I. Agency A. In General 1. Policy a) Minimize divergence of interest between principal and agent.

b) Avoid disadvantaging 3rd P who deal with agent instead of principal. (ties go to the 3rd P). 2. Definitions a) A fiduciary relationship, where two parties agree agent will act on behalf of and under the control of the principal. As a fiduciary, have both: (1) Duty of Care: breach = $ damages (2) Duty of Loyalty: cant act on own behalf or 3rd P behalf without disclosing. Breached by self-dealing or usurpation of opportunity. b) Consent, control and on behalf of (exclusivity in the subject matter of the relationship). 3. Formation a) Intent. Not necessary. Intent to do thing that constitute principal/agent makes it so even despite written agreement to contrary. It is an issue of fact. b) Capacity. Any Jure person can be an agency. Rules of infancy apply. Voidable, affirmable upon majority. c) Ramifications (1) If Agent, where they servant. If servant, where they within scope of employment? If yes to all, liable for torts. 4. Categories & Authority a) Servant-type agents (1) An agent over whose moment-to-moment activities the principal/master has the power of direct control (whether exercised or not). (2) Examples: (a) Cook carries pot of coffee out of kitchen, trips, burns customer. Hes probably a servant, and r estaurant is vicariously liable. (b) Cook calls supplier, orders more sugar. In that case, this servant is also an agent as to this transaction (or as restatement puts it, a servant and an independent contractor). Any agent with authority can bind the principal. b) Agents (who are not servants) c) Independent Contractors B. Classification of Principals 1. Disclosed Principal: a) Definition: 3rd P knows theyre dealing with an agent, and they know who the principal is. b) Obligations: Principal liable for K to 3rd P. 3rd P is liable to principle. Agent is not a party to the K. 2. Partially Disclosed Principal: a) Definition: Dealing with an agent, but they dont know who the principal is. b) Obligations: Principal liable for K to 3rd P. 3rd P is liable to principle. Agent is also liable on the K. 3. Undisclosed Principal a) 3rd P is dealing with agent, and thinks they are principal. b) Obligations: Agent is bound to K. Principle is bound to 3rd P, and 3rd Party is also bound to undisclosed principle. C. Classifications and Relationships of Agents 1. Classifications of Agents a) General Agent (1) Does same kind of transaction repeatedly for the same principal. (2) Has apparent authority to enter into K protects 3rd P. (3) 3rd P doesnt have to inquire into their authority. b) Special Agent (1) Authorized to do a one-off transax. Authorized for certain activities. (2) 3rd P has duty to inquire. 2. Relationships Between Agents a) Co-Agents (1) Two or more agents working for same principal. (2) No rights and obligations between co-agents. b) Subagents (1) Created by agent who with permission delegates authority to another. (2) Subagent can go to Principal for agents unfulfilled duties. c) Agents agent (1) Created by agent without permission to delegate. (2) Principal owes no duty to agent. D. Power or Authority of an Agent to Bind Principal 1. Requirements a) Power is limited by authority. b) Agency Authority must eminate from principal. 2. Express Authority. Created by manifestation from principal to agent. a) Actual Authority = Express + Implied 3. Implied Authority. Authority which, though not express, is reasonably necessary to carry out the express authority. 4. Apparent Authority. Created by manifestation from principal to a 3rd P. Effective only as to 3rd P to whom it is made. a) General agent almost certainly has apparent authority. b) Principal is bound by Ks. 5. Agency by Estoppel. Not really agency. Created when a putative principal allows circumstances in which its reasonable and fo reseeable for a 3rd P to rely on appearance of agency, principal is estopped from denying the agency. a) Question for jury. b) Reliance damages. 6. Inherent Agency Power. Indistinct doctrine. Operates where agent lacks actual or apparent authority (no manifestation), but agent has purported to bind principal to a 3rd P who has no notice of the limits on power. a) Most often applied in case of general agents or undisclosed principals.

b) Example: 18 yr old minding store buys copier. Here were have an issue of agency. He is a servant. Argument could be that by leaving him alone in shop, he has inherent agency power to bind the store in K to someone who comes in to make a K. Argument would probably fail b/c buying copier is not in ordinary course of business and b/c copier salesman had been earlier refused. c) Example: Shop sells collectibles, customer comes in and makes offer to the 18 yr old behind the counter for a micky mantle card, sells it for cheap, owner tries to repudiate. Its an agent, servant-type of agent, could use inherent agency to argue K stands. Could also call it apparent authority. 7. Emergency Authority or Power. 8. Ratification. Agent exceeds authority, but principal likes it and vests with authority after the fact. Five prerequisites: a) Principal must have had capacity to take action at time (i.e., no un-formed company). b) No undisclosed principals. c) Ratifying principal must know all material facts. d) Complete ratification only. (i.e., you own torts, etc) e) Ratifying principal must make effective affirmance. (1) Must be unequivocal (2) Must occur before 3rd P disaffirms. (3) If 3rd P has changed circumstances, it can avoid. 9. Restitution: 3rd P can still turn to equity for relief if its performed for benefit of principal. a) Note: If Agent misrepresents their status as agent, its a tort. E. Duties As Between The Parties To an Agency Relationship 1. Agents Duty to Principal. a) Duty of Care: breached by negligence. $$ damages. b) Duty of Loyalty: exclusive representation. c) Full Disclosure of all Facts Pertinent to the Principal. d) Good Faith 2. Principals Duty to the Agent a) Duty of Indemnification. If Agent suffers loss of spends $$ on principals behalf. b) Disclose risk. c) Safe workplace. d) Other duties like keep and render accounts, furnish opportunities, good conduct, pay compensation and not interfere with commission. F. Termination 1. Methods to Terminate a) In general: employer or agent has power to terminate by withdrawing consent. May contract away that right. b) Other methods: (1) Agreement to Terminate. (2) Unilateral Renunciation (3) Expiration of Time. (4) Accomplishment with agencys objective. (5) Impossibility (subject destroyed, etc..) (6) Death or incapacity of agent or principal. Estate of deceased principal is bound to 3rd P who negotiates in good faith with agent, while unaware of death. c) Duties post-termination: Generally competing unfairly. 2. Irrevocable Agencies (Agencies Coupled With An Interest): Example, proxy to bank in security for loan. Usually, proxy is revocable. Not true agency, b/c not revocable, b/c its coupled with an interest. G. Notice, Knowledge and Admissions Chargeable to the Principal From Agents Behavior 1. In General: If its info agent acquires in course of agency, attributable. Notice has two parts: knowledge and notification. 2. Notification: purposeful attempt to change legal relations. Attributable to principal, so long as given at proper time and scope. 3. Knowledge: Info in agents head. Knowledge is attributed to principals head too. 4. Admissions H. Master-Servant 1. In General: Servant is an agent who is subject to power of control over physical conduct. Under respondeat superior, master is liable for physical torts of servants within scope of employment. All question of fact. 2. Respondeat Superior a) Control: Principals Right of Control is the chief factor in establishing master-servant. Under SC Law (see YELLOW CAB and WILKINSON), four elements of servant-hood. Any one can be sufficient. (1) Direct evidence of right to exercise control (2) Method of payment. If paid by job, more like an IC than employee. (3) Furnishing of equipment. If they furnish own equipment, more like an IC. (4) Right to Fire. Do they become unemployed if theyre fired? If not, they are an IC. b) Masters Liability: Master is liable for physical torts of servants within scope of employment. Goal of scope of employment principle is to correctly determine whether this is a normal risk that should be born by the business. (1) (Restatement) Employee is in scope when conduct (a) Is of kind employed to perform (b) Occurs substantially within authorized time and space limits (c) Actuated, at least in part, by purpose to serve the master (d) If force is intentionally used by servant, use of force is not unexpectable to the master. (2) South Carolina (a) Really a three part test: place, time, intent to serve the employer (i) If doing some act in furtherance of employer, within scope even if acting outside of masters instructions. (ii) If on frolic, wholly disconnected from employers business, employer not liable. (b) SC Examples (i) Use of instrumentality not furnished by master. If instrumentality was expressly or impliedly authorized by master, liable. (ii) Smoking. Generally outside scope. If employer aware of behavior and it increases risk, could be held guilty for negligence. Still on job during smoking break b/c its for employers benefit.

(iii) Servant Disregarding Instructions. Unless a frolic, its still probably within scope. If its a direct disregarding (i.e., t akes the car after told not to), may be frolic. (iv) Owner in Car. Creates rebuttable presumption that driver is owners servant. c) Borrowed Servants: Person may be servant to two masters. Issue is which master was in control of the details of work at moment of actionable event. d) DOE: Doctrine of Negligent Hiring and Retention applies in SC. Fundamental elements are (i) knowledge of the employer of the employees propensity, and (ii) forseeability of harm to others [even when acting outside scope of employment]. One previous assault was nt enough to be knowledge. II. Business Organizations A. Introduction 1. Start essay with: Partnership is an association of two or more persons to carry on as co-owners of a business for profit. 2. A corporation is a separate legal person that has powers, interests, and obligations of its own that are distinct from those of its shareholders, directors, and officers. The *SC Business Corporation Act (BCA) governs corporations in *SC, as supplemented by their articles, bylaws, and shareholder agreements. 3. Summary of most commonly tested issues: a) To pierce the corporate veil, a plaintiff must demonstrate the shareholders have ignored the corporate form such as undercapitalization, commingling of corporate funds with the shareholders own funds, shareholders have treated the corporation as a mere extension of their own affairs, or ignoring corporate formalities. b) Shareholder rights include election of the board, the right to vote, the right to approve or disapprove extraordinary acts, to amend the bylaws, to receive their ratable share of distributions, to be protected from personal liability, to have limited access to information, and to bring derivative actions B. General Partnerships 1. Definition a) An association of two or more persons to carry on as co-owners of a business for profit. 2. Creation a) Based on agreement oral, written, or inferred b) A contract is not necessary to form a partnership (unless Statute of Frauds requires), and a contract that expressly disclaims partnership is not dispositive of the question but can be evidence. c) Any legal person (including corporations) can be a partner; infants can be a partner, although voidable by the infant. 3. Evidence of Association a) Controlling factor is intent. There does not have to be intent to be partners, only the intent to do those things that in law makes them partners. b) Courts will look at sharing of profits, management practices, amount and type of services rendered, record title to any property (1) Sharing profits creates a rebuttable prima facie case that a partnership exists. Sharing of losses is also relevant to question. (2) Joint ownership of property does not in itself establish a partnership. c) Whether a partnership exists is a question of fact. d) Partnership by Estoppel: If a person is represented by words or acts, and with consent, to any third party as a partner in an existing or illusory partnership, a partnership by estoppel will result so long as the third partys reliance was foreseeable and reliable, and th e third party has detrimentally relied. 4. Relationships Among Partners and with Third Parties a) Powers (1) Each partner is a principal and an agent of the other parties, with the highest of fiduciary duty. (2) A partner has apparent authority to bind the partnership (but only) within the ordinary course/scope of its business except as to third parties with contrary knowledge. (a) Acts of partners outside the scope of the business can be ratified and be binding on the parties. Most common form of ratification is acceptance and retention of benefits of the transaction with knowledge thereof. (3) Partners manage the partnership. (4) Partners are jointly and severally liable for all obligations of the partnership. (5) Exceptions: assigning partnership property in trust for creditors, disposing of good will, confessing a judgment, submitting partnership claim or liability to arbitration, any other act making it impossible to carry on regular business b) Notice (1) Notification to a partner, or knowledge acquired by a partner while engaged in partnership affairs, is binding on the firm except when the partner is engaging in fraud. c) Liability (1) Nature of Liability (a) A partnership can be sued or sue in its own name. Personal assets of partners can be attacked if judgment exceeds the partnership assets if partner was joined in the lawsuit (so go ahead and join all partners). (b) Partners admissions and representations made within the scope of their authority bind the partnership. (2) Extent of Liability (a) Partnership is responsible for all torts of partners committed while acting on partnership business. (b) A new partner is responsible for all the existing debts of the partnership, but only to the extent of their investment can only be satisfied out of partnership property (c) A partner is entitled to indemnification by the partnership for payments made on its behalf in excess of his pro rata share 5. The Partnership Business a) Underlying Rules (1) Applicable Law/Rules (a) Partnership agreement (b) If none or for issues not in partnership agreement Uniform Partnership Act (2) There are three levels of reference to determine the extent of a partners authority: (a) Agreement of the partners, (b) The course of business of the particular partnership, OR (c) The course of business of similar partnerships in the locality. (3) Partnerships purpose can only be changed by a unanimous vote of the members. (4) Uniform Partnership Act:

(a) Purpose (i) Establishes default rules for governance of a general partnership, all of which can be altered by agreement. (b) Key Provisions (i) Voting is per capita (one person, one vote regardless of contribution). (ii) Majority rules (except when unanimous vote is needed for changes to partnership agreement or addition of new partners). (iii) Sharing of profits is per capita unless otherwise agreed. (iv) Sharing of losses follows sharing of profits. (v) Partners have unlimited access to partnership books and records. (vi) Each partner has a duty to notify other partners of mattes material to the partnership. (vii) Partners are not compensated for working for the partnership unless winding up after dissolution, in which case they get quantum meruit. b) Contributions, Profits and Losses (1) Each partner is entitled to be repaid his contributions to the partnership whether in capital, advances to the partnership property, or surplus remaining after all liabilities are satisfied each partner must also contribute to any losses (2) Absent contrary agreement, they share profits and losses equally c) Management (1) Unless PA says otherwise, each partner has equal rights to participate in management (a) Any difference arising as to ordinary matters can be decided by majority but no act in contravention of any agreement between partners can be done without consent of all (b) A partner has the right to get interest on any payments made on behalf of the partnership beyond the amount of capital he agreed to contribute (c) Not entitled to compensation for services performed for the partnership unless PA says otherwise 6. Partnership Property a) Rights (1) A partner gets three things: (a) Actual property (i) Tenancy in partnership (a) Equal rights to possess for partnership purposes but not any other purposes without other partners consent (b) Can't be transferred except if all partners agree (c) Attachment only to obligations of entire partnership and not personal creditors of partners (d) Upon death of partner his right vests in surviving partners not subject to probate (ii) Conveyance of Real Property (a) If in partnership name, any partner can convey in partnership name (b) If titled in some but not all partners and record doesnt mention partnership partners named on title can convey (c) If title is in name of all partners then all partners need to execuste conveyance (b) Interest in Partnership (i) A partners share of the profits and surpluses is personal property, which can be conveyed. (ii) A conveyance by a partner of their interest does not dissolve the partnership. (iii) An assignment does not make the assignee a partner. (iv) At dissolution, assignee only gets the assigning partners share and can get an accounting. (c) Right to manage/control of partnership (not personal property and cannot be transferred). (i) An assignee has not rights in management, no right to interfere with administration of partnership, and no right to inspect books until dissolution. Only entitled to receive profits otherwise entitled to partner. b) Acquisition (1) All property brought into partnership at formation and all property later acquired with partnership funds 7. Dissolution and Winding Up a) Generally (1) Dissolution of a partnership is the change in the relation of the partners caused by any partner ceasing to be associated in the carrying on of the business. On dissolution, a partnership is not terminated, but continues until the winding up of partnership affairs is complete. (2) Dissolution causes the ultimate termination (after winding up) of the partnership unless the parties agree to continue the business. (3) Life Cycle (a) Formation (b) Carrying on of Business (c) Event of dissolution (d) Winding up (e) Liquidation (f) Termination b) Causes of Dissolution: (1) Dissolution can be wrongful if a partner acts in violation of the partnership agreement. The wrongfully dissolving partner is cashed out but his amount can be set-off against injury caused to the partnership by the wrongful dissolution. (2) If a partnership at will, a partner can withdraw at will good faith at any time. (3) If a partner for a particular purpose or term, at the accomplishment of the objective or at the expiration. (4) Agreement of all the partners. (5) Expulsion of a partner pursuant to the partnership agreement. (6) Unlawfulness of carrying on the partnership business. (7) Death of any partner. (8) Bankruptcy of any partner. (9) Decree of court. c) Effect of Dissolution: (1) Dissolution revokes the authority of a partner except to those acts necessary for the winding up of the partnership. (a) A partner can nevertheless bind with respect to third parties (as to both existing and future creditors) who do not have notice or knowledge of the dissolution.

(b) Authority to bind with respect to new creditors without notice (except as necessary for winding up) can be extinguished by advertisement in a relevant newspaper. (2) Dissolution does not extinguish partners existing liability (and a deceased partners estate is still liable). (a) BUT if partnership is to continue a partner can be discharged from liabilities by an agreement between himself, the continuing partners AND the creditor (3) When the dissolution is caused by act, death, or bankruptcy of a partner, each partner is ordinarily liable to co-partners for his share of any liability created by any partner acting for the partnership as if the partnership had not been dissolved d) Winding Up (1) Generally (a) Upon dissolution, the partnership is not immediately terminated continues until winding up of partnership affairs is done (2) Right to Wind Up (a) Unless otherwise agreed, partners who have not wrongfully dissolved the partnership can wind up (b) Any partner can petition court for right to wind up upon good cause (3) Rights of Partners upon Winding Up (a) Unless otherwise agreed, if dissolution is caused in a way not in contravention of the PA, each partner may: (i) Have the partnership property applied to discharge the partnerships liabilities, AND (ii) Have the surplus added to pay in case the net amount owed to each partner (b) If dissolution is cause by expulsion of a partner in keeping with the terms of the PA, and the expelled partner is discharged from all partnership liabilities, he will receive in cash the net amount due to him from the partnership (c) If dissolution is caused in contravention of the partnership agreement (i) Partners Not Causing Wrongful Dissolution (a) Rights (i) To have partnership property applied to partnership liabilities and surplus paid in cash (ii) To damages for breach of PA against every partner that caused the wrongful dissolution (b) Partners who did not cause the wrongful dissolution may, if they all agree, continue the business in the same name, by themselves or jointly with others, and possess partnership property for that purpose (ii) Partners Causing Wrongful Dissolution e) Continuation vs. Winding Up: (1) If the partners agree to continue the business, the withdrawing partner gets paid his share of the partnership at dissolution. If paid later, the withdrawing partner can elect to receive his interest as valued at the date of dissolution plus interest or the value of his share as of the date of dissolution plus profits made thereafter. (2) If the partnership is not continued, it goes into a winding up when no new business is taken on and the old business is completed. (3) At completion of winding up, the assets of the partnership are liquidated and creditors and partners are paid. 8. Distribution Order: a) To outside creditors, b) To partners for any loans given to partnership, c) Contributions of partners, d) Surplus to partners the same as how profits were distributed. 9. Buy-Sell Agreements: a) The dissolution rules above are default rules. This is a clause in a partnership agreement that sets out how the partnership will behave in the event of a partners withdrawal. b) Agreements generally provide for calculation of a purchase price and the terms of the purchase. c) HINT: Note that the partnerships name and good will are assets that can be sold C. Limited Partnerships 1. General Rules: a) Name must contain limited partnership, LP, or LLP. b) Must have a registered agent. c) Formed by filing a certificate of limited partnership with the Secretary of State. d) Consideration is required for a limited partnership interest, but is very broad and includes past and future services. e) A limited partnership interest is almost always a security. f) Must have a general partner and can have several limited partners. 2. Operations: a) Limited partners have very broad access to partnership records and documents. b) Any amendments to the limited partnership certificate must be filed by the general partner. 3. Profits and Losses: Unless otherwise agreed, profits and losses are distributed according to the value of each partners contribution. 4. Liabilities: a) In general, limited partners are not liable for the partnership liabilities beyond mandatory contributions and their undistributed profits. In some cases, partners may have to pay creditors for distributions received. b) Limited partners can lose their limited liability if they: (1) Are general partners, (2) Permit their names to be used in the partnership, (3) Knowingly execute a false certificate, (4) Act as or hold themselves out to be a general partner (absolute), (5) Take part in control of the business, but not to the extent of acting as a general partner (creditor must have done business with actual knowledge of limited partners control) c) Safe harbor actions that a limited partner can do without jeopardizing limited liability: (1) Being a contractor for an agent or employee of the partnership or of a general partner, (2) Consulting with the general partner regarding business, (3) Acting as a surety, (4) Voting on amendments to the agreement or dissolution, (5) Bringing a derivative action, (6) Sale of assets not in the ordinary course of business, (7) Assumption of debt,

(8) Removal of the general partner, (9) Participating in winding up. d) General partners have unlimited liability to third parties, but they can limit their liability to limited partners by agreement. 5. Voting: a) The agreement controls voting rights of the partners (including general and limited partners). b) General partners can vote separately or with all the limited partners or with a class of limited partners, as determined by the agreement. 6. Assignment and Duties: a) A partnership interest is assignable in whole or in part, except as provided in the agreement. b) General partners owe a fiduciary duty to the entity and to the limited partners. Limited partners do not owe duties to each other or to the entity. c) A limited partner can bring a derivative action on behalf of the entity and can loan money to the entity. 7. Dissolution: Dissolution can be caused by a) Death or incompetence of a general partner, b) Withdrawal of a general partner, c) Assignment of all of a general partners interest, d) Bankruptcy or insolvency of a general partner, e) Dissolution or termination of the entity that is the general partner, f) Judicial dissolution is available whenever it is not reasonably practicable to carry on the business in conformity with the partnership agreement. g) Withdrawal of a limited partner does not cause dissolution. h) Non-defaulting general partners or, if none, the limited partners may wind up the business. i) A cancellation of the certificate should be sought at the conclusion of the winding up. 8. Distribution Priorities: a) To creditors, including partner creditors, b) To partners and former partners then entitled to distributions, c) To partners as past due returns of capital, d) To partners respecting their interest in proportion to their share of distributions. D. Limited Liability Partnerships 1. Generally: The LLP is a general partnership for all purposes except it special limited-liability characteristics. 2. Formation: Any general partnership can convert to an LLP by filing a form with the Secretary of State. 3. Requirements: In addition to the Secretary of State filing, the LLPs must maintain at least $100,000 in liability insurance and file an annual renewal with the Secretary of State. 4. Effects: A general partner of an LLP is not personally liable for the tort obligations of the partnership unless: a) They committed the tort, b) They were a fault in appointing, supervising, or cooperating with the person who committed the tort, or c) Such person was under their direct supervision or control. E. Limited Liability Companies 1. General Rules: a) LLCs are creatures of statute formed by registration with the Secretary of State. b) An LLC is a separate legal person. c) Members of the LLC have limited liability and are shielded by the corporate veil. d) LLCs are largely governed not by statute (which provides various default rules), but by agreement. This gives the entity a large amount of flexibility. e) LLCs choose how they want to be taxed, which can either be flow-through taxation like a partnership or corporate taxation. f) LLCs choose whether they want to be member-managed or manager-managed. g) LLCs choose whether they will be at-will or for a term. 2. Operating Agreement: a) Operating agreements can be a comprehensive agreement that varies almost all provisions of the LLC Act. b) Provisions that are not allowed (although note these allow a reduction of the default rule): (1) Unreasonably restrict members access to information or records, (2) Eliminate the duty of loyalty of managers or managing members, (3) Unreasonably reduce the duty of care of manager or managing members, (4) Eliminate the obligation of good faith and fair dealing, (5) Vary the right to expel a member by judicial determination. 3. Name: The name of an LLC must include any acronym of LLC and must be distinguishable. 4. Registered Office/Agent: a) Must maintain and agent and address with the Secretary of State. b) If the agent cannot with reasonable diligence be found at the registered address, service may be made upon the Secretary of State. 5. Organization: a) An LLC can be organized by anyone and the organizer need not be a member. b) LLCs can have as few as one member (distinguish from a partnership, which requires at least two). c) Life begins with filing of articles with the Secretary of State. d) Articles must include: (1) Name, address, name and address of agent for process, name and address of organizer, whether LLC is at will or for a term, member managed or manager managed, whether one or more members are to be personally liable for LLC obligations. (2) May include anything else not inconsistent with the law. (3) Amendment requires unanimous agreement of the members. e) Elections in Articles: An LLC must make three elections in its articles: (1) Whether LLC will be at-will or for a term, (2) Whether the LLC will be member-managed or manager-managed, and (3) Whether any members will be personally liable for the obligations of the LLC. 6. At-Will LLCs: a) An LLC At-Will is the default. b) A member can dissociate at any time, unless otherwise provided by agreement.

c) Upon dissolution, if the company is not dissolved, the company must immediately purchase the dissociating members distributi onal interest for fair value. 7. Term LLC: a) Dissociation is wrongful if a member dissociates prior to the expiration of the LLCs term. b) Upon dissociation, if the company is not dissolved, the company must purchase the dissociating members interest for fair val ue at the expiration of the term. 8. Authority to Bind the LLC: In member-managed, each member has apparent authority to bind the company in the ordinary course of its business. Limited only when the member in fact lacked authority and that was known to third party. a) Acts of members not within the ordinary course do not bind the LLC unless actually authorized or other type of authority. b) A dissociated members apparent authority lasts for two years after dissociation with respect to third parties without knowle dge unless a statement is filed with the Secretary of State, in which case the authority expires after 90 days. c) In manager-managed, the managers have apparent authority to bind the company in the ordinary course of business. Limited when they act outside their actual authority and that was known to third party. Cannot bind outside ordinary course of business unless they have authority. (1) Members are not agents of the company unless they are also managers. The normal rules of agency apply. d) With respect to real property, unless limited in the articles, any member of a member-managed LLC or manager of a manager-managed LLC can sign and deliver an instrument affecting the companys interest in real property. Conclusive as to a person who gave value wi thout knowledge of lack of authority. e) An LLC is vicariously liable for conduct of a member or manager acting in the ordinary course of business or with the company. Respondeat superior. 9. Limited Liability: a) All members of an LLC have limited liability unless they make themselves liable in some way (committing a tort, estoppel, etc.). b) Piercing the corporate veil operates the same way for LLCs as corporations, except an LLCs failure to follow corporate forma lities cannot be considered. c) LLCs must indemnify members and manager for costs and liabilities incurred in the ordinary course of business or for preservation of the LLCs business or property. 10. Membership: a) Unless otherwise provided in articles, admission of a new member requires unanimous consent. b) Consideration given in exchange for membership is termed a contribution. Sufficiency for admission to membership is determined by a vote of all the members or as otherwise provided in operating agreement (contrast with corporation, where Board decides sufficiency). c) Just like partnerships, LLC members are not entitled to compensation for their services performed for the company except for fair compensation for winding up. 11. Management: a) Member-managed LLC default: Each member has equal management rights (votes) with other members. Majority rules on all questions except those requiring unanimous consent. b) Manager-managed LLC default: Managers are appointed or removed by a majority of the members. Each manager has equal management rights (votes), but cannot make decisions that require unanimous consent. Majority rules as to those questions within scope of manager rights. c) Matters requiring unanimous approval of all members (note these are default rules): (1) Amendment of operating agreement, (2) Ratification of acts that would otherwise violate the duty of loyalty, (3) Amendment of the articles, (4) Compromise of obligation to make a contribution, (5) Making interim decisions including redemption of interest, (6) Admission of a new member, (7) Use of company assets to redeem a charging order/lien against member interest, (8) Dissolution, (9) Merger, (10) Disposition of all assets outside the ordinary course. d) Members and managers can take action without a meeting and both can act by proxy. 12. Distributions: a) A distribution is any transfer of value from an LLC to a member in connection with that persons status as a member. Including distribution of profits, redemption of a membership, and payments in liquidation. b) Default rule is that distributions must be in equal shares. c) An LLC, like a corporation, cannot make distributions unless, after taking the distribution into account, (1) The company would not be able to pay its debts as they become due in the ordinary course of business, OR (2) The companys total assets would be less than its total liabilities plus any preferential dissolution rights. (3) A member or manager who assents o a wrongful distribution is personally liable for excess. Those who knowingly receive wrongful distributions are personally liable to the company up to the amount they received. 13. Right to Information: a) Members have a right to inspect and copy their companys records at the principal office during regular business hours. Former members have access to records from the period they were members. b) Right of access to company records can be restricted in operating agreement but not unreasonably. 14. General Standards of Conduct: a) Member-managed: A member owes the company: (1) A duty of loyalty to account to the company for any profit made in the course of the companys business or using the company s property, not to deal with the company as or on behalf of an adverse party, and not to compete with the company. (2) A duty to care to the company and other members in the conduct of the company business although normal negligence does not violate this duty. (3) Member must discharge duties within the bounds of good faith and fair dealing. b) Manager-managed, the following duties apply: (1) Members owe no duties to the company or its members solely by reason of being a member. (2) Managers owe the company the same duties as member of a member-managed company. (3) A member who is not a manager but exercises the power of a manager owes the duties described above to the extent of such exercise of power.

(4) These duties are non-waivable, but the agreement can identify activities and determine standards for measuring their performance (thus, they can reduce the duties but cannot eliminate them). 15. Derivative Actions: a) A member may maintain an action against the LLC at law or in equity without first seeking an accounting, but remember Historic Charleston Holdings. b) Must have been a member at the time of the action complained OR obtained membership from someone who was. c) Member must specify with particularly the effort to get the members or managers to bring the action. d) Any proceeds of the action go to the LLC. 16. Transferees and Creditors of Members: a) A member has no transferable interest in the property of the company. b) A member has a distributional interest, which is the members interest in distributions. Transfer of the distributional inter est does not necessarily make the transferee a member. Unless all members agree or provided for the operating agreement, the transferee receives no management powers or right to information. Like the assignee of a partnership interest, the transferee receives only the right to receive distributions and can seek judicial dissolution. c) Operating agreement can make a transfer of distributional interest like the sale of stock. If silent, all members must agree to the new member. d) LLC has no duties to transferee until given notice of the transfer. e) A judgment creditor of a member can obtain a charging order against a membership interest, which can be foreclosed at any time. The purchaser of a charging order has the same rights as a transferee. 17. Dissociation: a) Dissociation describes events that are inconsistent when a person remaining a member. Depending on the circumstances, dissociation may lead to dissolution, winding up, and termination. b) The general rule is that a member has the power to dissociation at any time, which initiates dissolution and winding up. c) Events of dissociation are: (1) Transfer of all of a members distributional interest, except as security or charging order. (2) Expulsion pursuant to operating agreement, (3) Expulsion by vote of all members upon certain circumstances, including transfer of substantially all of a members distributional interest, (4) Expulsion by judicial determination because of violation of operating agreement or other actions harmful to company, (5) Bankruptcy of a member, (6) Death or incapacity or, if an entity, termination. 18. Wrongful Dissociation: a) Members always have the power to dissociation, but may have contracted away their right to do so. If a member dissociates when they lack to the right to do so, they have wrongfully dissociated. b) Dissociation is wrongful when: (1) There is a general provision in the operating agreement that revokes the power of free dissociation, (2) There are provisions in the operating agreement that make certain acts of dissociation, (3) Before the expiration of the term of a company, (i) The member withdraws, (ii) The member is expelled, (iii) The member becomes bankrupt, (iv) The member terminates itself. (4) A wrongfully dissociating member is liable to the company for damages caused. Set off against the members distributional int erest. 19. Effect of Dissociation: a) Member dissociation can cause dissolution and winding up if the operating agreement so specifies, or if the dissociating member gets judicial dissolution. b) If the company is dissolved and wound up, the dissolution rules apply, meaning that the company ceases business except for the purpose of winding up and then liquidates and terminates. c) In an at-will company, if the company is not dissolved, the company must purchase the dissociated members distributional interest imm ediately for fair value as of dissolution. d) In a term company, if the company is not dissolved, the company must purchase the dissociated members distributional interes t upon the expiration of the term for fair value as of date of the expiration. e) The dissociating members toll for apparent authority begins to tick. The dissociated members duties of care and loyalty terminate. The dissociated member is treated as a transferee. f) When a member dies, the estate does not become a member but becomes owner of the distributional interest. If the company is at will, the interest must be purchase immediately. If the company is a term company, the estate owns the distributional interest until the expiration of the term. 20. Winding Up: Dissolution is the first step in a winding up. The default rule is that dissociation initiates dissolution and ultimately winding up. The Act provides that an LLC has to be dissolved and wound up upon (but these are default rules): a) An event specified in the operating agreement, b) Consent of the number or percentage of members specified in operating agreement, c) An event making the carrying on of the companys business unlawful, d) On application to a court by a transferee, when the court deem it equitable, e) By judicial decree upon application of a member based on: (1) Economic frustration of purpose, (2) Failure to purchase a members distributional interest as required, or (3) The managers or controlling members act in a manner that is illegal, oppressive, fraudulent, or unfairly prejudicial to petitioner. f) LLC in Winding Up: (1) The LLC continues in existence, but only for purposes of winding up. (2) The corporate veil continues. (3) Any member who did not wrongfully dissociate may participate in the winding up and receive reasonable compensation for doing so. (4) During winding up, the apparent authority of members and managers continues to the extent appropriate for winding up or to the extent of pre-dissolution authority as to third parties without notice. (5) Members or managers who cause injury to the company during winding up are liable to the company, which can be set off against their distributional interest.

(6) A unanimous vote of the members, including a member whose dissociation cause the dissolution, can waive the right to wind up and terminate and the LLC will resume as normal. g) Distributions: (1) First to creditors, including members who are creditors, then to members as return of contributions and surplus in equal shares (regardless of how profits were paid/note contrast with partnerships). (2) Creditors payment depends on whether they were known or unknown. (a) To dispose of known claims, the LLC must send claimants a notice setting a deadline for the claim to be brought. Once notice is sent, claimants who assert claim after deadline are barred. (b) To dispose of unknown or contingent claims, the LLC must make publication at least once in a paper of general circulation in the county of the LLCs principal office. Claims are barred if not brought within five years of publication. If assets are alread y distributed, any claims brought within five years can recover from members up to the amount they received. h) Termination: After winding up is complete, the LLC is terminated by filing articles of termination with the Secretary of State. 21. Administrative Dissolution: a) Occurs if LLC does not pay taxes or fees within 60 days of being do. b) Secretary of State must give notice of intent to dissolve and the LLC can fix within 60 days to cure. c) After administrative dissolution, can continue in business but only for the purposes of winding up. d) Can apply for reinstatement for two years after dissolution, which relates back to the time of dissolution. 22. Conversions: a) Partnerships and limited partnerships can be converted to LLCs. b) The conversion must be approved by all of the partners and is accomplished by filing articles of conversion with the Secretary of State. c) General partners remain liable for obligations of the partnership prior to conversion. Does not relate back or provide retroactive limited liability. 23. Mergers: a) An LLC may merge with any other type of entity. b) A plan of merger must be approved by all members as specified in the agreement or, if the agreement is silent, by unanimous vote. c) The merger is accomplished by filing articles of merger and the plan of merger with the Secretary of State. 24. Foreign LLCs: a) Foreign LLCs can do business in the state and the governing law is their home state. b) Foreign LLCs that transact business in this state must register with the Secretary of State. Examples of activities that do not include transacting business are engaging in lawsuits, holding meetings, having bank accounts, selling through independent contractors, isolated transactions, and interstate commerce. Ownership of income producing real or personal property is transacting business. c) Failure to register does not impair contracts but does foreclose access to *SC courts as plaintiff, constitute the Secretary of State as agent for process, and subject to the LLC to an action by the attorney general to constrain its operation in *SC. F. The Corporation 1. Governing Law and the Statutory Corporate Model: a) The *SC Business Corporation Act (BCA) governs corporations in *SC, as supplemented by their articles, bylaws, and shareholder agreements. b) A corporation is a separate jural person that has powers, interests, and obligations of its own that are distinct from those of its shareholders, directors, and officers. c) The statutory corporate model has three parts: (1) The Shareholders. The shareholders are equity investors, and the BCA assumes they will be passive and take no direct role in the corporations management. (2) The Board of Directors. The shareholders elect the board, and the BCA charges the directors with the corporations management . (3) The Officers. The officers are appointed by the board, and carry out the boards policies and manage the corporations day-to-day business. 2. Shares: a) Default rule is that each share coveys to its holder one vote and a claim, ratable with each other share, on any distributions and on the distribution of the net proceeds of dissolution. b) Authorization: A corporation has as many shares as are authorized in its articles of incorporation. The articles must designate some amount of shares. c) Issuance: Shares are issued by the board in its discretion. The board determines the consideration to be paid by the new shareholders. The BCA requires adequate consideration, and the Board decides what is adequate. d) Issued shares are labeled authorized and outstanding, but unissued shares are authorized but unissued. e) Preemptive Rights: When issued shares, the board must offer shareholders the option to buy a ratable share if the new issue so that their ownership is not diluted. A corporation can opt out of preemptive rights if it does so in the articles. f) With regard to the corporation, ownership of shares is as listed on the books of the corporation. The corporations obligations only run to registered owners of the shares. 3. Shareholders: a) Under the statutory corporate model, shareholders are equity investors and are passive in the corporat ions management. b) Shareholder rights include election of the board, the right to vote, the right to approve or disapprove extraordinary acts, to amend the bylaws, to receive their ratable share of distributions, to be protected from personal liability, to have limited access to information, and to bring derivative actions. c) Shareholders can only act at meetings. (1) Annual Meeting: The BCA requires an annual meeting. (2) Special Meeting: Shareholders can conduct business at a special meeting, but only the business for which the meeting was called. Called by the board, a person authorized by the bylaws or articles, or by demand of 10% of votes entitled to be case on the issue. (3) Unanimous Written Consent: Shareholders can do anything they could have done at a meeting by unanimous written consent. d) Meeting procedural rules: (1) Default rule is to require 10 to 60 days notice of a meeting, but notice can be waived. (2) Proxies are permitted so that one person can be authorized to cast anothers vote. (3) A quorum, usually a simple majority, must be present at a shareholder meeting. (4) Most actions only require a majority of the votes cast to be passed. e) Voting Groups: A voting group is a group of shares that have the right, either under the BCA or under the articles, to vote together as a group on a matter of shareholder business. Where more than one voting group is interest in a matter, all voting groups must approve. Thus gives each voting group a veto. The meeting and quorum rules apply to each group.

(1) Rule of Thumb: Where two classes have exactly the same interest in a matter, they vote on it as a single voting group. Where the action would deprive one class of some preference, it gets to vote as a separate voting group, giving them a veto opportunity. f) Electing the Board: Cumulative vs. Straight: The board can be elected either by straight voting or cumulative voting. Cumulative voting is the default. (1) Cumulative Voting (Default): Each shareholder multiplies the number of shares by the number of directors to be elected and cast that number votes for any candidate or candidates. A shareholder may only vote cumulatively if: (i) The meeting notice conspicuously states that it is authorized, (ii) Shareholder gives written notice more than 48 hours before meeting, (iii) Announces intention at beginning of meeting. (2) Straight Voting: A corporation can opt out of cumulative voting in its articles. Can cast up to the straight number of votes to for each candidate. g) Extraordinary Corporate Acts: Must be recommended by the board to shareholders and approved by a 2/3 of all outstanding shares (and voting groups still apply). If a shareholder disagrees with the act and it materially changes the risk of the investment, he can require that he be cashed out at a fair price. There are four extraordinary acts: (1) Amending the articles, (2) Merger, (3) Sale of the corporate assets outside the ordinary course of business, (4) Dissolution. 4. Distributions: a) A distribution is any value conveyed by a corporation to a shareholder on account as that persons st atus as a shareholder. Distributions are authorized by the directors in their discretion; there is no intrinsic right to receive funds. b) Not all distributions are dividends. c) Disproportionate distributions do not benefit all of the shareholders equally and are carefully scrutinized by the courts. d) Corporations may only make distributions from legal funds. The BCA establishes a two part test to determine if a distribution may be made. It is unlawful to make a distribution if, after giving effect to the distribution if: (1) Assets would not exceed liabilities on the corporate balance sheet OR (2) The corporation would not be able to pay its debts as they become due in the ordinary course of business. 5. Limited Liability and Piercing: a) Shareholders are not personally liable for corporate obligations. Shareholders can become personally liable by making themselves liable (committing a tort or creditor rely on credit such as a guarantee) or by a plaintiffs piercing of the corporate veil. b) Piercing: To pierce the corporate veil, a plaintiff must: (1) Demonstrate the shareholders have ignored the corporate form. Courts consider: (a) Undercapitalization, (b) Commingling of corporate funds with the shareholders own funds, (c) Shareholders have treated the corporation as a mere extension of their own affairs, (d) Ignoring corporate formalities. (2) Demonstrate that fraud or some other fundamental unfair would result if the court failed to disregard the corporate form. (a) Shareholders took actions that they knew would disadvantage others (e.g. sucking money out of corporation knowing of imminent litigation). 6. Board of Directors: a) The board is elected by the shareholders and is charged with the management of the corporation by setting the policy to be executed by the officers. Action outside the ordinary course of business must be taking by the board or by officers with the boards express authority. b) Can be personally liable for improper distributions. c) Normally serve a term of one year. d) Can be either classified or staggered, or both, as governed by the articles. e) The board acts are meeting at which a quorum is present or by unanimous signed writing. Notice is not required for regular meetings and special meetings require two days notice. Action is taken by a majority of the directors present. f) The board can act through committees, which can wield the full power of the board except as to authorizing distributions, filling board vacancies, amending the bylaws, approving a plan of merger, or authorizing or redeeming shares. 7. Duty of Care and the Business Judgment Rule: a) The statutory standard of care for directors is to act: (1) in good faith (2) as an ordinary person in similar circumstances (3) In the best interests of the corporation and its shareholders. b) The duty of care is breached by negligence. An action may lie on behalf of the corporation or its shareholders (since the duty runs to both). The remedy is normally against the shareholder personally. c) A breaching shareholder has three potential defenses: (1) The statutory standard of care, (2) Affirmative statutory defenses, and (3) The business judgment rule. d) The statutory defense is that directors can rely on experts like accountant and lawyers so long as the directors believed in good faith on the expertise of the one relied upon. Can be employees of the corporation or outside. Reliance meets the standard of care. e) Business Judgment Rule: Even if directors are negligent, the rule protects directors who have make errors in taking entrepreneurial risks on behalf of the corporation. Courts will refrain from holding a director personally liable for good faith, well-informed business judgments. f) It does not protect directors from gross negligence, fraud, knowing illegality, or breaches of the duty of loyalty. 8. Duty of Loyalty and Conflicts of Interest: a) Essence of the duty of loyalty is exclusivity in the subject matter. They cannot take action as directors on any interest other than the best interests of the corporation and the shareholders as a whole. b) A director has a conflict of interest when he is directly or indirectly interested in a corporate decision. c) If a director makes full disclosure of the conflict, and if the transaction is thereafter approved by a vote of the disinterested directors or disinterested shareholders, the transaction is valid and enforceable. d) If a director does not disclose the conflict or get approval, the transaction is still valid if the interested director can prove that the transaction was fair to the corporation. A transaction is fair if it is within the range that might have been entered into at arms length by disinterested persons.

e) If a director breaches this duty, the transaction may be voidable, may render the director personally liable for damages, and may justify the imposition of equitable remedies like punitive damages. 9. Officers: a) Officers are appointed by the board and are charged to carry out the policies of the board and to manage the corporations da y-to-day affairs. They serve at the pleasure of the board. b) The BCA only requires a corporate secretary. All other positions are designated in the bylaws or established by the board. c) A person can hold more than one officer position. d) Officers are agents of the corporation and bind their principal to the extent of their authority. The sources of their authority lie in traditional agency principles and come from articles, bylaws, board resolution, apparent agency, shareholder agreement, or inherent agency authority in title. (1) Presidents are normally deemed to have authority by virtue of title to bind the corporation in the ordinary course of its business. Vice President is not deemed to have any inherent authority. G. Close Corporations 1. General: a) Close corporations are held by a small number of shareholders, even one. They normally have much of their wealth tied up with the corporation and expect a significant return, such as employment. b) Close corporations deviate from the statutory model because the shareholders are often not passive in its management. Control is usually allocated by agreement rather than by election and appointment. c) *SC has adopted the Statutory Close Corporation Supplement (SCCS): (1) Permits corporations to customize their governance and allocate control and cash flow by agreement and avoid the technicalities of the BCA. (2) A corporation can get rid of the board and permit the shareholders to manage the corporation directly, like a partnership. d) Failure to follow corporate formalities, as in an LLC, is not considered when attempting to pierce a statutory close corporation. e) Filing under the supplement is accomplished by filing special articles with the Secretary of State. 2. Plight of Minority Shareholders in Close Corporations: a) Controlling shareholders in close corporations might pay attention to their personal goals at the expense of the corporation and its minority shareholders. b) The problem is that controlling shareholders can take advantage of minority shareholders investment without providing anythi ng in return and there is usually no market for the minoritys shares. c) There are a number of statutory remedies for minority shareholders who have been frozen out of the corporation: (1) Dissolution: They can seek judicial dissolution when they are oppressed, or when those in control commit fraud or waste. (2) Dissolution Statute: The dissolution statute gives the courts equitable powers to rearrange the legal statute of the shareholders other than dissolving the corporation. This includes requiring purchase of the shares at a fair price. (3) Breach of Fiduciary Duty: A controlling shareholder will often have breached the duty of care or the duty of loyalty, or both, and can be personally liable to both the corporation and the other shareholders. (4) Derivative Action: A shareholder can bring a derivative action for breach of fiduciary duty or waste. 3. Widely-Held Corporations: Are characterized by ownership by many geographically dispersed shareholders. This normally has three effects: a) Control by management because shareholders are very passive. b) Market for shares. c) Separation of shareholders interest from that of the corporation. 4. Corporate Finance: Understanding corporate finance is important for two reasons: a) Capitalization is important to the piercing analysis. b) Shareholders participate in corporate cash flow through distributions, which can only be authorized and analyzed with respect to the corporations finances. 5. Equity: a) Equity is permanent capital, which the corporation obtains by selling shares. Shareholders are not entitled to payback from the corporation absent a surplus upon dissolution. b) Shareholders have the right to vote, a right to ratable share of distribution, and a right to ratable share of distributions upon dissolution. c) They have a right to purchase when there is issuance of new shares and they may be purchased at a fair price if there is a judicial dissolution action or in the case of a disagreed-upon extraordinary act. 6. Debt: a) Debt is money borrowed by the corporation, and must be repaid. Debt is a contractual obligation of the corporation that must be paid even if the corporation is not making profits. b) Debt can be created in several ways: (1) Long-term debt. This is normal debt that is typically borrowed from banks or other financial institutions. (2) Short-term debt. This is usually in the form of corporate revolving line of credit issued by a bank that is borrowed when needed and repaid when money is available. (3) Debt instruments. These are corporate IOUs like notes, bonds, and debentures. These are usually transferable and traded on the financial markets, in which case they are securities. They may or may not be secured and can be short or long term. c) Advantage of Debt: So long as the debt enables the corporation to make more money than it takes to maintain the debt, it is good because it creates positive leverage. Debt is also good for making distributions to the shareholders because interest is tax deductible. d) Disadvantages of Debt: Debt is not good because of the possibility of negative leverage, the possibility of re-characterization of debt as equity, and the possibility of piercing. (1) Negative Leverage: It takes more to maintain the debt than it enables the corporation to make. (2) Re-characterization: A tax notion that converts debt to equity when it appears to be equity in disguise, usually when the corporation is thinly capitalized relative to debt. (3) Deep Rock Doctrine: If a shareholder also has debt, the court upon dissolution may re-characterize it as equity so that the debt-holder cannot take unfair advantage of the priority of creditors. (4) Piercing: The manipulation of corporate debt to disadvantage others can provide the second step of the piercing analysis. e) Debt vs. Equity: (1) A corporation only has three things to give: Control, cash flow, and distribution proceeds. There is only so much of each to go around, so the statutory model divides it up between debt-holders and equity-holders. (2) Equity: Has a right to control through its vote, cash flow is available but highly contingent, and gets the lowest priority upon dissolution.

(3) Debt: Has no right to control, has the best claim to cash flow because of contract, and has a high priority in dissolution based on whether unsecured or not. 7. Hybrids of Debt and Equity: a) Preferred Stock: A special class of stock that allows for virtually limitless matching of the three corporate offerings. Usually does not vote except under special circumstances, has a dividend preference and a liquidation preference. (1) Can be cumulative or not cumulative: If cumulative, if there are no legal funds from which distributions can be paid, then it carries over to the next year. Non-cumulative means that a skipped distribution is just that. (2) Usually has priority just behind unsecured creditors but before all other shareholders. (3) Must be authorized and its rights described in the articles of incorporation. b) Debt Agreements: A lender can negotiate for provisions that convey control of the corporation in some circumstances. Could provide that the loan could be converted to stock or can require shareholders to give lenders a proxy in their shares. c) Shareholders Agreements: The BCA provides for three kinds of shareholders agreements: (1) Voting Trusts: These are true trusts where the shareholders contribute their shares to the trust in exchange for trust receipts. The trustee becomes the legal owner and votes the shares. Limited to 10 years. (2) Pooling Agreements: Shareholders agree to vote together in ways addressed by the agreement. No statutory limit on duration and made specifically enforceable by statute. (3) Agreement to Limit Board Powers: A unanimous shareholder agreement, disclosed in the articles, can dispense with or limit the powers of the board. When does, the articles must describe who has those powers and that person takes on the duties of a direct. (4) Others: Other agreements not listed in the BCA are usually valid unless they interfere with public policy, creditors rights, or the rights of other parties. d) Buy Back or First Refusal Agreements: Shareholders in close corporations use buy-back agreements that require shareholders to offer their shares for sale to the corporation before selling elsewhere. They also usually discuss the dispersion of shares upon a shareholders death. e) Restrictions on Sales of Shares: The BCA permits restrictions on the sale of shares under certain conditions: (1) Purpose of the restriction is reasonable (e.g. to maintain compliance as S Corporation or some tax benefit) and (2) The restriction itself may not foreclose all possible markets for the shares. (Can require corporate approval of buyer as long as the not manifestly unreasonable, which is the keyword with this prong). 8. Securities Regulations: a) Corporations must always issue shares and shares are always securities under federal and state law. b) When a corporation is formed, and whenever there is an offer or sale of shares in a corporation, the securities laws are triggered. c) Corporate debt instruments traded on the financial markets are also securities. d) Offers to sell stock made before incorporate are also securities. e) Pre-incorporation subscription agreements (agreements to buy shares upon incorporation and issue) are also securities. 9. Promotion: a) Because a corporation is not yet formed, it cannot have agents and cannot become bound by contracts entered into by promoters (remember no ratification allowed because no capacity to do so at the time of act). b) Promoter Liability: (1) Promoter is presumptively personally bound to a contract entered into on behalf of a corporation. (2) Promoters liability on contract can be rebutted by clear showing the creditors intent was not to look at the promoter for p erformance, but to look to the corporation if and when formed. (3) A corporation is not automatically bound to promoters contracts when it is formed. It must become bound by adopting the cont racts either expressly or impliedly (by retaining benefits). Adoption cannot be made without actual knowledge of the terms, and can only be bound to quantum meruit. (4) Promoter remains liable even after adoption unless there is novation whereby the creditor agrees to the substitution of the corporation for the promoter. c) Promoters Duties: A promoter owes some fiduciary duties to co-promoters and the future entity and shareholders: (1) To the corporation to be formed, to act in its best interest. (2) To co-promoters as partners in a joint venture, (3) To the future shareholders (even if unknown), (4) Possibly to the creditors of the corporation to be formed. 10. Premature Commencement of Business: If those forming a corporation hold themselves out as a corporation before filing, the BCA makes them personally, jointly, and severally liable for the obligations incurred on behalf of the corporation. There is no limited liability before filing. 11. Preincorporation Subscription Agreements: Enforceable even though the corporation does not exist. Constitutes an offering of securities. a) Irrevocable by subscriber for six months. b) Formed corporation can accept the subscription during period of irrevocability, upon which it becomes a contract between the corporation and subscriber. c) If subscriber fails to pay, the corporation can pursue subscriber as a debtor and rescind or resell shares. 12. Formation: a) BCA requires four steps to form a corporation: (1) Choose an Appropriate Name: Must be distinguishable from all other *SC corporations and must include a signal of its limited-liability nature. (2) File Articles of Incorporation: The entity comes into existence at moment of filing. Only shareholders can amend the articles. Must include: (a) Corporate name, (b) Registered agent and address, (c) A street address, (d) Description of authorized stock, (e) Name and address of incorporator, (f) A certificate signed by a *SC lawyer. (g) HINT: The articles can include anything else. Whatever is contained in the articles will be controlled by the shareholders since only they can amend the articles. (3) Hold an Organizational Meeting: There must be an organizational meeting, which is called by the directors named in the articles. Shares are usually issued here. If no directors are named, the incorporator is charged with organizing the meeting and electing directors. (4) Adopt Bylaws: Corporations must have bylaws. The bylaws can contain any provision for managing the business and regulating the affairs of the corporation. Usually sets procedures for meetings, size of the board, designation of officers, provisions for indemnification.

b) Dissolution: Dissolution does not end a corporations existence. It begins the end and can occur in three ways: (1) Voluntary Dissolution: Voluntary dissolution is an extraordinary corporate act on which shareholders get to vote. The steps are: (a) The board must propose and recommend dissolution the shareholders (board must propose if 10% of any voting class of shares requests), (b) All shareholders, whether or not entitled to vote, must be notified, (c) The shareholders must approve the vote by 2/3 of all shareholder entitled to vote (this can be altered in articles), (d) Articles of dissolution must be filed with the Secretary of State. (2) Effects of a voluntary dissolution are: (a) Existence continues but only for purposes of winding up and liquidation, (b) Title to property is not transferred, (c) Officers and directors continue to owe duties, (d) Corporate governance rules remain in effect, (e) The corporation can still be sued and can still sue. c) Known Claims: A dissolved corporation can dissolve of known claims by notifying claimants in writing with a deadline of at least 120 days and notified claims not received by the deadline are barred. Suits must be brought within 90 days if corporation rejects a claim. d) Unknown Claims: Can attempt to bar claims by publication in a newspaper of general circulation in the county of its principal office. Claims not brought within 10 years of publication are barred (note only five for LLCs). e) Enforcement of Claims: Claims against dissolved corporations can be collected from assets not yet distributed or assets distributed to shareholders (up to amount received). 13. Administrative Dissolution: a) Dissolution by the Secretary of State of a corporation that did not pay taxes when due, failed to file an annual report with the tax commission, or failed to maintain a registered office or agent or did not inform the Secretary of State of the change. b) A corporation has 60 days to cure the grounds for administrative dissolution. If no correction, dissolution occurs. c) An administratively dissolved corporation can only carry on business to the extent necessary to wind up. d) Can be reinstated at any time after dissolution upon correction of the defect. If granted, it relates back to the time of dissolution (so corporation acts are ratified and the corporate veil works retroactively. 14. Judicial Dissolution: Three different people can seek a judicial dissolution: a) Attorney General: Can seek judicial dissolution if the corporation obtained its articles through fraud or persistently exceed or abuses the authority conferred upon it by law (a type of piercing). b) Shareholders: Can seek judicial dissolution on a number of grounds: (1) Those in control are deadlocked and the corporation is suffering irreparable harm, (2) Those in control are acting in a manner that is illegal, fraudulent, oppressive, or unfairly prejudicial to the corporation or any shareholder, (3) The shareholders are deadlocked and have failed for two years to elect new directors, (4) The corporate assets are being misapplied or wasted, (5) The corporation has abandoned its business but has failed within a reasonable time to liquidate. (6) Creditors: Can seek judicial dissolution if its claim has been reduced to a judgment, the execution on the judgment has not been satisfied, and the corporation is involved OR if the corporation admits in writing that the creditors claim is due and the cor poration is insolvent. c) Relief Available: Courts may issue injunctions, appoint receivers, and take any action required to preserve corporate assets until final hearing. In an action by a shareholder, the court can, in addition to dissolution, amend the articles or bylaws, director an act by officers or the board, or require the corporation or other shareholders to purchase the shares at a fair price. 15. Foreign Corporations: a) Foreign corporations that do business in *SC must register with the Secretary of S tate. Must include an agent and address for process in *SC. b) Failure to register closes the *SC to the foreign corporation as a plaintiff and may result in a small fine. c) The key question is what constitutes doing business. Activities that do not include doing business are being a party to a lawsuit, holding a meeting here, maintaining a bank account, selling through independent contractor, soliciting orders accepted outside the state, mortgage lending, owning property n this state, isolated business transactions, owning or controlling a subsidiary that does business here. 16. Records and Reports: a) Required to be kept: Every corporation must maintain minutes of all board and shareholder minutes, appropriate accounting records, and a shareholder list with addresses. b) Records Required to Be Kept at Principal Office: Articles and bylaws, board resolutions relating to shareholder rights, minutes of shareholder meetings for 10 years, all written communications to shareholder for the past three years, list and business address of officers and directors, most recent annual report to Tax Commission, tax returns for 10 years. c) Shareholder Right to Inspect: (1) Unlimited Right: Shareholders have an unlimited right to inspect the items required to be kept at the principal office except tax returns. To inspect tax returns, shareholder must own at least 1% of a class of shares. (2) Limited Right: (a) If the shareholder can show: (i) Demand made in good faith and for a proper shareholder purpose, (ii) Purpose and records described with reasonable particularity, (iii) Records directly connected to the shareholder purpose. (b) The shareholder can inspect: (i) Excerpts from directors and shareholders minutes, (ii) Accounting records of corporation, (iii) The record of shareholders. (iv) HINT: A desire to determine the value of his shares, to communicate with fellow shareholders, or to determine whether improper transactions occurred are not definite enough to meet the test d) Required Reports: A financial statement with balance sheet, income statement, and statement of changes in shareholder equity must be delivered to shareholders annually by mail. An annual report must be filed with the Tax Commission every year. H. Securities Regulation 1. A security is an investment in a common enterprise intended to make profits from the efforts of others. a) Corporate shares are always securities. Corporate debt instruments are also usually securities. b) In LLCs, memberships in manager-managed LLCs are presumed to be securities and memberships in member-managed LLCs are presumed not to be securities.

c) Limited partnership interests are almost conclusively presumed to be securities. d) General partnership interests are almost conclusively presumed not to be securities. e) Every state and the federal government comprehensively regulate the purchase and sale of securities. f) Under federal and *SC law, every offer or sale of a security must be registered or qualify for exemption from registration. (1) Most common *SC exemption are for small offerings with no more than 10 buyers and no commissions paid to sales agents. These almost always also qualify for the federal small offering exemption. (2) Catch-all federal exemption is Regulation D. Can be used for fairly substantial offerings. (3) Remedies for failure to register include private civil remembers: usually rescission: and public civil and criminal penalties. g) Every offer or sale of securities is subject to antifraud rules: there can be no false or misleading statements. There are no exemptions under state or federal law to these requirements. Silence can be misleading: easier than common law fraud. h) Insider trading is also not permitted while in possession of material, non-public information. Must disclose or abstain from trading. i) Security compliance should be considered from the earliest stages of an enterprise to avoid making mistakes. I. Tax Sidebar 1. General and Limited Partnerships: The partnership is not a taxpayer. All taxable income of the partnership is attributed to the partners according to their partnership interest (e.g. their share of the profits). The partners must pay tax on the income attributed to them even if not distributed. 2. Limited Liability Companies: Can elect whether to be taxed as partnership, C Corporation, or S corporation. 3. Corporations: Corporations can elect to be taxed under either Subchapter C or S. a) Subchapter C: The corporation pays tax. If profits were distributed to shareholders, it is with after-tax dollars. The shareholders then pay tax on those distributions. The result is double taxation. b) Subchapter S: The corporation does not pay tax. The corporations income is attributed to the shareholders according to their share ownership. The shareholders must pay tax on income attributed to them regardless of whether distributed or not. To qualify for Subchapter S, a corporation must: (1) No more than 100 shareholders. (2) All shareholders must be human beings. (3) All shareholders must be U.S. citizens or resident aliens. (4) There can only be one class of shares.

UPDATE NOTES I. Agency A. Two basic kinds of questions. 1. One series set up a situation involving biz enterprise, gave facts, asked if partnership bound by acts of rogue partner. Then, what if a corporation? What if a LLC?, what if a LP? Has to do with powers and duties. 2. Other involves fact situation which often includes employee in store, other comes into the store, tries to conduct transaction, employee gets in own car/or biz car, drives somewhere gets into accident, along the line someone punches somebody else. B. Two recent agency cases: 1. WILKINSON v. PALMETTO STATE TRANSPORTATION COMPANY. Ct. App. 4179 Nov. 20, 2006 a) Issue: Whether someone is a servant type agent (Renders principal vicariously, personally liable for torts in scope of employment). b) Facts: Wilkinson owned cab of truck; trailer owned by D. He was killed. His widow sought workers comp and other insurance. Test for employee is same as test for servant. In this case, defendant and Wilkinson had a written agreement that said they were I.C., not employees. Recitations of K not what determines whether someones an agent or servent. Its evidence, and not very potent. Whether servant depends on facts o f the case. It comes down to how the two parties behave. c) Rules K is not binding. Once third party comes in, K doesnt bind the 3rd P. SC Test for servent is right of control. 4 factors to determine right of control. (1) evidence of a right to control (2) method of payment (is employee paid by hour/ on salary vs. by job) (3) furnishing of equipment (4) right to fire (if theyre fired, do they still have some other income/job?). Any one can be sufficient. d) Here, the truck was under their control (routes, logo, etc..); payment method was by mile (neutral), but no ss tax, etc very like IC. 2. ARMSTRONG v. FOOD LION INC SC Sct #26235 (Scope of employment case). a) Respondeat superior rests on relation of master and servent. Relationship must have existed at time of harm, and been about m asters business and acting in scope of masters employment. Partially in furtherance of masters business is enough. b) Even though they were in place and time of business, what they did had not even a particle of purpose to serve employer. Reasonable minds could not even differ over whether they were doing so, so summary judgment is appropriate. c) Three part test for scope : place, time, intent to serve the employer. C. Other agency cases 1. Apparent Authority a) WDI MEREDITH: Title of VP Marketing vests apparent authority, and being vested with day-to-day authority to supervise operations gives apparent authority b) R&G CONSTRUCTION: Apparent authority cannot be based on agents own representations; it requires a manifestation of the princ ipal. Can be spoken words, or by conduct which reasonably interested causes 3rd P belief. 2. Existence of Agency a) ** YELLOW CAB (S CT): Distinguishing Employees from IC: Right and authority to control and direct the particular work or undertaking as to the manner or means of accomplishment. Four elements: (1) Right of control (2) Method of Payment

(3) Furnishing Equipment (4) Right to fire. 3. Scope of Employment (Action must be motivated at least in part by motive to serve employer) a) STONE Beating up girlfriend at office isnt in scope. b) STRICKLAND (App ct). Going and Coming Rule generally coming and going from work not in scope of employment. Volunteer Firefighter on way to fire is in scope of employment. c) PRATT: When employer provides transportation (even when paid for by employee), it is in scope of employment. However, contravention of direct instructions terminates the course of employment. 4. Persistence of Agency Duties Post-Employment: Non-Competes 5. POOLE (S CT): Continued at will employment is not sufficient consideration to enforce covenant made after initial employment. II. Recent LLC Cases A. CLEARWATER TRUST (S. Ct.): 33-8-420 statutory 2-yr SOL displaced the CL 3 yr limit on breach of fiduciary duty for officers of corporation (previously applied to directors too) B. ROCK HILL TELEPHONE (S. Ct): 1. Independent Contractor Rule: Employer is not vicariously liable for negligent acts (i.e., torts) of independent contractor. 2. Exception: person who delegates to an independent contractor an absolute duty owed to another person. They remain liable for physical harm from negligence of IC as if they were employee (servant). (Rule from SIMMONS, affirmed here). 3. This is called the nondelegable duty doctrine by SCSC; most call this apparent agency or ostensible agency. 4. SIMMONS rule applies retroactively C. MURPHY v. JEFFERSON PILOT COMMUNICATION COMPANY 1. Existence of agency and scope of employment are issues for the jury. Apparent authority requires actual or implied representation. 2. Some cases say that apparent authority requires detrimental reliance not law in most places. Confusion in SC law here. D. COOKE 1. Statutory Employee under Workers Comp when services are important part of such trade, integral part of trade and a necessary or essential part of the trade or was previously performed by companys employees. Stat employees are limited to WKC remedies. 2. Borrowed servant issues. E. DOE: 1. Doctrine of Negligent Hiring and Retention applies in SC. Fundamental elements are (i) knowledge of the employer of the employees propensity, and (ii) forseeability of harm to others [even when acting outside scope of employment]. One previous assault wasnt enough to be knowledge. F. HUNTING (CT App) Piercing Veil: Equitable action, requiring a sufficiently powerful equity. 1. Two pronged-test a) Did SH ignore corporate forms (not formalities) themselves (1) If SubChap S, failing to pay dividends not enough. b) Element of injustice or fundamental unfairness if they recognize the first? (1) Looting corporation after action is enough here. G. KIRIAKIDES (S CT) 1. Sterile Minority SH case. Majority SH are using minoritys investment to make money they keep for themselves. Money left over at the end of they year they keep, then try to buy out minority SH at bargain price. This case clarifies what constitutes shareholder oppression and available remedies. SEE PAGE 16. III. Questions on Recent Exams A. Tiger has 2 classes of stock A & B. Needs to raise capitol, Debbie proposes Class C preferred, brings along acct who says 10 million price is fair. Class A and B approves. 1. What can class A SH do to stop new issuance of stock? Discuss duties of directors, breaches and defenses? In this case, all regular corporate steps were taken necessary to approve issuance of new stocks. Maybe there is an equitable action in recommending this. Did they violate either Duty of Care (ordinary person here under similar circumstances) (this is met b/c corp needed money and relied on accountant) or Duty of loyalty is violated by selfdealing. None is suggested here that they are interested. 2. Debbies duties/defenses/breaches? She is an interested party/director, but other 6 disinterested directors voted in favor of deal. So, though breached duty of loyalty, its not an actionable breach b/c of vote. As SH, has no duty to other SH or corporation. B. Gigi, Alex, Bob are partners in a lawncare biz. Gigi and Alex have authority to enter into K. Bob put in capitol. Gigi has to cancel a K b/c Bob wont put in $$$. ABC sues for breach of K. Gigi negligently runs into someone while driving own car back from meeting and causes $50,000 in damage. 1. Describe each of following, formalities: general partnership, LLP, LP, LLC and duties/liabilities of Gigi, Alex and Bob under each. Partnership . (def of partners) (all three have apparent authority; Gigi and Alex have actual as well). On tort side, will depend on whether there s a servant/master relationship and whether shes in scope of employment. Vicarious liability for the enterprise? 2. Does Bob have a fiduciary duty to contribute more $$? Probably not. Not part of partners obligation to contribute more. Discuss fiduciary duty. C. Anns Place (sole proprietorship) sells chickens. Hires Bob as employee to buy chickens for her. Tells him to buy only chickens. Bob goes to Carl to buy chickens, where he has bought them many times. Bob punches someone in the nose there, Ann fires him. Bob then orders truckload of turkeys and Ann refuses to pay. 1. Whos Liable for What? Bob liable for his own tort. Anns liability for the tort will depend on whether hes a servant acting in scope. (define serv ant, then scope). Almost certainly servant. Is he in scope hes in usual time, place, manner, but unclear whether hes acting in scope of employment depends on whats said. Going to be question for the jury. 2. Authority? What applies? Agent acting in scope of authority can render employer liable for all contact. Agency formed when (def). Hes an agent. Can bind in K when duly authorized. Can bind under actual or apparent authority. Express and implied authority both play a role. Apparent authority? Gen agent Bob has no more actual authority, but may still have apparent authority. Agency by Estoppel? 3. Earl goes to Anns Place to buy Chickens, who normally only sells in batches of 5000 he wants only 500, clerk there figures they must have struck deal, ann is unhappy, first decides to adopt, then repudiates. Example of Apparent and Inherent Agency Power. Hes an agent. Not actually authorized. Apparently authorized? Since hes evidently in charge, strong argument in favor of apparent authorization.