AGENCY § 219- Is there sufficient evidence to persuade a reasonable person that there was an agency? Look for: Fiduciary relationship KNOW FIDUCIARY DUTIES 1998 EXAM No filing is required Not liable for debts like a partner
Consent by one person to another to act What was agreed upon? Not unilaterally created. Can be unilaterally terminated. Breach of duty terminates relationship
*Control* Lending Relationship can create and agency Must follow P’s instructions General agent Special agent—single transaction or a series or trans
Continuous subjection. Control may change at any time Independent K’r Not controlled Contracts Independent Franchisor OR’s control or influence over the results alone are insufficient to est. P-A relationship Setting standards vs. control over daily operations The more you standardize franchise the more you control. EE’s can be turned into agents.
Economic Reason: P is in the best position to prevent this occurrence P selects A P can buy insurance
P has greater access to information M Ø subj. to liab for S acting OUTSIDE scope UNLESS: ULTRA VIRES
M intended conduct or conseq. M was neg. or reckless; Conduct violated nondelegable duty of M; OR S purported to act on behalf of princ. and reliance upon apparent auth. OR was aided in tort by existence of agency rel.
Disclosed - Reveals fact and ID of Princ. Partially Disclosed - Reveals fact but Ø ID of Princ. Undisclosed - Ø reveal anything. Ag. purports to act alone
Authority - Types
Actual Authority - § 26 - written or spoken words or conduct of princ. which reas. interpreted, causes A to bel. princ. desires him to act on princ.’s behalf Apparent Authority - § 27 - created as to 3rd party by action of princ. which, reas. int., causes 3rd to bel. that princ. consents to have act done on his behalf by A. REQUIRES Princ.’s manifestation to 3rd party. § 8.
Ratification - § 82 - IF Princ. treats act as valid that was orig. outside power of A, it will be given effect as if orig. auth. Termination - § 124A - Term. of auth Ø thereby term. app. auth. § 125 - App. Auth. terminates when 3rd Party has notice of the term. OR manif. from Pr. that he Ø longer consents Liability
Generally - § 140 - Liab to Princ. from 3rd upon trans conducted by A MAY be based on (a) actual auth; (b) app. auth.; OR (c) A had power from rel. Ø dependent on act. or app. auth. Disclosed -
Pr. is liab. to 3rd and can sue 3rd § 292 A has Ø liab to 3rd and CANNOT sue 3rd. § 320 3rd can sue Princ. but Ø agent
Partially Disclosed -
Pr. is liab to 3rd and can sue 3rd § 292 A is ALSO liab. to 3rd and can sue 3rd, (& Pr. if liab. to 3rd) 3rd can sue or be sued by A or princ.
Undisclosed -
Pr. can sue 3rd as 3rd party ben. A is party and can sue AND be sued § 322 3rd can sue A OR Pr. if A was in act. auth (Ø app. auth. b/c Ø manif. by Pr. b/c Ø known to exist)
NOTE: If Pr.’s non-existence is part of K, then 3rd CANNOT sue P. BUT CAN sue P if existence is fraudulently concealed NOTE: If A misrep. his auth, he becomes liab. to 3rd who relied, even if normally Ø liab. ALSO Disc. or part. disclosed P is liable for K made by A in violation of instr. to A not known to 3rd § 160.
Sole Proprietor - Can have liab. under (1) agency rel.; (2) M-S rel. w/ employees; OR (2) indep. contractor rel.
PARTNERSHIPS
PARTNERSHIP - UPA § 6(1) - Ñ is an assoc.(assoc. implies consent) of TWO or more persons to carry on as co-owners of a business (must share profits & losses) for profit.
Writing - Ø writing is req. BUT should do so to avoid disputes over agr. and force consideration of tough issues like dissolution, control and profit sharing Determining Existence - UPA § 7 joint tenancy, etc., alone does Ø establish Ñ regardless of profit share. sharing of gross returns from prop. Ø establ. Ñ reg. of ownership. receipt of profit share from bus. is PRIMA FACIE evid. of Ñ UNLESS
as debt by installment as wages or rent to LL as annuity to widow of deceased P as int. on loan, though amt. may vary w/ profitability of Ñ as consid. for sale of goodwill by installment
Martin v. Peyton - (loan Ø Ñ) JOINT VENTURE; Look at totality of circ.; control, debt v. eq.; defined period or amt.; collateral; covenants. Option may indicate Ñ. Absence of an explicit partnership agreement does not preclude the creation of a partnership.
HYPOTHICATE: to pledge without transferring title MORTGAGE; pledge of property as a security COLLATERAL; property that is pledged
Sharing Profits and Losses -
Profits and Losses - UPA § 18 - Ñ may set own agr. for profits and losses, (a) DEFAULT- if Ø agr. then all P’s share equally in profits. Losses absent agr. are shared just like profits.
2. Liability -
UPA § 13 - Ñ is bound by the wrongful act of P acting in ord. course of business. UPA § 14 - Ñ is bound by one P’s breach of trust where P is acting in scope of app. auth. INCLUDES misappr. of funds. UPA § 15 - Ps are liable JOINT AND SEVERAL for everything chargeable to Ñ under §§ 13 & 14 and JOINTLY for all other debts and obl. of Ñ (ie- must name ALL Ps if joint, can just hit deep pockets if joint and several. NEITHER - have to go for Ñ first) (TN - all J&S)
Losses - § 15 (a) says all partners are joint and several liab. for everything chargeable to the partnership. (b) reg. of agr., § 18 allows for agr. MAYBE § 18 applies to internal losses and profits, § 15 applies to dealings w/3rd parties Contribution - P MUST, absent agr., contribute towards losses, capital or otherwise, sustained by Ñ in prop. to profit share. UPA § 18(a). IF any P is insolvent, remaining Ps shall pick up insolvent’s share in ratio to their share of profits Indemnification - Ñ MUST, absent agr., indemnify P if pursued legally in ord. & proper course of bus. UPA § 18(b) SO even if J&S, P has action against other Ps for indemnity. § 40 - must dissolve Ñ before one P can enforce against another
Management -
Governance - UPA § 18(h) - Absent agr., majority vote rules. BUT Ø act against agr. may be rightfully done w/out consent of ALL Ps.
NOTE: Ø based on % own, but # of Ps. Could agr. otherwise. Agency - UPA § 9 - Every P is agent of Ñ for purposes of its bus. AND acts of every P for apparently carrying on the bus. of the Ñ binds the Ñ, UNLESS there is Ø auth. AND the 3rd has knowledge of Ø auth. Apparently Carrying on Bus. - look to what these type of Ñs do, and to lesser extent what this Ñ does UPA § 4(3) - Law of agency will apply under UPA.
Wrongful Acts - See UPA §§ 13 &14 above. § 15 J&S Liab. New Partners - UPA § 17 - New P is liable for ALL obl. arising before admission BUT shall be satisfied out of Ñ prop. ONLY. Nabisco v. Stroud - (P told Nabisco he would Ø longer be resp. for any deliveries, other P then ordered.) Ct. held that other P had act. auth. b/c every P is agent. Ñ is principal. NOTE: even if Ø act. auth. P had app. auth. b/c Nab. had Ø knowledge of restr. on auth. The acts of the partners are binding upon all copartners. Partners are JOINTLY & SEVERALLY liable for the acts & obligations of the parties. Holzman v. De Escamilla; if a limited partner exercises control over the partnership business, he becomes a general partner.
Duties of Partners to Each Other
UPA § 21(1) - Every P must acc. to Ñ for any benefit, and hold as T/ee any profits derived w/out consent, from any trans. connected w/formation, conduct, or liq. of Ñ, OR from use of Ñ prop. Meinhard v. Salmon - Per Cardozo - Ps have fid. rel. and owe each other “the duty of the finest loyalty” “Punctilios of honor.” At very least a duty to say what was going on and give M chance to compete. Owe each other the highest duty of loyalty while the enterprise is ongoing. §404 General Std of partner’s conduct.
NOTE: §21(1) only applies to profits, SO if S’s deal crashed Ø can hold M liab. Partnership Property - UPA § 25 - each P is co-owner as tenant in partnership Incidents of Tenancy:
each can use prop. for Ñ purposes rt. in specific prop. is Ø assignable, except by ALL Ps P’s rt.s Ø subj. to attachment, except on claim against Ñ On death P’s int. vests w/surviving Ps
* 1994 UPA - clearly puts ownership in hands of entity
UPA § 24 - Property rts of P are (1) rt. in spec. Ñ prop.; (2) int. in Ñ; (3) rt. to participate in management. UPA § 22 - ANY P has rt. to formal accounting as to affairs, IF:
wrongfully excluded from Ñ business or poss. of prop. by co-P If rt. exists under agreement under § 21 (P acc. as fiduciary) When circ. render it just and reas.
UPA § 28 - Although creditors Ø get Ñ prop., CAN stand in shoes of P for any prop. or $ coming out of Ñ. (2) suggests that Ct. can foreclose on Ñ without dissolution UPA § 27 - If P assigns P int., Ø make assignee full P, ONLY allow to receive profits & proceeds of dissolution. Does NOT dissolve Ñ UPA § 26 - int in Ñ, profits, and surplus is same as personal prop. UPA § 40(b) & (i) - Indiv. cred. have priority as to indiv. prop.; Ñ cred. have priority as to Ñ prop. Bankruptcy Exception (to Jingle Rule) - Ñ cred. have priority as to Ñ prop.; Ñ cred. are equal to indiv. cred. as to indiv. prop. (Rationale: if make loan to Ñ you are relying on Ps; if loan to P, Ø relying on Ñ) Putnam v. Shoaf; a co-partner owns no specific interest in an y specific property or asset of the partnership, and may only convey an undivided interest in the value or deficit of the partnership.
Partnership Dissolution -
UPA § 29 - Dissolution Defined - Diss. is the change in relation of the Ps caused ANY P ceasing to be assoc. in the carrying on, as distinguished from the winding up, of the business UPA § 30 - On diss. Ñ is Ø term., but continues until winding up of Ñ affairs is completed
NOTE: Diss. is something that happens b/c act says it happens. NOT related to cessation or operations. UPA § 31 - Dissolution is caused:
WITHOUT violation of agreement b/w Ps
by term of definite period or particular task specified in the agreement By express will of ANY P if Ø time or task by express will of ALL Ps, who have Ø assigned int., either before or after expiration of per. or task By the expulsion of ANY P
WITH violation of agreement b/w Ps, where the circ. Ø permit the a diss. under any other provision, by the express will of ANY P at any time By any event which makes it unlawful for bus. of Ñ to carry on by death of any Ñ by bankruptcy of any P or Ñ by decree of ct. UPA § 42 - Legal rep. of deceased P has right to P’s int. in Ñ at time of diss. (ie-death); AND option of (A) receiving interest, OR (B) profits attrib. to his rt.s in prop. of Ñ up until date of judgment. UPA § 38(1) - if Ø violation of agr. P has rt. to have Ñ assets applied against liab. and surplus paid in cash
(2) - when diss. is caused by contravention of agr
Each P who Ø wrongfully cause diss. shall have (II) the rt., as against P causing diss. wrongfully, to damages for breach. Ps Ø causing diss. MAY cont. bus., PROVIDED they secure payment to ousted P for amt. due up to diss. and indemn. that P for future liab.
Bohatch v. Butler; no duty not to expel a partner when she reported unethical conduct, BREACH OF TRUST. No fiduciary duty to remain partners. Partners have the right to withdrawal their consent and expulse a partner. Partner AT WILL. If not at will then must show causes. Whistle-blowers have special protection statutes. Putnam v. Shoaf; if a partner leaves the partnership & then the partnership wins a lawsuit, the expulsed partner gets nothing. The lawsuit is the property of the partnership. Owen v. Cohen; a court may order the dissolution of a Partnership where there are disagreements of such a nature and extent that all confidences and cooperation between the parties has been destroyed or where one of the parties by his misbehavior materially hinders a proper conduct of the partnership business. Collins v. Lewis - a partner who has not fully performed the obligations of the partnership may not obtain an order dissolving the partnership (L gets lease on café in bldg.; C contr. capital. L gets salary, C gets repayment from ALL profits, then split later. Start up costs C 2x anticipated. Fixed term Ñ (ie-life of lease). When Ø profitable C sues for diss.)
Court - Rt. to dissolve rests in equity. C Ø perform all of duties and L had so Ø diss UPA - Since fixed time, need BOTH to consent § 31(1)(c). IF diss., L would have action for lost profits b/c of C’s breach § 38(2). THUS C would get back his share of cap. less lost profits he caused (see Rickert).
Value of Partnership -
Equity - Assets - liabilities; Problem - Ø consider incr. in fmv and goodwill Capitalization of earnings - inc. stream X factor; Comparable business - sale value as a whole
UPA § 33 - Except as nec. to wind up affairs, Diss. term all auth of ANY P to act for Ñ, UNLESS b/c of bankr. or death of P UPA § 34 - If diss. caused by the act, death or bankr. each P is liab. to co-P for his share of any liab. created by P acting for Ñ as if Ñ Ø diss. UNLESS: (1) diss. being by act of a P, the P acting for Ñ had knowledge of diss. (2) diss. by death or bankr., P acting for Ñ had knowledge of death or bankr. UPA § 35 - (1) can still bind Ñ after diss. (a) if in winding up OR (2) by apparent auth. Can dispense app. auth. by notice to those w/whom previously dealt AND by publ. in newspaper for those w/whom Ø deal UPA § 36 - (1) Diss. ALONE Ø discharge existing liab. of P (2) MAY disch. if by agr. w/cred. OR by course of dealing if cred. knows of diss. UPA § 41 - New Ñ assumes liab of old Ñ, BUT old Ñ and old Ps Ø let off hook unless agr. b/w all parties
Partnership by Estoppel
UPA § 18(g) - Ø person can become a member of Ñ w/out consent of ALL P’s UPA § 16(1) - When pers. represents self as P in Ñ, he is liab. to anyone who, on the basis of such rep., gives cred. to actual or app. Ñ, (a) when Ñ liab. results he is liab. as if actual member of Ñ; When a pers. rep. self as P, and other person (in Ñ) consents, he is an agent for that pers. as for anyone relying on that rep. IF all Ps consent then he is agent for Ñ. Young v. Jones; A person who represents himself or permits another to represent him, as a partner is liable to persons who *relied* on such representations. Martin v. Peyton - loaned securities to Ñ. Got % of Ñ until paid off, as well as demanded who ran Ñ and veto power, etc. Statement in loan said “Ø a Ñ”) Ct. said statement Ø dispositive, actions were. ) liab. as if P b/c crossed fine line of what is proper to sec. loan and what is mgmt. and co-ownership for profit. Smith v. Kelly - (Ñ held S out to be P in K to 3rd, on tax returns, in suit against 3rd, BUT Ø agreement. S contr. nothing took Ø part in mgmt., Ø obligated for losses. S sued for acc. claiming was P) Ct. said not P. Ñ by estoppel may arise as to 3rd, but as for Ñ it is an agreement that req. intend and mutuality. WOULD be liab. to 3rd if rep. as P and Ñ consented. Could Ø be sued for slip & fall though, b/c Ø reliance.
1994 UPA - Ø require extension of credit ut works w/ANY transaction. STILL requires reliance. Limited Partnerships Certificate - MUST file certificate w/ state. ULP § 201. ULP § 303(a) - Liability - LP only liab. to extent of investment UNLESS LP rep.s to be GP, then to extent someone relies on that rep.; (b)(1) LP Ø exercise control by virtue of being officer, dir., or Sh. of Corp. GP (1)-(6) other things LP can do including consult and vote on things agr. says will be approved by LP’s LP is liab for his TORTS ULP § 503 - Absent agreement, profits shared based on contr. (as compared to per pers. in Ñ) Dissolution - difficult. ONLY by unanimous consent, loss of all GPs or by Court IRS 1987 - If LP is publicly traded then taxed as . Participation - NEW RULE is that LP can only be liab. if part. is subst. the same as that of GP, OR if people that trans. w/LÑ do so w/ actual knowledge of LP’s control.
HOW TO RESOLVE PROBLEMS IN THE FUTURE:
Detailed agreement between the parties Choose partner wisely—investigate potential partners Internal control Buy insurance
Corporate Formation
Mechanics of Formation
WHY DELAWARE? Well defined, predicable, body of law, and slightly pro-management bias. Articles of Incorporation -
Unless delayed existence is specified, existence begins when articles are filed. MBCA § 2.03(a). Sec. of State (SOS) filing articles is CONCLUSIVE proof that incorporators satisfied all conditions. § 2.03(b). § 2.02 - (a) Articles must set forth:
Name Number of auth. shares street address of initial registered office and agent name name and address of each incorporator (inc/or) Name - Must contain “corp.” “Inc.,” etc. § 4.01(a). Must be distinguishable by SOS from other or nonprofit. §4.01(b). Can reserve name for 120 days § 4.02. Foreign can reg. name § 4.03
NOTE: Ø deceptively similar std., BUT can be sued for copyright infringement. D/B/A - If use name other than registered name, MUST comply w/assumed name stat. which entails only a filing of d/b/a
Purpose, Duration, & Powers - Ø longer need in charter. Unless otherwise stated PURPOSE is “any lawful business.” § 3.01(a). DURATION is perpetual § 3.02. POWERS can do anything an indiv. can, including those specified § 3.02 Incorporators - One or more pers. who deliver art. to SOS By-Laws - Inc/or OR initial bd. SHALL adopt by-laws; MAY contain any prov. Ø inconsistent w/art. or law. § 2.06
Ultra Vires - Beyond the scope of authority
Generally - when the did not have the power to act, Ø liab. for act. § 3.04(a) except as provided in (b) an act of may Ø be challenged on grounds that Ø have power to act. (b) MAY be challenged: in proceeding by Sh. against to enjoin act; in proceeding by , directly, derivitively, etc., against incumbent or former dir., officer, etc.; OR In proceeding by the Atty. Gen.
in Sh. proc. under (b)(1), ct. may enjoin act IF equitable AND persons affected act are parties to proc. (Ø eq. unless 3rd knew)
Corporate Financial Matters
Financing a Corporation - Equity Securities, Par Value, Eligible Consideration
Equity Securities
PREFERRED STK: more like a bond. Rec’ stated dividends. Better off when mkt dwn. COMMON STK: gets what is left. Rt to vote & elect directors. Better off when mkt is up. BONDS: are paid off first MBCA § 2.02(2) - MUST specify number of auth. shares in the articles (any shares in excess are void. Dir. can be sued.)
NOTE: too many shares bad for minority b/c will be diluted by later issuance. BUT Maj. can just amend art. Min. should get K MBCA § 6.01(a) - art. can auth. more than one class of stock but must set # of each AND distinguish them. (b) MUST auth (1) one or more classes that have unlimited voting rights AND (2) one or more that are entitled to net proceeds on diss. CAN be same. OTHERWISE stock is flexible. Ø even mention preferred. ANY feature is allowed if put in art. OR give BOD power. MUST ALWAYS account for 100% of voting and liquidation rights. § 6.02(a) - IF art. so provide, BOD may determine the preferences, lim., & rights of any class of shares before they are issued. (ie-can create diff. types of stock) Par Value - completely arbitrary value for stock set in articles.
MBCA § 2.02(b)(2)(iv) - Ø have to set par but “MAY.” 1969 MBCA § 18 - Shares having par value may be issued for such consid. as set by bd. NOT LESS THAN par value. 1969 MBCA § 19 - judgment by the BOD is conclusive as to the price of stock EXCEPT where there is fraud in the trans. 1969 MBCA § 25 - Holder or subscriber of shares shall be under Ø obl. to corp. or cred. EXCEPT for the full consideration for which the shares were issued (ie - par value if sold for less. See § 18)
DISCOUNT STOCK - where cash is paid but less than par val. Accounting Stated Capital - # of shares X capital Capital surplus - sales price - stated cap. Earned surplus - add. cap. from growth CAN make distr. out of ES or CS, but Ø SC Some states base taxes on SC, but cred. usually Ø rely
3. Eligible Consideration -
1969 MBCA § 19 - Prohibited forms of consideration: (1) notes payable; (2) future services to be rendered. CAN have tangibles, intangibles, and past services. (if violate could cancel stock or create watered stock) MBCA § 6.21(b) - any consideration of tangible or intangible prop., cash, PROMISSORY NOTES, services performed, K FOR SERVICES TO BE PERFORMED, or other securities. (e) shares for future services or prom. note MAY be placed in escrow, but Ø have to. (NOTE: if for future serv. or prom. note, MUST report to other sh. § 16.21(b) Subscriptions - offer to buy stock from after it is formed. Used to line up investors. When formed call in Ks. Split as to whether K is accepted when formed or if must form then accept. GENERALLY K law applies. EXCEPT preincorp. subscr. K is irrevocable for 6mos unless otherwise stated. Idea is to give time to form.
Debt Financing; Capital Structure
Definitions -
Debenture - unsecured corp. obligation Bond - secured by lien on corp. prop. Registered bond - reg. in name of cred., coupons freely transferable Equity Securities - pref. & comm. stock Debt Securities - bonds and debentures Thin Corp. - High debt to equity ratio Leveraged - refers to debt/eq. ratio. More Leveraged requires higher rate of return to cover cost of interest on debt.
Liquidation - Order of Rights:
Debt/bonds Unsubordinated debentures Convertible subordinated debentures Preferred Stock Common Stock
Debt - Primary features -
fixed repayments Lack of mgmt. payments on interest tax deductible by Inv. pays taxes on int. as ord. gain, but return of cap. tax free
Factors in Determining Whether Debt or Equity
presence or absence of fixed maturity date source of payments rt. to enforce payment of int. & princ. part. in mgmt. intent of parties thin or adequate cap. failure to repay on due date or to seek postponement parties Ø respect own documents
Promoter Liability & Limited Liability
PRE-INCORP K’s
Southern-gulf Marine v. Camcraft; RULE; Where a party has contracted with a corp, the party is estopped from denying the legal validity of such a corp. when the obligations are sought to be enforced. Allowing someone to escape a K would not accord with justice and fair dealings. Corp had not been formed yet. Entered into a K to build a ship. The ship appreciated in value. & D wanted out of K.
CORP ENTITY & LIMITED LIABILITY
Walkovszky v. Carlton; Cab hit a person. (10 cabs in individual corps) HUCHTINSONS FAVORITE CASE. RULE; Whenever anyone uses control of the corp. to further his own rather than the corp.’s business, he will be liable for the corp.’s acts. Upon the principle of Respondeat Superior (Rules of Agency), the liability extends to negligent acts as well as commercial dealings. When a corp. is part of a larger corp., which actually conducts the business, the corp. will not pierce the corp. veil but will impose ENTERPRISE LIAB. Reverse piercing. Piercing theories: (1) alter ego; (2) unity of interest (3) fraud (siphoning $). PARENT/SUB; generally not liable for sub unless; (1) failure to follow corp. formalities (both have the same board and don’t have separate meetings) (2) P & S are operating pieces of the same business & S is undercapitalized; (3) public is misled about which entity is operating which business; (4) assets are intermingled bwn P & S; (S is forced to sell products to P. Tort v. K; courts are more likely to pierce the veil under TORT case (involuntary) than in a CONTRACT case (where the creditor is voluntary). Respondeat Superior; rule that the principle is responsible for the tortuous acts committed by its agents in the scope of their agency authority. Corporate Veil; Refers to the shielding from personal liability of the corp.’s officers, directors or shs for unlawful conduct engaged in by the corp. Whether creditors have been misled is not of primary importance. Rather, a ct will look at the degree to which the corp. shell has been perfected and the corp.’s use as a mere business conduit of its shs.
De Jure Corp. - the stat. has been followed and, even if there was a mistake, the art. were filed. THUS for all purposes. SUBSTANTIAL COMPLIANCE De Facto Corp. - Exists where there was (1) a valid law under which the bus. could operate; (2) bona fide effort to comply w/legal req.; (3) actual exercise of powers. THEN Q of can only be challenged by State. CORPORATION IN FACT Corporation by Estoppel - One is estopped from denying the corp. existence where the pers. seeking to hold the officer pers. liab. has contracted or otherwise dealt with the assoc. in such a manner as to recog. and in effect admit its existence as a corp. body. (i.e.-3rd recogn. , cannot then say Ø and sue indiv.)
Piercing the Corporate Veil
PURPOSE; Piercing Corp. veil is invoked by Ct. to prevent fraud or achieve eq. Most important factors are (1) ignoring corporate formalities, (2) under capitalization, (3) commingling of funds
ALTER EGO
Sea-Land Services v. Pepper Source; alter ego was claimed. Creditors had option to (1) look at credit reports; (2) dealt intentionally; (3) cts have less sympathy for creditors. VAN DORN TESTS (Not an exclusive test. Not accepted in every jurisdiction) RULE: The corp. veil will be pierced where there is a unity of interest and ownership (alter ego--no separation of ownership) bwtn the corp. and an individual AND where adherence to the fiction of a separate corp. existence would sanction a fraud or promote injustice. Promoter took loans and salaries in such a way as to insure that the corp. has insufficient funds to pay the debts. Intentional wrong is required. MBCA § 6.22 - Purchaser of share from a is Ø liab. to or cred. beyond price authorized for shares Factors for Piercing the Corp. Veil
inequity, illegality fraud (negl is insufficient, need SCIENTER aka knowledge) , misrep., disregard of formalities NO CORP BOOKS Mere facade, alter ego theory-one corp. treating the assets of another as its own. (u of int.) siphoning $$ (fraud) commingling of $ (unity of interest) under-capitalization (unity of interest) one or small # of Shs (shouldn’t be relevant but sometimes is) failure to maintain adequate corporate records (unity of interest)
POTENTIAL 3RD PRONG; TOTALITY OF THE CIRCUMSTANCES – FAILURE TO PAY RENT
Kinney Shoe v. Polan; RULE; The corp. veil will be pierced (equitable remedy) where there is unity of interest & ownership between the corp. and the individual shareholder and an inequitable result would occur if the acts were treated as of the corp. alone. Grossly inadequate capitalization (this alone is not enough to prove fraud!) combined with disregard of corp. formalities. POTENTIAL 3RD PRONG: should have conducted a credit investigation; would have disclosed gross under-capitalization. (NOT WELL EXCEPTED). Totality of the Circumstances is used to determine whether to pierce the corp. veil, and each case must be decided on its own facts.
LAYA TEST –SUBSTANTIAL DOMINION
Do Parent & Sub have c’mon directors & officers? Common business depts.? Do they file a consolidated return? Does P pay the salaries of the Sub? Is all of the Subs bus from the Parent? Are daily operations of the two entities separate? Does Sub observe basic corp. formalities?
UNDUE CONTROL W/O FRAUD
Perpetual Real Estate v. Michaelson; General partner was a Corp. RULE: Where a sole shareholder exercises undue domination and control over the corp., the corp. veil will be pierced if the sole shs also used the corp. form to obscure fraud or conceal a crime. Cts usually apply more stringent standards when piercing the corp. veil in a K case than a tort case. Unless the corp. misrepresents its financial condition to the creditor, the creditor should bound by its decision to deal with the corp. It should not be able to complain later that the corp. was unsound. The agreement included no personal guarantees by D. Burden of proof is on the P. Should have sought a complete personal guarantee.
ATTACH GENERAL LIAB TO LIMITED PARTNERS -DIRECT SUIT—(1) suit based on voting rts; (2) oppression of minority shs; (3) pmt of dividends; (4 inspection of corp books).
Frigidaire Sales v. Union; RULE: Limited partners do not incur general liability (unless there is a piercing) for the limited partnership obligation simply because they are officers, directors, or shareholder or a corporate general partner. Limited partner can incur general liability where there is a showing of fraud or deception. DIRECT—loss to shareholder. DERIVATIVE—loss to any shareholders.
LIMITED PARTNERSHIP; A voluntary agreement entered into by two or more parties whereby one or more general partners are responsible for the enterprise’s liabilities and mgt. and the other partners are only liable to the extent of their investment. DIRECT SUIT; General order of debt - Partnership Ñ - (1) sec. cred.; (2) unsec. cred.; (3) debts to P; (4) P Corporation - (1) fees; (2) taxes; (3) sec. cred.; (4) unsec. cred.; (5) Sh KEY DIF. - debts owed a P are automatically subordinated, unlike that is Ø auto. but stays w/ other cred.
Fiduciary Obligations
Duty of Care FOR DIRECTORS
MBCA § 8.24(d) - Dir. present at meeting when corp. action is taken is deemed to have assented to the action UNLESS: (1) objects at beginning to holding of mtg. or conducting its bus. (2) his dissent or abstention is entered into minutes OR (3) he delivers written notice of abstention or dissent to presiding officer before adjournment or to immediately after adjournment. CANNOT dissent if vote in favor.
MBCA § 8.30 - Dir. shall act in good faith and with care of ord. prudent person in manner reas. believes in best int. of . NOTE: much less protective of dir. than BJR (closer to Litwin) Comment says Ø adopt BJR b/c ct.s are still working it out.
Derivative Litigation -
Purpose; - action brought on behalf of to assert rights. Suit at EQUITY. Not at law. To make shareholder whole. No direct PRIVITY btwn the shareholder and the 3rd party. PRO’s;
Provides proper monitoring of fiduciary duties by shs. May prevent against future breaches Act as an incentive for mgt to act in socially responsible conduct May be the only effective remedy in certain circumstances DEMAND REQUIREMNTS prevent baseless claims, CON—when a BOD refuses a demand, the only issues to be examined are the good faith and reasonableness of its investigation. Bond requirement protect the corp. WE WANT SUSPICION & A HIGH DEGREE OF
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