. 1, 2003 is a very important date. If a company was incorporated prior to this date and the certificate of formation says nothing about preemptive rights, then the shareholders have preemptive rights. If the company was incorporated after this date and the certificate of formation says nothing about preemptive rights, the shareholders don’t have preemptive rights.
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Exceptions to pre emptive rights
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§21.204: Statutory Preemptive Rights
(b) No preemptive rights exist with respect: (1) shares issued or granted as compensation to a director, officer, agent, or employee of the corporation or a subsidiary or affiliate of the corporation; (2) shares issued or granted to satisfy conversion or option rights created to provide compensation to a director, officer, agent, or employee of the corporation or a subsidiary or affiliate of the corporation; (3) shares authorized in the corporation’s certificate of formation that are issued not later than the 180th day after the effective date of the corporation’s formation; or (4) shares sold, issued, or granted by the corporation for consideration other than money. These exceptions give the corporation the flexibility to adequately compensate employees, attract talent, acquire necessary assets, etc. The exceptions can only be overcome by specific statements in the certificate of formation. |
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Note: If Amanda and Claire wanted to sell Lesley shares of their own stock, Eric’s preemptive rights are not triggered.
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Preemptive rights do not apply to the sale of stock by other stockholders. They only apply to the sale of stock by the corporation.
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Stated Capital
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Stated capital” means the sum of:
(A) the par value of all shares of the corporation with par value that have been issued… |
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Surplus
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(12) “Surplus” means the amount by which the net assets of a corporation exceed the stated capital of the corporation.
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Hypo: Amanda, Claire and Eric each own 100 shares in ACE at a price of $5 per share. The par value is 10 cents per share (The board has to set a price of at least 10 cents). Eric loans the company $1,000 in exchange for a promissory note.
what is the stated capital and the surplus? |
Assets $2,500 Liability $1,000
Equity(net assets) Stated Capital: $30 (PV(Issued shares)) Surplus: $1,470 (NA-SC) |
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What is a distribution?
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§21.002: Definitions
(6)(A) “Distribution” means a transfer of property, including cash, or issuance of debt, by a corporation to its shareholders in the form of: (i) a dividend on any class or series of its outstanding shares; (ii) a purchase or redemption, directly or indirectly, of any of its own shares; or (iii) a payment by the corporation in liquidation of all or a portion of its assets. |
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What limitations are put on a company's ability to make distributions?
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a) A corporation may not make a distribution that violates the corporation’s certificate of formation.
(b) Unless the distribution is made in compliance with Chapter 11, a corporation may not make a distribution: (1) if the corporation would be INSOLVENT after the distribution; or (2) that exceeds the distribution limit. |
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What is a distribution limit?
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The distribution limit of a company is the surplus of the corporation
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what is the difference between authorizeds stock, issued stock, and outstanding stock
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Authorized stock is the amount of stock that a corporation is allowed to sell. Think of it as the number of shares that a company is permitted to sell.
Issued stock is the number of shares that said company has sold. This includes shares that the company bought back (treasury stock) or retired (no longer available in the market). Outstanding Stock is the number of shares that have been sold and are being traded in the market. Outstanding stock does not include treasury stock (the stock the company bought back--think of it as a companies piggy bank for stock it is not available to the public although it was previously sold until it was re-acquired). It also does not include the stock that has been retired. Outstanding stock reflects only the amount of shares that have been sold to the stockholders and remains out on the market. Treasury Shares - outstanding sotck that the company has bought back. (out in the piggy bank). Treasury shares are issued but not outstanding. |
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What happens when tresury share are cancelled?
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When tresury shares are cancelled, they are restored to the status of authrorized but unissued stock. THis will change the amount of stated capital.
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What are the consequences of an impermissible distribution of dividends?
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The consequence of an impermissible distribution is that the board of directors has personal liability for the distribution to the extent that the distribution was unauthorized.
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Hypo: Amanda, Claire and Eric each own 100 shares in ACE at a price of $5 per share. The par value is $5 per share. Eric also loans the company $1,000 in exchange for a promissory note.
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Assets $2,500 Liability $1,000
Equity (net assets) Stated Capital: $1,500 Surplus: $0 The company isn’t any richer or poorer than it was in the above hypo, but it is more restricted. |
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Hypo: Same, except after the first year, ACE just breaks even. There is a fight between the Amanda, Claire and Eric. Amanda and Claire want to buy out Eric’s stock. However, they can’t buy Eric out because it would be a impermissible distribution (insolvency). ????
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If the corporation really wants to get out of it, the board of directors can amend the certificate of formation to lower the par value. But this takes time and money, and the shareholders have to approve the amendment by a 2/3 vote.
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Hypo: Same, but the company lost $500 after the first year.
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Assets $2,000 Liability $1,000
Equity (net assets) Stated Capital: $1,500 Surplus: <$500> |
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Hypo: $5/share, $5 par value, 300 shares purchased, $1,000 loan from Eric:
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Assets $1,500 Liabilities $1,000
Equity ($500) Stated capital: $1,500 Surplus: <$1,000> |
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Hypo: $5/share, no par value, 300 shares purchased, $1,000 loan from Eric:
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the Board can allocate virtually any amount of the stated capital (but not all) to surplus:
Assets $2,500 Liabilities $1,000 Equity ($1,500) Stated capital: $1 Surplus: $1,499 Because of the definintion of SC: (B) if the COF says that the stock has no part value, then within 60 days to allocate an amount of net assets to surplus (but can't allocate all of it to surplus) |
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Hypo: $5/share, $0.10 par value, 300 share purchased, $1,000 loan from Eric. Amanda wants out. The corporation can safely buy out Amanda (according to the statute). What happens to the balance sheet?
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Amanda’s shares have become treasury shares.
§21.002: Definitions (13) “Treasury shares” means shares of a corporation that have been issued, and subsequently acquired by the corporation, that belong to the corporation and that have not been canceled…. The balance sheet will reflect the loss of assetts and the surplus will be reduced, however Stated capital will remain the same with ( a not that 100 shares are TS). |
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Same Hypo: $5/share, $0.10 par value, 300 share purchased, $1,000 loan from Eric. Amanda wants out. The corporation can safely buy out Amanda (according to the statute). What happens to the balance sheet?
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Assets: 2500
liabilites 1000 Equity (1500) SC: 30 Surplus: 1470 Becomes Assets: 2000 Liabilities: 1000 Equity (1000) SC: $30 (100 TS) Surplus: 970 |
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Hypo: Can the corporation now cancel the treasury shares? (the shares which it bought back)
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§21.252: Cancellation of Treasury Shares
(a) A corporation, by resolution of the board of directors of the corporation, may cancel all or part of the corporation’s treasury shares at any time. (b) Upon the cancellation of treasury shares, the stated capital of the corporation shall be reduced by that part of the stated capital that was, at the time of the cancellation, represented by the canceled shares, and the canceled shares shall be restored to the status of authorized but unissued shares. |
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What happens if the company buys out amanda's treasury shares?
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Assets 2000
liabilites 1000 Equity (1000) SC $30 Surplus 970 BECOMES Assetts 2000 liabilities 1000 Equity (1000) SC: 20 Surplus: $980 |
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Suppression of Dividends
Questions when analyaing these situations: Was the Board's policy regarding common stock dividends unduly conservaative? |
If an adequate corporate surplus is available for the purpose, directors may not withhold the declaration of dividends IN BAD FAITH.
BUT the mere existence of an adequate corporate surplus is not sufficient to invoke court action to compel such a dividend. There must also be BAD FAITH on the part of the directors. |
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The following facts are relevant to the issue of bad faith:
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-Intense hostility of the controlling faction against the minority
-Exclusion of the minority from employment by the corporation -High salaries, or bonuses or corporate loans made to the officers in control -The fact that the majority group may be subject to high personal income taxes if substantial dividends are paid -The existence of a desire by the controlling directors to acquire the minority stock interests as cheaply as possible. But if they are not motivating causes, they do not constitute bad faith as a matter of law. In the past, courts have been unwilling to intervene in situations like this. However, the new trend is to be a little bit more sympathetic to minority shareholders and consider their plight. |
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Management and Control of the Closely-Held Corporation
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the certificate of formation is the document filed with the SOS; to amend the COF requires shareholder approval.
Amending the bylaws, however, does not require shareholder approval, and can be done anytime by the Board of Directors or the Shareholders. |
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What if the board has made a wrongful distribution?
Are the shareholder's liable if they were paid wrongful distributions? |
Directors that vote for or assent to a wrongful distribution are j and S liable for the amount that exceeds the amount they could have distributed.
But he is not liable if he relies in GOOD FAITH on financial statments, etc. A shareholder can be forced to pay back the distribution if the shareholder KNOWINGLY received an impermissible distribution. |
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What is the default rule for a quorum?
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Majority of the shares that are entitled to vote. (Only shares that are OUTSTANDING, because those are the only shares entitled to vote)
This is important, because treasury shares, for instance, aren’t entitled to vote. Articles of formation can change this default rule. |
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Shareholder Voting
Can be diveided into three categories |
Shareholder voting can be divided into three categories:
1. Matters where the BOC specifies portion of (all) shares entitled to vote (fundamental actions/fundamental business transactions) 2. Other 3. Electing directors |
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Fundamental actions include:
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1. Ammending COF
2. Voluntary W/U or revocation of voluntary WU 3. cancellation of an evend req WU 4 reinstatement |
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What is dual authority?
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Dual Authority is provided by 21.058. it states that both the shareholders and the board of directors can vote to ammend, adopt, repeal the bylaws of a corp.
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Other than the Electing of Directors, Ammending the COF and the WU- reinstatment provisions, are there other shareholder voting requirements?
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We have to look at §21.363 to determine the requirements for shareholder voting when we are not dealing with the election of directors or an election in which the code already provides specific requirements. The presence of a quorum of shareholders is always the first requirement.
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Hypo: ACE Inc. has 450 shares outstanding. 300 shares are represented at the meeting.
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To have a quorum (under the default rule requiring a majority), shareholders representing 226 of the shares must be present. 300 shares are represented at the meeting; therefore there is a quorum. There is a motion to amend the bylaws. What vote is sufficient for the motion to pass?
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Hypo: A quorum is present and there is a motion to amend the bylaws. What vote is sufficient for the motion to pass?
Assume 150 shares vote for the motion, 50 vote against, 100 silent. |
Based on the default rule in §21.363(a), this is sufficient for the motion to pass. Why? Because only a majority of the shares who vote for, against, or expressly abstained is needed to pass the motion. This motion passed because 100 of the shares did nothing, which means that they don’t count toward the majority.
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How would it play out if the COF used the available alternatives to the default rule?
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1. the affirmative vote of the holders of a specified portion, but not less than the majority, of the shares entitled to vote on that matter;
150/450 No majority, so Motion Doesn’t Pass (2) the affirmative vote of the holders of a specified portion, but not less than the majority, of the shares entitled to vote on that matter and represented in person or by proxy at a shareholders’ meeting at which a quorum is present; 150 for / 300 No majority, so Motion Doesn’t Pass (3) the affirmative vote of the holders of a specified portion, but not less than the majority, of the shares entitled to vote on, and who voted for or against, the matter at a shareholders’ meeting at which a quorum is present; 150 for /200 for, against Majority so, Motion Does Pass (4) the affirmative vote of the holders of a specified portion, but not less than the majority, of the shares entitled to vote on, and who voted for, against, or expressly abstained with respect to, the matter at a shareholders’ meeting at which a quorum is present. in hypo change 100 eho did nothing to expressly abstained 150 for/ 300 for, against, expressly abstained If we use choice (3): If 1 share votes for and 299 do nothing, the motion would still pass because 1 voted for and no one voted against 1 is 100% of 1, so majority; |
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Election of DIrectors
What are the default voting requirements for the election of board members and how can the COF ammend them? |
Subject to Subsection (b), directors of a corporation shall be elected by a plurality of the votes cast by the holders of shares entitled to vote in the election of directors at a meeting of shareholders at which a quorum is present.
(b) The COF or bylaws of a corporation may provide that a director of a corporation shall be elected only if the director receives: (1) the votes of the holders of a specific portion, but not less than the majority, of the shares entitled to vote in the election of directors; (2) the votes of the holders of a specific portion, but not less than the majority, of the shares entitled to vote in the election of directors and represented by person or by proxy at a meeting of shareholders at which a quorum is present; or (3) the votes of the holders of a specific portion, but not less than the majority, of the shares entitled to vote in the election of directors at a meeting of shareholders at which a quorum is present. |
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Cummulative voting
What is cumulative voting and when is it allowed? |
Normally, in the election of directors, a plurality is determined by each sharedholder getting to vote their number of shares one time for each position seeking to be filled.
However, IF CUMULATIVE VOTING IS PERMITTED IN THE SOF AND AT LEAST ONE SHAREHOLDER NOTIFES IN WRITING THAT THEY PLAN TO VOTE CUMULATIVELY, votes can be totalled and added or split amongst as many candidates as one chooses. The number of votes = the number of shares X the number of directors being elected. |
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So how do you determine the number of shares needed to elect one board member into office?
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You use the formula (S/D +1)+1 = number of shares needed (NOT VOTES)
Where S= number of shares voting; D=number of directors being voted into office. This formula gives you the number of shares you will need to elect one deirector. To elect two directors, = 2(S/D+1)+1 |
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Do Worksheets and Hypos for cumulative voting
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Do worksheets and hypos for cummulative voting.
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Hypo: We know how many shares are required to elect certain directors. How does that correspond to the number of votes?
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DON’T FORGET THE DIFFERENCE BETWEEN SHARES AND VOTES
Eric → 121 shares x 4 directors = 484 votes divided between 2 directors E1 = 242 E2 = 242 E3 = ? 116 E4 = ? Claire → 61 shares x 4 directors = 244 votes for 1 director C1 = 244 C2 = ? C3 = ? 156 C4 = |
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So ther is no cummulative voting if it is not in the COF, right?
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Not so fast buster!
Before Sept. 1, 2003: Silence in certificate of formation = Cumulative voting allowed After Sept. 1, 2003: Silence in certificate of formation = Cumulative voting not allowed §21.362: Cumulative Voting Right in Certain Corporations Except as provided by the corporation’s certificate of formation, a shareholder of a corporation incorporated before Sept. 1, 2003, has the right to cumulatively vote…A corporation may limit or deny a shareholder’s right to cumulatively vote shares at any time after Sept. 1, 2003, by amending its certificate of formation. |
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Alternatives to Meetings
Are there ways to get things done in a corp other than to have a meeting? |
Yes.
UNANIMOUS WRITTEN CONSENT - If all of the shareholders agree to something: You can draft a unanimous written consent, get everyone to sign it, and it will be effective in lieu of a meeting. NON UNANIMOUS WRITTEN CONSENT - You can also use a non-unanimous written consent in certain cases. If enough shareholders sign it, and it’s explicitly allowed in the articles of formation, it’s ok. |
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What if a shareholder can't get to a meeting? Is he SOL?
What are the deets? |
Shareholders can designate a proxy to represent them at a meeting.
1. A proxy must be in writing. 2. As a default rule, proxies are revocable. Exception: If you follow the rules, you can make a proxy irrevocable. 1.You must specifically state that the proxy is irrevocable, and 2. the proxy must be coupled with an interest A proxy is not valid after 11 months after the date of execution unless otherwise provided by the prioxy(?) |
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Hypo: Miller sells her shares to me. She gives me the necessary documents and stock certificates. I’m supposed to submit that paperwork to the corporation so they can put my name in place of Miller’s name. I forget to do so. A shareholder meeting is coming up, and the corporation sends notice to Miller instead of me.
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The company sets a record date, which essentially freezes the company’s records. The company will issue notice of the shareholder meeting to the appropriate persons as of that record date.
Can anything be done about this? Yes. Miller can issue me an irrevocable proxy (if she specifically states that the proxy is irrevocable, and if my proxy is coupled with an interest, which it clearly is – I own the shares!). |
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Ammending bylaws...
Who can ammend the bylaws of a corp? |
By default, both the board of directors and shareholders can ammend the bylaws of a corporation. However the board can be restricted from ammending the bylaws as provided by the certificate of formation. The board can also vote to ammend the bylaws to not let it ammend the bylaws!
Shareholders can also ammend the bylaws: this is one of those "other votes" that requires 2/3 of voting for against or expressly abstaining" votes - unless ammended. |
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Directors of a corporation make most of the decisions. How many votes does a director get?
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Each director has one vote
Each board meeting must have a qorum for a vote to count. (maj or changed amount) Ex. if 5 directors, 3 to make a qorum and 2/3 would carry the day. |
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Can a board of directors take action without a meeting?
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Yes, unanimous written consent can take the place of a meeting.
HOWEVER, board members cannot have proxies. |
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How many directors and officers must a company have?
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1 Director = 1 vote
In TX; a corporation must have at least 1 director to operate; under TX, we must have at least 2 officers, a president and a secretary (but they can be the same person) |
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BOD notice and quorum
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NOTICE
• as with shareholders, the board meets both at regular and specially called meetings. The bylaws generally dictate whether, when, and how much notice must be given. • board action taken at a meeting at which all directors did not receive the required notice is invalid quorum • this requirement prevents a board minority from meeting and taken action that the majority would not have • A quorum must show up at the meeting • quorum = majority of total directors unless otherwise specified • Once at the meeting, a majority wins the vote (unless articles or bylaws require supermajority) • so, as long as a quorum attends the meeting; the majority of that quorum in attendance controls (but, be sure to check bylaws; because there may be different requirements) Note: The directors might also be shareholders, but that doesn’t matter in this context! |
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Hypo: Out of 9 directors, 5 show up for the meeting. They vote, and it’s 3-2.
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This is ok, and the 3 directors carry the day. 5 is a quorum, so there are enough directors at the meeting. Beyond that, a majority wins the vote.
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BOD voting rules
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-Unanimous written consent is allowed.
-Non-unanimous written consent is not allowed. -Telephone conference meetings are allowed. -Proxies are not allowed. (Directors can’t farm out their duties to the corporation!) -Board comprised of only one director is allowed, but the bylaws must specify the current #. |
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Committees:
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If the bylaws allow it, the board of directors can form committees to handle certain issues.
-Really big, important issues won’t be handled this way, but smaller ones will. |
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Vacancies
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-Vacancies can generally be filled by the board of directors
Before issuance of stock: can be filled by majority vote or written consent of maj of organizers or directors left After Stock is issued: requires shareholder vote or a vote of maj of directors, even if no quorum (no written consent) Vacancies due to an increase: can be filled by an election by the sh or by the board, but: A QUORUM MUST BE PRESENT AND MAJ RULES THE DAY ALSO, THE DIRECTORS ELECTED ONLY SERVE TILL NEXT ANNUAL MEETING AND ONLY UP TO TWO CAN BE VOTED IN BETWEEN MEETINGS |
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Agency priciples and the BOD - look this up. SOmething about finding out if the BOD authorized the director to act
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Is this getting to ???
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Hypo: Director gets confused at meeting and simply doesn’t vote on an issue. Later, the decision of the board turns out to be a bad one. As a result, a creditor wants to hold the directors liable. Confused director says, “I never thought that was a good idea, and I didn’t vote on it. I shouldn’t be held liable!”
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The confused director’s silence will be construed as assent.
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Agency Principles and Corporations
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actual authority: arises when the board, acting by the requisite majority at a proper meeting, expressly approves the actions of a corporate agent. Such board approved action binds the corporation
Board’s delegation of authority to an officer constitutes corporate consent to the officer to bind the corporation ratification is allowable in instances where the officer’s actions are not binding on the corporation when made. Ratification may be express or implied (2) apparent authority: if the board induces an outsider to rely on an officer, even if the officer has no actual authority, the corporation may be bound on a theory of apparent authority. president or CEO: can bind the corporation as to matters in the usual course of business, but usually not as to extraordinary matters (like bringing or settling litigation, offering lifetime employment contracts, disposing of or mortgaging all of the corporation’s assets) (3) inherent authority: (limited number of jurisdictions recognize) arises from the status of the corporate officer, particularly the CEO or Pres |
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MINORITY CONTROL RIGHTS:
(1) Supermajority Provisions: |
purpose:
• give minority participants a veto power. • can cover specific matters or can exist for all matters coming before the shareholders creation: • this is the default; under most statutes the charter must specify supermajority quorum or voting requirements for shareholder action – either when originally drafted or by amendment. • supermajority requirements for director voting may be incorporated in the articles or sometimes in the bylaws if no inconsistent with the articles. validity • state statutes generally permit supermajority requirements • a supermajority quorum requirements allows a party to “cast” her veto by absenting herself. |
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(2) Vote-Pooling Agreements
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operation
• primarily used in electing directors; in which SHs agree formally or informally to vote as a voting block • see CV RAP for formula (above) |
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HYPO
PIZZA CHATEAU, INC issues 500 shares to R; 250 to B and 250 to S. B and S distrust eachother b/c either can join with R to control the corporation. What do you do? |
(1) create a high quorum requirement: such as 80 percent → theoretically either could not show up and block action by the other. However, once a meeting with a proper quorum has started, B or S may be unable to break the quorum and could then be outvoted.
(2) higher voting requirement: a voting requirement of 80 percent of the outstanding shares would act as a unanimity requirement. This would create a safer buffer than a voting requirement of 80 percent of the voting shares present, b/c it would be possible for R and S to meet and take action w/o B. |
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Can shareholders agree to vote on ANYTHING in advance?
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“Agreements by which a stockholder binds himself to vote in a specified manner with regard to the election of corporate officers and directors are ok. Agreements by which directors abdicate or bargain away in advance the judgment the law contemplates they shall exercise over the corporation are void.”
its ok for SHs to agree to vote for certain people to become directors, or to agree to vote for who the majority of SHs want to become directors, are ENFORCEABLE and perfectly fine. PROBLEMATIC part arises where there is agreement among the directors to be bound to incur indebtedness, or allow certain directors to remain indefinitely, etc. WHY? because directors must be free to use their discretion to act in the best interest of the corporation. |
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Texas Statute
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§6.252: Voting Agreements → Owners = Shareholders
(a) Except as provided by this code or the governing documents, any number of owners of an entity, or any number of owners of the entity and the entity itself, may enter into a written voting agreements to provide the manner of voting of the ownership interests of the entity. A voting agreement entered into under this subsection is not part of the governing documents of the entity. This section allows “owners” to make a voting agreement. “Owner” means stockholder. Owners might appoint a voting proxy to ensure that votes are cast according to the agreement. This rule squares with the above cases. |
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Voting trust
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Voting trust: Owners agree to allow a voting trustee to vote their shares; A step beyond a proxy (to ensure that votes are cast according to the voting agreement).
Under a voting trust, shareholders transfer legal title to their shares to a voting trustee. The trustee, for a defined period and according to specific instructions, has the exclusive voting power over the transferred shares. |
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Irrevocable proxies as a means of control
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• SHs in close corporations can also structure control by giving another person (or each other) binding authority to vote their shares.
• unlike a regular proxy, the SH-principal cannot change her mind and withdraw the proxy holder’s authority to vote her shares. • If no date of expiration is provided, it automatically expires after 11 months; • but can be extended up to 10 years at a time Elements of Irrevocable Proxy 1. MUST be in writing; writing needs to show SH intended the proxy; and the proxy’s irrevocability must be conspicuously stated on the appointment form. 2. irrevocable proxy must be coupled with an interest in the corporation; i.e. by an interest in the corporation, its shares, or an agreement of the shareholders. |
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What can a sharehoder agreement do?
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Goes beyond ealier provisons. can
restirct the discretion of the BOD or elominate the BOD altogether. and musch more 21.101 The agreement must be contained in the COF or bylaws OR by a unanimous written agreement signed by all shareholders at the time of the agreement; AND made known to the corporation |
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SHAREHOLDER AGREEMENTS OF A CORP
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Can:(1) restricts the discretion or powers of the board of directors;
(2) eliminates the board of directors and authorizes the business and affairs of the corporation to be managed, wholly or partly, by one or more of its shareholders or other persons… MUST BE (1) contained in: (A) the certificate of formation or bylaws if approved by all of the shareholders at the time of the agreement; OR (B) a written agreement that is: (i) signed by all of the shareholders at the time of the agreement; and (ii) made known to the corporation… ALSO must be conspicuously on eac share and conatain the magic sentence and if shares are outstanding, you have to recall the certificates and reissue |
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Knowledge of a shareholder agreement and effect
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§21.105: Right of Rescission; Knowledge of Purchaser of Shares
(a) A purchaser of shares who does not have knowledge at the time of purchase of the existence of a shareholders’ agreement authorized by this subchapter is entitled to rescind the purchase. In English: If the shareholder agreement is not noted on a share certificate, the purchaser of the share can rescind his purchase! 21.104: Effect of Shareholders’ Agreement A SHs’ agreement that complies with this subchapter is effective among the SHs and between the SHs and the corporation even if the terms of the agreement are inconsistent with this code. |
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Skipped to this part
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skipped to this part
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Director's Fiduciary Duties
What are they? |
A director of a corporation has certain fiduciary duties to the shareholders.
1. Duty of Obedience - basically, the directors cannot exceed the powers and purposes of the corporation. (Ultra Vires). Doesn't come up very often because the directors are the head honchos. 2. Duty of Care - continued |
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What is the duty of care a direcors has to the corporation?
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Directors are not agents. THey do not EXECUTE DECISIONS, they MAKE DECISIONS. They are the brains of the company and thus owe a duty of care.
The standard of the duty of care that a director has for the coporation is the BUSINESS JUDGMENT RULE. Under the business judgment rule, we must presume that the directors acted in an informed manner, in good faith, honestly believing that they were doing the best thing for the company. This equates to a GROSS NEGLIGENCE STANDARD. |
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In Texas how can a direcor use the information he is given to protect himself?
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There is a statute for directors and officers that allows them to rely in GOOD FAITH AND WITH ORDINARY CARE on the information, opinions, reports or statenments including financial statements and other financial data...BUT may not rely on them if he has knowledge that makes the reliance unwarranted.
EVEN THOUGH THE TERMS GOOD FAITH AND ORDINARY CARE seem to point to a standard of Oridinay Negligence, case law says the standard is actually gross negligence. |
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So does that mean that directors are never liable as long as there is no gross negligence?
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No. Liability of Goverening persons is limited but there are some situations that cannot be limited
This statute applies to corps not LLP or LLCs. §7.001: Limitation of Liability of Governing Person This statute says the COF may limit liability of governing persons. BUT not for: (1) a breach of the person’s DUTY OF LOYALTY if any, to the organization or its owners or members; (2) an act or omission not in good faith that: (A) constitutes a breach of duty of the person to the organization; or (B) involves intentional misconduct or a knowing violation of law; (3) a transaction from which the person received an improper benefit, regardless of whether the benefit resulted from an action taken within the scope of the person’s duties; or (4) an act or omission for which the liability of a governing person is expressly provided by an applicable statute. |
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So, what can and can't we limit liability for?
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What can’t we limit liability for?
1. Breach of duty of loyalty 2. Bad faith act or omission that constitutes a breach of a duty; intentional or knowing misconduct 3. Improper benefit 4. Liability expressly provided for in the statute What can we limit liability for? 1. Breach of the duty of care as long as the director is in good faith 2. All other things not listed above |
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Do officers have a duty of care? Yes – They’re nothing more than corporate agents.
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Yes – They’re nothing more than corporate agents.
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Corporate DUTY OF LOYALTY
Hypo: Amanda and Claire decide to buy a piece of property for the company. The decision turns out to be a financial disaster. Eric, as a shareholder/director, is very concerned. He finds out that the property actually belonged to Amanda and Claire before ACE purchased it. They needed to get rid of it so they sold it to ACE. Does it make sense for the court to say, “We don’t want to be too quick to judge the decisions of directors” (business judgment rule)? |
No. This is blatant self-dealing and creates a conflict of interests. Courts are much quicker to act in this situation. If the directors’ actions don’t meet the standard of “utmost fairness to the company,” the court will take action.
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What is the Duty of Corp Loyalty encomplass? The duty not to engage in self-dealing. BUT..
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The duty not to engage in self-dealing?
21.418 - Applies to transactions between a corp and an entity in which a direcotr or officer has a managerial or corporate interest. Even if there is a conflict of interest a K is valid if 1. The corp's board knows the material facts as to the relationship and outhorizes BY A MAJORITY OF THE DISINTERESTED MEMBERS (even if those members don't make up a quorum). OR 1. THe shareholders entitled to vote specificaly approve in good faith by a vote OR 2. when the K is fair and the K is authorized, approved or ratified by the BOD, commitee, or board. interested parties may be included in the quorum count so that action can take place at a meeting. |
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Hypo: Board is made up of 5 people. A conflict of interests arises that involves 2 of the Board members. The Board is given full disclosure about all the details. They take a vote, and it comes out 3-2. However, the two interested directors make up the majority.
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This will not work under (b)(1)(A) because there isn’t majority of disinterested directors. However, there is one more chance for it to pass: if it’s “fair” under (b)(2).
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Hypo: Same, but the directors send the issue to the shareholders for a vote (assume the directors are also the only shareholders). The vote comes out 3-2. However, the two interested shareholders make up the majority.
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The statute has no requirement in (b)(1)(B) that this must pass by a majority of disinterested shareholders. The shareholders must only prove they were in good faith.
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Usurping corporate opportunity
What the hell is this? |
Directors/officers cannot take for themselves business opportunities that, in fairness, should be made available to the corporation. The courts are not formulaic when deciding these cases.
If a director/officer learns of an opportunity while on the job that is related to the corporate business, he must disclose the opportunity to the corporation. |
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If this is the rule, can a director/officer ever engage in an activity that the corporation might have an interest in?
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If the corporation declines the opportunity, the director/officer can pursue it unless it is in direct competition with the corporation.
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Hypo: Director discovers an opportunity. He knows that the corporation would not be able to take the opportunity because of financial inability. Is this a good defense?
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In TX, no. You must offer the opportunity to the corporation, even if you know they would not take it. You have to give them the chance to reject it.
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But the COF can renounce..
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IN COF interest in being offered certain opportunities
an interest in being offered opportunity to participate in specified bus. opportunities presented to the entity or one or more of its managerial officials or owners Didn’t we say above (in §7.001) that you can’t limit liability for the duty of loyalty? This section doesn’t technically limit liability. It alters what constitutes a breach of the duty of loyalty. But understand: |
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Hypo: ACE has a general, broad purpose clause. The COF says nothing about renouncing any potential interest in business opportunities. ACE says generally to Eric, “You can pursue whatever opportunity comes along. We don’t care.” An opportunity comes along. Must Eric offer it to ACE?
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Hypo: ACE has a general, broad purpose clause. The COF says nothing about renouncing any potential interest in business opportunities. ACE says generally to Eric, “You can pursue whatever opportunity comes along. We don’t care.” An opportunity comes along. Must Eric offer it to ACE?
Yes. And if ACE wants it, Eric must pass it along. ACE’s general renouncement isn’t good enough to satisfy §2.101(21). must be in the COF? ! |
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Derivative suits
Hypo: The directors and officers of a corporation have breached their duty of care and duty of loyalty. The corporation needs to bring a lawsuit against them for their wrongdoing. The shareholders are the ones who want to file suit. However, the directors and officers are the ones who decide when lawsuits should be filed. What result? |
The shareholders can bring a derivative suit on the corporation’s behalf against the officers and directors. This is called a derivative suit.
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Who pays the attorney fees in a derivative suit?
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Court will charge the plaintiff shareholders attorney’s fees to the corporation if the suit is successful. This makes sense since the suit is actually brought on the corporation’s behalf and, to the extent that the suit results in success, the corporation will benefit. Thus, some attorneys will try to seek out and find these claims to bring. To balance this, there are some procedural hurdles that the plaintiff must clear in order to bring these suits:
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What are the requirements needed in order to bring a derivative suit?
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1.Standing
2.Demand 3. Independant review and recommendation of dismissal 4.Other Procedural safeguards |
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Derviatice suits
Standing -To have standing the plaintiff shareholder must have: |
• owned shares in the corporationAT THE TIME OF THE ACT OR OMISSION which is the basis of the suit or acquired shares by operation of law; i.e. by inheritance, from a person who was a shareholder at the time (contemporaneous ownership requirement); and
• fair and adequate representation of corporation’s interest in enforcing the right of the corporation |
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deamand
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Shareholder must make a written demand upon the corporation requesting the corporation to
take action and must wait 90 days after this notice before filing a derivative suit Exceptions to 90-day waiting period: • Corporation rejects the demand prior to the expiration of 90 days; or • Corporation would suffer irreparable injury during the 90 day period -If demand is rejected based on a good faith determination by independent, disinterested directors after reasonable inquiry, and the plaintiff still commences suit, the plaintiff is subject to heightened pleading requirements |
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Independant Review and Recommendation of dismissal
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Courts must dismiss a derivative suit if independent, disinterested directors or court-appointed persons determine, in good faith and after reasonable inquiry, that the suit is not in the best interests of the corporation
-If a disinterested independent review is underway, the court must stay the suit. |
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Other Procedural Safeguards
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-Settlement or discontinuance requires court approval.
-Court may order corporation to pay plaintiff’s attorney’s fees and expenses if the derivative suit resulted in substantial benefit to the corporation. -Court may order plaintiff to pay corporation’s and defendants’ attorney’s fees and expenses if suit was without reasonable cause or for an improper purpose. -Court may order either party to pay other party’s attorney’s fees and expenses in connection with any pleading, motion or paper filed without adequate basis in law or fact or for improper purpose. |
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How do derivative suits work in a closely held corporation?
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-“Closely-held corporation” is the generic term for small corporations. A closely-held corporation is not necessarily the same as a “close corporation.” If a closely-held corporation elects to be governed by the close corporation statutes, it is a “close corporation. Whether a corporation is closely-held or close, it is not subject to the procedural requirements set out above (standing, demand, and dismissal).
Close corporation: less than 35 shareholders; not publicly traded -A court has the discretion: • to treat a derivative suit brought by a shareholder of a closely held corporation as a direct suit [shareholders can recover directly]; and • to order the recovery in a derivative or direct suit to be paid directly to the plaintiff or to the corporation if necessary to protect creditors or other shareholders. |
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Let's say that a coporate director or the board of director's is sued. is there anyway that the direcotor can be protected by the company?
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Yes. Indemnification
A corporation has the power (and is sometimes obligated) to indemnify its directors from liability damages. Directors might be subject to liability from third parties, othershareholders, the government, etc. Advancement of expenses is allowed upon WRITTEN AFFIRMATION OF THE DIRECTOR OF A GOOD FAITH BELIEF that he meets the standard for indemnification and promises to repay if it is ultimately determined that he is not entitled to indemnification. SHAREHOLDER NOTIFICATION -must be notified of any indemnification or advance of expenses before notice of the next annual meeting or within 12 months. |
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When is indemnification required and when is it merely permissable?
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-A director may be indemnified for judgments, penalties, fines, settlements, and expenses if he meets the permissive indemnification criteria. His indemnification is limited to expenses if he is found liable to the corporation or on the basis of receiving improper personal benefits. This permissive indemnification can be made mandatory or limited in the articles of incorporation, bylaws, resolutions of shareholders, or contract.
-A director may be permissively allowed indemnification if he: • Conducted himself in good faith; and • Reasonably believed: → in the case of conduct in his official capacity as director, that the conduct was in the corporation’s best interest; and → in all other cases, that his conduct was at least not opposed to the corporation’s best interest; and → in the case of any criminal proceeding, that he had no reasonable basis to believe conduct was unlawful. |
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Who must make the determination that a director claims he acted in good faith, and reasonable believed was in the best interest?
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-Permissive Indemnification Factfinders: ORs
• Disinterested Directors → majority vote of non-defendant directors (regardless of quorum) → majority vote of board committee designated by majority of non- defendant directors and consisting of non-defendant directors • Special legal counsel → selected by disinterested board or committee • Disinterested shareholders → shareholder vote excludes shares held by defendant directors |
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Fundamental Changes
Amending the Articles of Incorporation |
Amending the Articles of Incorporation
-If a corporation wants to change things, it can amend the articles of incorporation. To do this, the corporation needs a vote of 2/3 of all shares entitled to vote. |
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Fundamental changes - Merger
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Merger
-If all of the shareholders cannot agree to a sale, another option is a merger. In order to begin the process, one corporation approaches another corporation and submits a plan of merger. If the required procedural steps occur, the merger is accomplished. |
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What is the merger process?
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Merger Process:
• BOD of each party submits a plan of merger to the shareholders, either recommending or withholding recommendation with explanation. → At least 20 days’ notice of a shareholder meeting is required • Shareholders of each party approve plan of merger by a vote of 2/3 outstanding shares entitled to vote. • File articles or certificate of merger and filing fee with Secretary of State. → The new corporation will be formed after this date. The shareholders of the old corporation will not own any shares anymore. The new corporation will get all of the property, assets, and liabilities of the old corporation. • Shareholders entitled to vote on the merger have dissenter’s rights. They must: → File written objection prior to meeting → Not vote in favor of merger → Demand payment of fair value of shares, tender share certificate → If no agreement re: fair value, appraisal proceeding . Note: A dissenting shareholder can get the FV of his shares in cash rather than according to the terms of the merger. |
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How does a triangular merger work?
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Triangular Merger: If the parent corporation does not want to be subject to the other corporation’s liabilities, they can arrange a triangular merger. To do this, they set up a subsidiary corporation and arrange a merger between the subsidiary corporation and the other corporation. It requires the same procedural steps as a merger. The only difference is that the parent corporation would not be liable for the other corporation’s liabilities.
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Hypo: Lowes approaches ACE, Inc. and wants to acquire 100% of its business. Amanda, Claire, and Eric agree to sell. Lowes pays for each person’s stock in cash.
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ACE, Inc. would remain a separate corporation but would become a wholly-owned subsidiary of Lowes. This is not a merger.
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Hypo: Merger this time. Under the terms of the merger, Lowes is the surviving corporation. It will pay Amanda, Claire, and Eric in Lowes stock for their shares.
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In order for this merger to go through, ACE board/shareholder approval is required. ACE would not remain a separate corp. Instead, it would be subsumed by Lowes.
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Hypo: What if Eric doesn’t want to sell his shares?
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If Lowes follows the correct procedural steps, the merger occurs. Eric can’t stop the merger if Amanda and Claire vote for it! Is there anything Eric can do? He can say: “Instead of being paid what the plan provides (i.e., stock in Lowes), I demand to be paid the fair value of my shares in cash.” To determine the fair value of Eric’s shares, an appraisal proceeding must take place, and Eric will pay for it.
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What is a share exchange? and what is the process?
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-Another option for combining two companies.
Share Exchange Process: • Board of directors of corporation whose outstanding shares are to be acquired submits plan of exchange to the shareholders, either recommending or withholding recommendation with an explanation. → At least 20 days’ notice of shareholder meeting is required → For acquiring corporation, only approval of BOD required • Shareholders whose shares to be acquired approve plan of exchange by a vote of 2/3 outstanding shares. • File articles or certificate of exchange and filing fee with Secretary of State. • Shareholders whose shares are to be acquired have dissenters’ rights. |
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Hypo: Plan of exchange says, “ACE’s shareholders are each going to exchange their shares for Lowes stock.”
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If ACE’s BOD and stockholders approve this, Lowes acquires all of ACE’s stock, and Eric can’t complain. He will be forced to sell his stock.
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How else can a corporation merge?
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4. Sale of Substantially all Assets Not in Ordinary Course of Business
The acquiring company may not want the liabilities of the other company. That is not possible in a merger. However, the acquiring corporation can purchase all of the other corporation’s assets not in ordinary course of business. Result: The acquiring corporation will only take on the liabilities that they contractually agree to. Catch: The acquired corporation must go completely out of business after the sale. General rule: The acquiring company only acquires liabilities that they contractually agreed to take on (no successor liability). Exception: • De facto merger doctrine – Not structured to be a merger, but we’re going to treat it like a traditional stock merger. TX doesn’t recognize the de facto merger doctrine or any other form of successor liability. |
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If a company wants to go out of business to merge, what is the process?
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Asset Purchase Process:
• BOD of selling corporation submits proposal sale to shareholders, either recommending or withholding recommendation with explanation. → At least 10 days notice of shareholder meeting is required → For acquiring corporation, only approval of BOD is required • Shareholders of selling corporation approve sale of assets by vote of 2/3 outstanding shares entitled to vote. • No filing with Secretary of State required. → Bills of sale, deeds, etc. would be executed and delivered by parties to transaction. → Ordinarily, selling corporation will dissolve after sale, pursuant to which articles of dissolution or certificate of termination will be filed • Shareholders of selling corporation have dissenters’ rights • No de facto merger doctrine in TX Note: A sale of assets is in the usual and regular course of business if the corporation, directly or indirectly, either continues to engage in a business or applies a portion of the consideration received in the sale to the conduct of a business in which it engages following the sale. |
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Hypo: Lowes investigates ACE and finds several lawsuits. Lowes wants ACE’s business but not ACE’s lawsuits. What can it do to accomplish this?
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Lowes can buy all of ACE’s assets. Then, it can say, “We’ll assume liabilities A, B, and C, but not liabilities X, Y, and Z.” Problem solved!
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FUNDAMENTA CHANGE - winding up a corp.
what is the process for a corporation's winding up? |
Winding/Up Termination Process
• BOD recommends and submits to shareholders → At least 10 days notice of shareholder meeting is required → Shareholders can authorize dissolution/winding up by unanimous written consent without prior board action → if no shares are issued, the incorporators or initial directors may dissolve/wind up corporation • Shareholders approve by a vote of 2/3 outstanding shares entitled to vote • Corporation ceases to carry on business except as necessary to wind up, gives notice to claimants, pays or makes provisions for claims as far as assets will go, distributes remaining assets to shareholders. • File articles of dissolution or certificate of termination with filing fee with Secretary of State, thereby ending corporate existence except for limited purposes. → A corporation that has terminated its corporate existence survives for three years to tie up loose ends. Can a plaintiff file suit during this 3-year period for a tort/K claim that existed at dissolution? Yes. Can a plaintiff file suit during this 3-year period for a K claim that arose after dissolution? Yes. Can a plaintiff file suit during this 3-year period for a tort claim that arose after dissolution? No. |
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What is conversion?
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6. Conversion
-Most conversions in the last few years have involved converting a corporation to a LP. Purpose: To get around the state franchise tax. Conversion is designed to be a seamless, easy process. Conversion Process • BOD of converting corporation submits plan of conversion to shareholders → At least 20 days notice of shareholder meeting is required • Shareholders of converting corporation approve plan of conversion by a vote of 2/3 outstanding shares entitled to vote • File articles or certificate of conversion with filing fee with Secretary of State • Shareholder’s have dissenters’ rights. |
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MISSING FOREIGN CORP STUFF
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MISSING FOREIGN CORP STUFF
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