I.

AGENCY

1. AGENCY GENERALLY - 3-FACTOR TEST: 1.01 - Agency is the [fiduciary] relationship which results from the manifestation of consent by one person (principal) to another (agent) that Test for (1) the other shall act on his behalf and Agency (2) subject to his control, and relationship (3) consent by the other so to act. * compensation not required Gorton v. Doty (69 P.2d 136 (Id. 1937); p.2) - Teacher volunteered her car for use to transport football players to game. Coach drove, car wrecked, player injured. Court held that the coach was the agent of the teacher in driving her car. Three principal forms of agency exist: principal/agent, master/servant, and employer/independent contractor. Gorton v. Doty (69 P.2d 136 (1937) p. 2). 1.02 - Labeling Whether a relationship is characterized as agency in an agreement between parties or in the context of industry or popular usage is not controlling. 1.03 - Manifestation A person manifests assent or intention through written or spoken words or other conduct. The relevant state of mind is that of the person who observes or otherwise learns of the manifestation, i.e. __________________. 1.04(2) Terminology (a) Disclosed principal. A principal is disclosed if, when an agent and a third party interact, the third party has notice that the agent is acting for a principal and has notice of the principal's identity. (b) Undisclosed principal. A principal is undisclosed if, when an agent and a third party interact, the third party has no notice that the agent is acting for a principal. (c) Unidentified principal. A principal is unidentified if, when an agent and a third party interact, the third party has notice that the agent is acting for a principal but does not have notice of the principal's identity. 1.04(1) - Coagents. Coagents have agency relationships with the same principal. A coagent may be appointed by the principal or by another agent actually or apparently authorized by the principal to do so. 1.04(8) - Subagent. A subagent is a person appointed by an agent to perform functions that the agent has consented to perform on behalf of the agent's principal and for whose conduct the appointing agent is responsible to the principal. The relationship between an appointing agent and a subagent is one of agency, created as stated in Sec. 1.01. Jenson Farms v. Cargill (309 NW2d 285 (Minn. 1981); p.10) - Cargill lent extensive credit to Warren, a grain elevator, which was overextended. Cargill got excessively entangled in Warrens business decision making, reviewing the books and when Warren went under, other creditors went after Cargill as Warrens principal. Court agreed, held that Cargill was entangled enough in Warrens business that it was acting as Warrens principal and therefore was liable for Warrens debts. A creditor who assumes control of his debtors business may become liable as principal for acts of the debtor in connection with the business. If a person contracts to acquire property from a third person and conveys it to another, that person is only an agent of the third person if there is an agreement that the person is ~1~

to act for the benefit of the third person and not himself. Jenson Farms v. Cargill (309 NW2d 285 (Minn. 1981); p.11) Circumstantial proof: 1. The principal must be shown to have consented to the agency since one cannot be the agent of another except by consent of the latter 2. A Creditor who assumes control of his debtors business may become liable as principal for the acts of the debtor in connection w/the business Used factors: 1. The sum of them together made for a case of agency/principal Factors indicating a party is a supplier and not an agent are: (1) That he is to receive a fixed price for the property irrespective of the price paid by him. This is the most important. (2) That he acts in his own name and receives the title to the property which he thereafter is to transfer. (3) That he has an independent business in buying and selling similar property. Jenson Farms v. Cargill (309 NW2d 285 (Minn. 1981); p.11)

2. LIABILITY OF THE PRINCIPAL TO THIRD PARTIES IN CONTRACT What do you need to establish? 1. Was there an agency relationship? Did an agent make a contract on behalf of a principal? 2. Would the principal be responsible for the contract? When does liability flow from that contract? 6.01 When an agent acting with actual or apparent authority makes a contract on behalf of a disclosed principal: (1) the P and the 3rd party are parties to the contract; and (2) the A is not a party to the contract unless the A and 3rd party agree otherwise. Burden falls to the principal to give specific instructions so that they are clearly followed. Principal still liable to 3rd party because the 3rd party is y are an innocent party. When dealing with Apparent Authority its the 3rd partys interpretation that matters control it by giving then notice/tell them specifically what you are wanting/expecting. A principal can manage their risk but requires them to be proactive by narrowly defining everyones role. If it is reasonable for the 3rd party to interpret info a certain way, then the principal is on the hook for it. A. The Agents Authority who is the information being given/interpreted to/by? Categories of Agency 2.01 - Actual Authority - An agent acts with actual authority when, at the time of taking action that has legal consequences for the principal, the agent reasonably believes, in accordance with the principal's manifestations to the agent, that the principal wishes the agent so to act. Perspective of the Agent matters here. o Actual Express Authority - Grows out of explicit words or conduct granting the agent power to bind the principal o Actual Implied Authority - Grows out of words or conduct taken in the context of

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the relations between the principal and the agent. 2.02 Scope of Actual Authority - (1) An agent has actual authority to take action designated or implied in the principal's manifestations to the agent and acts necessary or incidental to achieving the principal's objectives, as the agent reasonably understands the principal's manifestations and objectives when the agent determines how to act; (2) An agent's interpretation of the principal's manifestations is reasonable if it reflects any meaning known by the agent to be ascribed by the principal and, in the absence of any meaning known to the agent, as a reasonable person in the agent's position would interpret the manifestations in light of the context, including circumstances of which the agent has notice and the agent's fiduciary duty to the principal. (3) An agent's understanding of the principal's objectives is reasonable if it accords with the principal's manifestations and the inferences that a reasonable person in the agent's position would draw from the circumstances creating the agency. 2.03 Apparent Authority - Apparent authority is the power held by an agent or other actor to affect a principal's legal relations with third parties when a third party reasonably believes the actor has authority to act on behalf of the principal and that belief is traceable to the principal's manifestations. Perspective of the 3rd party matters here. R2 8A - Inherent agency power is a term used to indicate the power of an agent which is derived not from authority, apparent authority, or estoppel, but solely from the agency relation and exists for the protection of persons harmed by or dealing with a servant or other agent. A general agent is an agent authorized to conduct a series of transactions involving a continuity of service. Restatement (Second) of Agency 161 R3 2.06 - Inherent Agency Power - reformulation of R2. o Principals are responsible for some acts of their agents which, while unauthorized, are close to or incidental to that which they are authorized to do o Focus on protecting third parties 2.06(1) Liability of Undisclosed Principal - (1) An undisclosed principal is subject to liability to a third party who is justifiably induced to make a detrimental change in position by an agent acting on the principal's behalf and without actual authority of the principal, having notice of the agent's conduct and that it might induce others to change their positions, did not take reasonable steps to notify them [3rd party] of the facts. (2) An undisclosed principal may not rely on instructions given an agent that qualify or reduce the agent's authority to less than the authority a third party would reasonably believe the agent to have under the same circumstances if the principal had been disclosed. [Fills a hole in liability of principal for agent contracts] o This means: In this rare situation, you cannot limit the agent (that 3rd parties do not know is an agent) to something less than what he would reasonably/normally be able to do (like buy some kinds of bar supplies but not others) o Basic idea is that an undisclosed principal is liable for the debts incurred by agents acting within the scope of their authority o Plus slight gloss or extension: an undisclosed principal is liable for debts that the principal has prohibited but that are within the scope of authority of agents engaged in similar activities o Rationale for the rule tricky o The third party ends up with more than it bargained for or had any reason to expect

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o But the undisclosed principal certainly should not be entitled to the gains from the endeavor without exposure to the loss o Policy rationale: the undisclosed principal is in the best position to avoid the loss, so it is better to let the loss fall on him than on the innocent third party o Honesty is better a principal that hides his/its existence seems tricky Connect this to Chapter 6 (Parties to Contracts) 6.01 Agent for Disclosed Principal When an agent acting with actual or apparent authority makes a contract on behalf of a disclosed principal, (1) the principal and the third party are parties to the contract; and (2) the agent is not a party to the contract unless the agent and third party agree otherwise. 6.02 Agent for Unidentified Principal When an agent acting with actual or apparent authority makes a contract on behalf of an unidentified principal, (1) the principal and the third party are parties to the contract; and (2) the agent is a party to the contract unless the agent and the third party agree otherwise 6.03 When an agent acting with actual authority makes a contract on behalf of an undisclosed principal, (1) unless excluded by the contract, the principal is a party to the contract; (2) the agent and the third party are parties to the contract; and (3) the principal, if a party to the contract, and the third party have the same rights, liabilities, and defenses against each other as if the principal made the contract personally, subject to Sections 6.05 6.09. NOTE: Contrast with Section 2.06 which is dealing with situation where there is no actual authority (and of course no apparent authority since existence of the principal is undisclosed) Mill Street Church v. Hogan (785 SW2d 263 (Ky. 1990); p. 14) - Church Board hired Bill Hogan to paint the church; in the past, Bill had been allowed to hire his brother Sam to help. This time, Board encouraged Bill to hire Gary Petty, Bill hired Sam, Sam got hurt and sued. Church argued Bill had no authority to hire anyone and so wasnt liable. Court found Bill had implied authority to hire Sam; plus apparent authority based on past experience. Implied authority is actual authority circumstantially proven which the principal actually intended the agent to possess and includes such powers as are practically necessary to carry out the duties actually delegated. Apparent authority [] is not actual authority but is the authority the agent is held out by the principal as possessing. It is a matter of appearances on which 3rd parties come to rely. Mill Street Church v. Hogan (785 SW2d 263 (Ky. 1990); p. 15) 370 Leasing v. Ampex (528 F.2d 993 (5th Cir. 1976); p. 22) - 370 negotiated with Ampex to purchase computer hardware; Kays, an Ampex salesman, sent documents to 370, who executed them. Ampex did not. Court found the documents were a solicitation that turned into an offer

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when 370 signed, but Ampex never accepted that offer; however, found Kays later memo about delivery dates was acceptance, and found Kays had apparent authority and therefore bound Ampex to the deal. An agent has apparent authority to bind the principal when the principal acts in such a manner as would lead a reasonably prudent person to suppose that the agent had the authority he purports to exercise. An agent has the apparent authority to do those things which are usual and proper to the conduct of the business which he is employed to conduct. 370 Leasing v. Ampex (528 F.2d 993 (5th Cir. 1976); p. 18) Unless a third party to a contract knows of a limitation to the agents authority, that actual limitation will not bar a claim of apparent authority. 370 Leasing v. Ampex (528 F.2d 993 (5th Cir. 1976); p. 19) Undisclosed principals are liable for the acts of their agents when those acts are done on the principals account and if those actions are usual and necessary, even if the actions are forbidden by the principal. Restatement (Second) of Agency 194, 195. Watteau v. Fenwick (1 QB 346 (1892); p. 20) Humble sold brewery to Fenwick but remained on as manager. He was supposed to have the power only to buy beer and water for the business, but bought other goods as well. Watteau, the supplier, sued Fenwick as the principal; Court found that even though the principal was undisclosed to the supplier at the time of the contract, and even though Humble went outside his actual authority, he had apparent authority and therefore Fenwick was liable for his actions. The principal is liable for all the acts of the agent which are within the authority usually confided to an agent of that character, notwithstanding limitations, as between the principal and the agent, put upon that authority. No apparent authority or actual authority; Inherent agency power 195 derived from the then-existing rule for silent, undisclosed partners. Defs were principals for beerhouse in hotel; no actual authority - not supposed to buy from Fenwick; no apparent authority - didnt know Humble was an agent. Agent was manager in whose name everything for the beerhouse was imprinted o Humble remains the front of the operation even though he had already sold to the principal o Agent, Humble, made contracts w/various people for which he was unauthorized o These purchases were not of those outside of the ordinary course of business Debts accumulated by the agent were due payable by the principal, even though the principal expressly did not authorize them o Even though said agent could not make them Undisclosed principals are liable for ordinary debts of agents Partnerships are treated the same in this manner B. Ratification Botticello v. Stefanovicz (177 Conn. 22 (1979); p. 24) Walter and Mary were tenants in common on a piece of property. Walter leased his portion, included option to buy. Mary told Walter she wouldnt sell for less than a certain price, but was no part of the lease agreement. Walter didnt tell tenant that he didnt own property outright, nor did he ever indicate he was acting as his wifes agent. Tenant tried to exercise option, was refused, and sued for specific performance. Court held that Walter wasnt acting as Marys agent and she didnt later ratify the lease, specific ~5~

Difference Between Estoppel and Ratification Agency by estoppel implies that there was some act indicating agency and the principal did not take action to deny the agency. This would be in advance of an action by the purported agent. Ratification can only take place after an act by the purported agent, when the principal ratifies the agent's act.

performance couldnt be ordered against her. Marriage does not equal an Agency relationship. There are three elements to proving an agency relationship exists: (1) a manifestation by the principal that the agent will act for him; (2) acceptance by the agent of the undertaking; and (3) an understanding between the parties that the principal will be in control of the undertaking. 4.01 - Ratification is the affirmance by a person of a prior act which did not bind him but which was done or professedly done on his account(quoting Restatement (Second) of Agency, 82) [and] requires acceptance of the acts results with intent to ratify and with full knowledge of all the material circumstances. Botticello v. Stefanovicz (177 Conn. 22 (1979); p. 26) Does not occur unless: o Act is ratifiable 4.03 o Ratifying person has capacity 4.04 o Ratification is timely 4.05; and o Ratification must encompass entire act 4.07 4.02(2) - Certain limitations (a) manifesting assent that the act shall affect the persons legal relations, or (b) conduct that justifies a reasonable assumption that the person so consents. 4.02(1) - Effect of Ratification (1) Subject to the exceptions stated in subsec. (2), ratification retroactively creates the effects of actual authority. (2) Ratification is not effective: (a) in favor of a person who causes it by misrepresentation or other conduct that would make the contract voidable, (b) in favor of an agent against a principal when the principal ratifies to avoid a loss, or (c) to diminish the rights or other interests of persons, not parties to the transaction, that were acquired in the subject matter prior to the ratification Two critical questions: (1) What types of acts constitute an affirmation by the principal?; (2) What effect should we give to that affirmation?

C. Estoppel stopped/prevented from doing something. Only look at estoppel if NO agency relationship exists. 2.05: Not a party (i.e. no authority, etc.); Might still be iable to a 3rd party if: (1) justifiably induced to make detrimental change in position; (2) the person intentionally or carelessly caused such belief; (3) having notice of such belief and that it might induce other to change their positions, the person did not take reasonable steps to notify them of the facts... One way street liability for P but not for 3rd party... [stops the P from denying liability] Hoddeson v. Koos Bros. (47 NJ Super 224 (App Div 1957); p. 28) - Hoddeson ordered furniture from a supposed salesman in a furniture store, paid cash, didnt get a receipt. When checked back later, no record of order; appeared the salesman was a con artist who walked off with the cash. Court found furniture store liable for the order because it was the proprietors duty to protect its customers from such con artists. Where a party seeks to impose liability upon an

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alleged principal on a contract made by an alleged agent [] the party must assume the obligation of proving the agency relationship. It is not the burden of the alleged principal to disprove it. Types of authority: o (1) express or real authority which as been definitely granted; o (2) implied authority [] to do all that is proper, customarily incidental and reasonably appropriate to the exercise of the authority granted; and o (3) apparent authority, such as where the principal by words, conduct, or other indicative manifestations has held out the person to be the agent. Hoddeson v. Koos Bros. (47 NJ Super 224 (App Div 1957); p. 30) D. Agents Liability on the Contract Atlantic Salmon v. Curran (32 Mass App Ct 488 (1992); p. 31) AS sold product to Curran, who was claiming to be an agent of Boston Seafood Exchange, which was actually a doing business as for Marketing Designs. Curran never paid AS, and AS sued Curran personally; Court found for AS. If an agent wishes to avoid liability as a party to a contract, it is the agents duty to reveal the existence and identity of the principal. If the principal is non- or partially disclosed, the agent is liable as a party to the contract. It is the agents responsibility to reveal the principal, not the third partys responsibility to discover the existence of the principal. 3. LIABILITY OF THE PRINCIPAL TO THIRD PARTIES IN TORT A. Servant versus Independent Contractor Principal Liability Vicarious - does not require fault on the part of the principal Direct - generally involves fault on the part of the principal Remember: the agent is still liable, too When is the principal subject to vicarious liability to a third party harmed by an agent's conduct ? How to analyze: 1. Establish the relationship type (define - What is Agency? then apply to the situation) 2. Establish liability that goes with the particular relationship type (and the nuances that go with it...) 1. 2.04 Respondeat Superior: an employer is liable for the torts of its employees while acting within the scope of their employment. Master/servant relationship exists when (a) servant agrees to work on behalf of the master, AND (b) servant agrees to be subject to masters control in the manner in which the job is done and not just the result of the job. 7.07(1) Employee Acting Within Scope of Employment - An employer is subject to vicarious liability for a tort committed by its employee acting within the scope of employment. (2) An employee acts within the scope--(3) - (a) employee is an agent whose principal controls or has the right to control the manner and means of the agents performance of work, and (b) the fact that work is performed gratuitously does not relieve a principal of liability.

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o Scope of employment performing work assigned by the employer subject to the employers control not independent course of conduct not intended to serve the employer 7.03 Principals Liability - (a) the agent is an employee who commits a tort while acting within the scope of employment; or (b) the agent commits a tort when acting with apparent authority in dealing with a third party on, or purportedly on, behalf of the principal. 7.08 Agent Acts with Apparent Authority Authority establishes agency purpose is to protect the 3rd party & stands as a proxy for legitimacy. Apparent authority lets us rely in confidence on the relationship Vicarious liability Control/independent course of conduct not intended When looking to decide on relationship = control goes to risk. Who has the most risk in the relationship.

2. Independent Contractors. a. Agent-type independent contractor: one who agrees to act on behalf of the principal but is not subject to the principals control over how the job is done (e.g. carpenter who, with homeowners permission, buys lumber for the contracted job on the homeowners credit) b. Non-agent independent contractor: one who operates independently and enters into arms-length transactions with other (e.g. carpenter who agrees to build a garage for a homeowner) Humble Oil v. Martin (148 Tex 175 (1949); p. 36) Woman left car at Humble, a station operated by Schneider, for repair and it rolled into the street and hit Martin. Martin sued Humble, who argued no liability because Schneider, who ran the station, was not Humbles agent. Court disagreed, found master-servant relationship. A franchisor may be held to have actual agency relationship with its franchisee when the franchisor controls, or has the right to control, the franchisees business. Hoover v. Sun Oil (58 Del. 553 (1965); p. 38) Sun Oil owned a gas station operated by Barron. Station employee attended a car, which caught fire; Sun Oil was sued for damages. Court found no liability, relationship more like landlord/tenant than master/servant. A master-servant relationship does not exist when an independent contractor controls the day-to-day operations of the entity that is responsible for damages suffered by a plaintiff. The assistance offered by Sun was voluntary, Humble was under no obligation to follow Suns directions and he bore the risk of the success or failure of the station. Murphy v. Holiday Inns (216 Va. 490 (1975); p. 41) Murphy was staying at a Holiday Inn, operated by a franchisee, when she slipped and fell. Sued franchiser. Court held that no master/servant relationship existed. When an agreement, considered as a whole, establishes an agency relationship, the parties cannot effectively disclaim it by formal consent. In determining whether a contract establishes an agency relationship, the critical test is the nature and extent of the control agreed upon. Murphy v. Holiday Inns (216 Va. 490

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(1975); p. 43) A franchise contract does not insulate the contracting parties from an agency relationship. If a franchise contract so regulates the activities of the franchisee as to vest the franchiser with control within the definition of the agency, the agency relationship arises even though the parties expressly deny it. Murphy v. Holiday Inns (216 Va. 490 (1975); p. 44)

B. Tort Liability and Apparent Agency Miller v. McDonalds Corp. 150 Or. App. 274, 945 P.2d 1107 (1997); p. 47) P (Miller) sued D (McDonalds Corp.) for injuries she received when she bit into a heart-shaped sapphire stone while eating a Big Mac sandwich that she had purchased from a McDonalds franchise. D motioned for SJ and it was granted on the grounds that the D did not own or operate the restaurant, rather it was owned and operated by a franchisee 3K Restaurant. The Control Test: To make vicariously liable for s negligence requires that have the right to control the method by which performed its obligations under the Agreement. C. Scope of Employment Ira Bushey & Sons v. US (398 F2d 167 (2d Cir 1968); p. 61) Navy sailor went out on shore leave, got drunk, came back to ship, opened valves, boat slid, dock damaged. Dock owner sued US as principal. Court held that master/servant relationship existed, so govt responsible, even though the actions causing damage were outside scope of sailors employment, because they were reasonably foreseeable. What is reasonably foreseeable [in the context of respondeat superior] is quite a different thing from the foreseeably unreasonable risk of harm that spells negligence. [] The employer should be held to expect risks [] which arise out of and in the course of his employment and labor. Manning v. Grimsley 643 F2d 20 (1st Cir. 1981); p. 66) Pitcher at a baseball game was being heckled, threw ball at crowd. Ball went through fence, hit Manning, who sued pitcher and the team (employer). Court held for plaintiff. Restatement 228(2) provides that a servants use of force against another is within the scope of employment if the use of force is not unexpected by the master. 231 a servants acts may be within the scope of employment although consciously criminal or tortious. 228(2) a servants use of force against another is within the scope of employment if the use of force is not unexpectable by the master. Must look at the scope of employment interfers with the employees ability to perform his duties successfully. Interference may be in the form of an affirmative attempt to prevent an employee from carrying out his assignments. E. Liability for Torts of Independent Contractors Majestic Realty v. Toti Contracting (30 NJ 425 (1959); p. 76) Majestic owned \buildings adjacent to property owned by Authority, who hired Toti to demolish one of its buildings. In the process, Toti negligently demolished one of Majestics buildings. Court found Authority liable for the acts of its independent contractor because the work contracted for was a per se nuisance. A principal is not liable for the negligence of the contractor during the performance of the contract unless the principal retains control over the means and manner of the work being

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contracted for, if the principal hires an incompetent contractor, or if the work contracted for constitutes a nuisance. 7.03(1) Principals (Direct) Liability - when principal is liable for an agents tort; usually in context of non-employee agents (independent contractors) o principal who retains control over the aspect of the activity in which the tort occurs is liable o principal can be held liable if it employed an incompetent independent contractor o principal can be held liable where the performance involves an inherently dangerous activity or non-delegable 7.01 Agents Liability to Third Party - An agent is subject to liability to a third party harmed by the agent's tortious conduct. Unless an applicable statute provides otherwise, an actor remains subject to liability although the actor acts as an agent or an employee, with actual or apparent authority, or within the scope of employment. 4. FIDUCIARY OBLIGATIONS OF AGENTS A. Duties During Agency Duties of Agent and Principal to one another Duty to act loyally/not to acquire material benefit Not compete/use Ps property Duty of care/duty of good conduct Duty to indemnify/deal fairly and in good faith An Agent must... 8.09 Act within scope of actual authority and to comply with Ps lawful instructions Why? Because this is a voluntary relationship, dont have to get involved if you dont want to. 8.01 General Fiduciary Principle - An agent has a fiduciary duty to act loyally for the principal's benefit in all matters connected with the agency relationship Duties of Loyalty by Agent to Principal o An agent may not put 1. his own interests 2. interests of a third party o ahead of the interests of the principal 8.02 Material Benefit - An agent has a duty not to acquire a material benefit from a third party in connection with transactions conducted or other actions taken on behalf of the principal or otherwise through the agent's use of the agent's position. o Part of the agents duty of loyalty is a responsibility not to use the agency position and/or the principals property or facilities for the agents own benefit, without the principals (at least tacit) consent 8.03 Acting as or on Behalf of an Adverse Party - An agent has a duty not to deal with the principal as or on behalf of an adverse party in a transaction connected with the agency relationship. 8.05 Use of Principals Property; Use of Confidential Info. - An agent has a duty (1) not to use property of the principal for the agent's own purposes or those of a third party; and (2) not to use or communicate confidential information of the principal for the agent's

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own purposes or those of a third party. 8.04 Competition - Throughout the duration of an agency relationship, an agent has a duty to refrain from competing with the principal and from taking action on behalf of or otherwise assisting the principal's competitors. During that time, an agent may take action, not otherwise wrongful, to prepare for competition following termination of the agency relationship.

Reading v. Regem (2 KB 268 (1948); p. 69) British soldier earned extra money by acting as a security guard for presumably illegal activities; wore his uniform while doing so. Crown discovered the bribery and claimed the money as his principal. Court upheld the seizure. If a servant takes advantage of his service and violates his duty of honesty and good faith to make a profit for himself [] then he is accountable for it to his master. An Agent has a duty to act solely for the master, and any profit earned while violating this duty belongs to the master. Rash v. J.V. Intermediate, Ltd. (498 F.3d 1201 (10th Cir. 2007); pg. 72) B. Duties During and After Termination of Agency: Herein of Grabbing and Leaving Town & Country House v. Newbery (3 NY2d 554 (1958); p. 88) Newbery worked for T&C, broke away and started competing business; T&C sued for unfair competition. Court held for T&C. Even where a solicitor of business does not operate fraudulently under the banner of his former employer, he still may not solicit the latters customers who are not openly engaged in business in advertised locations or whose availability as patrons cannot readily be ascertained but whose trade and patronage have been secured by years of business effort and advertising, and the expenditure of time and money [] An employee can owe a fiduciary duty to their employer for the employers trade secrets after their service has been terminated. 8.05 Use of Principals Property; Use of Confidential Information - An agent has a duty (1) not to use property of the principal for the agents own purposes or those of a third party; and (2) not to use or communicate confidential information of the principal for the agents own purposes or those of a third party. 8.04 Competition - Throughout the duration of an agency relationship, an agent has a duty to refrain from competing with the principal and from taking action on behalf of or otherwise assisting the principals competitors. During that time, an agent may take action, not otherwise wrongful, to prepare for competition following termination of the agency relationship.

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II.

PARTNERSHIPS
1. WHAT IS A PARTNERSHIP? AND WHO ARE THE PARTNERS? Tax treatment corporation is taxed at corp. tax rate, dividends (pro rata share of the corp. profits), considered a flow-through entity, meaning that the money goes through the company and is not itself taxed. Non-tax factors - life no life outside of its partners (individual members) - liability joint and severable liability - management general partner right to be involved in the management of the business - transferability may transfer your undivided interest in the partnership - flexibility of structure very flexible How do you form? - 202(a) Except as otherwise provided in subsection (b), the association of two or more persons to carry on as co-owners a business for profit forms a partnership, whether or not the persons intend to form a partnership. Very informally; may inadvertently create a partnership despite their expressed subjective intention not to do so. - Three Rules: 202(c) Rule #1 (1) Joint tenancy, tenancy in common, tenancy by the entireties, joint property, common property, or part ownership does not by itself establish a partnership, even if the co-owners share profits made by the use of the property Rule #2 (2) The sharing of gross returns does not by itself establish a partnership, even if the persons sharing them have a joint or common right or interest in property from which the returns are derived Rule #3 and the protected categories (3) A person who receives a share of the profits of a business is presumed to be a partner in the business, unless the profits were received in payment of/for (i) debt; (ii) employee/independent contractor wages/comp.; (iii) rent; (iv) annuity or other retirement/health benefit; (v) interest or other charge on a loan; or (vi) sale of goodwill of business or other property A. PARTNERSHIP COMPARED WITH EMPLOYEES 6/202 - A partnership is an association of two or more persons to carry on as co-owners of a business for profit. Ownership involves the power of ultimate control To state that partners are co-owners of a business means that they each have the power of ultimate control. 7(3)/202(c)(2) Sharing in profits is prima facie evidence of the existence of a partnership, but not if the profits are received by a party as employee wages, as rent, as annuity to the representative of a deceased partner, as interest on a loan, or as consideration for a sale. ~12~

7(1) Parties who are not partners to each other are not partners as to third parties. 16(1)/308 Partnership by estoppel: A party who represents himself, or permits another to represent him, to a third party as a partner (whether to a partnership or to others who arent in a partnership), is liable to the third party who, in reliance on the representation, gives credit to the partnership. Two main types of partnerships General Partnership - A partnership in which all partners participate fully in running the business and share equally in the profits and losses (although the partners monetary contributions may vary). Limited Partnership - a partnership composed of one or more persons who control the business and are personally liable for the partnerships debts (general partners) and one or more persons who contribute capital and share profits but who cannot manage the business and are liable only for the amount of their contribution (limited partners). Association - organized body of persons who have some purpose in common A Partnership is created by agreement, either express or implied Fenwick v. Unemployment Compensation Comm. (133 NJL 295 (1945); p. 79) Fenwick and Chesire drew up a contract under which Chesire would work for Fenwick, who retained control of business, but the K called the two partners. Court held the K was an employment agreement, not partnership. Elements relevant to determining if a partnership exists: intent of the parties (not dispositive), right to share in profits, obligation to share in losses, sharing ownership and control of property and business, language in the agreement, conduct towards third parties, and rights upon dissolution. Two big things the court will look at is control and right to share in the profits B. PARTNERS COMPARED WITH LENDERS Martin v. Peyton (246 NY 213 (1927); p. 84) A banker-broker firm, KN&K, was in financial difficulties, and Peyton et al. offered to become partners in the business. That offer was rejected, but a new agreement arose in which Peyton et al. would lend KN&K money, receive speculative stock in return, and also get 40% of profits till loan repaid; Peyton et al. had rights to inspect KN&Ks books and veto any proposals deemed too speculative. Court determined this arrangement was not a partnership. To prove a partnership, parties may introduce as evidence a written agreement, testimony as to an oral agreement, or circumstantial evidence. Southex Exhibitions v. Rhode Island Builders Assn. (279 F3d 94 (1st Cir. 2002); p. 89) Agreement between RIBA and SEM on home shows; each party had rights and obligations, profits were to be shared, and agreement called the parties partners. Southex acquired SEMs interest, disagreement over terms with RIBA, and RIBA dissolved agreement. Court held agreement was not a partnership. Because a partnership can be created even in the absence of a partnership contract, the existence or non-existence of a partnership must be evaluated in light of the totality of the circumstances. C. Partnership by Estoppel Young v. Jones (816 F.Supp. 1070 (DSC 1992); p. 93) Plaintiffs made an investment deposit on the basis of a financial statement that was later found to be falsified. A Bahamian accounting firm identified in the audit letter as Price Waterhouse had certified the statement. Plaintiffs claimed PWBahamas and PW-US operated as a partnership; defendants argued they are separate organizations. Court found no evidence that investment made on belief of a partnership between PW-Bahamas and

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PW-US, so no partnership by estoppel. Rights of Partners in Management o What is a partnership liable for? [first level of analysis] - 305 ordinary course or authority Responsible for conduct of a partner acting in the ordinary course of business or with authority of the partnership o What is a partner liable for? - 306 j/s for all obligations of ptsp j/s liability for all obligations of the partnership o What does Agency have to do with this? Each partner is an agent of the partnership Partnership/Partners o 307 Actions by and Against Partnership and Partners (a) partnership sues/may be sued (c) Judgment against partnership not a judgment against partner and may not be satisfied from a partners assets unless there is also a judgment against the partner. o When can a creditor go after a partner? (d) - See 307(d)(1)-(5) Statement of Partnership Authority - 303 o What does the effect of this section have? Defeats apparent authority; this is the equivalent of notice o What specifically is it aimed at defeating?

2. THE FIDUCIARY OBLIGATIONS OF PARTNERS 404(a) The only fiduciary duties a partner owes to the partnership and the other partners are the duty of loyalty and the duty of care set forth in subsections (b) and (c). 404(b)The duty of loyalty a partner owes to the partnership and the partners is limited to (1) accounting to and holding as trustee for the partnership any property, profit, or benefit derived from partnership business, (2) refraining from dealing with the partnership as or on behalf of a party with interests adverse to the partnership, and (3) refraining from competing with the partnership. 404(c) A partners duty of care to the partnership and the other partners in the conducting and winding up of the partnership business is limited to refraining from engaging in grossly negligent or reckless conduct, intentional misconduct, or a knowing violation of the law. (d) [obligation of good faith and fair dealing] (e) [not necessarily a violation if the partners conduct furthers the partner's own interest] 9(c)(3) Unless authorized by the other partners, [] one or more but less than all the partners have no authority to do any [] act would make it impossible to carry on the ordinary business of the partnership. 38Dissolution is caused, without violation of the partnership agreement, by the expulsion of any partner from the partnership in accordance with the power to do so granted under the partnership agreement. 20A partner has an obligation to disclose, upon demand, true and full information of all things ~14~

affecting the partnership to any partner. Meinhard v. Salmon (249 NY 458 (1928); p. 97) Salmon and Meinhard created joint venture in a business in property leased to Salmon by Gerry; parties agree that Salmon and Meinhard were partners with fiduciary duties to each other. At time of lease renewal, Salmon entered into a new agreement with Gerry without informing Meinhard of the new agreement or including him as a partner in it. Meinhard argued for a piece of the new agreement. Court agreed found Salmon had violated fiduciary duty to Meinhard. Joint adventurers, like copartners, owe to one another, while the enterprise continues, the duty of the finest loyalty. Corporate opportunity doctrine: Partnership Opportunity? o If the transaction in question is a NOT a partnership opportunity no liability attaches to its taking o If it IS a partnership opportunity disclosure alone is not enough: the other partners consent to its taking is required o Partnership opportunity not defined in RUPA Sandvick v. LaCrosse, 747 N.W.2d 519 (N.D. 2008); pg. 103), In May 1996, Sandvick, Bragg, LaCrosse, and Haughton purchased three, 5-year oil and gas leases in North Dakota. The leases were known as the Horn leases. Empire Oil Company, owned by LaCrosse, held record title to the leases. In November 2000, Haughton and LaCrosse purchased three oil and gas leases on the Horn property. These leases were referred to as the Horn Top Leases and were set to begin at the expiration of the initial Horn Leases. Prior to purchasing the top leases, LaCrosse and Haughton twice offered to purchase Sandvicks and Braggs interests in the Horn leases, but Sandvick and Bragg refused. Sandvick and Bragg then sued LaCrosse and Haughton, claiming they breached their fiduciary duties by not offering Sandvick and Bragg an opportunity to purchase the top leases with them. (1) Did a partnership or a joint venture exist? Joint Venture b/c the leases were purchased out of the parties checking account funds in equal shares, they were titled in Empire Oils name rather than each of the parties names, and profits were going to be shared if the leases were sold, a joint venture did exist. (2) If so, was a fiduciary duty breached? Yes b/c, although the original Horn leases did not contain an extension or renewal provision, the top leases purchased by LaCrosse and Haughton were effectively extensions of the original Horn leases. Because of this, they breached their fiduciary duties of loyalty by taking advantage of a joint venture opportunity when they purchased the top leases without informing Bragg and Sandvick. B. Grabbing and Leaving Meehan v. Shaughnessy (404 Mass. 419 (1989); p. 109) Meehan et al. were partners at PCD, left to start their own firm, and then sued PCD, claiming PCD owed them money under the partnership agreement. PCD counterclaimed, claiming breach of fiduciary duty and tortious interference. Court found Meehan et al. had acted improperly in the way they solicited clients from PCD; remanded for further findings. Partners owe each other a fiduciary duty of the utmost good faith and loyalty [] As a fiduciary, a partner must consider his or her partners welfare, and refrain from acting for purely private gain. A fiduciary may plan to compete with the partnership so long as in the planning, he does not

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otherwise violate his duties to the partnership. Meehan v. Shaughnessy (404 Mass. 419 (1989); p. 114) [A] partner who separates his or her practice from that of the firm receives (1) the right to his or her capital contribution, (2) the right to a share of the net income to which the dissolved partnership is currently entitled, and (3) the right to a portion of the firms unfinished business, and in exchange gives up all other rights in the dissolved firms remaining assets. Meehan v. Shaughnessy (404 Mass. 419 (1989): facts on p.119, this segment starts on p. 190) Partners in a law firm left, formed own firm, solicited clients from old firm. Court held the withdrawing partners violated fiduciary duty, and remaining partners had the right to payment of a fair charge for any case removed from their firm. Breached their duties to ptsp. by contacting clients in a way that did not give them a real choice to stay, and by actively lying to their partners about leaving up until December.

C. Expulsion Lawlis v. Kightlinger & Gray (562 NE2d 435 (Ind.App. 1990); p. 116) Lawlis, a partner at K&G, told partners he was an alcoholic. Agreement drafted under which hed get treatment and retain his partnership position; agreement specified no second chances. He started drinking again and partners did give him a second chance, but then fired him, with severance, two years later. Lawlis sued, claiming breach of fiduciary duty. Court disagreed, found no breach. Where the remaining partners in a firm deem it necessary to expel a partner under a no cause expulsion clause in a partnership agreement freely negotiated and entered into, the expelling partners act in good faith regardless of motivation if that act does not cause a wrongful withholding of money or property legally due the expelled partner at the time he is expelled. (p. 121). 3. PARTNERSHIP PROPERTY 202(a) 202(c)(1) 203 Partnership Property - Property acquired by a partnership is property of the partnership and not of the partners individually. 204 - When Property is Partnership Property (Three Ways) (a) Property is partnership property if acquired in the name of: (1) the partnership; or (2) one or more partners with an indication in the instrument transferring title to the property of the person's capacity as a partner or of the existence of a partnership but without an indication of the name of the partnership. (b) Property is acquired in the name of the partnership by a transfer to: (1) the partnership in its name; or (2) one or more partners in their capacity as partners in the partnership, if the name of the partnership is indicated in the instrument transferring title to the property. (c) Property is presumed to be partnership property if purchased with partnership assets, even if not acquired in the name of the partnership or of one or more partners, with an indication in the instrument transferring title to the property of the person's capacity as a partner or of the existence of a partnership (d) Property acquired in the name of one or more of the partners, without an indication in the instrument transferring title to the property of the person's capacity as a partner or of the

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existence of a partnership and without use of partnership assets, is presumed to be separate property, even if used for partnership purposes 306 Putnam v. Shoaf (620 SW2d 510 (Ct.App.Tenn. 1981); p. 123) Putnam sold her partnership interest in a failing business to Shoaf. Business later recovered a substantial judgment against a thieving employee; Putnam sued, claiming the money paid to partner Shoaf rightfully belonged to Putnam. Court disagreed; holding that she sold her partnership interest and therefore any rights she had in the business. Co-partners do not personally own any asset of the partnership; the partnership owns the asset and the partners own interest in the partnership. Their interest is an undivided interest, a pro rata share of the net value of the partnership. A partners possessory right does not exist absent the partnership. Putnam v. Shoaf (620 SW2d 510 (Ct.App.Tenn. 1981); p. 125) The partnership interest can sell their interest in the partnership 502. transferable interest in partnership. 4. RIGHTS OF PARTNERS IN MANAGEMENT National Biscuit Co. v. Stroud (249 NC 467 (1959); p. 127) Stroud and Freeman partners in a grocery store. Stroud said hed no longer be liable for purchases made from NBC, Freeman made purchases anyway, but Stroud wouldnt pay. Court found Stroud was liable because Freemans actions were within the scope of the partnership and Stroud, not being a majority of partners, couldnt prevent Freeman from acting. What either partner does with a third person is binding on the partnership. Every partner is an agent of the partnership [] [and] all partners are jointly and severally liable for the acts and obligations of the partnership, unless the partner has no authority to act in that particular matter and the third party knows of the restriction. National Biscuit Co. v. Stroud (249 NC 467 (1959); p. 128) (emphasis added) Business differences regarding ordinary partnership business may be decided by a majority of partners, and an act in contravention of such an agreement shall not bind the partnership unless the act was agreed to by all partners. National Biscuit Co. v. Stroud (249 NC 467 (1959); p. 128) When it comes to changing the status quo, the partnership will not be liable for the acts of the partner acting with apparent authority. The benefit was to the company, not to the individual A third party was attempting to recover. Partnerships liability to a 3d party differs from partners responsibilities to one another. Summer v. Dooley, (481 P2d. 318 (1971); starts on p. 144) Summers and Dooley partners in a garbage removal business and did the work themselves. S wanted to hire a third person, D said no, S did it anyway, and D refused to pay the third guy from partnership funds. S sued. Court found D couldnt be held liable because a majority of partners hadnt consented to the action. Business differences regarding ordinary partnership business may be decided by a majority of partners, provided that the partners have no other agreement speaking to the issues. o Note: Summers seems to contradict National Biscuit. Both dealt with two-partner businesses, but National Biscuit upheld liability to the non-consenting partner, and Summers did not. The difference appears to be that in National Biscuit, the nonconsenting partner wanted to change the partnerships pattern of behavior (i.e., stop

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ordering from NBC) whereas in Summers the non-consenting partner wanted to keep things as they were (i.e., no employee hired). Day v. Sidley & Austin (394 F.Supp. 986 (DDC 1975); p. 131) Day was a partner at S&A. E-board announced merger plans, partners (including Day) voted to approve. After merger, Days office location moved and he was made co-chair, rather than chair, of his office. He sued. Court found he had no rights to what he lost under his partnership K, and merger was allowed under the partnership K, so no violation of fiduciary duty. The essence of a breach of fiduciary duty between partners is that one partner has advantaged himself at the expense of the firm. The basic fiduciary duties are: 1) a partner must account for any profit acquired in a manner injurious to the interests of the partnership, such as commissions or purchases on the sale of partnership property; 2) a partner cannot without the consent of the other partners, acquire for himself a partnership asset, nor may he divert to his own use a partnership opportunity; and 3) he must not compete with the partnership within the scope of the business. Day v. Sidley & Austin (394 F.Supp. 986 (DDC 1975); p. 134) 5. PARTNERSHIP DISSOLUTION Dissolution v. Going out of business Dissolution is not the same as going out of business 29 A dissolution is simply the change in relationship of the partners caused by any partner ceasing to be associated in the carrying on of the firms business winding up: The process of shutting down post-dissolution. A. THE RIGHT TO DISSOLVE 602(a) A partner has the power to dissociation at any time, whether rightfully or wrongfully. May or may not lead to dissolution. After dissolution, the partnership must be wound up, absent agreement among the partners to carry on the business. Assuming that the business will not be continued, the winding up process generally contemplates that the firms assets will be distributed to the partners. 33/804. (Related to the winding up of the partnership) Authority of partners to act on behalf of partnership terminated except in connection with winding up of partnership business. Technically creates a new partnership Departing partner entitled to accounting o Fair value of partnership o Interest from date of dissolution in event of unreasonable failure to pay 36/703 Departing partner remains liable on all firm obligations unless released by creditors. 41/306(B) If a new partner joins the firm when it continues after a dissolution the new partner is also liable for the firms old debts, but such liability can only be satisfied out of partnership property? o The new partner cannot be held personally liable for the old debts, unless he or she expressly agrees to be so held. When a partner leaves the partnership 32 Courts shall decree a partnership dissolved upon application by a partner when it can be shown that a partner has been guilty of such conduct as tends to affect prejudicially the carrying on of the business, that a partner willfully or persistently breaches the partnership agreement, or that any other circumstances exist that make dissolution an equitable solution. ~18~

Uniform Partnership Act (1914). When a partnership contract does not specify a definite term or particular undertaking, the partnership may be dissolved at the will of any partner. Uniform Partnership Act (1914). 38When a partner or partners dissolve a partnership in a manner not in accord with the partnership agreement, partners who didnt cause the wrongful dissolution have the right to damages for breach and the right to continue the partnership business if they wish, provided they pay the dissolving partners for their interest in the partnership at the time of dissolution, less any damages caused by the wrongfully-dissolving partners. Uniform Partnership Act (1914). 701 If a partner withdraws in a manner not in accord with the partnership agreement, the partnership isnt necessarily dissolved. If it isnt, the remaining partners must buy out the withdrawing partner for his/her interests in the partnership assets, less any damages for wrongful withdrawal. Revised Uniform Partnership Act (1997). 401(b) Each partner is entitled to an equal share of the partnership profits and is chargeable with a share of partnership losses in proportion to the partners share of the profits. Revised Uniform Partnership Act (1997) Owen v. Cohen (19 Cal.2d 147 (1941); p. 154) Partnership in bowling alley; one partner managed and one partner financed. Disagreement over how business to be run; conflicts affected profitability. Owen (financing partner) sued for dissolution. Court found Cohen at fault for the disharmony and ordered dissolution. Judicial determination of status of loan required Receiver probably needed for orderly liquidation Potential for wrongful dissolution o UPA 31(1) v. 31(2) o Dissolution of a term partnership (partnership for a term) prior to expiration of the term is wrongful o Adverse consequences 38(c) Hence, there always exists the power, as opposed to the right, of dissolution Dissolution is an appropriate remedy b/c of Cohens misconduct, See 32(1)(c) and (d) Collins v. Lewis (283 SW2d 258 (Tex Ct App 1955); p. 157) Partnership agreement to open caf; Collins to finance and Lewis to manage. Cost overruns in preparing to open and in running the business; Collins said Lewis mismanaged and Lewis said Collins micromanaged. Collins sued for dissolution. Court found that under the partnership agreement, dissolution proper only if and when Lewis failed to pay Collins back on the agreed-upon terms. Lewis hadnt breached the terms, so dissolution not granted on those grounds; further, by refusing to make the mortgage payment, Collins was actually in breach. [T]here is no such thing as an indissoluble partnership only in the sense that there always exists the power, as oppose to the right, of dissolution. But the legal right to dissolution rests in equity, as does the right to relief from the provisions of any legal contract. Bad blood is not enough to dissolution, looked at: term partnership, type of misconduct at issue, nature of the relationship vis-a-vis ability of partnership to prosper. 31(1)(b) 601(5)(i-iii)/Dissolution at Will 31(4) Dissolution 32 Dissolution by Decree of Court Page v. Page (55 Cal.2d 192 (1961); p. 162) Partnership in linen business initially unprofitable. Major ~19~

creditor a corporation owned by one partner, plaintiff here. Partnership turned profitable, but P still wanted to dissolve. Court found that there was no definite term specified in the partnership K, so P could dissolve at will. A partner at will is not bound to remain in a partnership, regardless of whether the business is profitable or unprofitable. Exercising the power to dissolve, however, must be exercised pursuant to the fiduciary duty of good faith. Term Partnership Explicit Term o Duration specified in partnership agreement o Specific purpose/object specified in partnership agreement Implicit Term, i.e. duration of a loan B. The Consequences of Dissolution Prentiss v. Sheffel (20 Ariz. App. 411 (1973); p. 148) Three-person partnership-at-will. Two partners excluded the third from business decisions (as court found, because they couldnt work well together, not out of bad faith attempt to acquire business). Partnership was declared dissolved by the courts; those two partners then purchased partnership assets from the court-ordered sale. Court held such a purchase was proper. A partnership at will may be dissolved when a partner is frozen out or excluded from the management and affairs of the partnership. A partner is not prohibited from bidding on partnership assets at a judicially-ordered sale. Prentiss v. Sheffel (20 Ariz. App. 411 (1973); p. 148) Pav-Saver v. Vasso (143 IllApp3d 1013 (1986); p. 151) Pav-Saver a partnership formed by Dale (contributing work), PSC (contributing patents and trademarks), and Meersman (contributing money). This agreement dissolved and replaced with identical one between PSC and Vasso. PSC tried to terminate pursuant to agreement, Vasso physically ousted Dale and assumed management, and PSC sued for dissolution and a return of its patents and trademarks. Court found PSC wrongfully dissolved, Vasso could continue the business and keep the trademarks, and PSC would get liquidated damages. 31(2) Early dissolution of a term partnership

Partnership review Part may be for a term or at will. Default at will Joint and several liablity for all that the partnership is liable for Partners are entitle to share in control When a majority deprives a pt of participation in control, it violated the ptsp agreement Upon dissolution there is supposed to be a winding up the ptsp continues for the pruposes of the wind up In some situations, the winding up will be accomplished by the partners who are still available to do so. If not feasible, then court may order a sale court has discretion to appoint a receiver and as to how the sale is to be accomplished Partners may bid for the assets of the partnership, including its goodwill piecemeal/going concern Partners owe each other a fid obligation, so they cannot dissolve in bad faith Example on pt knows the other doesnt have/cannot get the money to bid on the ptsp, and there will be no other bidders at a fair price, and dissolves in order to be able to buy the ptsp assets at an unfairly low price In effect, when a pt dissolves and bids for the assets of the ptsp, she must pay a fair price. Otherwise, a court may find bad faith and a violation of fiduciary duty. ~20~

C. The Sharing of Losses Kovacik v. Reed (49 Cal.2d 166 (1957); p. 157) Contracting partnership, Reed to superintend and share in profits, Kovacik to finance. No specification on what would happen if lost money on the contracting job. Job did lose money and Kovacik sued when Reed refused to pay Kovacik half the loss. Court found Reed not liable for losses.Partners are presumed to have intended to share equally in the profit and loss of the partnership business, regardless of any inequality in money fronted by the partners, absent agreement to the contrary. When one partner contributes money and another labor, neither party is liable to the other for contribution for any loss sustained. Thus, upon loss of the money the party who contributed it is not entitled to recover any part of it from the party who contributed only services. Kovacik v. Reed (49 Cal.2d 166 (1957); p. 157) o Note: this holding of Kovacik is specifically rejected by the Revised Uniform Partnerhship Act 401(b). D. Buyout Agreements Buy-out or buy-sell agreement - allows a partner to end the relationship with the other partners and receive a cash payment or series of payments, or some assets of the firm, in return for their interest in the firm shotgun buy-sell one side proposes a price, but the person selling can turn around any buy the business for that same price. G&S Investments v. Belman (145 Ariz. 258 (1984); p. 161) Partnership in apartment complex. One partner got involved in drugs, rarely worked, and when did, pushed for bad investments. Partners sued to dissolve; while suit was pending, that partner died. Court held that the filing for dissolution was not an effected dissolution, but the partners wrongful conduct gave the court power to dissolve, and partners had to buy out the partners interest. When a partner dies, retires, resigns, or goes insane, the remaining partners may continue the business provided they purchase the interest of the withdrawing partner according to the buyout provision in the Articles of Partnership, the partners capital account plus the average of the prior three years profits/gains actually paid to the partner. Limited Partnership general partnership statute applies Nordale was a general partner The ULPA did not speak to the specific issue presented UPA 6 provides that it governs limited partnerships as well Limited partner has no management responsibility if limited partner does start managing the business, they become general partners Fair market value is a range depends on whos available in the market to make the purchase

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III.

THE NATURE OF THE CORPORATION

Attributes: o Legal personhood contracts in its own name, some constitutional rights, exists independent of its owners, and can last for 100s of years o Separation of ownership and control bd of dir is controlling body of the corporation o Liquidity publically held shares (public marketplace stock exchange)/privately held shares (must be invited to buy in) o Flexible capital structure

Shareholder Redress Derivative suit suit brought by the shareholders against the corp to essentially get the corporation to do what they are wanting, to make certain changes. Shareholder can use this as a way to bypass the board of directors. Balance between director autonomy and accountability to shareholders. Two types: o Suing a board member o Somebody that the board should be suing on behalf of the company Capital Structure o Authorized shares something that can be created (can be unlimited, or set limit) shares do not exist yet o Outstanding shares already issued and owned o Authorized but unissued shares o Treasury shares shares that exist, being either bought or sold by someone, not by the corporation. Incorporation Process o Draft articles of incor and other constating documents o File articles w/ Sec of State o Then 2.03 o Draft by by-laws (2.06), organizational meeting (2.05), issue stock Liability for Pre-incorporation o Issues? o Contracts? o Liability? Corporations Analysis o Agency is a way that shareholders may become liable for the acts of the corporation o Agent working on behalf of an undisclosed principle = liable

1. PROMOTERS AND THE CORPORATE ENTITY Southern-Gulf Marine v. Camcraft (410 So.2d 1181 (La.App. 1982); p. 171) Letter of agreement that Camcraft would build a ship for SGM specified that SGM was a US corporation. SGM was not actually incorporated at the time of the K, later incorporated in Cayman Islands; SGM informed Camcraft of its Cayman incorporation. Camcraft didnt deliver the boat, SGM sued, and Camcraft argued K void b/c of the incorporation issue. Court held for SGM, said Camcrafts substantial rights not affected by the issue. One who contracts with what he acknowledges to be and treats as a corporation, incurring obligations in its favor, is estopped from denying its corporate existence, particularly when the obligations are

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sought to be enforced. [A party], having given its promise [] should not be permitted to escape performance by raising an issue as to the character of the organization to which it is obligated, unless its substantial rights might thereby be affected. Southern-Gulf Marine v. Camcraft (410 So.2d 1181 (La.App. 1982); p. 173) De facto corporation v. corporation by estoppel (equitable remedy) De Factor corporation De Factor corporation is a company which operates as if it were a corporation although it has not completed the legal steps to become incorporated (has not filed its Articles) or has been dissolved or suspended but continues to function. The court temporarily treats the corporation as if it were legal in order to avoid unfairness to people (Directors, Officers, and shareholders) who thought the corporation was legal. Requires: (1) a relevant incorporation statute, (2) a good faith attempt to comply with it, and (3) evidence that the business is being run as a corporation. Corporation by estoppel - only applies to contract claimants [equitable remedy] Corporation by estoppel, on the other hand, applies against someone who operates a business as if it were a corporation, irrespective of whether there was a good faith effort by the business to incorporate. The person doing business as such an entity may later be estopped from arguing that it is not in fact a corporation, in an attempt to reach the assets of the incorporators. For the same reason, defendants who had acted as a corporation will be estopped from denying liability as a corporation when sued by a plaintiff who had relied on the defendant's corporate form when dealing with the defendant. 2. THE CORPORATE ENTITY AND LIMITED LIABILITY Walkovsky v. Carlton (18 NY2d 414 (1966); p. 176) Plaintiff run over by a cab, which was owned by a corporation whose sole stockholder owned ten like corporations, each with a couple cabs. Plaintiff sued stockholder, claiming the fractured corporate entity was an attempt to defraud the public. Court disagreed, said there was no cause of action to pierce veil. Piercing the corporate veil is allowed whenever necessary to prevent fraud or to achieve equity. [] [W]henever anyone uses control of the corporation to further his own, rather than the corporations business, he will be liable for the corporations acts. Enterprise liability a legal doctrine under which individual entities can be held jointly liable for some action on the basis of being part of a shared enterprise. It is a form of secondary liability. As per the enterprise liability an entire organization may be held responsible for the obligations and/or offences of its constituent units. Different from piercing the corp veil in that not going after the shareholder here. Piercing the corporate veil - the courts may decide not observe the separation of the corporate entity from its stockholders, and it may deem the corporation's acts to be those of the persons or organizations actually controlling the corporation. This is based upon a finding by the court that the corporate form is used to perpetuate a fraud, circumvent a statute, or accomplish some other wrongful or inequitable purpose Limited Liability - 6.22(b) o Unless otherwise provided in the articles of incorporation, a shareholder of a corporation is not personally liable for the acts or debts of the corporations except that he may become

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personally liable by reason of his own acts or conduct. Sea-Land Services v. Pepper Source (941 F2d 519 (7th Cir. 1991); p. 181) SLS shipped peppers for PS, who didnt pay its bill and later was dissolved. SLS sued, attempting to pierce corporate veil and get payment from stockholder; SLS was also attempting to reverse-pierce defendants other corporations. Court found first part of test satisfied, remanded for findings on the second part. There are two requirements that must be met before the corporate veil can be pierced: (1) such a unity of interest and ownership that the corporation and the individual are not separate personalities, and (2) circumstances are such that not piercing the veil would sanction a fraud or promote injustice. Factor (2) is what elevates this above agency. If there was no debt owing there would be no reason to go after the corp. It shouldnt matter that there was money owing, otherwise it defeats limited liability and becomes a oneprong test. There are four factors involved in reverse-piercing: (1) failure to maintain adequate corporate records or to comply with corporate formalities, (2) the commingling of funds or assets, (3) undercapitalization, and (4) one corporation treating the assets of another corporation as its own. Sea-Land Services v. Pepper Source (941 F2d 519 (7th Cir. 1991); p. 183). Roman Catholic Archbishop of San Francisco v Sheffield (15 Cal. App.3d 405 (1971); (p. 187))- Tried to hold local subsidiary/archbishop of San Francisco as alter ego The roman catholic church, governed by the pope through the Code of Canon Lawone worldwide corporation Alter ego theory: [Enterprise liability] 1) such a unity of interest and ownership that the individuality of such person and corporation has ceased AND 2) the facts are such that an adherence to the fiction of the separate existence of the corporation would, under the circumstances, sanction a fraud or promote injustice May have raised an issue as to whether the Pope is an alter ego, but not the archbishop o Makes a parent liable for the actions of a subsidiary which it controls o Does not make a subsidiary liable for the other subsidiaries when all are controlled by a parent corporation o No respondent superior 1. The purpose of the doctrine is not to protect every unsatisfied creditor, but rather to afford him protection ,where some conduct amounting to bad faith makes it inequitable for the equitable owner of a corporation to hide behind its corporate veil In re Silicone Gel Breast Implants Product Liability Litigation (887 F.Supp. 1447 (NDAla. 1995); p. 221) Bristol bought MEC; they had a parent-subsidiary relationship and Bristol was involved in MECs day-to-day business. MEC eventually shut down by Bristol. MEC was sued in tort over breast implants; plaintiffs wanted to pierce veil and go after Bristol. Court found it couldnt grant summary judgment to Bristol, issue of alter ego to be decided by jury. [A] parent corporation is expected indeed, required to exert some control over its subsidiary. Limited liability is the rule, not the exception. [] However, when a corporation is so controlled as to be the alter ego or mere instrumentality of its stockholder, the corporate form may be disregarded in the interests of justice. To determine if a subsidiary is merely the alter ego of the parent, the court must evaluate the totality of the circumstances, considering factors like: if they have directors or officers in common, if they file consolidated taxes, if the subsidiary is undercapitalized, if the subsidiary

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gets all its business from the parent, if the parent uses the subsidiarys property for its own, if the parent pays expenses or wages for the subsidiary, if their daily operations are commingled. In re Silicone Gel Breat Implants Product Liability Litigation (887 F.Supp. 1447 (Ala. 1995); p. 221) When determining if veil-piercing is appropriate in a parent-subsidiary situation, no showing of fraud is required under Delaware law. In re Silicone Gel Breat Implants Product Liability Litigation (887 F.Supp. 1447 (Ala. 1995); p. 221) Frigidaire Sales Corp. v. Union Properties (88 Wash2d 400 (1977); p. 229) Mannon and Baxter limited partners in Commercial and also directors and shareholders of Union. Union was Commercials only general partner. Commercial breached contract with Frigidaire, who sued and tried to pierce Commercials and Unions veils. Court refused to pierce veil, found that Mannon and Baxter scrupulously separated their actions on behalf of Union from their personal actions, and Frigidaire never had cause to believe Mannon and Baxter were general partners in Commercial. [L]imited partners do not incur general liability for the limited partnerships obligations simply because they are officers, directors, or shareholders of the corporate general partner. 3. SHAREHOLDER DERIVATIVE ACTIONS Direct or Derivative Suit must make sure that you are bringing the suit properly. Direct Derivative Brought by the shareholder in his/her own Brought by a shareholder on corporations name behalf Cause of action belonging to the Cause of action belongs to the corporation shareholder in his/her individual capacity as an entity Arises from an injury directly to the Arises out of an injury done to the shareholder corporation as an entity Traditional tests o Who suffered the most direct injury? If corporation, suit is derivative o To whom did defendants duty run? If corporation, suit is derivative Called into question in Eisenberg Delawares alternative two-prong standard to determine whether a stockholders claim is derivative or direct: 1. Who suffered the alleged harm, the corp or the suing stockholder, individually 2. Plaintiff Qualifications: Shareholder Status o 7.41 Standing. Limits standing to shareholders Albeit by negative implication does not say so outright but only indicates shareholder Creditors may not bring derivative suit o 7.41(1) Must be a shareholder at the time of the alleged wrongdoing Devolution Continuing wrongs? o 7.42. Must be a shareholder when suit commenced (Many states say also must remain a shareholder through judgment o 7.42(2). Named plaintiff must be a fair and adequate representative of the corporations interests ~25~

On what ground might one challenge a plaintiffs fairness or adequacy? Conflicted interests, such as bringing suit for unrelated strategic purposes Unclean hands o Internal affairs doctrine where you are incorporated is where the case will be heard. Derivative suits allow shareholders to hold directors accountable Supreme court called it a remedy born of stockholder helplessness Potential abuses: Strike suits: nuisance suits brought for settlement value Meritorious suits: Settled too easily

Plaintiff-side Incentives o Any recovery goes to corporate treasury, whether by settlement or trial victory o Lawyer is real party in interest o Lawyer can get contingent fee out of any recovery BUT corporation also must pay plaintiffs legal fees if there is a substantial nonmonetary benefit Defendant-side Incentives o Strike suites: settle to go away o Meritorious suits against insider defendants: Indemnification: corporation must reimburse directors expenses if successful defense Settlement in which director doesnt pay anything deemed a success Combined Effect o Strike Suits [security for expense statutes only address strike suit class] Plaintiff counsel has incentive to bring Management has incentive to pay o Meritorious suits Management has incentive to settle in ways that ensure indemnification Plaintiff lawyer has incentive sto settle so as to get on to next case Hence, settled too lightly Cohen v. Beneficial Industrial Loan (337 U.S. 541 (1949); p. 201) Cohen, owner of .0125% of BIL stock, alleged corporate mismanagement, filed shareholder derivative suit. State law required shareholders owning so little stock to post bond for corporations defense costs in case shareholders lose; P challenged law. Court found law a reasonable exercise of state power. [A] stockholder who brings suit on a cause of action derived from the corporation assumes a position [] of a fiduciary character. He sues, not for himself alone, but as a representative of a class [] [The state is not obliged] to place its litigating and adjudicating process at the disposal of such a representative, at least not without imposing standards of responsibility, liability, and accountability which it considers will protect the interests he elects himself to represent. Policy considerations: the derivative suit belongs to the corporation, not the individual; the corporation may not want the facts of the suit to become common knowledge because of how it may negatively impact the corporation Eisenberg v. Flying Tiger Lane (451 F2d 267 (2d Cir. 1971); p. 205) Suit to prevent merger and reorganization. Corporation demanded bond for costs, pursuant to state law on shareholder derivative suits. Court held the action was personal, not a shareholder derivative, so no bond required. [I]f the injury is one to the plaintiff as a stockholder and to him individually and not to the ~26~

corporation, the suit is individual in nature and may take the form of a representative class action. When the plaintiff is charging that management is interfering with the rights and privileges of stockholders and is not challenging managements acts on behalf of the corporation, securities for costs cannot be required.

B. THE REQUIREMENT OF DEMAND ON THE DIRECTORS Basic Policy Issue When if ever should the corp, acting through the board of directors or a committee of directors, be permitted to prevent or terminate a derivative action? Put another way, who gets to control the litigation: the shareholder or the corporations board of directors? Demand Typically a letter from shareholder to the board of directors. asking the board to do something, i.e. bring suit on the alleged cause of action must be sufficiently specific as to apprise the board of the nature of the alleged cause of action and to evaluate its merits at a minimum, a demand must identify the alleged wrongdoers, describe the factual basis of the wrongful acts and the harm caused to the corporation, and request remedial relief. Demand required unless excused for being futile 2 tests for whether or not demand is excused: acts as a filter o NY Three factor (disjunctive) standard: Majority of directors interested in challenged transaction Directors failed to inform themselves to degree reasonably appropriate Challenged transaction so egregious that it could not have been the product of sound business judgment of the directors (self-dealing) o Del plaintiff must allege particularized facts (pre-discovery using the tools at hand) creating a reasonable doubt that the board is capable of making a good faith decision on suit: Majority of board has material financial or familial interest Majority of the board lacks independence (domination and control by wrongdoers) Challenged transaction not product of valid exercise of business judgment Disjunctive Rational plaintiff A rational plaintiff will file derivative suite before making demand o Consequences of not making demand trivial if required, slight delay while you make demand o Preserves right to litigate: Direct v. derivative Demand futility

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Derivative suits a mechanism of managerial accountability Potential for bias: Directors cannot be expected to ___

Cause of action belongs to corporation Like all assets, litigation under control of Bod Shareholder may have interests diverse from those of corporation Shareholders lawyer often real party in interest Therefore BoD should have some say Demand made? Demand refused? ( Does BJR apply?) Wrongful Refusal Demand excused sues SLC Yes, suit probably over No. (BJR?)

sues
has injury Standing Requirement Demand Futility Excusal Analysis: NY or Del Demand required

*SLC totally independent (no current directors on the committee)

Grimes v. Donald (673 A.2d 1207 (Del. Sup. Ct. 1996); p. 210) Grimes, shareholder in DSC, believed employment agreement between DSC and Donald, CEO, was bad. Grimes asked Board to abrogate the agreements; Board refused. Grimes attempted shareholder derivative suit and claimed that his suit was excused from legal requirement of asking Board to sue. Court held employment agreement not an abdication of Boards duty, and Grimes couldnt argue his suit was excused when he had asked and had been refused. Directors may not delegate duties which lie at the heart of the management of the corporation. However, an informed decision to delegate a task is as much an exercise of business judgment as any other [] [and] business decisions are not an abdication of directorial authority merely because they limit a boards freedom of future action. When a claim of harm belongs to the corporation, it is the corporation, through the Board, that must decide whether or not to pursue the claim. Shareholder derivative actions impinge on the Boards managerial freedom; therefore, when a shareholder files a derivative action, he/she must show either Board rejection of his/her pre-suit demand, or justification why demand wasnt made (AKA excusal). The basis for claiming excusal would normally be that: (1) a majority of the board has a material financial or familial interest; (2) a majority of the board is incapable of acting ~28~

independently []; or (3) the underlying transaction is not the product of a valid exercise of business judgment. If there is reason to doubt that the board acted independently or with due care in responding to the demand, may then have the basis to claim wrongful refusal. Otherwise, boards actions covered by the business judgment rule.

Marx v. Akers (644 NYS2d 121 (1996); starts on p. 219) Marx filed shareholder derivative suit without pre-suit demand as required by state law; suit alleged waste of corporate assets and self-dealing by directors. Court found demand excused, but complaint dismissed because there was no wrong to corporation. Demand may be excused for futility when a complaint alleges that a majority of the Board have interests (either self-interest or loss of independence of a non-self-interested director because of control by a self-interested director) in the challenged transaction, or that a majority of the Board wasnt fully informed of about the transaction, or that the challenged transaction was so egregious as to not be a product of sound business judgment.
C. THE ROLE OF SPECIAL COMMITTEES Auerbach v. Bennett (47 NY2d 619 (1979); p. 225) GTE management conducted internal investigation of contributions to politicians, gave results of investigation to Board. Outside auditor hired, found wrongdoing. Report made to SEC and shareholders. Board created litigation committee to determine what action should be taken on behalf of corporation. After more investigation, committee decided not to litigate. Court found Board and its committee acted properly and its decision not to litigate was protected by business judgment rule. Courts are not equipped to evaluate what are and must be essentially business judgments. Zapata Corp v. Maldonado (430 A.2d 779 (Del. 1981); p. 230) Board created investigation committee that recommended action be dismissed. Court remanded for further fact-finding on independence and good faith of the committee. Stockholders, as a general rule, cannot be allowed to invade the discretionary field committed to the judgment of the directors and sue in the corporations behalf when the managing body refuses. If the Board wrongfully refuses action, a shareholder may have the right to initiate action and may sue on behalf of the corporation without demand, when it is apparent that demand is futile. A Board may legally delegate authority to a committee of disinterested directors when the Board finds that it is tainted by the self-interest of a majority of directors. An action must be dismissed if a committee of independent and disinterested directors conducted a proper review, considered a variety of factors and reached a good-faith business judgment that the action was not in the best interest of the corporation. rales v. blasband - Its independent and disinterested judgment in responding to the claim

In re Oracle Corp Derivative Litigation- independence of SLCs-special litigation committeesIn finding that the SLC failed to meet its burden of proving its independence, the Court articulated the following principles. First, and most importantly, it held that "the question of independence turns on whether a director is, for any substantial reason, incapable of making a decision with only the best interests of the corporation in mind." This is a departure from prior Delaware case law which, in some cases, adopted a flexible independence inquiry and, in other cases, used a more rigid approach focused on whether a given director is under the notional or economic "dominion and control" of an interested

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party. By measuring the SLC's independence contextually, taking into account all the circumstances, the Court articulated an independence test that was stricter and more situation-specific than those expressed in the past. When applying this test to the SLC, the Court was satisfied that nether Garcia-Molina nor Grundfest was compromised by any fear that an unfavorable recommendation would harm his ability to earn a living. Nevertheless, the Court found that the inter-relationships between the SLC and the defendant directors were on the minds of the SLC members in a way that generated an unacceptable risk of bias. The Court also acknowledged that even though its task was to determine whether the SLC members were subjectively or actually biased, its consideration of how a reasonable person in the same position would behave was inescapable. Accordingly, the Court felt there was reason to suspect material considerations, other than the best interests of Oracle, could have influenced the SLC. First, when establishing a special committee, boards of directors should make in-depth inquiries into the background of proposed members. Depending on the context, inquiries may extend into academic background, professional and charitable affiliations of proposed members. Second, the due diligence process should not only focus on the proposed members' direct relationships with interested parties, but on indirect relationships as well. 4. THE ROLE AND PURPOSES OF CORPORATIONS AP Smith Mfg. v. Barlow (13 NJ 145 (1953); p. 251) Corporation wanted to donate to Princeton University; shareholders objected. Court upheld corporations judgment to donate. A corporation may participate in the creation and maintenance of community, charitable, and philanthropic funds as the directors deem appropriate and will, in their judgment, contribute to the protection of corporate interests. The court did not accept Defendants reasoning that the donation was not allowed because the corporation preceded the statute authorizing the gift-giving. The court explained that the potentially infinite lifespan of corporations would lead to corporations a varying ages to live under various sets of laws. Corporate gift-giving increases the goodwill of the corporation, and public policy should be to encourage corporations to provide to charities in the same manner as individuals are encouraged to give. Dodge v. Ford Motor Co. (204 Mich. 459 (1919); p. 276) Ford was a very profitable car maker; Dodge owned 10%. Ford cancelled its special dividends program in favor of a reinvestment policy. Dodge objected, offered its 10% for sale to Ford, who refused. Dodge sued, alleging the new policies were an abuse of discretion. Court partially agreed, ordering dividend paid but allowing some reinvestment. Directors have the power to declare the amount and frequencies of dividends, and courts will not interfere in those decisions unless it is clear the directors are guilty of fraud, misappropriation, or that they are refusing to declare a dividend when the corporation has a surplus of net profit and can distribute it to shareholders without detriment to the business AND such a refusal is such an abuse of discretion as to amount to fraud or breach of good faith to shareholders. Business Judgment Rule we are not business experty. Courts will not make business decisions which are better left off with the Directors. Shlensky v. Wrigley (95 Ill.App.2d 173 (1968); p. 262) Wrigley, owner of Chicago Cubs, refused to have night games on Wrigley field. Shlensky, a shareholder, sued, claiming decision was an abuse of

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discretion, and didnt initiate demand, claiming Board capture by Wrigley. Court gave deference to Board, dismissed Shlenskys suit. It is not the function of the courts to resolve a corporations questions of policy and management, and the judgment of directors will be accepted by the courts unless those decisions are shown to business Business Judgment Rule: In the absence of fraud, illegality or self-dealing by the directors, their decisions are final and not subject to review by the courts. Because the courts wont review such decisions, plaintiff has no standing to sue. Competing Interests: Balancing accountability/risk taking; encouraging autonomy to make decisions & take risks. o Presumption: directors are acting on an informed basis, in good faith, and in the honest belief that the action taken was in the best interests of the company. o Rubuttable: must show that the directors breached their fiduciary duty of care/loyalty or acted in bad faith. o Burden shifts: Director must then demonstrate that the challenged act/transaction was entirely fair to the corporation and its shareholders. MBCA 8.01(b) All corporate powers shall be exercised by or under the authority of the board of directors of the corporation and the business and affairs of the corporation shall be managed by or under the direction, and subject to the oversight, of its board of directors, subject to any limitations set forth in the articles or in a [shareholder agreement]. 8.30 Requirement for and functions of board of directors (a) each director, when discharging the duties of a director, shall act 1)in good faith, and 2) in a manner the director reasonably believes to be in the best interests of the corporation b) ...shall discharge their duties with the care that a person in a like position would reasonably believe appropriate under similar circumstances c) shall disclose to the board... information... material to the discharge of their decision making or oversight functions... Fiduciary Duties o Duty of loyalty: opportunistic self-dealing o Duty of care: good faith, ordinarily prudent person Director Liability reality check o Provisions in corporate o Certain pleadings rules charter o Indemnification agreements o BJR o Insurance

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IV.

LIMITED LIABILITY COMPANY

A partnership composed of one or more persons who control the business and are personally liable for the partnerships debts (general partners) and one or more persons who contribute capital and share profits but who cannot manage the business and are liable only for the amount of their contribution (limited partners) Limited partners are liable only for their agreed contributions Hierarchical structure with general partner(s) managing and limited partners more passive ULPA (2001) Eliminates the Control Rule LLCs o 301Agency of Members and Managers o 303 Liablilty of Members and Managers (liability test) o General Standards of Members and Managers Conduct Limited Partnerships o A ptsp formed by 2+ persons and having one or more general partner and one or more limited partners. o Formal formation, unlike an unlimted parternship in order to gain the limited protections provided o Holtzman o Participation & control Uniform Limited Partnership Act (2001) o Adopted in a minority of states (not Kansas) o Others using Revised Uniform Limited Partnership Act (1976, amended 1985) o Kansas is (still) a RULPA state o Connected to the Revised Uniform Partnership Act

6. LIMITED LIABILITY PARTNERSHIPS RULPA 303(a) - Liability to Third Parties - a limited partner is not liable for the obligations of a limited partnership unless the limited partner is also a general partner or, in addition to the exercise of his rights and powers as a limited partner, he takes part in the control of the business. However, if the limited partner takes part in the control of the business and is not also a general partner, the limited partner is liable only to persons who transact business with the limited partnership and who reasonably believe, based upon the limited partners conduct, that the limited partner is a general partner. (b) a limited partner does not participate in controlsolely by (2) consulting with and advising a general partner with respect to the business of the limited partnership; (3) acting as surety for the limited partnership or guaranteeing or assuming one or more specific obligations of the limited partnership; Defines Control (4) taking any action required or permitted by law to bring or pursue a derivative action in the right of the limited partnership; or ~32~

(5) requesting or attending a meeting of partners; (6) proposing, approving, or disapproving, by voting or otherwise, one or more of the following [list] ULPA (2001) 303. No Liability as Limited Partner for Limited Partnership Obligations An obligation of a limited partnership, whether arising in contract, tort, or otherwise, is not the obligation of a limited partner. A limited partner is not personally liable, directly or indirectly, by way of contribution or otherwise, for an obligation of the limited partnership solely by reason of being a limited partner, even if the limited partner participates in the management and control of the limited partnership.

Holzman v. De Escamilla (86 Cal.App.2d 858 (1948); starts on p. 196) Limited partnership went into bankruptcy. Limited partners participated in decision-making, wrote checks, had to countersign general partners checks. Court held that the limited partners were general partners in fact and thus liable for partnerships debt. A limited partner shall not become liable as a general partner, unless, in addition to the exercise of his rights and powers as a limited partner, he takes part in the control of the business. Participation ^ Control 303(a) reduces liability potential by making a ltd 1. Formation LLCs are desirable b/c combine corporate-type liability with partnership-type flexibility and tax advantages. Water, Waste and Land, Inc D/B/A/ Westec v. Lanham 955 P.2d 997 (Colo. 1998); p. 269)- The plaintiff, a development and engineering firm that had performed work for an LLC, successfully sued one of the owners in his individual capacity. Water, Waste & Land had performed work for the LLC, which was owned by two members, Lanham and Clark. When arranging to have work done, Clark failed to properly fill out a contract and verbally authorized the plaintiff to do the work. Clark gave the plaintiff a business card that showed the initials of the business name but did not include the letters LLC. The business card included the LLCs address, which happened to be the same as Lanhams personal address. The Colorado Supreme Court ruled that Clark had acted as an agent of Lanham and ultimately held both Lanham and the LLC liable for the bill. Importance of using the LLC on all firm documents and completing contracts properly. The decision illustrates the courts inclination to protect third parties in their dealings with agents of a business 2. The operating agreement Elf Atochem North America Inc v Jaffari C.A. No. 16320 (Del. Apr. 6, 1999), affg (Del. Ch. June 9, 1998) p. 274,- The statute did not authorize, but also did not expressly prohibit, a limited liability company agreement from providing for the exclusive jurisdiction of the courts of a jurisdiction other than Delaware. The Delaware Supreme Court, applying the provisions of Section 18-109(d), held that a contractual choice of California as the exclusive jurisdiction to maintain a court proceeding in a limited liability company agreement was enforceable. Essentially, giving premiere emphasis to the provisions of contract to have proper venue only in

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California and that DE law respects the right of LLC to contract its specific provisionsDE law is only a default provision when the contract does not speak to that subject. Contractual forum selection provisions must govern. Freedom of contract big deal Internal affairs doctrine

Fisk Ventures, LLC v. Segal, pg. 280 - Dr. Segal (D) the defendant and counter-claimant in this case, formed Genitrix, a biomedical LLC of which Fisk Ventures, LLC (P) was a member. Fisk (P) and other members failed to cooperate with Segal's (D/CC) financing efforts and the company ultimately failed. Fisk (P) and other members sought to dissolve the company and Segal (D/CC) counterclaimed, contending that the Genitrix members breached the LLC Agreement and their fiduciary duties to the company by standing in the way of the proposed financing. The members moved to dismiss the counterclaims, arguing that Segal's (D/CC) allegations reflected nothing more than their exercise of their contractual rights. Because LLCs are not a creature of the state but of contract, the duties and obligations of the LLC members are as set forth in the LLC agreement. 3. Piercing the LLC Veil Kaycee Land and Livestock v. Flahive, p. 287-Plaintiff, Kaycee Land and Livestock, wanted to hold Defendant, Roger Flahive, personally liable for damages stemming from an agreement made Defendants LLC, Flahive Oil & Gas. The District Court of Johnson County presented a certified question to the Supreme Court of Wyoming to determine if Defendant could be held personally liable. No reason to treat LLCs differently than corporations in regard to the piercing the corporate veil. Here the WY legislature has not spoken on piercing the veil of an LLC; court says then should treat as common law unchanged, which they interpret to mean that LLCs should be treated the same as corps in this regard. --the district ct must complete a fact intensive inquiry and exercise its equitable powers to determine whether piercing the veil is appropriate If the members and officers of an LLC fail to treat it as a separate entity as contemplated by the statute, they should not enjoy immunity from individual liability for the LLCs acts that cause damage to 3rd parties. 4. Fiduciary Obligation McConnell v. Hunt Sports Enterprises, p. 292. Appellants, Hunt Sports Enterprises et al., and Appellees, John McConnell et al., were part of an LLC that was bidding for a professional hockey franchise. The principal of one of Appellees, John McConnell, personally made a bid for a franchise after the principal of one of the Appellants, Lamar Hunt, rejected numerous lease agreements and stalled the application for the franchise. Sec 3.3 of the operating agreement members may compete, thus waived the duty of loyalty to the LLC, in any other business venture of any nature, including any venture which might be competitive with the business of the company Without this agreement, you have the same duties of loyalty and care that you would have in a corporation Free to define what the fiduciary obligations are, and if you do, its contract. Cannot completely nullify all fiduciary obligations, you can define it, but you cant get rid of it completely.

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5. Additional Capital Racing Investment Fund 2000, LLC v. Clay Ward Agency, Inc., 320 S.W.3d 654 (Ky. 2010); p. 298. Racing Investment Fund (RIF) did business with Clay Ward, a firm that specializes in equine insurance. After disputes over insurance for two horses, RIF terminated Clay Ward as their insurance agent while owing over $60,000 in unpaid premiums. The Fayette Circuit Court held RIF in contempt for its failure to pay the remainder of the judgment that it agreed to pay to Clay Ward, and the Court of Appeals affirmed the verdict. The KY Sup. Ct. reversed. A provision to provide on-going capital infusion as necessary, at the Managers discretion, for the conduct of the entitys business affairs is simply not an agreement to be obligated personally for any of the debts, obligations and liabilities of the limited liability company. p. 300 6. Dissolution New Horizons Supply Cooperative v. Haack 590 N.W.2d 282 (Wisc. 1999); p. 303. - LLC that dissolvedsince the proper dissolution papers were not filed, then the individual members are liable: if the dissolved limited liability companys assets have distributed in liquidation, a member of the limited liability company to the extent of the assets of the limited liability company distributed to the member in liquidation, whichever is less, but a members total liability for all claims under this section may not exceed the total value of the assets distributed to the member in liquidation.

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V.

THE DUTIES OF OFFICERS, DIRECTORS, AND INSIDERS

1. THE OBLIGATIONS OF CONTROL: THE DUTY OF CARE A shareholder derivative suit is a lawsuit brought by a shareholder on behalf of a corporation against a third party. Often, the third party is an insider of the corporation, such as an executive officer or director. Shareholder derivative suits are unique because under traditional corporate law, management is responsible for bringing and defending the corporation against suit. Shareholder derivative suits permit a shareholder to initiate a suit when management has failed to do so. Because derivative suits vary the traditional roles of management and shareholders, many jurisdictions have implemented various procedural requirements to derivative suits. Kamin v. American Express Co. (383 NYS2d 807 (1976); p. 308) AE bought shares in DLJ, ended up losing most of its investment. Declared a special dividend to distribute DLJ shares in kind. Shareholder derivative suit arguing that the shares should instead be sold for the tax advantages; AE refused and dividend was paid. Court found for AE, said no bad faith in AE decision. Standard of review: Courts will not interfere with [the business judgment of the Board] unless it first be made to appear that the directors have acted or are about to act in bad faith and for a dishonest purpose. [] More than imprudence or mistaken judgment must be shown. Smith v. Van Gorkom (488 A2d 858 (Del.Sup.Ct. 1985); p.312) Trans Unions CEO, Van Gorkom, approached Pritzker with proposal to sell Trans Union; CEO didnt inform Board, just company controller. Pritzker set up deal and CEO took it to management, who hated it; CEO took it to Board anyway, and merger went through. Shareholders sued; Court found for shareholders, saying Boards decision wasnt an informed one. The determination of whether a business judgment is an informed one turns on whether the directors have informed themselves, prior to making a business decision, of all material information reasonably available to them. [] the concept of gross negligence is the proper standard for determining whether a business judgment reached by a board of directors was an informed one. 249(a) Legal effect of a merger like changing from one partner to another 251(b)(5) what happens to old shareholder? Francis v. United Jersey Bank, 432 A.2d 814 (1981); p. 326) Pritchard inherited 48% interest in reinsurance company; she and her two sons were directors. She wasnt involved in day-to-day ops and knew almost nothing about the business. Sons misappropriated millions and corporation went into bankruptcy. Court held Pritchard had duty of care and breached it. Directors must discharge their duties in good faith and with that degree of diligence, care and skill which ordinary prudent men would exercise under similar circumstances in like positions. A lack of knowledge about the business or failure to monitor the corporate affairs is not a defense to this requirement. 2. THE DUTY OF LOYALTY A. DIRECTORS AND MANAGERS
Business Judgment Rule 3rd Party The business judgment rule protects a director from personal liability if he or she has performed diligently & carefully in legitimate furtherance of corporate objectives and purposes and has not acted fraudulently, illegally, or otherwise in bad faith. Judges have recognized that they are ill-equipped to evaluate what are essentially business judgment calls. Thus, the business judgment rule can be a defense to claims of corporate mismanagement and breach of a director's duty of care.

Fiduciary Duty Directors

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Quorum - # of directors needed to be present in order for the decisions made by the board to be binding. Floor = 1/3 of the board, upper level = at least a majority Quorum - In context of interested directors... o 141 o 144

Bayer v. Beran (49 NYS2d 2 (Sup.Ct. 1944); p. 334) Corporation advertised on a radio program; suit alleged that directors bought the advertising in order to support career of a singer on the program, who was also the wife of the companys president. Court found no evidence the Board knew the wife was on the program until after the advertising was approved, and there was no evidence of breach of duty in the decision to advertise. A directors personal dealings with the corporation to which he owed fiduciary duty, which may produce a conflict of interest, are, when challenged, examined with the most scrupulous care, and if there is any evidence of improvidence or oppression, any indication of unfairness or undue advantage, the transactions will be voided. The court emphasized that business decisions that would not typically merit an analysis under the normal business judgment rule will undergo more careful scrutiny when there is a conflict of interest. The duty of loyalty trumps the business judgment rule. Benihana of Tokyo, Inc. v. Benihana, Inc., 906 A.2d 114 (Del. 2006); p. 339. Aoki founded Benihana of Tokyo ("BOT") (P) and its subsidiary, Benihana, Inc. (D), which owned and operated restaurants. Aoki owned 100% of BOT (P) until he pled guilty to insider trading charges and transferred his interest to a trust to avoid licensing problems based on his convicted-felon status. The trustees of the trust were Aoki's three children and the family's attorney. BOT (P) owned 50.9% of the common stock and 2% of the Class A stock of Benihana (D). In 2003, conflicts arose between Aoki and his children. The children were upset that Aoki had changed his will to give control over BOT to his new wife. At the same time, the restaurants were becoming outdated and in need of renovation. Benihana's (D) CEO met with a representative of Morgan Joseph to discuss the company's financial situation. Fred Joseph recommended to the Benihana (D) board that Benihana (D) issue convertible preferred stock, which would provide the funds needed for renovation and put the company in a better position should it need to seek additional financing from a bank. On more than one occasion, the board reviewed and considered the detailed terms, which included the issuance of preferred stock that was convertible into common stock. There is a safe harbor under 144 (a)(1) if the material facts as to the director's relationship or interest and as to the contract or transaction are disclosed or are known to the board of directors and the board in good faith authorizes the contract or transaction by the affirmative votes of a majority of the disinterested directors Gross negligence is reckless indifference to or a deliberate disregard of the whole body of stockholders or actions which are without the bounds of reason. B. CORPORATE OPPORTUNITIES Corporate Opportunity Doctrine subset of the duty of loyalty Objective To deter appropriations of new business prospects belonging to the corporation Targets - Officers & Directors & Dominant Shareholders of corporation; Dominant Shareholders who take active role in managing firm Delaware Test: A corporate opportunity exists where: 1. Corp is financially able to take the opportunity

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2. Opportunity is in the corps line of business 3. Corp has an interest or expectancy in the opportunity Interest: something to which the firm has a bettter right Expectancy: takes something which, in the ordinary cours of things, would come to the corporation 4. Embracing the opportunity would create a conflict between directors self-interest and that of the corp Broz v. Cellular Information Systems (673 A2d 148 (Del. 1996); p. 345) Broz owned RFBC, a cell phone service company, and was also on the Board of CIS, a competitor. CIS was in financial difficulty and selling its cell service licenses. A cell service license was available for sale from another company, and Broz was interested in it. He talked to CIS CEO, who told him CIS didnt want that license. PriCellular interested in acquiring CIS. Broz and PriCell both put in bids on service license, and CIS knew PriCell was interested in that license. Broz got the license. PriCell completed acquisition of CIS, then sued Broz for breach of duty. Court found Broz had acted properly toward CIS, making sure it wasnt interested before bidding, and he had no duty to PriCell. A director may not seize for himself, when it would present a conflict of interest between the director and his corporation, an opportunity which his corporation is financially able to undertake, is in the line of the corporations business, is an opportunity in which the corporation has an interest or a reasonable expectancy of interest, and is of practical advantage to the corporation. In re eBay, Inc. Shareholders Litigation 2004 WL 253521 (Del. Ch.); p. 350. - Shareholder of ebay filed a lawsuit b/c a director got a lucrative stock option through a company contact 1. Court said should have been a corporate opportunity case in which ebay should have had the option 2. In this case, uses a four-factor test set out in Broz (but actually in Guth) a. Financial capability b. Line of business c. Conflict of opportunity between fiduciary duty and self-interest d. Ability of corp to make the choice to engage in this if desired 3. IPO-motives hereprice low b/c something to appease your other execs with 4. Shareholders of ebaycorporate opportunity a. Should have been able to purchase these IPO shares 5. All companies use their spare cash to invest securities C. DOMINANT SHAREHOLDERS Common stock: the most usual and commonly held for of stock in a corporation Typically has voting rights in corporate decision matters; generally different rights from preferred stock Owners of common stock last in priority when liquidating/bankrupt (residual claimants) Dividends need not be declared, and if declared, must be paid to preferred shares before being paid to comon stock shareholders. Residual shareholders get whats remaining after all debts are paid, because has participated in the growth of the company, regardless of what paid in. Preferred Shares: Rank higher than common shares in liquidation/bankruptcy, and for dividend payments

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May have a host of rights assiciated with them. May/may not have voting rights (most do not except in specual circumstances), convertible features, callable/redeemable features, Most have a fixed dividend rate, which may be cumulative Dont participate in the growth of the company, gets back equal or less than what they paid in Convertible: can be changd into another type of share (i.e. from preferred to common, from debt to equity) at option of shareholder after a certain time. Callable: issuing corporation reserves right to buy back on demand at a certain (set) price. Redeemable: shares may be bought back by the corporation, at corporation or shareholders option. Dividends: pro rata distributions in a share class, from earnings and profits of corporation, to shareholders. - Once declared by the BoD, become a debt of the corporation. Must set a record date, and a payment date - A special dividend occurs when corporation gets a non-recurring payment (i.e. from sale of an asset) and decides to not reinvest proceeds, so give to s/hs. - Can be money, but also stock, or property

Sinclair Oil Corp. v. Levien (280 A2d 717 (Del. 1971); p. 355) Sinven a partially-owned and not wholly independent subsidiary of Sinclair, an oil exploration company. Shareholder derivative suit alleging Sinclair caused Sinven to pay out such excessive dividends that Sinven was harmed. Court found no self-dealing, minority shareholders received a proportionate share, so business judgment rule applied, and under that rule, dividends were OK. A parent owes fiduciary duty to its subsidiary in parent-subsidiary dealings. When fiduciary duty is combined with self-dealing when parent is on both sides of transaction the intrinsic fairness standard and not the business judgment rule applies. This standard involves a high degree of fairness and a shift in the burden of proof. The burden would be on the parent to prove that its dealings with the subsidiary were objectively fair. Intrinsic fairness (applies to parent-subsidary situation)some kind of benefits has been derived and the BoP on defendants to show transaction was fair to Sinven; used when a parent has received a benefit to the exclusion of the minority shareholders of the subsidiary and at the expense of the minority shareholders of the subsidiary par value minimum amount corporation had to receive when it sold stock. Set in charter. watered stock stock sold by the issuer for less than par value Notion of par value as a trust fund for creditors Shareholder who bought watered stock from the firm was liable to creditors of the firm for the amount of the water. par value came to be an arbitrary figure having no relation whatsoever to the price at which shares were issued or to the price shares could command a secondary trading market. o low par shares: shares having Zahn v. Transamerica Corp. (162 F.2d 36 (3d Cir. 1947); p. 359) Transamerica acquired majority of Axton-Fisher Class A and B stock. Shareholder derivative suit claimed Transamerica knew A-F was holding assets valued on the books at $6 million but was actually worth around $20 million, and wanted to seize the value itself, so T redeemed Class A stock for $80/share and then liquidated A-F, selling the asset and keeping the profit. If Class A holders had participated in the liquidation, they wouldve gotten $240/share. ~39~

Court found self-dealing by Transamerica, so transaction voidable. The majority has the right to control; but when it does so, it occupies a fiduciary relation toward the minority, as much so as the corporation itself or its officers and directors.

D. RATIFICATION Effect of Ratification Fliegler v. Lawrence (361 A.2d 218 (Del. 1976); p. 365) Lawrence, president of Agau, a gold and silver exploration venture, had a leasehold on property. Offered leasehold to Agau, Board decided acquisition not possible at that time, so leasehold transferred to USAC, a closely-held corporation owned by Lawrence. Agau later exercised its option to acquire USAC by delivering shares of Agau in exchange for all issued shares of USAC; this action submitted to shareholders, majority of who approved. Dissenting shareholders sued. Court found they failed to show the transaction was a waste. When a majority of shareholders ratify a transaction and dissenting shareholders initiate suit, the burden shifts to the dissenting shareholders to demonstrate that the terms are so unequal as to amount to a gift or waste of corporate assets. Resets standard back to business judgment rule. Defendants controlled a majority of the shares, and there was ot enough proof that disinterested shareholders voted with the directors. However, Defendants did offer enough proof to show that the transaction was fair. In re Wheelabrator Technologies Inc. Shareholders Litigation (663 A.2d 1194 (Del.Ch. 1995); p. 368) WMI acquired majority interest in WTI; under the merger agreement, WTI shareholders would get shares in both companies. Merger approved by Board and shareholders. Shareholder suit alleged proxy statement about merger was materially misleading. Court disagreed, found no breach of duty. Directors have the fiduciary duty to disclose fully and fairly all material facts within its control that would have a significant effect upon a stockholder vote. Ratification decisions involving the duty of loyalty are those between: (a) a corporation and its directors (interested transactions), or (b) between a corporation and its controlling shareholder. o In the former, an interested transaction will not be voidable if approved in good faith by a majority of disinterested stockholders, and the objecting stockholder has the burden of proving that no businessperson of sound judgment would find that the corporation received adequate consideration. o In the latter, in a parent-subsidiary merger the standard of review is ordinarily entire fairness, with the directors having the burden of proving that the merger was entirely fair. o But where the merger is conditioned upon receiving majority of the minority stockholder vote, and such approval is granted, the standard of review remains entire fairness, but the burden of demonstrating that the merger was unfair shifts to the plaintiff. 3. THE OBLIGATION OF GOOD FAITH Business Judgment Rule: In the absence of fraud, illegality or elf-dealing by the directors, their decisions are final and not subject to review by the courts. Because the courts wont review such decisions, plaintiff has no standing to sue. Competing Interests: Balancing accountability/risk taking; encouraging autonomy to make decisions & take risks. o Presumption: directors are acting on an informed basis, in good faith, and in the honest belief that the action taken was in the best interests of the company. o Rubuttable: must show that the directors breached their fiduciary duty of care/loyalty

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or acted in bad faith. o Burden shifts: Director must then demonstrate that the challenged act/transaction was entirely fair to the corporation and its shareholders. A. COMPENSATION In re The Walt Disney Co. Derivative Litigation, 906 A.2d 27 (Del. 2006); p. 374. Disney hired Ovitz to be their executive, however he lacked any management experience at a public corporation. After 13 months, he was fired. Ovitz was given $130M as severance. Most of the compensation came from stock options that were negotiated as part of Ovitz's employment. Shareholders, led by Brehm, filed a derivative lawsuit against Disney executives, represented by Eisner (the CEO) for agreeing to pay Ovitz such a large amount of money. The shareholders argued: Eisner breached his fiduciary duties by agreeing to pay Ovitz so much, and for not consulting the board of directors before firing Ovitz. BJR applies even when information and decision making process was not so tidy as would have been the case had they followed a best practices approach, and falls short of what best practices would have recommended. Inherently wasteful carve out of the business judgment rule: the presumption that a businessman would have a sound reason for making a decision. However, when a decision is made without being thoroughly thought out it may be considered inherently wasteful. B. OVERSIGHT In re Caremark International Inc. Derivative Litigation (698 A2d 959 (Del.Ch. 1996); p. 391) Caremark, a health care corporation, had contracts that raised specter of kickbacks, changed policies to avoid kickback problems. Internal audit revealed compliance with policy, but Caremark tightened procedures anyway. Firm and some officers indicted; shareholder derivative suit alleging breach of duty of care. Here, the board failed to act. Court approved settlement for reorganizing Caremarks supervisory system. Director liability for breach of duty of care may arise in two contexts: (1) from a Board decision that was ill-advised or negligent, or (2) from an unconsidered failure of the board to act in circumstances in which due attention would, arguably, have prevented the loss. If a director exercises a good faith effort to be informed and to exercise appropriate judgment, he or she should be deemed to satisfy fully the duty of attention. [A]bsent grounds to suspect deception, neither corporate boards nor senior officers can be charged with wrongdoing simply for assuming the integrity of employees and the honesty of their dealings on the companys behalf. Necessary condition: for director oversight liability - a sustained or systematic failure of the board to exercise oversight - such as an utter failure to attempt to assure that a reasonable information and reporting system exists Stone v. Ritter, 911 A.2d 362 (Del. 2006); p. 391. This is a derivative suit against C. Dowd Ritter and other current and former executives of AmSouth Bancorporation. The Stones alleged in their complaint that the director defendants were liable for corporate losses, and resulting stock losses, as a result of management failure to prevent employee misconduct. AmSouth Bank, a wholly owned subsidiary of AmSouth, paid $40 million in fines and an additional $10 million in civil penalties arising from a government investigation primarily related to employee failure to file suspicious activity reports (SARs) relating to an investment fraud, Ponzi-style scheme. As to the derivative complaint, the Stones did not make a pre-filing demand on the defendants, nor did they allege that any defendant director had knowledge of the wrongful conduct. At trial, the Stones complaint against Ritter and the

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other defendants was dismissed, with that Court concluded they failed to adequately plead the futility of a pre-filing demand. The Stones appealed. Under Delaware law, the standard for director liability for employee misconduct requires bad faith or systemic oversight failure. Directors are not liable for misconduct that they were ignorant of, assuming that they established sufficient monitoring protocols to effectively manage corporate operations. Fiduciary Duties Directors o Loyalty includes good faith (Stone v. Ritter) o Care duty to be informed: obligation of basic knowledge and supervision. Read and understand financial statements. Object to misconduct, and if necessary, resign. 7. INDEMNIFICATION AND INSURANCE The Effects only to the amount that the indemnifier has available and can meet the indemnification/obligation. Indemnification Statutes o At common law, coporate employees were entitiled to indemnification for expenses incurred on the job, incl. certain legal liabilities, but directors were not. Today, all states have statutory provisions authorizing director indemnification to some degree. 102(b)(7) Applies only to directors. Although officers also are subject to a duty of care, they are denied exculpation by charter provision. 145(a) Indemnification of officers, directors 145(b) authorizes indemnification only for expenses, albeit including attoryneys expenses. o If the director or officer was held liable to the corporation, he may only be indemnified with court approval. [means the director does not have the protection of the business judgment rule and has breached their fiduciary duty (duty of care & loyalty)]. 145(c) Indemnification Required - the corporation must indemnify a director or officer who has been successful on the merits or otherwise. Waltuch is an aberrant case. o As for directors and officers who are unsuccessful, check whether indemnification is allowed by 145(a) or (b) o If so, the corporation may but need not indemnify the director or officer o Policy Issue proof of good faith should not be required under 145(c). The obvious advantage of this interpretation is that it eliminates a factual issue that is seldom likely to be significant. 145(e) - Advancement of Expenses - the corporation may advance expenses to the officer or director provided the latter undertakes to repay any such amount if it turns out he is not entitled to indemnification. o Sarbanes-Oxley prohibits loans by corporation to officers and directors. Some think this provision may affect advancement of expenses. 145(f) Indemnification by Agreement authoizes the corporation to enter into written indemnification agreements with officers and directors that go beyond the statute: statutory indemnification rights shall not be deemed exclusive of any other rights to indemnification vreated by bylaw, agreement, vote of the stockholders or disinterested directors or otherwise. Notworthy Points o Limits only the monetary liability of directors equitable remedies are still abailable o A 102(b)(7) provision is an affirmative defense. ~42~

o Distinguishes self dealing (improper personal benefit) and bad faith from the duty of care. o Some suggest that Van Gorkom itself can be interpreted as a loyalty and/or bad faith case o Deleware supreme court has opined thatr Van Gorkom included a disclosure violation and implied that such violations have a loyalty component. A director is not liable for X. (Set by the liability rules, i.e. business judgment rule) A director is liable for X, but the corporation will indemnify the director against X. (Indemnification only good as to amount the corp. has to pay the judgment)

A director is insured against liability (cost of insurance premia will approximate expected liability that director would owe for X.)

Waltuch v Conticommodity Services Inc., 88 F.3d 87 (2s Cir. 1996); p. 504. - Employee had contract that said BD agreed to indemnify him in suits; his lawyer made a deal so that he did not plead guilty to any counts, thus doesnt matter why he was not chargedhe still must be indemnified under the agreement. Good faith requirement in 145 may not be overridden by any agreement. Statute does not permit indemnification of officer who did not act in good faith. In criminal proceedings, the standard is whether the person "had reasonable cause to believe that the persons conduct was unlawful." Citadel Holding Corp v Roven 603 A.2d 818 (Del. 1992); p. 512. -Former director was entitled to indemnification in a suit which his former corporation brought against him the corporation shall indemnify the agent against any expense or liability incurred in connection with any threatened, pending or completed action, suit or proceeding, whether civil or criminal, administrative or investigative, to which he is a party or threated to be made a party by reason of his service as a director

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VI.

PROBLEMS OF CONTROL
Internal-Affairs Doctrine is a choice of law rule in corporations law which says that law of the state of incorporation should determine issues relating to the internal affairs of a corporation. This doctrine ensures that issues like voting rights of shareholders, distributions of dividends and corporate property, and the relations among a companys investors and managers are all determined in accordance with the law of the state in which the company is incorporated. The external affairs of a corporation, like labor and employment issues and tax liability, are typically governed by the law of the state in which the corporation is doing business. For example, if there is a dispute between two shareholders of a Delaware corporation, it should normally be decided using Delaware law, even if the company operates in another state.

E. SHAREHOLDER INSPECTION RIGHTS Crane Co. v. Anaconda Co., 346 N.E.2d 507 (1976); p. 563. - Respondent, Crane Co., brought this action to compel Appellant, Anaconda Co., to release to Respondent a list of Appellants shareholders in an attempt to purchase more shares in Appellant company. Whether a qualified stockholder may inspect the corporations stock register to ascertain the identity of fellow stockholders for the avowed purpose of informing them directly of its exchange offer and soliciting tenders of stock. A shareholder desiring to discuss relevant aspects of tender offer should be granted access to the shareholder list unless it is sought for a purpose inimical to the corporation or its stockholders and the manner of communication selected should be within the judgment of the shareholder. This statute should be liberally construed in favor of the stockholder whose welfare as a stockholder or the corporations welfare may be affected Burden on corp to prove improper purpose inspection compelled here State Ex Rel. Pillsbury v. Honeywell, 191 N.W.2d 406 (1971); p. 566. Shareholder purchased his shares in the corporation solely to give himself a voice in Honeywells affairs so he could persuade Honeywell to cease producing munitions. Petitioner not interested in long-term wellbeing of Honeywell or the enhancement of the value of his shares Purpose, as such, then does not allow right to inspect Honeywells records Sadler v. NCR Corporation, 928 F. 2d 48 (2d Cir. 1991); p. 569. Plaintiffs, William Sadler et al., sought to inspect the records of Defendant corporation, NCR Corporation, for the purpose of identifying shareholders in order to tender an offer. Plaintiffs also sought a non-objection beneficial owners (NOBO) list. A party can inspect records under section 1315(a) of the New York Business Corporation Law even when through an agent as long as the elements of the statute are met. the request for the NOBO list is not unduly burdensome. Upholding the New York Statute does not violate the Commerce Clause because the New York Statute is not inconsistent with the Maryland statute even though the New York statute compels the records disclosure while Marylands law only allows for the disclosure with no mandatory requirements. 2. SHAREHOLDER CONTROL -VOTING 6.01(b) Authorized Shares At least one class w/ unlimited voting rights; at least one class w/ residual claim ~44~

601(c) authorized nonvoting stock and other variants in one share-one vote Voting Rights: o Meetings: o Annual & Special: o Who may call? Look to MBCA 7.02 or DGCL 211 o Must be unanimous o In order for shareholders to ____ quorum o MBCA 7.25(c) a matter is approved if votes cast in favor > votes cast against & DGCL 216 Decisions must be approved by the vote of a majority of the shares present a. It seems like shareholder voting control does not do much to keep directors in line: i. Incentive to monitor-bad directors have minimal financial impact on a SH with a small interest in the corporation ii. Ability to discipline-each SH has little voting power, so her ability to oust bad directors is small; 1. however, b/c corporations who perform badly will have future shareholders to account for-thus this may keep them in line; however, these investors are likely to focus on shorterm profits b. Limitations on Control based on Stock Class Stroh v. Blackhawk Holding Corp. (KRB, 57376) (Ill. 1971); p. 576. A corporation may prescribe whatever restrictions/limitations it deems necessary in regard to issuance of stock, provided that it not limit or negate the voting power of any share. Under applicable Ill. statute, a corporation may proscribe the relative rights of classes of shares in its articles of incorporation, subject to their absolute right to vote. A corporation has the right to establish classes of stock in regards to preferential distribution of the corporations assets. However, the shareholders right to vote is guaranteed, and must be in proportion to the number of shares possessed. Here, the Class B stock possessed equal voting rights, though it did not possess the right to share in the dividends or assets of the company. The stock is valid. 3. CONTROL IN CLOSELY HELD CORPORATIONS Agreements Agreements among shareholders about how they will vote as shareholders. o Usually, who they will elect to the board of directors. Agreements about what these shareholders will do once they have elected one another to the board. o Courts are more reluctant to let shareholders make these agreements. Reasons? Shareholders tend to be less informed about the firm than the board does. Directors have a fiduciary duty to exercise independent business judgment on behalf of all shareholders, not just themselves. Shareholders are rationally ignorant. o Seldom applies to the facts in a closely held corporation. Most of these agreements are made in close corporations, among people who have invested large amounts (relatively) and hope to work for the firm well-informed investors. Shareholders owe more ambiguous duties. o Almost all s/h agreements are to a) elect each other to the board, and then b) to appoint each other officers of the corporation. In that case, those parties will be officers/directors, and will owe exactly the fiduciary duties that directors and officers otherwise owe. Voting Trust* - not very common, high level of formality, no longer owners of the stocks until the termination of the trust.

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o An agreement among shareholders under which all of the shares owned by the parties are transferred to a trustee, who becomes the nominal, record owner of the shares. The trustee votes the shares in accordance with the provisions of the trust agreement, if any, and is responsible for distributing any dividends to the beneficial owners of the shares. o Advantages? No possibility of shareholder deadlock, since everybody puts their shares in the trust and trustee votes all of the shares. o 218 a copy of trust doc must be files with corporations registered Delaware office o Under older Delaware statute, voting trust duration could not exceed 10 years o This is why Haley argues in Ringling that the shareholder agreement was a voting trust it would be invalid for noncompliance Courts today are reluctant to re-characterize an agreement as a trust Shareholder agreements (private agreements, courts will generally uphold) o A) Agreements relating to election of the board of directors (a.k.a. vote pooling agreements) must be unanimous Valid Solves the problem of director deadlock Director oppression still possible o B) Agreements relating to limitation on the boards discretion must be unanimous Ringling Bros-Barnum and Bailey v Ringling p. 582 - Plaintiff, Edith Ringling, brought an action to enforce a stock pooling agreement she had with one of the Defendants, Aubrey Haley. the parties will act jointly in exercising such voting rights in accordance with such agreement as they may reach with respect to a matter calling for the exercise of such voting rights Binding arbitration to resolve, and he decided what the vote should be, thus the others vote didnt count. Used cumulative voting to elect directors

Contrasting close and public corporation shareholders Public corporation shareholders: Usually own small % of shares as part of diversified portfolio Interested in share price Have little influence on Board of Directors or management If dissatified, typically follow Wall Street Rule: Easier to switch than fight Close propporation shareholders: Often undiversified Interested in the companys performance and dividends, not share price Minority shareholders may have little influence on Board of Directors or management Personality conflicts can lead to deadlock or oppression

Lock In and Frozen Out Locked in as shareholders; Close corporations often restrict share transfers Risk of being frozen out of decisionmaking and compensation: Minority shareholders may have no control

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Even if no formal restrictions, there is no secondary market for the shares

over companys activities May be denied compensation if denied employment

Shareholder agreements Voting trusts (unanimous) Vote pooling agreements (e.g. Rigling) (unanimious) Shareholder agreements constraining discretion of directors Shareholder agreements constraining director power Very common Require certain persons as officers Specify compensation and/or dividend policy Require shareholder approval of board actions McQuade v Stoneham 191 N.E. 234 (1934) p. 589.- shareholder agreement by which all agreed that they would each do their best to elect each other directors and, in their capacity as directors, appoint each other officers at specified salaries. the parties hereto will use their best endeavors for the purpose of continuing as directors of said Company and as officers thereof the following. Defendants didnt use best effort to continue him as treasurer. However, directors may not by agreements entered into as stockholders abrogate their independent judgment. Directors must exercise their independent business judgment on behalf of all shareholders. If directors o the power to unite is, however, limited to the election of directors and is not extended to contracts whereby limitations are placed on the powers of directors to manage the business of the corporation by the selection of agents at defined salaries. o Get agreement that he will be elected a director. Have by-laws state that officers may be removed only for cause or by the unanimous bote of the directors (Need to make sure that amending the by-laws requires unanimous director and/or shareholder action. [By-laws, Articles, and Shareholder Agreements are aligned] Clark v Dodge, 199 N.E. 641 (1936); p. 594. -Dodge and Clark the sole owners of two medicine companies, enter into an agreement, which said that Clark should continue in the efficient management and control of Bell and Co so long as he should remain faithful, efficient, and competent to so manage and control the said business and Clark should share his knowledge with the son of DodgeDodge breached by not continuing Clark in management. An agreement between shareholders, wherein the shareholders entering the agreement are the only shareholders of the company, is valid even if the agreement contemplates controlling management decisions. The McQuade court invalidated a similar agreement because it affected the rights of others that were not part of the agreement, and therefore it fell under the public policy argument. In this case, the only shareholders were Defendant and Plaintiff, and therefore the agreement between the two did not have any, or at least negligible, consequences on the public. Remedy of Specific Performance ~47~

Con Usually no available re. personal service contracts o But that mostly applies where employer seeks to bind employee

Pro In close corps, employment compensation is man source of investment return Denial of employment with no exit leaves minority shareholder with no return

Galler v Galler, 203 N.E.2d 577 (1964); p. 601 - shareholders will cast their votes for the above named persons (I, R, B, E). In the event of a death of either brother his wife shall have the right to nominate a director in place of the decedent ; as long as there is a surplus, there shall be $50K dividend declared ; upon the death of B or I, the corp. shall pay a sum equal to twice the salary of such officer, over a 5-yr period. Agreement is valid; unanimity not required if: (1) the corporation is closely-held; (2) the minority shareholder does not object; (3) the terms are reasonable. Close corporation: one in which the stock is held in a few hands, or in a few families, and wherein it is not at all, or ony rarely, dealt in by buying or selling. No secondary market to sell stocks. The Supreme Court, held that where the agreement was not a voting trust (b/c did not turn over votes to a third party) but a straight contractual voting control agreement which did not divorce voting rights from ownership of stock in a close corporation, the duration of the agreement, which was interpreted as continuing so long as one of the two majority stockholders lived, did not offend public policy and did not render the agreement unenforceable. In a closely held corporation, a minority shareholder does not have the ability to easily unload their shares as someone who held publicly traded shares, and therefore will have to resort to detailed, comprehensive shareholder agreements in order to guarantee their rights. Ramos v Estrada, 8 Cal. App.4th 1070 (1992); p. 606. - two groups were required to vote for the directors upon whom a majority of each respective ground had agreed. The terms of that agreement expressly state that failure to adhere to the agreement constitutes an election by the shareholder to sell his or her shares pursuant to buy/sell provisions of the agreement. The agreement also calls for specific enforcement of such buy/sell provisions.did not illegally give proxies 4. ABUSE OF CONTROL MBCA 7.30 Voting Trust 7.31 Voting Agreements 7.32 Shareholder Agreements Fiduciary Duties At early common law, shareholders qua shareholders had no fiduciary obligations to firm or fellow shareholders o Some erosion vis-a-vis controlling shareholders of public corporations (e.g. Sinclair Oil v. Levien) More erosion in close corporation In Donahue, - Stockholders in the close corporation owe one another substantially the same fiduciary duty in the operation f the enterprise that partners owe to one another. Business judgment rule BoP on plaintiff to rebut; Intrinsic fairness BoP on defendants to show ~48~

transaction was fair to Sinven Standard of review: intrinsic fairness used when parent has received a benefit tot he exclusion of the minority shareholders of the subsidiary and at the expense of the minority shareholders of the subsidiary Wilkes v. Springside Nursing Home, Inc., 353 N.E. 2d 657 (1976); p. 613. In a closely held corporation, the majority stockholders have a duty to deal with the minority in accordance with a good faith standard. The burden of proof is on the majority to show a legitimate purpose for its decision related to the operation of the business. Note: Shareholders in a closely held corporation are held to a similar standard as required between partners. Must majority subordinate interests to minority? No, balance fiduciary duty of majority and their right to selfish ownership If the majority has a legitimate business purpose, the burden shifts to minority to show less harmful alternative, if so, court must balance the legitimate business purpose against the practicability of proposed alternative Ingle v. Glamore Motor Sales, Inc., 73 N.Y.2d 183 (1989); p. 620 A minority shareholder in a closely held corporation, who is also employed by the corporation, is not afforded a fiduciary duty on the part of the majority against termination of his employment. A court must distinguish between the fiduciary duties owed by a corporation to a minority shareholder, as such, in contrast to its duties owed to him as an employee. Dissent cites Wilkes; says that the majority ignores the equities and fails to recognize that this is not just a suit for wrongful employment termination. Brodie v. Jordan, 857 N.E.2d 1076 (2006); p. 625 Smith v. Atlantic Properties, Inc., 422 N.E.2d 798 (1981); p. 629 Stockholders in a close corporation owe one another the same fiduciary duty in the operation of the enterprise that partners owe one another. A minority shareholder, at least where he has a veto power over corporate action, has fiduciary duties to the majority. Wolfsons use of his veto power was inconsistent with that duty because it subjected the corporation to an unnecessary assessment of penalty taxes. In Smith, Wilkes applies not to just majority SHs, but to anyone who controls the firm See Donahue v. Rodd Electrotype Co-shareholders in a closely held corporation owe each other the fiduciary duty of utmost good faith and loyalty o Widow inherited shares; right to vote directors, to receive dividends, but no claim to set on Boardno claim to his job either; directors might no pay dividends (bus jmt) o No protection from a buyout agreement; low-ball offer to buy her shares o Give the protection here b/c of the difficulty in liquidating your interest Vulnerable to oppression by majority o Equal opportunity doctrine-if repurchasing from one, then must buy from others at same price o No one knew if this equal opportunity doctrine extended beyond sale of shares

Jordan v. Duff & Phelps, Inc., 815 F.2d 429 (7th Cir. 1987); p. 634 Close corporations buying their own stock have a fiduciary duty to disclose material facts. Where sold his stock in ignorance of facts that would have

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established a higher value, failure to disclose an important beneficent event is a violation even if things later go sour. A must establish that, upon learning of merger negotiations, he would not have changed jobs, stayed for another year, and finally received payment from the leveraged buyout. A jury was entitled to conclude that the would have stuck around. 5. COUNTERMEASURES CONTROL, DURATION & STATUTORY DISSOLUTION Dissolution All states have provisions under which a shareholder may seek an involuntary dissolution of the corporation. Dissolution leads to To get dissolution: must show oppression or fraud. Ground for involuntary dissolution (preventing the firm from functioning at all) o Director deadlock The dir must be evenly divided and unable to make corp decisions The shareholders must be unable to resolve the deadlock corporation does not function at all (requires unanimous shareholder agreement) The deadlock must threaten irreparable injury to the corporation or prevent the business of the corporation from being conducted to the advantage of the shareholders. o Shareholder deadlock The shareholders must be evenly divided Because of their division the shareholders must be unable to elect a board of directors for two years running. Most statutes also provide a. Constructive Dividends as an Equitable Remedy Buyout in lieu of dissolution valid: Four questions (1) ; (2) statutory appraisal; (3) liberal dissolution rights allow minority shareholders to threaten to dissolve the firm and thereby potentially extort additional benefits from the firm or the other shareholders; (4) query whether its appropriate for court to create a remedy when the legislature didnt?

Alaska Plastics, Inc. v. Coppock, 621 P.2d 270 (Alaska 1980); p. 646 Majority shareholders in a closely held corporation owe a fiduciary duty of utmost good faith and loyalty to minority shareholders. Although there is no authority allowing a court to order specific performance based on an unaccepted offer, where payments were made to directors and personal expense paid for wives, they could be characterized as constructive dividends. Risk of oppression of minority interests by majority shareholders. o Oppression is defined as conduct that substantially defeats a minority shareholders reasonable expectations. Reasonable expectations: (1) were reasonable under the circumstances; (2) known (or should have been known) to the majority; (3) central to the petitioners decision to join the venture. Four grounds for ordering a buyout: 1) buyout agreement; 2) buyout in lieu of dissolution; 3) Appraisal; 4) Remedy for breach of fiduciary duty Limited by: o Imposition of expansive fiduciary duties. Relatively high costs of judicial enforcement. Often difficult to construct a remedy for breach of fiduciary duty.

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Haley. Talcott, 864 A.2d 86 (Del. Ch. 2004); p. 655 - agreement provided for buyout, but left the one leaving the business on the mortgage, so this agreement wont be specifically followed. 1. not an adequate remedy, thus statutory dissolution instead either party may still buy through bidding on the property of the former LLC Pedro v Pedro-an employee/shareholder may have an additional and separate claim for wrongful termination based on a reasonable expectation that his or her employment was not terminable at will, or even that there was an agreement to provide lifetime employmentin closely held!!! Stuparich v Harbor Furniture-sisters ask for involuntary dissolution under CA statute: reasonably necessary for the protection of the rights or interests of the complaining (SH). 1. 3 siblings own equal shares of nonvoting stock; Malcolm owns majority of voting stock; upon mothers death, find out that Malcolm also owns that voting stock. 2. sisters ask to buy out Malcolm-he refuses. a. Have a profitable mobile home park and unprofitable furniture business and sisters want to separate-Malcolm refuses. b. Malcolm, wife, and son all work for the corporation. Altercation between one sister and Malcolm. i. Working for the co? ii. Bus jmt rulein separating businesses iii. Expectation of control iv. Acrimony between SHs c. Ct: finds for Malcolm Meiselman v. Meiselman (KRB, 65556) (NC 83) such relief is reasonably necessary to protect a complaining shareholder, or alternatively order a buy-out of Held: At least in close corporations, a complaining shareholder need not establish oppressive or fraudulent conduct by the controlling shareholders. Rights and interests, under the statute, include reasonable expectations, including those that the minority shareholder will participate in the management of the business or be employed obey the company as long as they were embodied in express or implied understandings among the participants.

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