Ch1:Agency:Analysis(1) Is there a P-A Rshp, (2) Did A have authority, (3)was agreement made by A w/in Pnr or EE?
Pnr or EE? Consider when determining b/w Pnr or EE: (1)investment in firm, Oshp of firm assets, & Liab for
the Scope of A’s authority?
§1.01Elements of P-A Rshp: Arises when: (1)P indicates A should act on Ps b1/2, & (2)A is subject to P’s
ctrl, & (3)A manifests assent or otherwise consents so to act for P. -Agency Rshp arises only when the
elements in §1.01 are present. If parties characterize their Rshp as agency= not ctrlling. (§1.02)
§2.04RS: Er subject 2 Liab 4 torts committed by EE acting w/in the SOE. §7.03P’s Liab-In Gen:(1)A P is
subject to DirectLiab to a 3rd party harmed by an A’s conduct when either; (a)A acts w/ AA or the P
ratifies the A’s conduct, & [(i)the A’s conduct is tortious, or (ii)the A’s conduct, if that of P, would subject P
to tort Liab; or (b) P is negl in selecting, supervising, or otherwise ctrlling the A; or (c)P delegates
performance of a duty to use care 2 protect other persons or their prop to an A who fails 2 perform the duty.
(2)P is subject to VicLiab to 3rd party harmed by an A’s conduct when either: (a)A is an EE who commits
a tort while acting w/in the SOE (§7.07); or (b)A commits a tort when acting w/ AppA in dealing w/ a 3rd
party on or purportedly on b1/2 of the P (§7.08)
§7.07Agency Defined:(1)Er is subject to VicLiab 4 a tort committed by its EE acting w/in the SOE.(2)EE
acts w/in the SOE when performing work assigned by the Er OR engaging in a course of conduct subj
to the Er’s ctrl. EE’s act is NOT w/in the SOE when it occurs w/in an independent course of conduct NOT
intended by the EE 2 serve any purpose of the Er. SOE (*Clover): Acts w/in SOE are acts which R so
closely connected w/ what the servant is employed to do, &, so fairly & reasonably incidental to it, that they
may be regarded as methods, even if improper, of completing objectives of the Emnt. *Birkner
Criteria:(detailed what engaging in course of conduct is) *EE must be about Er’s biz & duties assigned by Er
(vs. being wholly involved in personal endeavor); *EE’s conduct must occur substantially w/in hrs of ordinary
(spatial) boundaries of Ement; & *EE’s conduct must be motivated at least in part by purpose of serving Er’s
interest.
§1.03Manifestation: A person manifests assent or intention through written or spoken words or other
conduct.
-§2.01/3.01Actual Authority(AA)+Creation: (Express-comm 2 A OR Implied) A acts w/AA when it’s created
by (1)P’s manifestation 2 A that, (2)as reasonably understood by A, (3)expresses P’s assent that A take
action on P’s b1/2. (AIA- P acted in manner that would lead A 2 reasonbly believe P intended 4 A 2 have
such pwrs 2 carry out duties; default rule is if P does not tell A how to carry out task, Ct lets A carry however
they please)
§2.02Scope of AA: (1)A has AA to take action designated or implied in the P’s manifestations to the A &
acts necessary or incidental to achieving the P’s objectives, as the A reasonably underst&s the P’s
manifestations & objectives when the A determines how to act.(P says or writes something to the A, or other
acts implied to achieve P’s objec); (2)An A’s interpretation of the P’s manifestations is reasonable if it reflects
any meaning known by the A to be ascribed by the P &, in the absence of any meaning known to the A, as a
reasonable person in the A’s position would interpret the manifestations in light of the context, including
circumstances of which the A has notice & the A’s fid duty to the P. (Requires us to look at the A’s
reasonable underst&ing); (3)An A’s underst&ing of the P’s objectives is reasonable if it accords w/ the P’s
manifestations & the inferences that a reasonable person in the A’s position would draw from the
circumstances creating the agency.
-§2.03/3.03Apparent Authority(AppA)+Creation: (3rd Party Believes) A thru AppA has pwr 2 affect a P’s
relations w/ 3rd party which is created when (1) a 3rd party reasonably believes the A has authority 2 act on
P’s b1/2, & (2) belief is traceable 2 the P’s manifestations. (3rd party believes A to have authority 2
act/bind; NO need 4 3rd party 2 show detr rel)
§3.11Term. of AA: doesnt by itself end any AppA held by A; AppA ends when no longer reasonable 4 the
3rd party w/ whom an A deals 2 believe that the A continues to act w/ AA.
-§2.06Liab of Undisclosed P: A undisclosed P is subject to Liab to a 3rd party when: (1)3rd party made
a detr change in position in rel on the agreement; (2)P had notice of A’s conduct & that A’s conduct
might induce 3rd parties 2 make a detr change in position; & (3)P did not take reasonable steps 2 notify
3rd party of the truth.
*P authorizes an A to act on the P’s b1/2 w/ rspct to 3rd parties, but the P’s existence is not made known 2
the 3rd party.*May bind P to an A’s action, even if the A lacked AA & even if the 3rd party didnt know the A
was acting on b1/2 of P.
- §4.01Ratification Defined: (1)Ratification is the affirmance of a prior act done by another, whereby the act
is given effect as if done by an A acting w/ AA. (2)A person ratifies an act by; (a)Manifesting assent that the
act shall affect the person’s legal relations, or (b)Conduct that justifies a reasonable assumption that the
person so consents. (3)Ratification does not occur unless; (a)Act is ratifiable (§4.03); (b)Person ratifying has
capacity (§4.04/cap. = (i) if the person existed at the time of the act & (ii) the person had capacity at the time
of ratifying the act (P may void ratification made earlier when P lacked capacity); (c)Ratification is timely as
stated (§4.05/=not effective unless precedes occurrence of circumstances that would cause ratifications 2
have adverse & inequitable effects on right of 3rd party), & (d)Ratification encompasses the act in its entirety
(§4.07) ALL OR NOTHING (may not partially ratify)
§4.02Effect of Ratification:(1)retroactively creates the effects of AA. (2)Ratification is not effective; (a)In
favor of person who causes it by misrep or other conduct makes K voidable; (b)In favor of an A against a
P when the P ratifies 2 avoid a loss; or (c)2 diminish the rghts or other interests of persons, not parties
2 trans, that was acquired in the subj matter prior 2 the ratification. *Must know or have reason to know the
material facts relating 2 trans.
§3.02Formal Req: If Law requires a writing/record signed by P 2 evid an A’s auth 2 bind P to a K, P not
bound in absence of such writing/record.
§2.05. Estoppel to Deny Existence of Agency Rshp: Prevents 1 party from denying a purported A’s
authority when the 3rd party wants 2 enforce the K. (3rd party must alter their position in rel of the alleged
authority.) P who hasn’t authorized A still subject 2 liability to 3 rd party whos justifiably induced 2 make a
detrimental change in position b/c trans is believed 2 be on P’s account if (1)P intentionally or carelessly
caused such belief; or (2)having notice of such belief & that it might induce others 2 change their positions, P
didnt take reasonable steps 2 notify them of the facts.
*Ag Prb involving Torts:Under doctrine of RS; P is NOT responsible 4 the torts of their non-EE/A’s (or
independent Kor) unless the tort arises out of area which the P exercised ctrl or tort arises under an
exceptions; (1)Inherently dangerous activity (activity likely to cause harm or damage unless some
precautions are taken); (2)non-delegable duty (duties a person may not avoid by mere deleg of a task 2
another person. i.e LLord/Attorney duties); or (3)neg hiring.
EE vs Non-EE A Factors: (1) Does P exercise ctrl over means/manner by which A performs the work; (2)
Whether the A is engaged in a distinct occupation or biz; (3) Whether the type of work done by the A is
customarily done under a P’s direction or w/out supervision; (4) The skill required in the A’s occupation; (5)
Whether the A or the P supplies the tools or other instrumentalities required for the work & the place in which
to perform it; (6) The length of time during P is engaged by A; (7) Is the A paid by the job; (8) Do parties
believe they are creating an Emnt Rshp; &, (9) Whether P is a biz?
Franchise Agreements: (see if F’or exercised ctrl) Involves a Co/Ind selling product or service or operating a
biz pursuant 2 an agreement from another co./ind. If the F’or is more likely involved in the day2day functions
of the F, F’or will b more likely, but if F’or not involved in the day2day functions, likely 2 b off the hook.
Apparent Agency: P could incur Liab 4 wrongdoing committed by an A, acting w AppA of P if there is:
(1)Reasonable belief by 3rd party that the alleged A is an A of the P; (2)Some action or inaction by the P 2
create (or 2 fail 2 dispel) that reasonable belief on the part of the 3rd party; & (3)(in some JX’s) some showing
that the 3rd party’s injury could have been avoided had the alleged P exercised ctrl over the alleged
A.*Butler v. McD’s: Doctrine of AppAg to a F’or/F’ee situation; (1)F’or acted in a manner that would lead a
reasonable person 2 conclude that the operator &/or EEs of the F restaurant were EEs or As of the ∆; (2)π
actually believed the operator &/or EE of the F restaurant were As or servants of the F’or; & (3)π thereby
relied 2 his detrmnt upon care & skill of the allegedly neg operator &/or EEs of the F restaurant.
Int Torts: P not held liable 4 the int torts of their A’s bc they are (1)normally outside the SOE, & (2)committed
w/out any intent 2 serve the Er. *Exceptions: some part of the tort done w/ intent to serve Er (bouncer) or
4seeable (some Jxs); *Ira v. US - drunk sailor 4seeable: EE acts w/in the scope of Er-EE Rshp if harm (1)Is
4seabl despite all reasonable efforts for the Er to 4stall; (2)Arises characteristically out of & in the course of
Emnt; &, (3)Is w/in the unique nexus/proximity of Emnt.
Frolic & Detour: Frolic takes an EE’s action outside the course of his Emnt, & an Er would probably NOT be
held liable for torts arising during an EE’s frolic bc its unrelated 2 Emplynt; Detours R generally considered 2
fall w/in the course of Emnt b/c EE strays only slightly from direct assignment & an Er would b liable under
RS 4 torts arising during an EE’s detours.
LIAB: A’s Liab 4 Torts: A liable 4 tortious conduct, regardless whthr P is also liable thru vicarious liability.
A’s Liab 4 Ks: A not liable as a party 2 the K that A enters into on b1/2 of a disclosed principal, unless spcl
circumstance &/or parties agree A will b liable under K. Situations where A will b treated as party 2 K;
(1)undisclosed P (A doesnt tell 3rd party they acting on b1/2 of P); or (2)UnID P (P is UnID or partially
disclosed when A tells 3rd party that A is acting on b1/2 of P, but the ID of P is not disclosed; unID party may
not enter into K, A usually treated as a party & is bound).
*Ch 2: Pshps= (1)assoc of 2+ persons, (2)to carry on biz as co-Os, (3)4profit. *Characteristics:
decentralized = all pnrs participate in mgmt Ask: intent of the parties to carry on as co-Os of a definite biz?
Relevant Factors Include:(1)Profit Sharing (unless profits R receved as debt service/wages/rent/annuity or
PA allocates),(2)Contribution (Os make some contribution), (3)Participation in Mgmt/ctrl (not nec 2 have
equal votes/ctrl), (4)Risk of Loss (share in finan losses) & (5)Absence of Alt Classification (not Pshp if
registered as another entity ex. LLC/Corp/etc.)
Pshp Feat: In addition, Liabs (Pnrs are J&SLiab for debts; have pwr 2 create oblgns & liab 4 the Pshp), Tax
Treatment (not taxed on their income; P+L are “passed thru” 2 Pnrs 2 include on their rspctive “personal” tax
returns), Fid duties (owe fid duties to each other & to the Pshp), Distinct entity (treated as a distinct legal
entity, separate from its Pnrs).
Default Rules: Intended 2 fill gaps in agreement/provide guidelines; May NOT b modified 2: *Unreasonably
restrict Pnrs access 2 books & records of the Pshp; Eliminate the gen DoL; Unreasonably reduce the DoC;
Eliminate the oblig of GFFD.
JV: biz endeavor undertaken by 2+ parties; usually has a ltd scope & 4 ltd time.
Pshp by Estoppel: (Pshp may b held liable 4 actions of non-Pnr) (1)Manifestation by Non-Pnr such that he
holds himself out as a Pnr, (2)3rd partys detr rel on Non-Pnrs manifestation, & (3)such detr rel is reasonable.
AppA of a Purported Pnr: Must be traceable back to something Pshp did 2 create that underst&ing; No need
4 party claiming AppA show detr rel.
entities (corp) can b jointly liable 4 some action on basis of being part of shared enterprise. Claimed when
firm debts & oblgns. (factors do exist=Pnr role); do not=status akin 2 EE) (2)whether (& what extent) indv’s
compensation based on firm’s profits & whether they receive fringe benefits (Ind subj 2 firms econ fortunes,
status resembles Pnr; paid salary=akin 2 EE) (3)Rght 2 engage in policy making; Participation in & votng pwr
w/ regard 2 firm governance; Ability 2 assign work & 2 direct the activities of EEs w/in firm; & The ability 2 act
4 the firm & its Ps.
Pshp Mgmt: Any Pnr has pwr 2 bind a Pshp in regards 2 day2day operations; bigger decisions/change 2 its
day2day operations; Maj vote typically appropriate. Std default rule-each Pnr has one vote. For Really BIG
decisions; Outside ordinary course of biz, require unanimous approval.
*Pshp Rule of Thumb: Absent PA contrary, diff arising b/w Pnrs as 2 ordinary matters connected w/ Pshp
biz must b decided by maj vote; Status quo remains in place unless by PA or a maj vote or Dissolve.
Pshp Finan Struc (w/oPA), Each Pnr chargeable 4 losses of Pshp in same proportion that Pnrs share
profits.
Interests Pnrs Hold:*Econ rghts:Includes the rght 2 receive $ [Econ rghts R transferable; When
transferred, transferor Pnr will sometimes still hold mgmt rghts in the Pshp. May obtain an econ interest in
several ways: (1)By voluntary transfer; (2)By invol transfer which may occur due 2 enforcement of judgment
against him/her; or (3)Following death of the transferor Pnr] *Mgmt rghts: Includes rght 2 vote & participate in
mgmt of Pshp. Mgmt rghts R not transferable w/out consent of ALL the Pnrs.
Pshp Prop: Econ rghts dont entitle 2 any rght in any of the specific prop of the Pshp. (ALL prop acquired by
the Pshp is prop of the Pshp & not of Pnrs indvly)
*FiD & Other Duties in Pshp: (1)Pshp DoC: Std by which Pshp must evaluate & make Pshp decisions.
RUPA §404c Pnr violates DoC if they engage in: *Gross negl, *Reckless conduct, *Intentional misconduct,
& *knowing violation of the law. (2)Pshp DoL: Pnrs have oblgns; 2 account 2 Pshp 4 profits, prop or benefits
from the conduct (or winding up) of Pshp biz or use of Pshp prop; Cant act as/on b1/2 of party w/ adverse
interest 2 the Pshp; & 2 refrain from competing w/ Pshp in the subj matter of the Pshp biz (Pnr not 2 take
opportunities belonging 2 Pshp; May take opportunity 4 personal benefit if they (1)Disclose the opportunity 2
the other Pnrs & Pshp; & (2)Give the Pshp opportunity 2 act & if it declines, get Pshps consent 4 Pnr 2 take
opportunity. Pnr must perform duties 2 Pshp & Pnrs consis w/ Implied Covenant of GFFD (not consid Fid
Duty). Pnrs can waive specific duties (categ of act dont viol DoL) but not gen duties (DoL). Wvr occurs b4
the fact, & ratification occurs after the fact. Ratification more informed action; 2 b effective Pnrs ratifying
action must b fully informed.
Pshp Dissolution/Dissociation: 3phases when Pshp ends; (1)Dissolution, (Signals end of prior
constitution of the Pshp), (2)Winding up (Neutral period b4 termination when Pshp must conclude its biz/sell
its assets/pay creditors/make distributions 2 its Pnrs) & (3)Termination (Once the winding up phase has been
concluded, the Pshp is terminated). Note: even following dissolution, Pnrs may vote 2 continue Pshp, rathr
than proceeding 2 termination; vote of ALL the Pnrs is required. During winding up phase, the Pshp may not
embark upon new biz.
(B4 RUPA, when Pnr left, deemed dissolution; remaining Pnrs would vote either 2 continue Pshp or not)
*Dissociation: When Pnr leaves a firm voluntarily/involuntarily (expulsion/death). If Pnr doesnt have rght 2
leave the Pshp, dissociation is wrongful & dissociated Pnr might b liable 2 Pshp 4 damages. *Default Rules
Provide: If a Pshp is 4 term/undertaking, dissociation b4 completion of term 4 undertaking (unless provided 4
in PA) would b wrongful; Any dissociation violating the PA would b wrongful; However, Pnr may dissociate
from at-will Pshp at any time, provided the PA doesnt provide otherwise. (Whether or not the dissociation was
wrongful, the dissociated Pnr entitled 2 receive funds, representing their share of Pshp (minus any
damages)) -Under RUPA, assuming Pnrs dissociation doesnt result in dissolution & winding up of Pshp biz,
dissociated Pnrs usually entitled 2 greater of their share of *going concern value (value of Pshp as an
operating entity (w/out dissociated Pnr)) or *liquidation value (value 1 could get 4 selling all biz assets),
minus damages, if any, 4 the pnrs wrongful dissociation & minus other amounts that might be owed 2 the
Pshp. Pshp at-will: Dissociated Pnrs typically entitled 2 his/her share of biz w/in 120 days after dissociating.
Pshp 4 term/undertaking: Dissociated Pnr not entitled 2 b paid 4 his/her share of Pshp until end of term/
completion of the undertaking.
LimPshps (LP): (not subj 2 veil piercing) LPshps R governed by PA. *One Ltd Pnr; & (not PersLiab/involved
in Daily Mgmt)(Liab lim 2 amount invested) *Cant bind LP; may not exercise AA/AppA; *No Fid duties;
*Bound 2 exercise any rghts they have consistent w/ oblgn of GFFD. *Invlvmnt, like their Liab=ltd; If they
participate in ctrl, risk losing their ltd status & may incur PersLiab. (restriction on participation in biz known
as“ctrl rule”) *LPs R protected from unLimLiab 2 creditors of firm (however, may still incur Liab for $ they
receive in form of improper distributions or fraudulent transfers) *One Gen. Pnr (responsible 4 mgmt) *Has
personal Liab 4 the debts & oblgns; No requirement that it b indv (some form Corp 2 serve as GP).*FiD
duties akin 2 duties of Pnrs in a Gen Pshp. States following ULPA approach: LPs dont incur PersLiab 4
participating in mgmt unless they take other action 2 incur Liab. Other States: Lps only incur Liab if: (1)LP
participates in ctrl, (2)3rd parties aware LP participates in ctrl, & (3)3rd party does biz w/ the LP w/
reasonable belief that LP is a GP.*Safe Harbor Areas LP’s 2 participate: Being K'or 4 orAorEE of LP or of
Gen Pnr of the LP; Being an Off, Dir, or SH of a Corp Gen Pnr of the LP; Consulting w/ & advising Gen Pnr
w/ rspct 2 LP biz; Acting as surety or guarantor of LP; Requesting/attending a mtg of Pnrs; votng; & Winding
up Pshp.
Transfrblty of LimPnr Intst: May trans econ intrst w/out consent of other Pnrs, but requires consent of other
Pnrs 2 trnsfr Lim Pnr status; GP more restricted w/ rght 2 transfer GP interest in LPshp.
Dissociation from Pnrshp: At-will Pnrshp - LPnrs has rght 2 dissociate from Pnrshp; 4 term/undertaking -
LPnrs may not dissociate w/out incurring Liab 4 wrongful dissociation.
LLCs: (offer tax structure & flexibility of Pshp & LimLiab of Corp)* Formed by filing Art of Org w/ Sec of St in
St wishng 2 form entity. *Operating Ag governs LLC & St statute (def rules) fill gaps. Significant Features:
(1)LimLiab (2)Pass thru taxation (3)Os ability 2 participate in mgmt w/out risking Liab (4)flexbl in ability 2
allocate P+L 2 membrs (5)flex. & choices in entitys mgmt (centralized/decentralized) (6)Pshp like
FiD(ManMan/MemMan).
MemMan:(has Pshp feel) Os referred 2 as Mem; engaged in daily operation as A of LLC (has AppA in
day2day biz); States split (vote 1 per or by % but typically set in Op Ag)
ManMan: Ppl who operate R Managers; respons set4th Op Ag (has AppA in day2day biz) No req Man b
Mem (has AppA in day2day biz unless Man had no AA, and 3rd knw Man lacked AA)
Taxation: (dont pay taxes)(sim 2 pshp) P+L are passd thru 2 mem who r responsible 4 paying tax on the
profits & will b able 2 report losses on their rspctive personal income tax returns
Liab 4 the Mem:Os have LimLiab; Not PersLiab 4 debts/oblgn of Biz; Can pierce LLC veil (std same as 4
corp.veil) (unity of interest/disregard 4 entitys sep existence+some fraud-like conduct/injustice); Violation of
unity of interest is by *co-mingling funds, *no sep. fin records; *fail2rspct sep existence of LLC; or
*undercapitalization. NOT 4 failin 2 have formal mtgs/maintain min.
Transferability:(sim2pshp)(mbrshp interest not transferable w/out consent of other Mem) *attempted transfer
winds up in transfer of mem econ intrst (not mgmt interest) Trnsfree would only have rght 2 receive funds.
Dissociation:(When mem leaves LLC) Dissociation may b Voluntary (“Im leavng) /Involuntary (“Uve been
expelld”) Usually entitled 2 receive value of her interest, less any damages caused by dissociation if
dissociation is “wrongful.”
LLC 4 term or an undertaking?; dissociating member may need 2 wait 2 receive payment for her interest until
the end of the term/undertaking.
Dissolution: Statutes provide LLCs existence continues until its dissolved. Will typically b dissolved & affairs
wound up as per Op Ag or upon vote of its Mems.
*Ch3: CORP Structure: centralized=core group manages firm.
-Promoters (DoC/DoL) organize & make other arrngmnt b4 corp formed (lay grndwrk)(bound 2 K entered on
b1/2 of corp not yet been formed, UNLESS clear intent not 2 bound*Once formed, may b bound by K, but
only if Corp agrees by adopting K: *express/impliedly ratifying K (novation/paying rent 4 lease);
accepting/acknowledging benefits of K. *Remains bound unless there’s agreement (novation=bye old k, Hi
new K) 2 release from Liab (clear intent by both). -Incorprs actually work 4 Corp/execute ArtInc
Characteristics:Corp considered sep person from its Os; SH: own corp/no participation direct w/ mgmt; Vote
on certain matters=*Elect Dir; *amend ArtInc+bylaw; *fund trans (merger/acquis); *Misc mattrs. Entitled 2
Residual Intrst in assets of Corp (Upon liquidation, SH entitled 2 assets left after oblgation saitsfied) BOD:
elected by SH; resp 2 SH for managing; appoint Corp Off 2 manage day2day biz
Formation:Created under St law; ArtInc filed w/ SoS in St; once properly filed, Corp established & known de
jure Corp
De Facto (equitable doc): Corp not properly formed, yet would-be SHs believe/act as corp properly formed.
Os must establish:(1)they made GF, sub effort 2 comply w/ St Inc statute; (2)biz had legal rght 2 inc; &
(3)parties involved had GF belief & acted as if formed corp. Most St provide notice when ArtInc R/Rnt
properly filed. Incorprs will almost always have notice (or constructive notice) of whether the ArtInc were
successfully filed.(*Hard 2 have GF belief corp been formed when it has not-St refuse 2 apply De Facto)
*When De Facto corp status unavailable, still possible P of Corp b protected by Corp by Estoppel. If 3rd party
treats org like corp, 3rd party may b estopped from denying org’s Corp existence if denial would result in
unjust harm 2 Ps. Conversely, if org holds itself out as Corp (even if not), that org will b estopped from
denying its own corp existence 2 avoid an oblgn or 2 obtain an unfair benefit.
Corp Operates as Sep Person:“making its own decisions” thru its BOD*May sue/b sued; *Must have PPB;
*Must have A 4 service of process in St formed so public record where Corp may b srvd; *Must file tax
returns+pay taxes. -Since Corp sep from its Os, when corp wants 2 take money out of corp & give 2 SHs,
SHs required 2 pay taxes = dbl taxation. Avoid x2 taxation; *selecting diff entity; *avoiding dividends &
increasing value of biz (recognized in form of capital gains, following sale of biz); *s-corp status. S-corp
(afforded pass thru tax status of a pshp) Strict Qualifying Requirements: strict internal revenue code
conditions Including: b domestic corps wholly owned by persons, NOT entities, who are U.S. citizens + 100
or less SHs
LimLiab: SH of Corp not PersLiab 4 acts/debts of Corp since corp sep person under law. SH ltd 2 amount
they investd; Corp creditors can look only 2 corp assets 4 payment, so long as basic rules followed: *SHs
must treat corp as separate person & not as extension of themselves. Key Corp Formalities: *Formal
SHs/BoD mtgs+maintain mins; *Elect Dir; *Separate Bnk accounts/no commingling funds; *Corp funds/trans
separate from ind funds/trans; *Adequate capitalization; *ID Biz as Corp. LimLiab Xception: If $$ supposed 2
stay in Corp, but taken out as fraudulent conveyance/transfer or improper dividend. Biggest Exception:
Piercing Corp Veil (only 4 prvt/closely held corp)-SH loses protection of corps liab shield & becomes
PersLiab. Creditor can disregard Corp prtction & pursue Pers Assets of SHs.Note on Enterprise Liab: Ind
(corp has a preexisting K’l rght), *expectancy (Corp doesn’t have legal rght yet, but given other dealings,
theres common Oshp among 2+ corp (sister corp). CANT use enterprise Liab 2 pierce corp veil.
Piercing Veil in LLC: Mentioned in Chpt 2; 2 Prong Test: (1)Is the unity of interest & Oshp such that
separate personalities of corp & the indv SH no longer exist? &,(2)Would equitable result occur if acts R
treated as those of corp alone (injustice would result if percing werent allowed)? LLCs less formalities; harder
2 show unity of interest based on failure 2 follow formalities. *LAYA Factors: Consider when piercing corp
veil; *Commingling F/A w/ ind SHs; *Diversion of corp's F/A 2 non-corporate uses; *Failure 2 maintain
corporate formalities necessary 4 stock issuance; *SHs representing 2 persons outside the corp that they R
PersLiab; *Failure 2 maintain mins/adequate records; *Identical equitable Oshp in 2 entities; *Failure 2
adequately capitalize Corp; *Absence of sep held Corporate assets; *Use of same office/biz location by corp
& its indv SHs;
Rev Piercing: Direction of piercing diff, BUT test same. Occurs when claim against ind SH is found 2 b
enforceable directly against corp in which ind is a SH.
Piercing b/w Parent & Subsd Corps: Std 4 piercing same, but Cts R frequently less rigorous that fraud-like
conduct or injustice b shown. Cts look 4 interlocking BoD b/w parent & subsdy as indication that sub is
not“separate.” Just like Corp must b separate from SHs, sub corp must b separate & independent from its
parent or risks piercing.
Alter Ego Doctrine: Imposes Liab on Corp 4 acts of its sub when sub is organized/operated as mere tool/biz
conduit. Applies when theres such unity b/w parent & subsdy that the separateness of the 2 corps has
ceased & holding only the subsdy corp. liable would result in an injustice. Single biz Enterprise Theory: When
Corps R operated as separate entities but integrate their resources 2 achieve common biz purpose, each
constituent Corp may b held liable 4 debts incurred in pursuit of that biz purpose. Totality of Cir: must b
evaluated whether subsdy may b found 2 b alter ego/mere instrumentality of parent corp. Factors 2 b
considered R whether: *Parent & Sub have common Dirs/Offs, *have common biz departments; *file
consolidated financial statements & tax returns; *Parent finances the subsdy; *Sub receives no biz except
that given to it by the parent; *Daily operations of the 2 corp are not kept separate.
Other Claims that Might B Made Against Personal Assets of SHs: *Actual Fraud;*Fraudulent
conveyances/transfers;*Improper dividends;*Negl (If SH commits neg act on b1/2 of corp &, as direct result,
sum1 is injured; injured party may sue corp but may also sue negl indvdl);&,*Personal guaranty of corp oblgn
by SH (No need 2 pierce corp veil; SH already PersLiab under volun. k prom to pay on b1/2 of corp.
*Ch 4: DoC/GOOD FAITH:Progression of Derivative Suit: SHs Derivative suits brought by SH on b1/2 of
Corp claiming some harm suffered by 3rd party (including Dir(s)) claiming they caused/allowed harm 2 occur.
(1) SHs must b eligible 2 file claim; (2) SHs must file demand on BoD 2 bring suit; (3)BoD can accept (Corp
will file suit), reject (SHs can file suit), not act (no action by Corp w/in 90day, SHs file)
Pwr/Scope/Purpose of Corporate Auth: Dir R charged w/ responsibility of maximizing value ofCorp 4 its
SHs. Actions not consistent w/ objective may not b deemed 2 b w/in scope of Corp authority. Scope & limits
R set in Corps ArtInc/bylaws. Historically, actions outside of Corp purpose were considered 2 b void(able)
under Ultra Vires; Doctrine seldom used; Issues now challenged under category of “waste.”
“A trans constitutes ‘waste of corp assets’ if it involves expenditure of Corp funds/disposition Corp assets 4
which no consid is received in exchange & 4 which theres no rational biz purpose, or, if consideration is
received in exchange, considration is so inadequate in value that no person of ordinary sound biz judgment
would deem it worth that which corp has paid.”*Dirs still can act outside Corp’s charter (i.e. through
waste/excessive charitable acts.); Look whether theres direct/indirect benefit 2 Corp/SHs. Gift made 2 Pet
Charity? Large gift relative 2 corporate earnings/assets? Was gift anonymous?
Charitable Acts: can b made as long they R; *In reasonable amounts; *Not made indiscriminately/2 pet
charities; & w/ reasonable belief donation will advance Corps interests w/in community in which it operates.
Corp duty/purpose is 2 maximize wealth or value 4 its SHs, thus, excessive charitable acts may not be done
at their expense; Assets must be used toward the corporate purpose of maximizing SH value & to accomplish
this goal, the co may not engage in “wasteful” acts.
Scrutiny of Corporate Actions: Discretion of Dir won’t B interfered w/ by the Cts, unless there *bad faith,
*willful neglect, or *abuse of discretion.
DOC: §4.01(a): Dir/Off has duty 2 Corp 2 perform their functions in (1)good faith, & (2)in manner they
reasonably believe 2 b in best interests of Corp. DoC establishes std of conduct, any allegation that Dir
breached DoC still subj 2 fundamental principles of tort law; Π must still show Dir failure led 2/was cause of
loss, which π alleged 2 have suffered.
BJR: Usually protects Dir from Liab against DoC claims; If biz decisions made by Dir R Informed, BJR will
protect Dir from Liab that challenge their biz judgment, UNLESS theres a showing of *Fraud, *Illegality,
*Conflict of Interest, *Bad Faith, *Egregious decision, or, *Waste. Even if FICBEW present, no instant Liab; Π
still must prove: (1)Dir breached DoC (gross negl std), & (2)Damages. Key point: Not about protecting good
decisions; about protecting bad decisions in GF. Prevents Cts from 2nd guessing the Biz Judgmnt of Dir.
BJR Procedural & Substantive Requirements: Must satisfy both 2 b afforded protection; (1)Procedural:
*Decisions must b informed; *keep sufficient records/documents that decisions R indeed informed; *Dir must
actually make decision. 2 Avoid Liab 4 breach of DoC on PRC grounds, Dir should: *Keep informed about &
properly oversee Corp activities & policies; *B adequately informed about Corp biz, its interests & relevant
issues, b4 making decisions; *Possess min lvl of skill & expertise w/ regard 2 role of Dir 4 specific biz; &, B
aware of Fin status of Corp. (2)Substantive: Refrain from FICBEW*
Intrinsic & Entire Fairness as Def in DoC Actions: Affirm Def; looks 2 whether consid receivd by corp in
particular trans was fair. Dir not subj 2 Liab 4 trans beneficial, fair or causing NO injury 2 corp even if trans
constituted a breach of DoC.
Informed Decisions: BJR ONLY protects informed decisions; Even if decision is not 2 act, decision itself
must b informed. *Francis v. United Jersey Bank: Dir has duty 2 know biz affairs of corp; *includes basic
underst&ing of what Co does; *being informed on how Co is performing; *monitoring corporate affairs &
policies; *attending board mtgs regularly; & *making inquiries into questionable matters. §4.01(c)(2):biz
judgment is informedif Dir reasonably believes 2 b appropriate under the circumstances. “Reasonable
belief” test factors: (i)importance of biz judgment 2 b made; (ii)time available 4 obtaining info; (iii)costs related
2 obtaining info; (iv)Dirs confidence in those who explored a matter & those making presentations; & (v)state
of Corp biz at time & nature of competing demands 4 boards attention. -Model Biz Corps Act permits rel by
Dir on “outside advisers” extending beyond lawyers & accts. Duty of Care Breach Analysis: (1)π sues;
(2)Does BJR Apply? [applies?; we can stop, if not; Procedural(informed decision analysis),
Substantive(FICBEW exceptions apply?) Even if no BJR protection, Dir may still b off the hook! Dirs bad faith
may b cleansed by full disclosure+approval by: *Disinterested Dirs (not involved w/ bad faith actions) or,
*SHs. (3)If BJR doesnt apply & there was breach of DoC, R there affirmative defenses? (Intrinsic fairness
defense (action fair/beneficial/no injury), Entire Fairness [used in mergers & acquisitions(Intrinsic fairness &
Procedural Fairness)]
Do Off & Dir Have Diff Duties?: Off have diff responsibilities in acting in accordance w/ their respective
DoC. Split of Auth: *Some dont allow Off of Corp 2 avail 2 BJR; 18 Jxs do. Even in JX where BJR not
available 2 Corps Off, π still must show that those Off breached their DoC 2 prevail in any action. §307 of
Sarbanes Oxley Act (PR); Steps attorney must take if there’s evidence of material violation of securities law
or breach of duty or similar violation by the Co or any A: (1)Report such evidence 2 chief legal counsel or
CEO (or equivalent). If that person doesnt respond appropriately, (2)Report such evidence 2 audit committee,
another committee of indpdnt Dir, or full BoD. If the co doesnt take appropriate action, then, (3)Attorney must
w/draw from representation.
Failure 2 Act/Monitor the Firm: *Caremark claims; Where entire board accused of failing 2 act, BJR not
available (BJR only protects judgments); Involves instances of corporate wrongdoing, which BoD accused of
failing 2 detect, prevent or stop. (1) Unless suspicion of wrongdoing, theres no duty upon board 2 install &
operate corporate system 2 find wrongdoing board doesnt suspect/believe exists. (2) Board must attempt in
good faith 2 ensure that adequate reporting system is in place so that board can obtain necessary info 2
make informed decisions. 1way is 2 establish compliance programs; *policy manuals, *employee training,
*audits, *sanctions 4 violations, & *provisions 4 self-reporting violations 2 regulators. *Provided that Dirs dont
have info something improper is occurring & theres good system in place 4 corporate info, Dirs arent liable 4
failing 2 monitor. *Recent cases, absent showing of bad faith, Dir wont b liable 4 failure 2 exercise
oversight; Stone Court “Only sustained/systematic failure of board 2 exercise oversight such as utter failed
attempt 2 assure reasonable info & reporting system exists will establish the lack of GF thats nec condition 2
liab.” Other cases, once a Dir is aware of wrongdoing, if Dir fails 2 take adequate action, that failure is
evaluated under gross negl std.
The Oblgn 4 Fiducs 2 Act in GF: Dir has duty 2 act in Good Faith; Provides basic std, w/out which
protections of BJR won’t apply. Unless breach of DoL or *acts/omissions not in *GF, *Intentional misconduct,
or *knowing violation of law, Dir not PersLiab. Bad Faith Claims (3types); (1)Subjective Bad Faith =motivated
by intent 2 do harm, (2)Lack of Due Care/Fiduciary action taken solely by reason of gross negligence &
w/out any malevolent intent, (3) intentional dereliction of duty, or conscious disregard 4 1s responsibilities
(more culpable than gross negl.)
*Ch5: DoL Requires FiD (Off/Dir) 2 put interests of Corp b4 theirs. Arises when Dir involved in situation
where COI. COI: When Dir knows at time hes askd 2 take action w/ regard 2 potential trans, that he or
person related 2 him; (1)is a party 2 trans, or (2)has beneficial financial interest in trans, & then exercises his
influence 2 detriment of the Corp. COI include: *self-dealing (when Fid 4 Corp enters into trans w/ themselves
or w/ entity in which they (or fam mem) have substnl financial interest); *taking corporate opportunity (when
FiD 4 corp misappropriates an Opp that belongs 2 Corp); *executive compensation (when execs whose comp
at issue R also on BoD that votes 2 determine their comp); *& other situations which a Fids Pers financial
intrst of the Corp. Alleged Violation DoL, Analy: *Is there a true conflict of interest? *If there is a CoI, has
the fiduciary (or fiduciaries) breached a duty 2 put Corp interests ahead of their own interest? *If so, can
conflict & breach b cleansed?(3types)(May be cleansed if; (1)after full discl, approved by maj vote of
disinterested Dir; (2)ratified by SHs; or (3)shown 2 b intrinsically fair 2 Corp) *If hasn’t been cleansed, trans
can still be upheld IF its fair 2 Corp (use intrinsic fairness std; 4 merger/buyout use entire fairness std) *If
hasn’t been cleansed & doesnt hold up 2 intrinsic or entire fairness stds, trans voidable + FiD who violated
DoL may b liable.
Problems w/ 50-50 Oshp: If irresolvable dispute,*Corp might not b able 2 function, *1side might need 2 take
action 2 run biz & risk future challenge,*co can b forced into liquidation, dissolution, etc.
Corporate Opp Doctr: Not Sep Duty; Subset of DoL. Stands 4 principal that FiD (Off/Dir) of Corp may not
take, 4 personal gain, an Opp (like biz venture/new Opp/Discovry) which firm has Prop rght & use it 4 their
own advantage w/out 1st offering 2 Corp. Early Def of Corp Opp was sumthing which corp had; *interests
reasonable expectancy that opp would b offered e.g., lease renewal); or *necessity (Corp needs in order 2
stay in biz, e.g., certain raw materials necessary 2 manuf prdct) Ask yourself: (1)Is opp consistent w/ corps
current/anticipated future biz?; (2)Does corp even have resources 2 pursue the opp? Line of Biz Test:
*wheres corp now & where might it logically expand in the future taking into consideration financial
constraints; Fairness Test: (NOT used in CA or DE) *Looks whether FiD taking a corporate Opp
violated whats considered fair & equitable by corporate stds. Idea behind the test: If the opp falls w/in
corps biz or its prospective biz, should still b deemed 2 b corporate opp; Hybrid tests include the Line of Biz
concept & some aspect of interest, expectancy, & necessity tests. Some St employ fairness test; under
fairness test, 1 would need 2 determine whether Off/Dir taking Opp would violate stds of whats fair &
equitable by corporate stds. Common Defenses: Even if Opp fall under 1 of above tests, might still b
found NOT 2 qualify as Corporate Opp (1)Incapacity: Circumstances where Corp not able 2 take
advantage of Opp; Corp couldnt take advantage of Opp b/c of Legal Restrictions (anti-trust laws, K
restrictions in a loan agreement, or Corp in bankruptcy, thus subj 2 restrictions on biz dealings); Practical
Restrictions (Corp didnt have financial resources 2 purchase particular Opp, or holder of Opp refused 2 deal
w/ corp, or Corp lacked skills 2 engage in Opp). (2)Source: Opp presented 2 sum1, NOT b/c corporate
position BUT b/c of their personal skills/attributes/expertise. (Deemed not 2 b corporate opportunity b/c Opp
is determined 2 belong 2 the indv, not 2 Corp) If Corporate Opp exists, a person wishing 2 take advantage
of the Opp must fully disclose the Opp + their interest in Opp 2 BoD. (BoD has first rght of refusal on Opp) If
BoD DOESN’T properly reject Opp, & indv takes Opp, breach may still b cleansed by disclosure 2, &
approval by, the SHs or by showing that trans was fair. Violation of the Corporate Opp Doctrine subj 2
various equitable remedies (such as constructive trust). No liability 4 possessing/knowing about corporate
Opp. Corporate Opp Doctr Analy: *Line of Biz Test (most common)(Off/Dir may not take biz opp 4 his
own if: (1)Corp can financially exploit the opp; (2)Opp w/in Corp line of biz; (3)Corp has interest/expectancy in
Opp; (4)Off/Dir has not wrongfully employed Corp resources in pursuing/exploiting Opp; *Fairness Test;
*Combined Biz/Fairness test; *ALI Approach (rarely used)(when Dir of corp presented w/ a biz opp closely
related 2 a biz in which corp is engaged, Dir must fully disclose the Opp 2 the corp; Only after corp formally
rejected Opp, Dir may take advantage of Opp; Approach “protects the DoL while providing long-needed
clarity+guidance 4 corporate decision makers)
Dominant SH & the DoL: Dom SH has more influence over the Corp & over BoD. Most Cts don’t allow
interested trans w/ Dom SH 2 b cleansed by vote of BoD, since BoD has been selected by that same SH.
*How can an interested trans w/ Dom SH b cleared? Intrinsically fair standard unless merger or more
significant trans is involved in which case an Entire fairness standard (requiring showing that procedures
assoc’d w/ trans+price of trans was fair) is used.
Transfers of Ctrl: Dom SHs have ability directly/indirectly have ability 2 exercise ctrl over corp. Ctrlling SHs
may determine All or Maj of indvs who will serve as corp BoD. BoD elect corp Off, thus, ctrl has substantial
value. Easiest way 2 Purchase Ctrl is purchase ctrlling block of stock in corp from another SH. Usually
purchased in excess of market value, thus, aka “ctrl premium.” *Absent looting of corporate assets,
conversion of Corp Opp, fraud, or other acts of bad faith, ctrlling SH free 2 sell, & purchaser free 2 buy that
interest at premium. (Cant buy board seat; SH may sell ctrl of, not officers in, a corp.) Note: Some Cts allow
selling SH 2 facilitate resignation of existing BoD 2 b replaced w/ purchasers nominees, rather than waiting 4
term 2 end. (fruits of ctrl)
Duties in Agency:
§8.01. Gen. Fid Principle: An A has Fid Duty 2 act loyally 4 P’s benefit in all matters connected w/ the
agency Rshp.
§8.02. Material Benefit Arising out of Position: An A has a duty not to acquire a material benefit from a 3rd
party in connection w/ transs conducted or other actions taken on b1/2 of the P or otherwise through the A’s
use of the A’s position.
§8.03. Acting as or on b1/2 of Adverse Party: An A has a duty not to deal w/ the P as or on b1/2 of an
adverse party in a trans connected w/ the agency Rshp.
§8.04. Competition: Throughout the duration of an agency Rshp, an A has a duty to refrain from competing
w/ the P & from taking action on b1/2 of or otherwise assisting the P’s competitors. During that time, an A
may take action, not otherwise wrongful, to prepare for competition following termination of the agency Rshp.
§8.05. Use of P’s Prop; Use of Conf Info: An A has a duty (1)not to use prop of the P for the A’s own
purposes or those of a 3rd party; & (2)not to use or communicate confidential info of the P for the A’s own
purposes or those of a 3rd party.
§8.06. P’s Consent:
Conduct by an A that would otherwise constitute a breach of duty as stated in §§ 8.01-.05 does not constitute
a breach of duty if the P consents to the conduct, provided that (a) In obtaining the P’s consent, the A
(i) Acts in GF; (ii) Discloses all material facts that the A knows, has reason to know, or should know would
reasonably affect P’s judgment unless P has manifested that such facts are already known by the P or that
the P does not wish to know them, &; (iii) Otherwise deals fairly w/ the P; &, (b) The P’s consent concerns
either a specific act or trans, or acts or transs of a specified type that could reasonably be expected to occur
in the ordinary course of the agency Rshp. (2) An A who acts for more than one P in a trans b/w or among
them has a duty (a) To deal in GF w/ each P, (b) To disclose to each P (i) The fact that the A acts for the
other P or Ps, & (ii) All other facts that the A knows, has reason to know, or should know would reasonably
affect P’s judgment unless P has manifested that such facts are already known by the P or that the P does
not wish to know them, & (c) Otherwise to deal fairly w/ each P.
§8.07. Duty Created by K: An A has a duty to act in accordance w/ the express & implied terms of any K b/w
the A & P.
§8.08. Duties of Care, Competence, & Diligence: Subject to any PA, an A has a duty to P to act w/ care,
competence, & diligence normally exercised by As in similar circumstances. Special skills or knowledge
possessed by an A are circumstances to be taken into account in determining whether the A acted w/ due
care & diligence. If an A claims to possess special skills or knowledge, the A has a duty to the P to act w/ the
care, competence, & diligence normally exercised by As w/ such skills or knowledge.
§8.09. Duty to Act Only w/in Scope of AA & to Comply w/ P’s Lawful Instructions: (1) An A has a duty to
take action only w/in the scope of the A’s AA; (2) An A has a duty to comply w/ all lawful instructions received
from the P & persons designated by the P concerning the A’s actions on b1/2 of the P.
§8.10. Duty of Good Conduct: An A has a duty, w/in the scope of the agency Rshp, to act reasonably & to
refrain from conduct that is likely to damage the P’s enterprise.
§8.11. Duty to Provide Info: An A has a duty to use reasonable effort to provide the P w/ facts that the A
knows, has reason to know, or should know when (1) Subject to any manifestation by the P, the A knows or
has reason to know that the P would wish to have the facts or the facts are material to the A’s duties to the P;
&, (2) The facts can be provided to the P w/out violating a superior duty owed by the A to another person.
§8.12. Duties Regarding P’s Prop – Segregation, Record-Keeping, & Accounting: An A has duty,
subject to any agreement w/ the P, (1) not to deal w/ the P’s prop so that it appears to be A’s prop; (2) not to
mingle the P’s prop w/ anyone else’s; & (3)to keep & render accounts to the P of $ or other prop received or
paid out on the P’s account.
§8.14. Duty to Indemnify: A P has a duty to indemnify an A (1) in accordance w/ the terms of any K b/w
them; & (2) unless otherwise agreed (a) When the A makes a payment (i) w/in the scope of the A’s AA, or (ii)
that is beneficial to the P, unless the A acts officiously in making the payment; or, (b) When the A suffers a
loss that fairly should be borne by the P in light of their Rshp.
§8.15. P’s Duty to Deal Fairly & in GF:
A P has a duty to deal w/ the A fairly & in GF, including a duty to provide the A w/ information about risks of
physical harm or pecuniary loss that the P knows, has reason to know, or should know are present in the A’s
work but unknown to the A.
DIFF Choices in Entities:
LLCs CORPORATIONS
Limited by requirmnt of having
Flexibility of Ctrl BoD w/ each Dir having 1
vote.
Can b MemMan or Potential 2 go public or attract
ManMan certain venture investments.
Can be ctrlld by Ownr w/o Can reinvest earnings at a
Maj Financ'l Intrst lower tax rate
Potential 2 take advantage of
certain tax benefits or avoid
May have Diff votng
phantom income issues that
structures 4 Diff events.
may arise w/ pass thru
taxation.
Non-managing members
may participate in votng in
ways that would b difficult
2 achieve in a Corp Struct.