BA Outline – Fall 17’ Prof.

Groves
I. PARTNERSHIPS AND LIMITED LIABILITY COMPANIES (UNINCORPORATED
ENTITY)
A. Introduction to Business Forms
Type of Managemen Liability Tax Formalities
business t Treatment
Sole Owner No shield Individual None
Proprietors against
hip Personal
liability b/c
no
separation
btwn owner
and business
- Unless
owner
transfers the
business to a
corp. or LLC
General All partners - Shield only Pass through None
P’ship manage for activity to partners
outside the
scope of
business
activity.
- Joint and
several
liability for
business
activity
(Personal
liability after
all p’ship
asserts
exhausted)
Limited All partners Shield for all Pass through - Must be
Liability manage partners to registered
P’ship (LLP) against individuals professional
personal (file and
liability for obtain
obligations certificate)
that exceed - LLP must
the p’ship have
assets insurance
- Unless
claims arise
due to their
own
misconduct

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BA Outline – Fall 17’ Prof. Groves
Limited - Corp. is the - Shield Taxed as
P’ship (w/a sole general against corp.
corp. partner of a liability for
general limited limited
partner) p’ship partner, but
- Narrowly (ownership no shield for
used for tax interests are general
reasons publicly partner
traded)

Limited - Like p’ship, No personal Can CHOSE - File

Liability all members liability for b/w corp. or Articles of
Company can manage; any p’ship Incorporatio
(LLC) total participants taxation n with
flexibility (whether or secretary of
not they are state
active on - Operating
mgmt of Agreement,
business) oral or
written
Corporation - Directors No liability Taxed for - Paper: (1)
delegate on directors, income and Filing AOI;
mgmt to officers and dividends! (2) Minutes
officers shareholders (DOUBLE of
- Can be . TAXATION) shareholder
directors or - BUT, meeting; (3)
shareholders directors Minutes of
and officers Directors
can be liable meeting; (4)
to Bylaws
shareholder - People: (1)
if grossly Incorporator
negligent s; (2)
Shareholders
; (3)
Directors; (4)
Officers

B. Agency
i. Creation of the Agency Relationship
 R: Agency is a fiduciary relationship which results from the
manifestation of consent by one person to another that the other
shall act on his behalf and subject to his control, and consent by
the other so to act.
 3 Elements of Agency Relationship:
a. Consent by principal and agent
 Manifestation of consent - in writing or oral or
implied from parties’ conduct

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BA Outline – Fall 17’ Prof. Groves
 The relationship b/t the principal and the agent need
not be by contract. Consent alone is sufficient.
Therefore, no consideration is required for someone
to act as an agent for another.
b. Action by agent on behalf of Principal AND
 On behalf of – agent must act primarily for the
benefit of the principal (not for benefit of agent)
c. Control by the principal (Principal can be liable for agent’s
actions)
 Agent must act subject to principal’s control A
principal need not exercise physical control over the
actions of its agents. Agent must be subject to the
principal’s control over the result or ultimate
objectives of the agency relationship.
 Principal – person for which agent is acting.
a. Principal has specified the task that the agent should
perform
 Agent – Person acting for the other. Agent should be acting if
reasonable third party would say it’s reasonable that the principal
asked agent to do something.
a. Reasonableness
 If the principal’s words or conduct
 Would lead a reasonable person (objective standard)
 In the agent’s position
 To believe that the agent has authority to act on the
principal’s behalf
 The agent has actual authority.
b. Agency relationships are not limited to natural persons.
ii. Liability from the Agency Relationship
 Tort Liability from the Agency Relationship
a. Principal can determine what the ultimate goal is
b. Master principal who employs an agent to perform service,
and has the right to control the physical conduct of the
other in performance of the service.
c. Servant Agent employed by a master
d. Independent Contractor person who contracts w/another
to do something for him, but is not controlled.
o A Principal is not liable for an independent
contractor’s torts even if they are committed in the
performance of the K and even though a principal is
liable under doctrine of respondent superior for the
torts of his employees if committed in the
furtherance of their employment.
o This is b/c principal does not supervise the
independent contractor’s work.
e. Principal liability only applies to actions w/in the scope of
D’s employment.
f. A K b/t agent and TP may impose liability upon the
principal, the TP and/or agent.
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BA Outline – Fall 17’ Prof. Groves

TYPES OF PRINCIPALS
Term 3 Pty Notice of 3rd Pty Notice of
Agent Role Principal I.D.

Disclosed YES YES

Principal
Partially YES NO
Disclosed
Principal
Undisclosed NO NO
Principal

 Examples:
a. A: “I am an agent for Kill Vick, Inc.” (Disclosed)
b. B: “I am an agent, but I am not telling you who I
represent.” (Partial)
c. C: “I am going to electrocute you.” (Undisclosed)
 Contract Liability from the Agency Relationship
a. Liability of the Principal to the Third Party
o Actual Authority – the actual instruction b/t
principal and agent. Ptr needs actual authority to
bind p/s w/respect to matters outside the ordinary
course of the p/s business.
o Apparent Authority – looks at view point of TP
person (reasonableness-objectiveness). A partners
possesses apparent authority to bind the p/s
w/respect to matters outside the ordinary course
of the partnership’s business.
o Termination of Relationship – Can be terminated
Counter-Argument on by Principal by giving notice.
Essay - Principal can terminate “apparent authority”
by giving notice to a TP
- You can get rid of apparent authority when it
longer appears reasonable to a TP. Apparent
authority ends when the Principal says its
over. (e.g. giving notice that agent no longer
works for them.)

Type Actors Scope End

Actual Authority Principal/Agent Implied, Nec, or - Nat Term

Incidental to - Agent
Prin’s Objectives Renounces
- Prin Revokes

Apparent 3rd Party/Agent Reas’ble Belief No longer

Authority and Traceable appears actual

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BA Outline – Fall 17’ Prof. Groves

b. Liability of the Third Party to the Principal

c. Liability of the Agent to the Third Party
 Agency 6-Step Analytical Construct (“PATAAT”)
a. Who is the Principal?
b. Who is the Agent?
o Are there any subagents?
c. Who is the TP?
d. Scope of Agent’s Actual Authority?
e. Scope of Agent’s Apparent Authority?
f. When Does the Agent Authority Terminate?
C. General Partnership (GP/S)
i. Introduction
 Both partners are liable
 The most basic entity type
 No filing req’t
 No agreement req’d
 Can be implied or oral
 Inadvertent GP/S: Default business entity when more than one
owner and entity does not make filing with the state
 GP/S is an entity distinct from its Ptrs:
a. Can buy and sell property
b. Can sue or be sued
c. Can borrow or lend money and
d. Can continue to exist even after w/drawal of a ptr.
ii. Taxation
 A GP/S is not separate tax paying entity.
 Pass Through Entity: P/S income is taxed at the ptr. Level
regardless if some or all of the net income is distributed to the ptrs.
 Each Ptr puts income/loss on own tax return
 Ptrs are taxed on allocation of profit and not on distributions
a. (e.g. p/s makes 100k net profit but ptr A makes 75k and ptr
B makes 25k. Each ptr will be taxed 50k.)
iii. Formation
 The Definition of Partnership – A P/S is formed when (RUPA §
202):
a. Two or more persons
o Can be individuals, corporations, p/s or any other
entity
b. Associate (agreement)
o A p/s agreement can be written, oral, or implied
from conduct
o A p/s agreement must occasionally be in writing to
satisfy applicable statute of frauds when
- (A) A p/s by its express terms will continue
for more than one year and/or
- (B) Business of p/s is buying and selling real
property

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BA Outline – Fall 17’ Prof. Groves
c. To carry on a business
o Any trade, occupation or profession. Anything a
business can do
d. As co-owners
o Two indications of ownership:
- (A) Participation in management of business
 Voice day to day operations and vote
on matter of p/s activity
- (B) Sharing of profits from the business
 if a person shares in profit they are
presumed to be a ptr.
e. For Profit
o Can’t be a business for putting profits back into the
community to do good, must have intent to make
profit.
 Martin v. Peyton: I: whether agreement intended to protect the
financial interests of creditors necessarily make them ptrs of debtor
firm. R. General p/s formation rule (see above). H: No. P/s was not
formed here b/c the trustees were in charge only of transactions
affecting their collateral, and they were prohibited from
commingling the collateral w/KNK’s other securities.

**People can become ptrs even when they don’t have the
subjective intent**

a. Determining when P/S is Formed:

o A person who receives a share of the profits of a
business is presumed to be a ptr in the business,
Rebuttable
Presumption
UNLESS:
- the profits received were paid back for debt
(creditor)
- services provided to the business (service
provider)
- property sold to the business (seller)
- goods sold to the business
- Independent contractor or other
compensation to an employe
o Factors to Determine if Employee vs. Gnrl Ptr
(SASMOVF) ~ Simpson v. Ernest & Young ~
- Share in Profits
- Access to Books & Records
- Security – Permanence
- Management Control/Authority
- Ownership Interests (unbilled timed – UBT)
- Voting Rights
- Fiduciary Duty

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BA Outline – Fall 17’ Prof. Groves
 The Partnership Agreement
a. Partners share equally in the profits and losses, and profits
of the P/s, and every ptr has the right to participate in the
management of the p/s. (UPA)
b. A p/s is dissolved whenever any ptr ceases to be associated
in the carrying on of business.
 Management & Operation (Right to Control): RUPA 401 & 301)
a. General ptrs are agents of the p/s and bind the p/s as to
third parties even if the other partner(s) do not consent.
b. If there is not p/s agreement on the division of management
rights, the ptrs have EQUAL RIGHTS to manage. (Article
401(f))
c. When Ptrs Conflict – Majority Prevails (RUPA 401(j): If
there is a dispute b/t ptrs, a majority of the partners have
to agree to the act. That is only re: ptrs enforcing a
provision against other partners. The internal agreement
cannot restrict the rights of TP against the p/s.
d. Relations Among Partners – (Art. 401(f)(j))
o Summers v. Dooley (trashcan business): I: Is a
partner who refused to hire an additional employee
liable to a co-partner for expenses incurred in hiring
a new worker? R. In a general p/s, each partner has
an equal right in managing the p/s’s business. H.
No. In a general p/s each partner has equal rights re:
the mgmt. of the ordinary affairs of the p/s/. Unless
there is an agreement, differences b/t the partners
everyday business are to be decided by majority of
the ptrs. When a p/s only consists of 2 ptrs, 1ptr
cannot unilaterally bind the p/s by incurring
expenses over the objection over the other.
e. If Outside the Scope of Business, Unanimous Consent
Required (Article 401(j)): An amendment to the p/s
agreement may be undertaken only with unanimous
consent required
f. Relations b/t Partners & TP (Art 301)
o NBC v. Stroud- D said to P that he would not
personally buy the bread anymore. This doesn’t
mean the p/s isn’t going to do it. D’s partner
(Freeman) has the power to bind the p/s and
purchase the bread on behalf of the p/s. I. Can one
general ptr restrict another ptr from conducting
business on behalf of a 2-person p/s? H. No! Each
ptr has an equal right in the mgmt. and conduct of
p/s. Can’t restrict rights of 3rd party and apparent
authority to bind p/s)
o Collapsed R. In a GP/S w/two partners, each ptr
has the power to bind the p/s in matters pertaining
to the p/s business.

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BA Outline – Fall 17’ Prof. Groves
o Article 301(1): Each partner is an agent of the
partnership for the purpose of its business. An act of
a partner…for apparently carrying on in the
ordinary course of the partnership business or
business of the kind carried on by the partnership
binds the partnership, unless the partner had no
authority to act for the partnership in the particular
matter and the person with whom the partner was
dealing knew or had received a notification that the
partner lacked authority.
g. Ratification Exception
o Must be estopped. You may have objected, but you
Counter-Argument on benefited from the extra help. Whether who
Essay dissented received the benefits and should be
ratified or estopped.
o Acquiescence:
- Not doing nothing = yes
- Facts show person objected and not saying
anything means they are not objecting. Not
oral or written = NO VOTE
o Ratification - Express or Implied through
acceptance of benefits
h. Analysis
o #1 Ask: (1) Relations b/t ptrs or (2) Relations b/t
ptrs & TP
- Relations b/t ptrs: (a) Equal Rights (b)
Majority vote in ordinary course of business
(c) unanimous consent for an act that occurs
outside ordinary course of business
- Relations b/t ptrs & TP: (a) Each ptr in a
GP/S is an agent of p/s, (b) apparent
authority to bind p/s
o #2: If there are ppl in the p/s you have equal right to
manage
o #3: If there is a dispute (need a majority vote).
Dissenter should have its way when it just 2 ptrs.
When there are 2-ptrs there is NO MAJORITY
o #4: See Ratification Exception
iv. Financial Rights and Obligations
 Sharing of Profits and Losses (RUPA 401(b)) – Default Rule!
a. R. Each ptr is entitled to an equal share of the p/s profits if
there is no agreement stating to the contrary. If there is an
agreement on profits, but not losses, losses are split the
same way as profits.
b. Profit Sharing Agreements (PUCSAS) - Profits of a
business may be divided by an agreement in numerous
ways:

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BA Outline – Fall 17’ Prof. Groves
o P - Percentage (flat): ptrs may share on a flat %
basis. Works under assumption that everyone works
the same & no one slacks
- if new ptrs are added dilution of existing
interests occurs automatically w/o the need
to amend the agreement.
- If old ptrs depart w/o new ones being added,
the remaining interests are also
automatically concentrated.
o U - Units (ratio): 10 ptrs each invest $10 each. Each
has 10 units ($1 per unit). If new member adds $10.
Partners Units / Total Units = Ratio stays the same –
one of the Preferred Methods
o C - Capital Invested: If you put in 80% of $$, you
want 80% of profits. Problem: If you’re the
rainmaker but not the money, you won’t like this b/c
it’s unfair
o S - Salary (plus profit): Set Salary & then some
profits. Problem: You don’t always have profits and
profits may not always increase the salary
o A - Annual Agreement: B/c they don’t know what
their profits for the year will be.
o S - Sales/Billable: If you bill a lot of hrs, you like
this option but if you don’t bill a lot but bring in
clients, this is unfair.
o Partners may be entitled to a fixed weekly or
monthly salary. Payment can be treated as a “cost”
and (-) before the profit is computed for dilution on
some other basis.
o Partners may share on a % basis. This type of
arrangement is appropriate when the business is
largely dependent on capital for income generation.
c. Kessler v. Antinora (“Sharing Losses”)
 Partnership Liability to Third Parties
a. UPA Sec. 13: Partnership is liable to TP for any wrongful
act/omission of any partner acting in the ordinary course of
the business of the partnership or w/the authority of his co-
partners.
b. UPA Sec. 14: Partnership is liable in circumstances is ptr
misapplies money or property of a TP.
c. §103 (b)(10): Internal Agreement Useless vs. Third Parties
o Internal agreement on how to mesh out
agreement is useless, but you can’t have an
agreement about liability to TP
d. §301(1): P/S Liability for Partner as Agent
o Each partner is an agent of the partnership for the
purpose of its business. An act of a partner…for
apparently carrying on in the ordinary course the
partnership business or business of the kind carried
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BA Outline – Fall 17’ Prof. Groves
on by the partnership binds the partnership, unless
the partner had no authority to act for the
partnership in the particular matter and the person
with whom the partner was dealing knew or had
received a notification that the partner lacked
authority.
e. §305(a)(b): P/S Tort and Misappropriation Liability
o A partnership is liable for loss or injury caused…as
a result of a wrongful act or omission, or other
actionable conduct, of a partner acting in the
ordinary course of business…or with authority of
the partnership.
o If, in the course of …business…money or property
is misapplied by a partner, the partnership is liable
for the loss.
f. §306(a): Partner Joint/Several Liability
o Except as otherwise provided in subsections (b)…
all partners are liable jointly and severally for all
obligations of the partnership unless otherwise
agreed by the claimant …”
 Timing Issues: Partners Liability
a. All ptrs are liable jointly and severally for all obligations of
the p/s unless otherwise agreed upon by claimant.
b. If ptrs joined p/s after the liability that ptr is not liable
o It’s when the obligation has occurred that makes the
partner liable.
o Obligation before admitted as ptr = NOT liable
o Obligation after admitted as ptr = LIABLE
o If a reasonable person thinks they are receiving
legal advice on how to handle a loan, the p/s is
liable. (Roach v. Mead)
c. Except as otherwise provided in subsections (b)…all
partners are liable jointly and severally for all obligations
of the partnership unless otherwise agreed by the claimant
…”
d. A person admitted as a partner into an existing partnership
is not personally liable for any partnership obligation
incurred before the person’s admission as a partner.
e. Each partner has unlimited personal liability for the
obligations of the p/s
f. UPA – ptrs have “joint and several” liability for all p/s
obligations. “Joint and Several” liability permits a P to sue
one or more of the ptrs w/o having to sue them all. And the
ptr can then go after the other ptrs for their share of
contribution.
g. Roach v. Mead
 Indemnification & Contribution RUPA 401(c)
a. UPA 18(b): In the absence of a contrary agreement, a p/s
must indemnify a ptr for payments made and liabilities
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BA Outline – Fall 17’ Prof. Groves
incurred by the ptr in the ordinary course of the p/s
business.
b. In an ongoing p/s, an indemnification payment reduces the
p/s profits just like any other p/s payment
c. An individual ptr has unlmtd personal liability for the
obligations of the p/s. An outside creditor may collect the
entirety of the p/s from any ptr under UPA and RUPA
d. Reimburse ptr for payments
e. Indemnify ptr for liabilities
f. In ordinary course
g. to preserve business or property
h. Reimburse for advances (loans) RUPA 401(d)
i. Thompson v. Wayne Smith

v. Fiduciary Duties
 Meinhard v. Salmon: Partners owe a duty to reveal opportunity for
new work that is an enlargement from the current work. The
breach is due to the failure to provide the ptr an opportunity to
compete through acting in secret with the TP.
 Relevant UPA Provisions for Partner’s Duties:
a. §403(c)(1) – partners rights and duties w/
respect to info: duty extends from partner to
partner w/o demand and any info concerning
the p’ship business reasonably required for
the exercise of the partner’s rights
b. Duty of Care: §404(c) – a partner’s duty of
care to the p’ship and the other partners in the
conduct and winding up of the p’ship business
is limited to refraining from engaging in
grossly negligent or reckless conduct,
intentional misconduct or a knowing violation
of law
o Gross negligence – a conscious,
voluntary act or omission in reckless
disregard of a duty and of consequences
to another
c. §404(b) and (d) – cant not A.A-I.C
(Appropriate, Adverse Interest and
Competition)
d. Duty of Loyalty: §404(b)(1) - Partners duty
of loyalty is limited to the following:
o (1) To account to the p’ship and hold as
trustee for it any property, profit, or
benefit derived by the partner in the
conduct and winding up of the p’ship
business or derived from the use of the
partner of p’ship property including the
appropriation of p’ship opportunity

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BA Outline – Fall 17’ Prof. Groves
o (2) To refrain from dealing w/ the p’ship
in the conduct or winding up of the
p’ship biz as or on behalf of a party
having an interest adverse to the p’ship
o (3) To refrain from competing with the
p’ship in the conduct of the p’ship biz
before the dissolution of the p’ship
e. §404(d) – a partner shall discharge the duties
to the p’ship and other partners under the act
or under the p’ship agreement and exercise
any rights consistently with the obligation of
good faith and fair dealing
f. §404(e) – a partner does not violate a duty or
obligation under the p’ship agreement merely
b/c the partner’s conduct furthers the
partner’s own interest
g. §404(f) – a partner may lend money to and
transact other business with the p’ship and as
to each loan or transaction the rights and
obligation of the partner are the same as those
of a person who is not a partner, subject to
other applicable law (treat the partner as a
CREDITOR)

vi. Partnership Liability to Third Parties:

 Liabilities that arise under tort law:
a. The partnership as an entity is liable to third parties with
respect to the tortious acts or omissions of a ptr so long as
the ptr during the act or omission was acting with actual or
apparent authority.
 Liabilities that arise under contract law:
a. The p/s as an entity is liable to third parties with a ptr w/o
possessed actual or apparent authority.

 Partners Liability to Third Parties:

a. A ptr is jointly and severally liable for all obligations of
the partnership whether in tort or contract EXCEPT:
o (1) Newly admitted partners: Personal assets of
newly admitted partners are NOT exposed to TP
w/respect to pre-admission obligations of the p/s.
However, the new ptr is liable up to the extent of
her capital contribution w/respect to pre-admission
obligations of the p/s
b. There is a unanimous vote required for admission of new
ptrs
c. Unanimous vote required for amending p/s agreement
o The p/s is at will absent something in the p/s
agreement stating that it’s not, and can be banned at
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BA Outline – Fall 17’ Prof. Groves
any time. Thus, ptrs can end the current p/s and start
a new p/s with new people when they aren’t
satisfied
vii. Partnership Dissociation and Dissolution under RUPA
 Dissociation – Ceasing activity of a ptr
 Dissolution – Event leading to termination
 Winding up – Finalizing the termination
viii. Ownership Interests and Transferability
 No ptr shall have the authority to transfer, sell, assign or in any
way dispose of p/s property and shall not have the authority to sell
transfer, assign his share in the firm, no enter into any agreement
as a result of which any person shall become interested with him in
this firm, unless the same is agreed to in writing by a majority of
the ptrs as determined by a % of ownership except for members of
his immediate family who have attained majority, in which case no
such consent shall be required.
ix. Partnership Dissociation and Dissolution
D. The Limited Partnership
i. Introduction
ii. Formation
iii. Management and Operation
iv. Financial Rights and Obligations
v. Limited Liability
 The Control Rule
vi. Fiduciary Duties
 General Partners
 Limited Partners
vii. Ownership Interests and Transferability
viii. Dissociation and Dissolution
E. The Limited Liability Partnership
i. Introduction
ii. Formation
iii. Limited Liability
iv. The Limited Liability Partnership
F. The Limited Liability Company
i. Introduction
ii. Formation
iii. Management and Operation
iv. Financial Rights and Obligations
v. Limited Liability
vi. Fiduciary Duties
 Basic Duties
 The Role of Contract
vii. Ownership Interests and Transferability
viii. Dissociation and Dissolution

II. CORPORATIONS
A. The Development of Corporation Law in the United States: Jurisdictional
Competition
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BA Outline – Fall 17’ Prof. Groves
i. Dole Food Company, Inc.
B. The Formation of a Closely Held Corporation
i. Definition: A business that has filed “articles of incorporation” with the
state’s secretary.
ii. Where to Incorporate
 A corporation can be incorporated in ANY state
 The decision about where to incorporate can be as simple as “this
is where we do business and where we live” OR as sophisticated as
“the law of this state is really well developed in this area” and we
want it to govern our corporation (usually Delaware).
iii. How to Incorporate – Mechanics of Incorporation
 A corporation is formed when articles of incorporation are
delivered to the relevant secretary of the state and then filed by the
secretary of state.
a. A person may deliver the articles to be filed but a
corporation doesn’t exist until they’re actually filed
 Consequences of Failure to File
a. If articles of incorporation are not filed:
o Persons purporting to act on behalf of the
corporation, knowing there was no incorporation,
are personally liable for the obligations of the
corporation
 Content
a. The articles of incorporation must include certain things:
o Corporate Name (w/Inc. or Corp.)
o Number of shares of stock the corp. is authorized to
issue
o Street Address of corporations initial registered
office and name of initial registered agent
o Name and address of each incorporator
b. Articles of Incorporation must authorize if the corporation
is to have them:
o Preemptive Rights
o Preferred Stock
o Straight v. Cumulative Voting
iv. The Decline of the Doctrine of Ultra Vires

C. The Premature of Commencement Business

i. Promoter Role
 A person, who acting alone or in conjunction with one or more
other persons, directly or indirectly takes initiative in founding and
organizing the business or enterprise of an issuer.
 A Promoter is often referred to as the “founder” or “organizer” of
an enterprise.
 The formation of a business enterprise largely involves business
rather than legal problems.
 If the new business needs a plant, the promoter must locate one
and rent or buy it.

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BA Outline – Fall 17’ Prof. Groves
 The promoter must negotiate an employment contract with him,
find capital
 The promoter owes significant fiduciary duties to other
participants in the venture.
ii. Promoter Fiduciary Duties (MF-PIG)
 Avoid Misrepresentation
 Material Fact Disclosure
 Personal Interest Disclosure (of her transactions re: corporate
enterprise)
 Personal Gain Avoidance (at the expense of Corp)
 Good faith
 Adhering to a high standard of honesty and frankness
iii. Promoter Fiduciary Duties to WHOM? (SCCCs): 4 Promoter Enemies –
Who may attack transactions b/t a promoter and the corp. on the ground
the transaction violates the promoter’s fiduciary duty?
 Subsequent Purchasers/Investors of Corp. Interests: Especially if
subsequent purchaser has dealt directly with the promoter in
connection with the investment, promoter is liable for CL fraud in
the event of misrepresentation.
 Co-Promoters
 Creditors
 Corporation
iv. Promoter Liability Rule
 Acting for the entity prior to formation
 Brings personal liability
 Unless (1) unambiguous intent to hold corporation or 3rd person
liable solely or (2) Corporate Ratification (express or implied)
 MBCA § 2.04: “All persons purporting to act as or on behalf of a
corporation was no incorporation under this Act, are jointly and
severally liable for all liabilities created while so acting.”
v. Defective Incorporation
 Under MBCA, there can be no limited liability for a person w/in a
corporation before the certificate of incorporation is filed. If person
acts w/o authority, he isn’t relieved from liability even if the
corporation then comes into existence a little later.
 Robertson v. Levy
D. Disregard of the Corporate Entity
i. Normally liability resides only with the corporation not the individual
shareholders.
ii. PCV is an equitable doctrine where plaintiffs can get personal liability against
the principal shareholder.
iii. PCV is also when the Court disregards the subsidiary to get to the parent
company.
iv. Requirements for PCV: fraud, illegality, misrepresentations and manifest
injustice. (i.e. unjust to allow the corporate shield)
v. Doctrine by which we will pierce (get rid of) one entity in order to hold another
entity liable.
vi. Purpose is not to legally eliminate an entity, but it is trying to find someone to
pay.
vii. Dewitt Truck Brokers v. W. Ray Flemming Fruit Co.
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viii. The Piercing Doctrine in Federal/State Relations
ix. Successor Liability
x. Supp. Model Business Corporation
E. Financial Matter and the Corporation
i. Debt and Equity Capital
ii. Types of Equity Securities
 Shares: Common and Preferred Stock
 Shareholder – Owner of shares registered on the records of the
corporation
 Subscriber – Person who subscribes for shares, not yet owner
iii. Issuance of Shares: Herein of Subscriptions, Per Value, and Watered Stock
iv. Debt Financing
v. Public Offerings & Exemptions from Regulation
 The goal for many closely held corporations is to “go public” (to
raise substantial amounts of capital by making a public offering of
their securities through the services of an underwriter. These
transactions are known as initial public offerings (IPOs)
 The principal benefit of going public is to raise additional capital
for expansion
 Going public often has the advantage of reducing a corporation’s
need to rely on bank debt.
 Money raised in public offerings often is used to pay down pre-
existing indebtedness. Public offerings of equity enable a company
to use the money for projects with a long-term time horizon.
 SEC v. Ralston Purina Co.
 Under Ralston, when is the offering sufficiently private offering?
a. When the class of employees are already informed
 Smith v. Gross
a. Holding: The federal securities laws apply where there is
an investment of money in a common enterprise, with
profits to come solely from the efforts of others.
o Investment Contract Test: (3 elements)
- Was there an investment of money
- in a common enterprise
 looks to whether there are substantial
efforts made by parties other than the
investor that affect the success or
failure of the enterprise
 One in which the investor’s fortunes
are interwoven with and dependent
on the efforts and success of the
party seeking the investment, or on
other third parties.
- with profits to come solely from the efforts
of others
b. Rule: An investment contract is a security regulated by the
federal securities laws.
 Transaction & Shares
vi. Securities without Registration
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vii. Issuance of Shares by a Going Concern: Preemptive Rights and
Dilution
 The shareholders of a corporation do not have a preemptive right
to acquire the corporation’s unissued shares except to the extent the
articles of incorporation. MBCA 6.30
 Preemptive right must be in the articles of incorporation
 Stokes v. Continental Trust Co. of City of New York
 Rule: A stockholder has the right to vote in proportion to the
number of his shares, and this right cannot be curtailed by the
directors, officers, or other shareholders of the company.
 Holding: A stockholder has a right to subscribe for new stock in
the same proportionate share as he held in the old stock.
 Preemptive strike means “I intervene before something bad
happens.” Here the bad is a new issuance of shares that leaves the
shareholder with less voting rights. The Shareholder is about to
intervene to prevent (e.g. preempt is dilution of those voting rights)
 Preemptive rights is to buy shares when you want
 Dilution of Shares: Issuance in new shares.
viii. Distribution by Closely Held Corporation
ix. Legal Restrictions on Distributions
F. Management and Control of Corporation
i. Traditional Roles of Shareholders and Directors
ii. Shareholder Voting & Agreements
G. Duty of Care and the Business Judgment Rule
i. Fiduciary Duties – Duty of Loyalty
 Self-Dealing
ii. Executive Compensation and the Waste Doctrine
iii. Corporate Opportunity
H. Dissension in the Closely Held Corporation
I. Transactions in Shares: Securities Fraud and Sales of Control
i. Insider Trading

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