Partnership

1. Formation: association (voluntary), 2 persons, co-owners, for profit (UPA § 6)

a. Only need intent (though not necessarily intent to become a formal partnership, only intent for that type of relationship)
b. p/f evidence of pship = sharing business profits (UPA § 7(4))
i. RUPA § 202 says rebuttable presumption
ii. unless the profit sharing is for:
1. debt, wages, rent, annuity, interest payment, or consideration
iii. joint ownership, or sharing gross returns, while indication of partnership, are not dispositive proof of P. Also look at capital
contributions..
2. Rights & Duties
a. UPA & RUPA both operate as default rules.
i. RUPA prohibits eliminate duty of loyalty (but may specify types of behavior which don't violate, may authorize actions in advance that
would), unreasonably alter duty of care, eliminate obligation of good faith and fair dealing (but may specify standards), alter the power
to dissociate, etc. (RUPA § 103)
b. Equal right to manage & participate (UPA § 18; RUPA § 401)
i. No pmt for acting in partnership (unless by agreement as salary or capital account contribution) (RUPA § 401(h)) (Busick v
Stoetzl)salary cant increase w/o agreement
c. Fiduciary duties (RUPA § 404)
i. Care -- nothing illegal, grossly negligent, reckless, or intentional misconduct
ii. Loyalty -- can't compete or do business with or use pship name/biz/prop for personal gain (RUPA § 404(b))
1. Profits made on one partner’s own in the course of the partnership or by using pship property held in constructive trust
a. If transaction is w/I scope of biz, comprehends something of value to pship, and accused partner acted in self-interest
w/o full knowledge or consent of the partners. Fouchek v. Janicek- must disclose to partners & not act in self interest
iii. Carry out obligations in good faith and fair dealing
d. Exit right (see continuity & duration section)
3. Liability -- Joint and severally liable- personal liability, any partner, P must recover from other P’s via suit
i. Unless new partner (then not personally liable to creditors of pship before entered into (RUPA § 306) or prior dissolved pship (UPA)
4. Management & Control
a. Unanimous consent for new partners- Summers
b. Matters in normal course of business by majority of partners (or by partnership agreement)
i. RUPA § 301 defines “ordinary course” as for the particular biz, OR for a biz of its kind.
ii. RUPA: Matters outside normal course, or for amendment of agreement, only by all of the partners
iii. UPA: Acts in contravention of agreement- S 9, not binding to persons w/ knowledge of no authority
iv. Also needing unanimous decision:
1. Assigning property for creditors, disposing of good-will, making it impossible to carry on the business, confess a judgment
against the partnership, submit a pship claim or liability to arbitration or reference (UPA § 9(3))
c. Every partner is an agent (UPA § 9, RUPA § 301)
i. Actual authority -- Express or Implied (includes law or industry custom according to Epstein case); Apparent authority – By
manifestation of the principal
ii. During winding up the pship, partners only have authority to complete executory contracts etc.
1. Other partners liable for act of a partner as if there was no dissolution, unless the acting partner knew of the facts giving rise to
the dissolution (bad faith essentially)
5. Financing & Capital & Property
a. RUPA § 401 establishes capital accounts
i. Increased by value of money or property (minus liabilities such as mortgage) partner contributes, and decreased by value of money or
property received by partner from the partnership
1. Property can be real, personal, or intellectual
ii. Credited w/ share of pship profits & Charged w/ share of pship losses
1. Equal shares (RUPA § 401(b))
2. If agreement states how to do profits, but not loss, then allocate in the same manner
iii. Same was done under UPA but w/o a statutory provision. See § 18c about repaying partners’ capital contributions-interst
b. Partner may make loans to pship and is entitled to interest from the date of the loan
i. Pship reimburses and indemnifies partners (RUPA § 401(c))
1. Reimbursement only for payments made in course of ordinary business to which other partners at the very least do not object to
ii. Pship pays back advance payments beyond the agreed capital amount (RUPA § 401(d))- no interest
c. Property contributed to partnership or acquired in name of pship is pship property (UPA § 8; RUPA § 203)
i. Essentially a matter of manifest intent Cyrus- tax paid by P was enough even tho in name of just one P
ii. Use of pship assets to purchase is presumed pship property. UPA prop brought into P is P prop unless pship is for profits only-Gape
iii. Property acquired in name of P(s) w/o indication it’s in capacity as P & w/o use of pship assets = individual property even if used for
pship purposes (RUPA § 204(d))
iv. Unless expressly in name of pship, very factual analysis of intent
d. Interest in pship property
i. UPA § 25: tenants in partnership
ii. RUPA § 501: not a co-owner
1. Entity theory, not reachable by personal creditors
e. Conveying pship property: UPA § 8(3) title in pship name only conveyed in pship name -interst can be passed by ind. name- LOOK AT § 10
/ RUPA § 302- same unless P knew/notified he lacked authority
f. Partners are not entitled for remuneration/payment for services for pship
i. But may agree otherwise- Stoetzl
6. Transferability
 a. Management rights are not transferable – see Continuity & Duration section
b. Financial interest is transferable (RUPA § 502) (UPA 26)
i. Profits, losses, and right to receive distributions- aka-(personal property interest)
ii. Does not include a share of the value of property
7. Continuity & Duration
a. Partnerships may be one of three durations (UPA § 31)- P continues until wind up and p’s choose if continue
i. At-will – any single partner may terminate the pship; default
ii. Term -- If the pship just purchased a not easily fungible asset, may be an implied agreement for term until debt is paid
iii. Task
b. If a partner decides to leave the business:
i. UPA –
1. Dissolution is caused by any partner changing relationship for business (UPA § 29)
2. Upon dissolution, partnership continues until winding up is complete and partnership is terminated (UPA § 30)
3. Also by expulsion of a partner in accordance with the agreement (UPA § 31)
4. Also by death, partner bankruptcy, or court decree (UPA § 31)
a. Estate of deceased partner owed his or her interest in the partnership at time of dissolution, or profits attributable to use
of his right in the property (UPA § 42)
5. A partner may dissolve either in accordance with agreement or in contravention
a. IF in accordance, then:
i. Right to wind-up (UPA § 37)
ii. Right to require pship property to be applied towards liabilities and surplus added to capital accounts (UPA §
38(1))
b. IF in contravention, then:
i. Non-breaching partners: right to have pship property applied to liabilities and capital accounts, right to
damages for breach, may continue business, and may possess partnership property upon paying breaching
partners for their property interest. (UPA § 37(2)(a)-(b))
ii. Breaching partners:
1. If the business is not continued, then right to have pship property applied to liabilities and capital
accounts. (UPA § 37(2)(c)(i))
2. If the business is continued, then entitled to value of their interest in the partnership (share of profits &
surplus under UPA § 26 ... not including good-will), minus damages. (UPA § 37(2)(c)(ii))
3. Liability to pship creditors remains with the pship, not the breaching partner
ii. RUPA – entity theory.
1. UNLIKE UPA, if a partner dissociates, the partnership remains - no automatic dissolution of the partnership!
2. Dissociation of partner occurs by pner choice, by agreement terms, by expulsion, by pner bankruptcy or assignment for creditor,
by partner death or incapacity (RUPA § 601)
a. dissociation is wrongful if violates express agreement, or before term/task expires they dissociate by bankruptcy, free
will, or expulsion
i. wrongful dissociated partner is liable for damages (RUPA § 602)
ii. may not participate in winding up
b. if no dissolution, then remaining pners buyout dissociated pner (greater of the value of asset, or value of ongoing
enterprise, minus damages) (RUPA § 701)
i. no buyout for wrongful dissociation before term expiration unless proven that payment won't unduly harm
pship
c. all partners (including those not wrongfully dissociated) may agree to continue the partnership before winding-up is
complete
3. Dissolution occurs if -- illegal to continue biz; judicial determination; (in at-will pship) by choice of any pner; (in term/task
pship) by all partners, by expiration, or by 1/2 of pners w/i 90 days of a death/bankruptcy/incapacity/wrongful dissociation.
(RUPA § 801)
c. Order of liability payment: creditors other than partners > $ owed to partners other than capital and profit > partner capital > partner profits
(UPA § 40(b))

Corporations
1. Formation
a. File articles of incorporation w/ appropriate agency (SoS usually)
i. must include name, address, # of shares authorized, name and address of incorporators (may include more) (MBCA § 2.01-2.07)
1. not all authorized shares need be sold/outstanding
b. Incorporators call meeting to elect board (if not already named) - board appoints officers
c. Incorporators or board must adopt bylaws
d. Defective incorporation -- c/l imposes estoppel-not legally incorp but treated as such (de facto); MBCA 2.04= liability where person claims
to be agent of corp, knowing the corp doesn't exist
e. Ultra Vires -- if articles state purpose of corp, then limited to that purpose. MBCA default purpose is anything that's legal.
2. Management & Control
a. Internal affairs doctrine - state of incorp governs internal relationships of corp
b. 3 major groups of players:
i. Shareholders
1. Stock Classes
a. at least one class must have voting rights
b. can use classes to structure how board is elected, rights associated with different classes, and different prices, etc (eg --
make each class responsible for electing a certain number of directors)
 2. Shareholder voting agreements
a. voting trusts -- shareholder conveys legal title to trustee but retains financial interest.
i. MBCA § 7.30 limits to 10 years at a time
ii. MBCA 7.30 & DGCL § 218 both require public record
b. irrevocable proxies -- normally proxies are freely revokable, but irrevokable when couple with an interest or for
consideration (MBCA § 7.22(d)) (i.e proxy holder: purchase of shares, extended credit, party to vote, employee)
c. vote pooling agreements -- MBCA § 7.31 permits, no need to disclose, but difficult to enforce. Sholders vote as a unit
i. Ringling Bros case - DE ct says arbitrator couldn't require specific performance b/c arbitrator wasn't owner --
public policy right to vote your stock any way you see fit
3. Cumulative voting
a. Multiply shareholder votes by the number of directors being elected, or give all those votes to one, or stagger
b. Option to opt-in to this system under both DGCL and MBCA- must be in articles of incorp 7.28 MBCA
c. Can be made less effective by staggering elections or reducing number of directors to decrease the multiplier
d. number of shares needed = ((shares at meeting * seats targeted) / (directors being elected + 1)) + 1
4. VOTING OCCURS WHEN...
a. Sale of corp's assets under MBCA 12.02
i. But sale doesn’t need shareholder approval if meets 12.01 (usual course of business, if for mortgage, etc
ii. Under 12.02 – safe harbor provision – if not 12.01, then requires shareholder approval if “significant assets”
1. sale is ≥ 25% of assets and ≥25% of income before taxes = significant
2. but other sales could also be significant
b. Mergers -- board approval, then recommendation and shareholder approval (MBCA 11.04 & DGCL § 251)
i. by majority vote of all stock, not just present stock (DGCL § 251)
ii. quorum = majority entitled to vote, but no rule on how many votes for approval (MBCA § 11.04(e))
1. MBCA § 7.25(c) make default vote for approval pass if votes for action exceed votes against when
a quorum is present
iii. de minimis Exception
1. MBCA § 11.04(g) - if surviving corp, no amendments requiring shareholder vote, no change in
shareholder # of shares or rights and no conversion, AND doesn't require vote for the 20% rule
(below) or consideration other than cash rule under 6.21(f)
c. MBCA 6.21(f) -- quorum majority shareholder vote needed when Issuing stock if...
i. > 20% of prior outstanding stock, or
ii. for consideration other than cash
d. Dissolution – see Continuity section
e. Amending articles – MBCA 10.03 adoption by board and submit to shareholders for approval w/ quorum of at least
majority of votes entitled to cast (doesn’t say what a passing vote is) – some exceptions (10.05, 10.07, 10.08)-must read
ii. Board generally manages major decisions and appoints the officers
1. power to determine when to issue the authorized stock (but see stockholder rights above)
a. Most states have an "opt-in" for a preemptive rights option (allowing current shareholders option at buying proportional
amount of newly issued stock) (MBCA § 6.30(b))
i. Never any preemptive right if shares are issued as consideration (right to buy b4 any1 else)
2. No proxy voting
iii. Officers manage day to day operations
1. Agency: normal express/implied/apparent PLUS...
2. Inherent agency power of CEO to conduct acts in the usual course of business (this reflects agency based on manifestation of
the agent rather than the principle like in apparent agency)
3. Ratification of agency when the principle does not rectify unauthorized actions -- relates back to time of Agent's actions
c. Amending the articles of incorporation:
i. board recommends, approval by at least majority of outstanding stock (MBCA 10.01-10.09)
d. Amending bylaws: MBCA 10.20 shareholders may amend or repeal, or board may amend or repeal (unless the right is reserved to
shareholders under Articles, 10.21, or 10.22)
e. 8.22 2 days notice for transaction vote issued by board, if shareholder special meeting, at least 10 days before & no more than 60, 7.05
3. Liability
a. No liability for board or officers unless breach of fiduciary duties
i. Duty of care – MBCA 8.30, 8.31 (not widely enacted)-good faith in business dealings, can be exculpated-unless illegal activity
1. Monitoring cases / duty to be informed – process-based analysis, must have process and follow it to prevent wrongful or illegal
activity
a. Caremark – board has duty to create systems to monitor for violations of law, despite violations if process was in good-
faith then no breach of duty of care
b. Stone v. Ritter – scienter requirement-utter or conscious failure necessary
c. Citigroup – duty to monitor is for wrongful or illegal acts only, not for poor biz decisions
2. Transactional cases / duty to act
a. Business Judgment Rule: Π has b/p to show lack of good faith, failure to act in corp’s best interest, and failure to
become informed in order to overcome presumption of honest and well-meaning directors.
b. Directors may reasonably rely on belief that disclosure viokates law, other officers, counsel (MBCA 8.30(c)(e)F))
c. Smith v. Van Gorkom -- odd case of imposing liability when board failed to monitor leverage buyout-not enough info
ii. Duty of loyalty – applies when director’s interests conflict with the corp
1. MBCA 8.60 – 8.63 – (8.60 defines terms) – cannot be exculpated
a. No judicial review if – no Dir. Conflicting Interest or there was DCIT but complied with procedure
i. Procedure = vote by qualified directors after disclosure w/ deliberations and voting outside DCIT presence
(quorum includes only qual’d directors)
 ii. OR vote by qualified shares if notice given, DCIT notifies tabulator/tab knows of DCIT shares, and
disclosure.
2. DGCL – § 144 interest of director doesn’t void the K or transaction so long as the board is informed and acts in good faith,
stockholders are informed and act in good faith, or the K or transaction is fair to the corp
a. quorum includes conflicted directors
b. Unsettled over Review for Fairness – if § 144(a)(1) or (2) procedures are met, then judicial review for biz judgment rule
only (Remillard Brick, Benihana), OTOH compliance with procedure could merely “remove cloud” but still if unfair
could be reviewed (Flieger v Lawrence – DGCL cannot condone patently unfair practices)
3. Good Faith -- “intentional deriliction of duty, a conscious disregard for one’s responsibilities” or willful intent to do harm –
something worse than just negligence = violation of good faith
a. Ex ATR-KIM case – directors knew about embezzlement and allowed it to continue.
4. Corporate opportunity doctrine – directors and officers may not divert an opportunity for the corp towards themselves
a. Elements: financially feasible for corp, in line w/ corp business and is advantageous, and corp has interest or
reasonable expectancy
b. See Farber case for ex of directors wrongfully taking opp and saying it was approved by shareholders—wrong b/c
majority shares not presented with opp
c. But Burg v. Horn said there was no agreement for directors to seek opps for corp, so no possible violation of corp opp
doctrine
d. Remedy: profits director receives in violation / constructive trust?
b. Exculpation and Indemnification (subchapter e – MBCA 8.50-8.59)
i. Limited by 2.02(b)(4) which prohibits exculpation for embezzlement, self-dealing, intentional harm, intentional criminality, or unlawful
distributions. Must indemnify Director if wholly successful (reinburse). No liability for damages in K
c. No liability for stockholders, except the risk of loss of the capital they have invested
i. UNLESS: corporate veil is pierced
1. Tort Creditors – if control of corp is really just used as an instrument for personal use in order to avoid liability. Look for
shuffling of personal funds, operating w/o regard for corp formailities, undercapitalization of a subsidiary as an inference (but
not if insured – think of the policy reasons behind undercap. theory)
2. Contract Creditors – elements: owner (or equitable owner) takes complete control/dominates, control used to commit fraud or
wrong, proximate cause Freeman v. Complex Computing-taxi case
4. Financing, Capital & Property
a. Debt: from creditor’s point of view
i. More stable b/c can get guaranteed payments of interest (bankruptcy remedies), private ordering for terms
ii. Most attractive to debtor if the debt can be leveraged for higher rate of return elsewhere to pay for the interest charges
b. Common stock:
i. pmt only by dividends and corp doesn’t have to pay it (or may not even be able to pay b/c of legal capital rules)
ii. Decision to pay dividends is discretionary, unless there is oppression (Blance Test/Wilkes v Reasonable Expectation/Kemp)
iii. Holder gets voting rights, and potential for higher return than debt creditors
c. Preferred stock:
i. Private ordering.
1. Eg 10% is % of dividends (if $1000 at 10% then $100/year); non-participating (no right to share of common stock dividend
distributions); non-voting (no voting rights – default); cumulative (if they don’t pay, rolls-over into next year)
ii. Need to organize for exit strategy: could private order (corp will want to b/c don’t wanna pay 10% indefinitely, shareholder will want to
in case interest rates get higher) – put or call options
d. Dividends & Legal Capital
i. Legal capital has nothing to do with actual assets - it appears on the right side of the balance sheet, but some states use it to determine
whether a dividend payment is possible -- tests for whether dividends are ok is governed by internal affairs doctrine
ii. Legal capital = number of shares outstanding x par value
1. Par value = amount invested originally / number of shares issued
a. not affected by after-market stock increases, change in stock value affects the stockholders, not the corp
b. may issue stock at higher price than par value, but not lower
c. No such thing as par value in MBCA, optional in DGCL
2. May be revalued later on
iii. DGCL § 170: surplus = net assets (assets exceeding liabilities) - legal capital. Distributions can be made out of the surplus, or if no
surplus then out of prior year's net profits.
iv. MBCA § 6.40: prohibits distribution if after the distribution...
1. either "equity insolvency test" is failed (current liabilities > current assets)
2. or "balance sheet test" is failed (total assets < SUM OF total liabilities + amount needed to satisfy preferred shareholders in
event of dissolution)
5. Continuity & Duration
a. Liquidation priorities: creditors > preferred shareholders > common stock
b. 14.02-07-Directors and shareholders vote to dissolve. 14.30-minority shares can petition to dissolve if deadlock or abuse
Special Close Corp Issues
1. Close corp has few stockholders, big overlap btn owners, board, and officers, no real market for the stock
2. MBCA offers opt-out of each default rule, DGCL offers an entire separate regime for any org identifying itself as a close corp
3. Particular attraction of private ordering for minority rights through shareholder voting arrangements and cumulative and class voting
4. Oppression:
a. Some courts will imbue close corp w/ partnership-type fiduciary duties among owners – Wilkes case test = is there a legitimate biz reason for
freezing out a shareholder? Or is it just avarice?
i. Utmost duty of good faith and loyalty to each other
b. DE rejects that view, leaves it to private ordering – special provisions for close corps