3 hours, for 3 hour exam half multiple choice, half short answer, essays discuss all the issues

is a mess; tries to guide us, even on the essay part multiple choice covers scope of course, particularly in-class materials essay question generally deals with corporations cross-reference the cases w/ statutes Agency Law Flip through the restatement sections in the book; provides a review of agency How and why are agency relationships created? Really the simplest business organization form i.e., if you hire someone, theyre not your partner, but theyre your agent Agency also runs through other structures i.e., if you want to sue a corporation, have to find out whether the actor is an agent of the corporation If an agency relationship exists, two big consequences Fiduciary Duties Body of law that gets applied in different contexts AgentPrinciple are the only ones to worry about Focus on loyalty, especially non-competition Transaction cost reducing mechanism; making sure that the servant is loyal to the master If you rely on fiduciary duty as a set of background default rules when you hire an agent, it helps you police your agent and make sure they are acting for your behalf Contract law is another alternative mechanism that may be available Partnership: if partnership wrongs you, may either sue 1) for breach of partnership agreement (contract), 2) breach of fiduciary duty (fiduciary duty Remedies may differ depending on what theory; contract is restrained, fiduciary duty are equitable, and courts are free to craft them, including injunctions, which may not be available under contract Key: how far do we want to push the duties in various context? Policies for having: reducing transaction costs, etc. Policies for reigning in: if noncompetition was absolute, could never leave and go somewhere else, etc. Principles of Attribution Acts of agent are attributed to principal, if one of the

various tests are met Contract Normally, the agent then drops out, so the principal takes their place Exception: partially/wholly undisclosed principal, agent may remain on the contract Actual authority (express/implied), apparent authority, inherent agency power, estoppel, ratification How is each created, how do they differ? Why is apparent authority needed to protect third parties who are unable to prove actual authority? Distinction between tort/contract Initial: language distinction (attributing tort to someone else is about master/servant, respondeat superior) Task of plaintiff is therefore to show a master-servant relationship, which was a higher burden; not only elements of agency, but also that the master had retained the right to control the physical conduct of the servant as they carried out their task Rationale: since were talking about physical torts, vicarious liability should require some showing that the upper party had the right to physically control the others conduct Franchisor/Franchisee (in the middle of master-servant/principal-agent; how to define?) Courts havent been totally consistent about how they do so; usually they use principal-agent, but they tend to look at whether the franchisor retained the right to control the franchisees in the particular area where the tort arose Inquiry is similar to master-servant control inquiry, but tend not to use that language; focus on control remains. When legislatures write statutes ( fair labor standards, FHA, utah, etc.), they generally do not specify which agency principles apply, only what someone may be liable for doing. Agency problems arise. Did the legislature intend the common law agency to underlie, or Case Farms: court doesnt do any kind of analysis of which norms to apply, it just goes with implied actual authority analysis Meyer v. Holley: thoughtful analysis of the issues raised by conflict Partnership Law Like agency law, in that the law will find a partnership, even if not specified, such as in Holmes o Agency and Partnership are only two business organizations that are found by courts, not formed explicitly

Many cases involve a distinction between whether someone was an employee, or whether they were a partner o Facts likely to provoke conflict on this issue: defense is arguing employee, plaintiff arguing partner; sharing of profits is the key to this If partnership found, then partnership law suddenly applies to govern the relationship, plus fiduciary duty law Fiduciary v. Contract Tension o Holmes: chose to sue for breach of partnership agreement, not for breach of fiduciary duty, but she probably could have since fiduciary duties were imposed. However, she wanted damages, not an injunction or other equitable remedy, and so chose to go under contract theory. o In corporate context, often asking the court to declare an action void or order the board to do something; these are easily classified as fiduciary duty remedies Focus on UPA, but look at where the specific differences arise in RUPA Understand partners obligations for liability, joint and several o In re Keck: lesson on how liability attaches, and follows even after you leave Think about the agency law of partnerships o This is how the liability problem gets created in the first place; some partner goes out and creates a civil obligation by committing a tort, which is then distributed out to the other partners Think about how partnerships come to an end o Difference between UPA and RUPA RUPA introduces dissociation, instead of dissolution Why did they do this? What was the debate about? o Centers on liquidation right under 38(1); the ease of dissolution/liquidation under UPA triggered shift of default rules away from real dissolution/liquidation, to the norm being a continuation under RUPA Rationale: Rule under the UPA seemed to be value-destroying, in that people were more encouraged to liquidating, selling at less than value of ongoing business Creel: the law doesnt demand a fire sale for liquidation, and applies RUPA even though not yet in force in state, since they dont like the outcome of the UPA Partnership Accounting o Simple problems are fair game, but nothing complicated. o Think through UPA 40 Methodology set up there, in theory, is what supposed to happen In fact, people are going to end up writing checks back and forth because someones accountant will do the calculations and figure out who

owes what to whom Steps What does the partnership owe to outside creditors? What to inside creditors? What to partners for capital account balances? Partners pay all that in, and then whatever is left is distributed back out o Fiduciary Duty Law CHCs are like incorporated partnership, and so Meinhard applies to CHC relations Meinhard: utmost good faith and loyalty, not arms length, not morals of the marketplace How far do we want Meinhard to be applied? o After Donahue imported Meinhard, they backed off it using Wilkes, since you dont want to import wide-open fiduciary duty language without giving trial courts guidance on how to apply it; who knows what morals of the marketplace are? In other areas of partnership law, we see limits o Gibbs: case about what partners can do before they leave the partnership. Really broad reading of Meinhard, maybe you couldnt do anything until you were actually gone, since fiduciary duty law may prevent you from even preparing to compete before you left, or until youve told your partners you plan to leave. Not that strict, so can do some things in preparation even before telling your partners. NOT GOING TO BE TESTED ON RULES ON THIS Just be thinking about why fiduciary duty law is graduated like this o Countervailing interests: interest of partnerships in investing in partners, vs. interest in encouraging competition Traditional Rule: law firms werent subject to things like non-competition agreements, because theres an additional countervailing interest in making sure that clients can always get the lawyer that they want o Bohatch: Mistakenly, in good faith, reporting on partners overbilling; she turned out to be wrong, partnership expelled her. Many people believed that fiduciary duty should protect her, but it does not protect whistleblowers in that situation (but, theoretically, it could; policy: would that be a good idea?) Hybrids o Get the names straight. They have different names, histories, economic functions. o Limited Partnerships Apparently as old as partnerships, go back to roman law. When corporations were hard to get, limited partnerships were the

vehicle for getting passive investment involved with a business enterprise i.e., two people would have a ship, limited partner would provide capital; passive investor would get limited liability Back in the day, there werent general incorporation statutes, they were acts of government Like a corporation, in that limited partners dont have agency authority, but general partners do have agency authority to act for partnership They also dont benefit from the limited liability shield GPs have fiduciary duties to LPs, since they are supposed to be running their enterprise for their benefits o LPs are much like shareholders; they dont owe duties to enterprise or to each other Exception: Control Rule (no longer valid) As a limited partner, if you cross the line and act like a GP by exercising control, youre treated like one. o Limited Liability Partnerships Relatively new, formed at the request of professional service firms (i.e., accounting, law) Basic rule was that these firms had to operate as general partnerships, so they were subject to unlimited personal liability, and they were concerned about malpractice litigation, since the firm would be liable for any malpractice, and JSL means that personal assets were on the line for malpractice committed by someone else in the firm This explains the shield; started off with tort-only shields, which seems sort of odd from a public policy perspective, since tort victims are the exact people who havent had the opportunity to bargain when the obligation was created, so why should they be subject to a shield protecting other people? Broader shields, full shields, protect partner from any liability of the firm, whether contract or tort o One dimension: tort, or tort and contract? o Second dimension: is there an exception for supervisors of the tortfeasor? Some statutes have an exception for if you were the supervisor of the person who committed the tort. Tries to incentive partners to supervise those people under their nominal supervisory authority, so that they dont commit malpractice o Old rationale for general liability was to have people monitor each other, and this serves that interest Have to put LLP on letterhead, give notice, and so personal assets cant be reached anymore for debts/obligations of the partnership, but there arent two classes of people like there are in LPs Through a partnership agreement, can set up these relationships, but

LLP is basically a partnership that has a liability shield LLLP Limited Liability Limited Partnership o Think limited partnership, then allow the limited partnership to give everybody limited liability There is still the passive/active distinction, with respect to agency authority and control rights and fiduciary duty, but even the general partners enjoy limited liability o This is done because they already allow you to use a corporation as a general partner, there isnt a reason not to limit personal liability directly o NOTE: law is going from a series of mandatory rules to a series of facilitative default rules that you can contract around, if you want to do something different If your state allows an LLLP, there really is no reason to use a standard limited partnership o Limited Liability Companies Imported business form, common in civil law jurisdictions and Latin America, mining company from Latin America convinced Wyoming to allow it, and once IRS authorized it as a way to get partnership taxation, it took off, since there is partnership taxation and shareholder limited liability Used be judged on Kintner factors, using limited liability and other factors, but now all unincorporated entities can have pass through Can set it up to be run by a partnership or to be run like a corporation If like general partnership, have it member-managed, then every member has agency authority and equal rights in management, but still enjoy limited liability (kind of like an LLP) If you want centralized management, have it manager-managed, and then only designated managers have agency authority, and other members are more like shareholders in a corporation, passive investors Most courts are importing other law to evaluate these, like existing piercing doctrine or agency law Corporations o Macro Level: think about the idea of a corporation vs. the reality of a corporation?
Shareholders

Ideal: shareholders control board, who controls officers and employees o Economists talk about this in agency setting, as the agents, the board is supposed to managing the money for the benefit of their principals, the

shareholders However, shareholder voting is a fairly crude way to control the board, since in most cases you either vote for the management-chosen slate of directors (one list, no alternative candidates; can withhold vote, but that takes away your voice) o Shareholders votes require a majority to hold the meeting, then a majority of the quorum to act. For director elections, a plurality is the requirement Therefore, the managements slate could theoretically win with one vote o Fiduciary Duty Law Think of it as a tool for trying to police management o Berle & Means Wrote a book in the 1930s about the American publicly traded corporation, and their thesis was that there is a separation between ownership and control between shareholders and board, since shareholders arent really effectively in control of the company. Institutional investors have changed the landscape somewhat, since theyre so large and can easily work together to set up a bloc of shares o Not just the fact that the officers are acting without the shareholders, its that theyre dominating the board that is supposed to be supervising them Inmates controlling the asylum, so to speak Chairing the board and being the top officer ends up with corporations being run by one person o Whether they do good or bad job, theyre not really constrained by shareholder action o Inside v. Outside Directors This is one reason why the board ends up getting dominated by officers, if they are on the board, then they are the ones who really know how the corporation runs; the outside independent directors know much less about operations. The best case is that the IOD is someone from the same industry who knew, the worst is that theyre an actor or politicians spouse, and the idea that theyre going to exercise any effective monitoring over the officers is absurd Getting a little better, since so much pressure has been exerted, but every time there is a scandal due to an ineffective board, there are often unqualified people there o Formation DONT WORRY ABOUT HOW (its super-super-easy) Issue: promoter contracts Sign contracts for corporation before the corporation even exists o Lesson: courts have been reluctant to let these people off the hook

May find that corporation also on the hook, which is generally not a problem if they succeed, but if the corporation fails, promoters generally found liable Question: did the third party want the corporation on the hook, but also agree to let promoter off the hook? o Distributions Dividends: pays out cash to shareholders Repurchasing: buying back shares from shareholders For purposes of policing this, these two types are treated the same ???: two approaches. DGCL still ties ability to pay distributions with the legal capital idea Par value comes in here (?) o MA gets rid of par value and treasury shares o Piercing the Corporate Veil Equitable, like fiduciary duty law, so the opinions are very fact intensive, tend to get a list of factors and an answer. If treated as alter ego, then can hold him liable o Need to look at things like commingling of assets (always a CHC) So, is the shareholder mingling the personal with corporate assets in a way that suggest that theyre not following the rules; some courts wont let you have it both ways, and say that if youre going to have the benefits of a corporation, you need to go through the formalities Some courts will only pierce for a plaintiff who has somehow been harmed by the particular goofiness that the shareholder was doing, but some dont require the connection. o Soerries: father wasnt harmed by the bar owners cheating on taxes, but the court pierced anyway o Think about the relationship between the legal norms that govern corporations Sources of Law: State corporate law, fiduciary duty law, contract among the investors in the particular corporation These things all interact, so they all will be in play in a given case o i.e., fiduciary duty law may invalidate action that is technically legal under the statute and the agreement Fiduciary Duty Law Duty of Care, Duty of Loyalty, Unocal, Blasius o Understand Blasius, in relation to the other standards Delaware has the most sophisticated system of fiduciary duty law, so they always have it in mind when deciding cases o The Blasius standard is thus linked to the existing system of duties Duty of Care claims have a very high burden on the plaintiff to prevail o Have to show something like gross negligence, negligence, wild

disregard for responsibilities Courts dont like these cases, since they dont want to be secondguessing normal business decisions If thought through, not self-interested, but turned out poorly, courts dont even want to be involved o Hence, the Business Judgment Rule Closely Held Corporations o Why are they formed, and how do they interact with tax? Formed to get liability limitation, but could avoid double taxation by not paying dividends, so instead pay out salary and hire family, that sort of thing. When courts started to realize that basic corporate-law default rules dont function well, because minority shareholders can get oppressed Even a 49% shareholder may not get anybody on the board, would have no right to dividends (since its a business judgment decision on whether to pay at all), no hiring power (so cant get hired as employee), and few exit options. o Couldnt force buyout, couldnt force dissolution; these required something more than 50% o Massachusetts courts imported Meinhard and fiduciary duty law, saying that controlling shareholders owe fiduciary duties, but then this was limited by Wilkes, which requires a balancing of a legitimate business reason with the practicability of a less-harmful alternative Delaware didnt provide any protection at all o Other control allocations Could shape corporation as they want to in order to protect from freeze out situations Interchangeable, but can also use in combination with one another o Simple (in freeze out context): supermajority requirement for board actions However, this doesnt help you unless youre guaranteed a board seat Could have the board divided so that one class of shares elects one particular seat, so Person A could own A, B owns B, and each class elects one director o Then, have unanimity requirement, so that neither person can act without the others consent o Delaware says that people could have bargained for more rights This is not always true, since CHCs often involve families, and so to say that the kids could have bargained isnt really realistic, which leads to results like Donahue, instead of the contractualist, free-market view of Delaware

Exams are pretty straightforward, curved on who wrote the best answer. Not about issue-spotting.
I. a. Restatement 219 and 220 Two part test i. 219(1): a master is liable for the torts of his servant made in the scope of his service to the master ii. First: is it a master servant relationship? iii. Second: when the servant committed the tort, was the servant acting within the scope of his service (employment)? 1. Master intended or was negligent or reckless 2. Or there was a non-delagable duty b. When asking if the servants actions were within the scope of the employment you refer to the doctrine of Detour v. Frolic. Badgers tickets are a frolic, lunch is a detour. Employers are liable for detours but not frolics. c. Ask yourself, what could the principal have predicted? If its a predictable tort the master is liable. d. Deadlock: What if there are only two partners with an equal share? i. Three positions 1. Lewis (one of the drafters of the UPA): when the share is 50-50, there is no majority. Any contract made with a third party w/out majority vote would not be a partnership contract. 2. Nabisco: find second partner liable for acts of first partner objecting partner on the hook. 3. Summers v. Dooley (p66 footnote): finds second partner NOT liable for acts of first partner objecting partner on the hook. a. The court reconciles these two cases say that in both cases, they ruled that partners cannot change the status quo w/out a majority vote. II. UPA 9, 13 and 14 a. All different ways you can have obligations in a partnership b. UPA 15: partnership obligations listed in 9, 13 and 14 then get distributed back out to all the partners, either jointly (for 9) or jointly and severally (for 13 and 14). c. Entity: partnership as a entity is liable, individuals partners dont bear personal responsibility for that d. Aggregate: partners are personally liable e. UPA 13: covers general wrongful acts of partners i. Acting on behalf of the partnership and in the ordinary course of business of the partnership. ii. Even if outside ordinary course of business, if other partners authorize the action, other partners will be liable iii. Excludes situations where partner is not acting on behalf to the partnership and not within the normal course of business f. UPA 14: written to cover breach of trust situations

Not for ordinary torts ii. When reading this think about client funds iii. Look closely at 14(b) money is in possession of the partnership from a third party and one of the partners mis-uses the money (third party gets ripped off). iv. Under 15, you and your partners are jointly and severally liable to the party who was ripped off. v. 14(a) when the money has never actually come into the possession of the partnership but a partner gets the money supposedly for the partnership and then rips the third party off g. RUPA look at 306 and 307 exhaustion requirements have been added cant collect a judgment against a partners personal assets unless youve named the partner in the lawsuit and have exhausted the resources of the partnership first
i.

I. a.

Bohatch problem (p 117) Who owes what duties to whom here? i. Partners owe fiduciary duties to the partnership ii. Partners also owe fiduciary duties to the other partners iii. Partners also owe fiduciary duties to clients (in this case Pennzoil) b. Bohatch thinks McDonald is over-billing Pennzoil and reports that to Powers and eventually to Payne (managing partner). c. If Bohatch is right, then everyone in the firm is exposed to joint and several liability. Therefore theres an argument that she has a duty to report her suspicions. d. Shes not right and McDonald was actually under-billing. e. No cause expulsion. f. Court says were not going to allow fiduciary duty law to slop over into the area of wrongful termination law. Court says there was no breach of fiduciary duty to Bohatch.

Water, Waste & Land: Rule: if youre an agent with a fully disclosed principal
you are not liable the principal is, if youre an agent with a partially disclosed or completely undisclosed principal then you yourself are liable. However, you may then have a case against the principal for whatever your liability was determined to be.

Problem 9-4 (Frankino) o Whats the business problem? o Even if the articles give the power to the board, that doesnt take the power away from the shareholders. o Under the Model Act you need ???? for a shareholder consent

o Under Delaware Law you only need a simple majority by shareholder consent o Board has to initiate amendment of the bylaws o Delaware Law requirements do exist for amending or repealing supermajority voting requirements found in the charter, but not in the bylaws o Frankino is allowed to do this II. a. Bohatch problem (p 117) Who owes what duties to whom here? i. Partners owe fiduciary duties to the partnership ii. Partners also owe fiduciary duties to the other partners iii. Partners also owe fiduciary duties to clients (in this case Pennzoil) b. Bohatch thinks McDonald is over-billing Pennzoil and reports that to Powers and eventually to Payne (managing partner). c. If Bohatch is right, then everyone in the firm is exposed to joint and several liability. Therefore theres an argument that she has a duty to report her suspicions. d. Shes not right and McDonald was actually under-billing. e. No cause expulsion. f. Court says were not going to allow fiduciary duty law to slop over into the area of wrongful termination law. Court says there was no breach of fiduciary duty to Bohatch. III. Mall of America problem (p 119) a. When you see a bunch of entities such as in this problem, you should ask yourself: why are they doing this? b. In this case, they are dividing up revenue streams: one entity is the entertainment, one is the land, and one is the management company. c. In this case they are not driven to create these entities as a limitation of liability. d. Why did the Simons and the Ghermezians form three general partnerships for this? i. Because they already had limited liability due to the fact that the general partners themselves were limited liability entities. ii. In many respects the Gs ended up being like limited partners anyway because they had given away management rights to the Ss. e. Look at RUPA with respect to the fiduciary duty claims here (in this problem). Traditionally, boards havent owed fiduciary duties to preferred shareholders. Preferred shareholders have always been suspectthey have guaranteed rights, like bondholders, so courts dont feel they need to protect preferred shareholders. In the past, courts have also been not as eager to protect preferred shareholders b/c they have in the past done scams that have hurt the common shareholders. Kimberlin v. Ciena Corporation Preferred shareholders can also bargain for the terms of the contract that they

want. If they arent there when the contract is being created, they can read the contract/securities certificate that states their rights when they buy shares, so they know what they are getting.

I. Hypothetical a. A, B and C form a corporation with only one class of shares and one vote per share. Shares cost $1 so capital you invest is proportionate to percentage control you have. b. A: 49% ownership c. B: 25.5% ownership d. C: 25.5% ownership e. Under the default rules of corporate law, what can B and C do to take advantage of A? i. Shareholder voting (B and C have majority voting): 1. B and C can vote for new directors must have a simple majority to get a quorum, so B and C can get a quorum and can elect the board (can kick A off of the board) a. Why does A care if shes kicked off the board? Because as a board member she has the right to demand information about the management of the company any information the rest of the board sees you have a right to see as a board member. If you are just a shareholder, you have no right to see that information (which could be information about the financial situation of the company). b. Default rule is straight voting, here cumulative voting would have helped A because she could have at least kept her board seat. 2. B and C can vote to fire A as an officer, is she is one and/or for B or C to be an officer of the corporation. a. Do officers have additional control? Sometimes, but more importantly, they get paid for being an officer and this salary money is often used to avoid double taxation on the profits. So A may be losing her share of the profits. b. A would have a hard time suing for this because its under the Business Judgment Rule (BJR). 3. B and C can amend the articles of incorporation (the charter) to remove any cumulative voting rights A may have been granted in the original agreement. As directors they propose the amendment and then as shareholders they vote on it and it gets through. a. You can put in a super-majority requirement into the charter i.e. to amend this charter you must have 100% of the votes and statutes provide protection for these types of agreements 4. B and C can vote to issue more shares to themselves thereby diluting As control. a. Preemptive rights might provide A some protection if she were offered an option to buy 49% of any new issuance of shares. The best way to do this would be in a contract with the corporation because they cant amend that like they can the charter. b. These shares could be preferred shares, with a preference when it comes to

dividends, which would allow them to pay dividends to some people but not to me also a BJR decision. ii. Authority to call board meeting: might be outlined in the bylaws who has authority to call the meeting. If not, then it will usually require a majority, but not 100%, of the board members to call a meeting. So here B and C could still easily seize control. II. Problem 9-1 (p349) a. Harper: 48 shares b. Kosachuk: 48 shares c. Contrasena (web company owned by Harpers uncle): 4 shares d. Other shareholders have option to buy K out at $10/share if they fire him. e. How can a squeeze out work here? H and his uncle have majority control of the board and can fire K if they wish and then can buy out his 48 shares at $10 a share. f. Its never a good idea to set a share price in an agreement because the value of the shares will fluctuate. A valuation method is a much better thing to agree to (some percentage of the valuation of the shares by a third party). g. How could K have protected himself? Shareholder agreement could have had provisions to protect K from being fired.

Control Mechanisms in Closely Held Firms: Review Shareholder Agreements (2 general types): o Agreements to pool votes in shareholder voting matters (vote pooling) Ronnen v. Ajax o Agreements that seek to constrain (sterilize) the Board in traditional Board actions (Baseball case) courts are more suspicious of this second type of agreement

Uses of these agreements are things like employment, dividends, antidilution and so forth if youre going to control these as a shareholder youre going to have to control the boards actions because these are traditionally under the control of the board Trend is to allow shareholders, by agreement, to constrain the Board (see, MBCA 7.32) Transfer Restrictions o Restrict the transferability of shares to third parties (think partnership) May require prior approval before sale May give corporation or other shareholders option to buy out shareholder (problem 9-1); and May facilitate exit by requiring corporation or other shareholders to buy out

shareholder who wants out (buy-sell agreements) Delaware courts reaction to whats going on in Mass:

The message from the D courts is a laizze fair attitude toward regulation (i.e. the Mass court has intervened in relationships that are essentially market relationships and inappropriately redistributing value). The D courts are looking at these relationships as contract relationships where the parties had the option to contract around these fiduciary duties and they didnt, and the remedy of these issues by the courts is an inappropriate redistributing of wealth.

You are giving them something they didnt bargain for, so if you give somebody something now that they didnt get through the bargaining relationship it's an illegitimate redistribution of wealth through the court. Its all ex post not predictable. This is the legislatures obligation protection of closely held corporations should be managed by passing laws, not through litigation. When you read D cases its always safe to assume that the judges are always thinking about how this will affect the political economy of Delawares status as a state for incorporation.

Employer-Employee Agency Law (Respondeat Superior)

An employer is liable for torts committed by an employee within the scope of employment. Restatement 2nd 219(1) Two part test o First: is it an employer/employee relationship? A) Person is employed to perform services for another B) Person is subject to the others control with respect to the physical conduct

Board Voting and Fid. Duty Law Officers and Employees Collective Action Problem: although they need to act together, the incentives act in the other directi has material interest to challenge management, especially in the face of the wall street option Own/Ctrl Divide