My Corporations Outline:

Intro: Agency
A. What is Agency?
a. “An agency relationship is one in which an agent and principal
agree that the agent will use some degree of judgment to perform
a service for the principal’s business”
b. “Relationship between a Principal (P), agent (A), and a 3rd party
(3P)”
B. Who is involved?
a. Principal: The owner of the business
b. Agent: The individual acting on behalf of the principal
c. 3rd Party: An person or entity that is doing business with the
principal through the agent.
C. Restatement 3d. of Agency (Three main rules)
a. Agency: a relationship formed by manifestations of authority from
a principal to the agent subject to principal control
b. If an agent does a deal on behalf principal and fully discloses that it
is acting on behalf of an identifiable principal, agent is not liable on
the contract. Must be an existing principal
c. If an agent does a deal on behalf of a principal and there is full
disclosure, automatically, principal and 3rd party are bound to
each other.
D. Types of K’s within Agency Relationship
a. Principal/Agency Contract: Contract between Principal and Agent
for agent to act on behalf of principal
b. Agent/3rd Party Contract: Contract between agent (on behalf of
principal) with 3rd Party to achieve Principal’s desires
c. Assignment Contract: binds principal and 3rd party
E. Relationship of the Principal to third parties
a. A principal can become liable to a third party ( i.e. to a natural
person or entity that is not the agent) for the actions of the agent
under five theories of liability
i. Most common theories are :
1. Actual Authority
2. Implied Authority
ii. When neither of these two authorities results in liability,
courts turn to the remaining three theories.
F. Case Law Dealing with whether an agent is liable or not
a. Texacoma Broadcasters Inc. v. Hospital Corporation
i. Facts: Hosptial Corporation (Principal) uses Advertising
Agency (agent) to conduct business with Texacoma (3rd
Party) for advertising of Hospital. Hospital pays advertisers
to pay Texacoma for ads, but Agent never paid texacoma.
ii. Issue: Whether principal or agent is liable to 3rd party for
non payment on open account?
 iii. Rule: If an agent does a deal on behalf principal and
fully discloses that it is acting on behalf of an
identifiable principal, agent is not liable on the
contract. Must be an existing principal.

Authority: Express, Implied, And Apparent

A. Actual Authority
a. Defined: A principal is bound to third parties by anything the agent
does that is in accordance with the principal’s “manifestation” to
the agent
i. This manifestation is determined by the agent’s reasonable
interpretation in light of all the circumstances.
ii. Manifestations can be express:
1. “you are authorized to sell my car for any price in
excess of 2,000.”

iii. Manifestations can be implied:

1. The agent has actual authority to do collateral acts
that are incidental, that usually accompany or are
usually done in the business, or that are reasonably
necessary to accomplish the acts that the principal
has expressly authorized.
b. Express Actual Authority
i. Authority given in things such as contract, oral agreement
ii. What matters with express authority is what the AGENT
believes the authority is given from the principal
c. Implied Actual Authority
i. Authority to do something that is incidental, necessarily
reasonable to achieve the objective.
ii. Filling gaps that we think must be filled to get the job done
iii. Must identify some aspect of ACTUAL AUTHORITY to fulfill
and provide evidence of implied authority
iv. Implied authority only increases authority of someone who
already has authority
v. By expressly saying no, principal can restrict the range of
authority. Principal can restrict the range of authority.
vi. What matters with implied authority is what the AGENT
believed the authority to be given from principal
vii. Evidence of implied authority:
1. Industry custom (expert witness testimony)
viii. Case Example for Implied Authority
1. Mill Street Church of Christ v. Hogan
a. Facts: Sam Hogan, brother of Bill Hogan was
injured at Miller Street Church while
painting. Bill Hogan, who was hired by the
church had in previous assignment brought
 in people to work with him. Bill as in the past
enlisted his brother to work with him with no
objection from the church officials. Sam fell
off the ladder and broke his arm and was
paid for the work he did. The church went
under new management that wanted to deny
Sam workmen’s compensation.
b. Issue: Whether Sam Hogan was an employee
of the church and was entitled to workmen’s
compensation as a result of a at work
accident?
c. Rule:
i. Implied authority is actual authority
circumstantially proven which the
principal actually intended the agent
to possess and includes such powers
as are practically necessary to carry
out the duties actually delegated.
Estell v. Barrickman, Ky.App., 571
S.W.2d 650 (1978). Apparent
authority on the other hand is not
actual authority but is the authority
the agent is held out by the principal
as possessing. It is a matter of
appearances on which third parties
come to rely. Estell v. Barrickman,
supra.
ii. #2 In examining whether implied
authority exists, it is important to
focus upon the agent's understanding
of his authority. It must be determined
whether the agent reasonably believes
because of present or past conduct of
the principal that the principal wishes
him to act in a certain way or to have
certain authority.
B. Apparent Authority
a. Defined: Apparent authority stems from a third party’s belief,
traceable to the principal’s manifestation, that the agent (or even a
non-agent) is authorized to act for the principal.
i. Principal is bound by an agent’s actions within the scope of
the agent’s apparent authority.
b. Also known as “ostensible authority” or “Constructive Authority”
i. No real agency relationship, no real authority.
ii. There should be authority if things happened the way the
3rd party thought
 iii. This is based on “manifestations from the principal to 3rd
party”
1. If you are going to hold principal liable, you must
look to what the principal did in relation to third
party (must figure out what principal did)
2. Based on reasonable reliance of 3rd party that agent
had authority based on actions by the principal
iv. Source of the 3rd party belief must come from the principal
(must show what principal did to cause reliance in 3rd
party about what agent presents)
1. PRINCIPAL MUST DO SOMETHING TO ESTABLISH
APPARENT AUTHORITY
v. Can apply to a person who has no actual authority at all

Apparent Authority Continued

c. When analyzing apparent authority:

i. Look to the principal’s manifestations (actions or inactions)
ii. Manifest something about the apparent agent’s authority to
do something
1. Example: principal lets it appear that agent had
authority to do deals, set appointment, have access
to register, make sells, gain commission.
iii. Look to different factors that would lead a reasonable
person as a 3rd party to believe that agency exists
1. Does the “agent” in question have access to things
true agents do?
a. Receipts
b. Store access
c. Business cards with company name on it
d. Other things that are reasonable
iv. Plaintiffs must prove that principal made manifestation and
also must prove that they reasonably relied on those
manifestations
1. If the agent does something that seems suspicious or
something that shocks the conscience, a third party
should see the red flags
2. A failure to see these obvious red flags may result in
a finding against the third party
3. If something seems odd about the deal, ask to talk to
the principal, it’s the safest route
v. Classic problem for plaintiffs in apparent authority assess:
1. The plaintiff looks to what the agent did to make
them believe thy were an agent
 2. BUT a plaintiff must look to the manifestations of the
PRINCIPAL’s manifestation in order to establish
apparent authority
vi. ALWAYS look to the principal’s manifestations. Agent
doesn’t really matter for apparent authority. It’s about
communication between principal and 3rd party

d. Case Law dealing with apparent authority

i. Blackburn v. Aetna Casualty & Surety Co (bad analysis)
1. Facts: Smith d/b/a Smitty’s Lawn Service alleged he
had liability insurance with Aetna. Aetna denied him
coverage when he was involved in an accident.
Smith’s asked Rued, an independent insurance agent
that represent multiple insurance agents including
Aetna, by way of an Rued agent Savelkoul, for a
automobile liability insurance.
2. Issue: Whether the trial court erred when it decided
that Smith had automobile liability insurance on
October 7, 1985, the day of his accident?
3. Rule:
a. #1 "One of the tests of agent’s powers is his
ostensible or apparent authority. An agent
has the power to bind the princip[al]. An
agent can make contracts, receive payments
and can do all of the other items specified in
the agency agreement.
b. #2 A principal is bound by acts of his agent
under a merely [apparent] authority to those
persons only who in good faith and without
ordinary negligence have incurred a liability
or parted with value upon the faith thereof.
ii. Boulos v. Morrison
1. Rules
a. Rule: The burden of proving apparent
authority is on the party relying on the
agency. Bamber Contractors, supra.
b. A third party seeking to benefit from the
doctrine of apparent authority may not
blindly rely upon the assertions of an agent.
He has a duty to inquire into the nature and
extent of the agent’s power. Buckley v.
Woodlawn Development Corp., 233 La. 662,
98 So.2d 92 (1957); Byles Welding, supra;
Bamber Contractors, supra.
iii. Hoddeson v. Koos Bros
1. Facts: The plaintiff was deceived by an imposter in
the defendant’s store. The imposter posed as an
store agent, showed the plaintiff the items she
wanted to purchase and took her money. The
imposter promised the delivery of the goods on a
later date but they were never delivered. The
defendant store had no knowledge of the interaction
or the transaction
2. Issue: Whether the plaintiffs have sufficiently
provided circumstantial evidence to show that
apparent authority existed within the alleged agent
from the principal
3. Rules:
a. Concisely stated, the liability of a principal to
third parties for the acts of an agent may be
shown by proof disclosing (1) express or real
authority which has been definitely granted;
(2) implied authority, that is, to do all that is
proper, customarily incidental and
reasonably appropriate to the exercise of the
authority granted; and (3) apparent
authority, such as where the principal by
words, conduct, or other indicative
manifestations has ‘held out’ the person to be
his agent.
b. where a proprietor of a place of business by
his dereliction of duty enables one who is not
his agent conspicuously to act as such and
ostensibly to transact the proprietor's
business with a patron in the establishment,
the appearances being of such a character as
to lead a person of ordinary prudence and
circumspection to believe that the impostor
was in truth the proprietor's agent, in such
circumstances the law will not permit the
proprietor defensively to avail himself of the
impostor's lack of authority and thus escape
liability for the consequential loss thereby
sustained by the customer.
Ratification; Undisclosed Agency
 Ratification occurs by a principal manifesting assent, to treat an
action as authorized.
 Manifestation may be express but need not to be communicated
to Agent or3rd party to be effective
 Ratification can also be manifested through conduct that is only
principal explicable on the ground that the principal intends to
ratify the agent’s action.

Restatement (Third) of Agency

Chapter 4. Ratification
§ 4.01 Ratification Defined
 Ratification is the affirmance of a prior act done by another, whereby the act
is given effect as if done by an agent acting with actual authority.
 (2) A person ratifies an act by
o (a) manifesting assent that the act shall affect the person's legal
relations, or
o (b) conduct that justifies a reasonable assumption that the person so
consents.
 (3) Ratification does not occur unless
o (a) the act is ratifiable as stated in § 4.03,
o (b) the person ratifying has capacity as stated in § 4.04,
o (c) the ratification is timely as stated in § 4.05, and
o (d) the ratification encompasses the act in its entirety as stated in §
4.07.
 Comment D to Section 4.01 Ratification
o Actions that constitute ratification.
 Ratification requires an objectively or externally observable
indication that a person consents that another's prior act shall
affect the person's legal relations.
 To constitute ratification, the consent need not be
communicated to the third party or the agent.
 This is so because the focal point of ratification is an
observable indication that the principal has exercised
choice and has consented.
 In contrast, the principal's manifestation of assent to the agent
is essential to the presence of actual authority, (see §§ 2.01 and
3.01) and the principal's manifestation to the third party is
essential to the presence of apparent authority (see §§ 2.03
and 3.03)
 Conduct demonstrates consent to becoming subject to the legal
consequences of another's act in the two situations stated in subsection (2).
o First, a person may ratify an act by manifesting assent that the act
affect the person's legal relations.
 o Second, the person may ratify the act through conduct justifiable only
on the assumption that the person consents to be bound by the act's
legal consequences.
o For example, knowing acceptance of the benefit of a transaction
ratifies the act of entering into the transaction.
 This is so even though the person also manifests dissent to
becoming bound by the act's legal consequences. See Comment
g for further discussion.
 It is a question of fact whether conduct is sufficient to indicate consent.
Conduct that can be otherwise explained may not effect ratification.
o For example, a principal's failure to terminate or reprimand an
employee by itself is not likely to ratify the employee's unauthorized
action because the employer may have varied reasons for failing to
take action adverse to an employee.
o On the other hand, if the employer is aware of ongoing conduct
encompassing numerous acts by the employee, failure to terminate
may constitute ratification, as in some circumstances may the
promotion or celebration of such an employee.

Undisclosed Agency

 Undisclosed Principal
 Agent is liable to contracts
o Can be indemnified by principal if the corporation wants to hide
their identity
o Achieved by an indemnification clause or something else
 Partially disclosed (or unidentifiable) principal
o It is clear that agent is working on behalf of someone but not clear
who it is
o If the agent does not fully disclose, then he is still liable (same as
undisclosed) along with the principal
 Disclosure only matters for agency
 The difference between being liable and not
o Undisclosed or Partially disclosed principal: agent and principal
liable
Disclosures do not have to be grand:
 Could be as simple as putting “inc.” after the company name
 Or you could just explain the business structure of the organization
 It is on agent to FULLY disclose the organization or corporation’s full name
including business titles such as “Inc.,” or “LLC”
d/b/a: doing business as
 A name a corporation registers that is not what it is incorporated under but
one that it uses when conducting business
 No “Inc.,” after d/b/a’s. It’s not a real entity, just a name; like a nick name of a
corporation
  When doing business, agent must disclose the actual registered corporate
name, or it will be considered a partially or undisclosed principal and the
agent will be liable
 If you are going to claim that you are fully disclosing as an agent, then you
must disclose both the company’s name and the type of entity it is.
o Never have to disclose d/b/a; only used for marketing and public
purposes. (only have to disclose true corporate name)
o d/b/a is really irrelevant when it comes to agency law.
Difference between undisclosed and unidentified principal
o Undisclosed: agent doesn’t mention he is an agent
o Unidentified: Agent tells you he is an agent on behalf of an
entity, but doesn’t say for what corporation

Torts by Agents

Torts Continued; Agency Termination

Partnership Formation

o Association:
o two people voluntarily coming together
o Carry On (a business for profit)
o Has to carry on a business for profit
o Co-Ownership (Finding Of)
o Determination of Partnership: Its not about what the parties
intend (subjectively), its is how they operate together
(objectively)
o Five Factors cts. Look to between parties:
  (1) Profit sharing
 If you have a profit sharing
arrangement then you are a
partnership
 (do both parties have interest in profits
made)
 (2) Control sharing (control over business)
 Bottom line decision to make, who gets
to make it?
 (3) Loss sharing
 (4) Contribution
 (5) Ownership of property
 If two-people agree to or share profits
 Two people who have stakes in profits have
an partnership

o Partnerships can be thought of as a business owned by more

than one person
o Any partner has the absolute right to end the co-ownership,
even though such ending might violate a contract with the other
owners
o Default rule: When an owner ceased to be a co-owner, the
partnership’s assets would be liquidated and each partner paid
his or her interest
o Because liquidation often resulted in depressed sale price,
partners often agree in advance that the partner’s assets
would not be liquidated when a partner ceased to be a co-
owner
 Instead the remaining partners would continue the
business and the partner who left would receive the
value of his or her interest
o Each partner will have an equal right to manage the business
o In absence of explicit agreement of the partners, losses
would be divided in the same proportion as profits
o A partner’s powers could not be transferred, and no one
could become partner without unanimous consent
o Regardless of the partner’s agreement among themselves,
agency law provided that a partner who ceased to be a co-owner
nonetheless remained liable to third parties for existing
obligations of the business.
o When new partners are admitted, they are only liable to
third parties for subsequent actions
 o A partner, as agent, could only bind those persons who were
currently partners

Uniform Partnership Act

o Created in 1914
o Adopted in every state except for Louisiana (although they
adopted most underlying principles)
o Current UPA created in 1997
o Most profound change is the consequence of a change in
the co-ownership of the partnership

Reasons to businesses were conducted as partnerships

o (1) Partnership can be formed inadvertently
o parties may not realize they are forming a partnership
o (2) Some people deliberately choose a partnership but do so
without seeking legal advice as to the most advantageous
business form
o (3) Lack of alternative forms
o (4)Until the 1990’s, certain tax advantages could only be
effectively obtained by partnerships
o The IRS taxes partnerships as aggregates rather than
entities
 The partnership does not pay tax; it merely files an
informational return with the IRS
o All profits or loses are reported by the partners
o Since 1996 taxation as a partnership can be also obtained by an
LLC
o The LLC has certain advantages over partnerships and is
thus the form of choice for entities seeking partnership
taxation

Partnership Rules
  A person can acquire an ownership interest without making any
contribution
o More typically, that interest is in return for past
contrbutions to the business or in the expectation of future
contributions
 Money is the most intuitive contribution
 Property that a business may find useful or necessary is a
contribution
o Lease on favorable terms or in a favorable location
o Vehicles o inventory
o Intangible property such as intellectual property,
copyrights, trademarks, patents
 Services rendered serve as a contribution
o Working in a business’s daily operations
o Providing professional services
o Accounting services

Partnership Property
 Partnership property belongs to the partnership
o Not the partners collectively
 UPA 203 defines partnership property as “ property
acquired by a partnership…”
o The ultimate question is the intent of the parties
 UPA 204
o Property becomes partnership property if acquired:
 (1) in the name of the partnership or
 (2) in the name of one or more of the partners
with an indication in the instrument
transferring title of either: (i) their capacity as
partners or (ii) of the existence of a
partnership, even if the name of the
partnership is not indicated.
 o UPA Sets out two presumptions that apply when the
partners have failed to express their intent:
 (1) property purchased with partnership funds
is presumed to be partnership property,
notwithstanding the name in which it is held
 (2) Property acquired in the name of one or
more partners, without an indication of their
capacity as partners and without use of
partnership funds or credit, is presumed to be
the partner’s separate property, even if used
for partnership purposes.
 In effect, it is presumed in that case that
only the use of the property is
contributed to the partnership
 Partner’s interest in the partnership
o A partner has only two transferrable rights:
 (1) the right to an allocation of profits and
losses,
 which is simply the right to have a
certain percentage of the profits and
losses credited to the partner’s account
 (2) The right to receive distributions from the
partnership
o Each partner has a equal right to manage the
partnership
o A transferee does not become a partner, even where
the transferee receives all of a partner’s
transferrable interest,
o A partner’s transferable interest in the partnership
can also be involuntarily seized by a judgment
creditor or partner
 This seizure is called a charging order and it
works like a lien: it may be foreclosed upon
and sold at a judicial sale
 Allocations and Distributions
o A partners economic interests are, in the first
instance, a matter of agreement among them,
 need not be equal, and
 may change over time.
 Personal Liability
o Partners have unlimited personal liability for the
debts of the partnership
o UPA 307:
  A partnership creditor cannot levy on the
partnership assets until the assets of the
partnership are exhausted and the creditor
obtains a judgment against the partner.
o UPA 306 (a)
 Partners are jointly and severally liable for all
partnership obligations
 This means that a judgment creditor
entitled to proceed against the partners
may seek payment from some partners
but not others
 If a partner pays more than the partner’s
share of partnership debts, measured by
the proportion of loses each each partner
is to bear, he or she may recover
contribution from other partners when
partnership is dissolved.
o Exception to personal liability
 New partners
 Newly admitted partner is not personally
liable for pre-exisisting partnership debt
but, in practice, such partners may be
required to assume those liabilities as a
condition to being a partner
 Dissociated partners
 Dissociation occurs when a partner
ceases to be co-owner
 A partner is dissocated in five settings:
o (1) upon the happening of an
agreed upon event
 such as repayment of a loan
from the partner or the
passage of time
o (2) Upon becoming a debtor in
bankruptcy
o (3) Partner may be expelled
o (4) Death
o (5) By express will
 this power cannot be
contracted away
 Unless the dissociation causes
dissolution, the dissociated partner’s
interest is bought out by the partnership
  Remains personally liable for partnership
obligations incurred before dissociation
 Dissociation of an individual is wrongful
only if it breaches an express agreement
or if, prior to the end of a term
partnership,
o the partner dissociates by express
will,
o by becoming a debtor in
bankruptcy, or
o by expulsion by a court order
o
 In limited circumstances, may be liable
for debts incurred after dissociation
 Dissociated partner remains
liable for partnership
obligations incurred within
two years after dissociation
to persons who reasonably
believed that at the time of
the obligation that the
dissociated partner was a
partner and who is not
deemed to have notice that
the partner was dissociated
 A dissociating partner of the partnership
can file a statement f dissociation
o This cuts off postdissociation
liability after 90 Days
 Dissolution
o Under the UPA 801
 (1) where it becomes unlawful to continue all
or substantially all of the partnership’s interest
 (2) A partnership dissolves if all the partners
agree
 (3)if partnership is for a certain term, an
expiration of the time or completion of the
undertaking
 (4) if a partner ceases to be a partner for what
ever reason, the remaining half of the partners
may opt to dissolve the partnership
 (5) courts have equitable power to dissolve a
partnership on several grounds:
  economic purpose f partnership is likely
to be unreasonably frustrated
 court also has the equitable power to
dissolve the partnership at the behest of
a transferee of a partnership’s interst
 (6) Each partner in a partnership at will, the
absolute right to compel the partnership’s
dissolution

Incorporation Process

Delaware
 Popular state for big corporations to incorporate their business
o Delaware corporate law is familiar to most corporate lawyers
o Delaware has a large body of case law that interprets the statute
which provides a measure of predictability and comfort for
corporations
o Delaware has a specialized court, the Court of Chancery, that handles
corporate matters
Reserving a name
 Under both Delaware and the MBCA, the name must be distinguishable from
the name of every other corporation on file with the secretary of state
 In some states, the requirement is a narrow one:
o A corporate name is acceptable if it is different in anyway.
 In other states, including MCBA states:
o A name is not distinguishable if it is different I such minor ways as
punctuation, capitalization, or use of a definitive article or a plural in
the name.
 Under Law I most states, a state must contain some evidence the entity is a
corporation and must not cotain words falsely suggesting that the new
incorporation will engage in certain businesses, usually those involving
banking or other financial services.
o Corporation must be licensed to engage in banking and to carry that
title
Incorporation Documents
 The document that creates and governs the corporation is
o In Delaware: Certificate of Incorporation
o MBCA: Articles of Incorporation
 In most states the states the statute authorizes a government official, usually
a secretary of state to promulgate a standard form that may be used to
incorporate.
o Most states require minimal information for the Articles:
 Corporation’s name
  Name and address of each person, or other corporation who
will act as the incorporator
 Often lawyer and his staff will act as incorporators
 Must name a person, or other corporation, who w, who will act
as the corporation’s agent upon whom service of process may
be made and must identify an address within the state where
the registered agent may be served.
o These requirements exist so that personal jurisdiction may be
properly asserted over the corporation.
o Articles must also inclue the number of shares the company may issue
 Also must mention if the shares will have different
management or economic rights
 Many states require the corporation to state the purpose for which the
corporation is being formed.
o This is now sort non-relevant
Filing
 Filing is the action by which the state accepts the Articles.
o Important because it is through filing that the corporation comes into
existence
o Must file with the secretary of states
o Mistakes made by lawyers in the filing process can lead to articles
being reected.

Organizing the New Corporation

 Once the new corporation is formed, need to ensure everything is properly
organized.
 Must have an organizational meeting to complete the tasks of:
o Naming officers
o Creating bylaws
o To take any action on behalf of the corporation
o Electing directors (if they aren’t named in the Articles)
o Note: statutes do not require the corporation to issue stock at the
organizational meeting
 Case law in most jurisdictions provides that a corporation cannot engage in
business until it has received valid consideration in exchange for shares

Capital Structure
 A capital structure are the set of securities a new corporation will issue
o In selecting a capital structure the monetary needs of the entity
must be balanced with the needs of the new entity must be
balanced witht the needs of each of the potential investors.
 Including both economical and managerial components
 Corporations can get money in three different ways:
 o They can sell ownership interests (sometimes called equity)
o They can borrow
o They can use money generated by the business itself

Corporate securities
 Security is a set of rights that, over the years, has proven useful to
corporations and those who supply money
 Types of corporate securities (four)
o Common Stock
 This is the model corporate security
 It represents ownership interest in the business rather than
a loan to the business
 Interchangeable with shares, shares of stock and stock
 According to MBCA and DGCL, all shares are identical
absent of an explicit differentiation in the Articles of
incorporation
 If no such differentiation is made, stocks will by default
share these three qualities:
 (1) one vote on every matter submitted to the
shareholders
 (2) the right to its proportionate amount of any
dividend
 (3) the right to its proportionate amount of the
corporation’s assets, if any, upon dissolution
o Preferred Stock
 Preferred stock is stock that has a priority or preference
over other stock (common stock) in either the payment of
dividends or the distribution of assets on dissolution or
both.
 Preferred stock is a class of stock
 Some preferred stock have a subset of a class of
shares, called a series
 A typical preference is to grant the preferred stock a fixed
amount of money per year as a dividend to be paid before
the other stock receives any dividend
 Preferred stock typically gets a fixed amount at dissolution
before the common stock gets any money
 The longstanding rule is that preferred stock has all the
attributes of common shares unless stated otherwise.
o Other Relative Rights
 Voting
 A frequent tradeoff for granting certain
shareholders economic preferences is that they do
not receive the right to vote
 Convertible
  When a stock is convertible, the holder has the
option of exchanging the shares for a fixed amount
of security to the corporation
o Most typically conversion is a available more
senior shares to junior shares
o Any variation from the default version of stock must be carefully
documented.
o Debt
 Corporations receives a tax benefit by issuing debt rather
than equity
 IRS may allow a deduction to a corporation for
interest payments from their income
 When a corporation enters bankruptcy or voluntarily
dissolves, the debt holders have priority over the equity
holders.
o Short term debt
 Loans for weeks

 Documentation for loan: a loan agreement, promissory
note, and a UCC-1

o Long term debt

 Loans over years
 Increases bank risk and will bring higher interest rates
 Documentation for loan: a loan agreement, promissory
note, and a UCC-1
o Right
 Usually means an option granted to an existing security
holder
 Rights are usually short term and are often when the
corporation believes its current security holders are a likely
source of new capital
o Warrant
 Usually a long term option to purchase securities
 Usually sold to the general public rather than only to
existing security holders
o Frequently a corporation will sell both stock and warranty as a
package called units
o Option
 Can have three definitions
 The power but not the obligation to do something
 Second, it can connote a power granted by the
corporation to a particular person often a key
employee.
Choosing a Capital Structure for the startup Corporation
 How does one actually plan a new corporation’s capital structure (examine
these areas carefully):
o (1) The investors’ relative claims on the business’s income (and
assets and dissolution)
o (2) The investor’s relative management power
o (3) The dangers that concern capital structures with excessive debt.
 This is a financial matter

Mechanics of Issuance
 Three principal concepts involved in validly issuing stock:
o Statutorily authorized
o Issued
o Outstanding
 Statutory Authorization
o Articles of incorporation must contain a statement of the number and
kinds of shares that the corporation may-is authorized to issue
o If corporation desires to issue more shares that authorize in it’s
articles, it must amend it’s articles
o A corporation that purports to issue more share than it has authorized
has acted illegally
 Thus the new shares issued are called overissue and are void
 Issuance of stock
o Defined as the process of putting statutorily authorized shares in the
hands of investors
o Issuance comprises of two other concepts:
 (1) the board must approve (authorize) the issuance of the
shares
 (2) the corporation must receive appropriate consideration
 When these two things happen, the share are said to have been
validly issued and fully paid and therefore nonassessable
o Board authorization
 Not only does the appropriate number of shares must be
permitted by articles of incorporation
 The corporation, acting through its board of directors, has
approved a particular transaction in which statutorily
authorized shares will be exchanged for consideration
o Consideration
 Outstanding
o Shares are outstanding when they have been statutorily authorized,
validly issued, and remain in the hands of some entity other than the
corporation itself.
 The shareholder need not be the original shareholder
  Shares are still outstanding in the hands of a transferee as long
as the transferee is not the issuing corporation
o The concept of outstanding shares has importance in two settings:
 Only outstanding shares are entitled to vote
 Only outstanding shares may receive dividends
 Preemptive Rights
o Protects current sharehlders from economic impairments, the courts
created the doctrine of preemptive rights
o Doctrine of Preemptive Rights
 This doctrine represents the right of each current shareholder
to maintain his or her proportionate interest by purchasing the
same the percentage of to-be-issued shares on the same terms
and conditions as proposed by the board of directors
 Not absolute and subject to several categories of exceptions.
o Preemptive Rights under the MBCA and DGCL
 Do not exist unless granted by the articles of incorporation.
o Three settings where issuance of new shares do not trigger
preemptive rights
 (1) Where consideration for the new shares is something other
than cash
 (2) Where the newly issued shares are issued pursuant to the
corporation’s initial plan of financing.
 (3) Where the corporation has, or is to have, more than one
class or series of shares

Shareholder Finance

 There are two ways to convert a company’s financial ncrease into money
o (1) Corporation can distribute the increased vale to the shareholders
 This is called a dividend
o (2) A shareholder may sell some or all of their shares
 Dividends
o Board discretion
 Both MBCA and DGCL provide that corporation’s board “may”
authorize he corporation to pay dividends, subject to certain
restrictions
 Corporation cannot pay dividends unless its board of
directors approves.
 When board authorizes, they are said to be declared
  Reasons why corporations wouldn’t declare
dividends:
 Board’s judgment that corp needs to retain
increased wealth to expand business
 to ensure that the corporation can meet future
obligations
 board may conclude that the shareholders are
best served by retaining the increased wealth
in the coporation rather than distributing it to
the shareholders
o Statutory Restrictions
 Every state’s corporations statutes restrict the ability
of a corporaton to pay a dividend even when its
board wishes to declare one.
 If the corporation is in financial difficulty, the
corporations directors have a distinct incentive to
ensure that the shareholders, in whose best interest
the directors must act, get as great a return as
possible
 Statutes exist to prevent the payment of dividends in
circumstances where creditors may be especially
harmed.
 These restrictions are not waivable and directors are
personally liable for knowing breach of these
provisions
o Mechanics of paying Dividends
 A corporation should wait until the board has
officially declared the dividend because unexpected
developments may result in the board failing to
make the declaration on the anticipated date.
 Because of this, board resolutions typically fix
a future date on which the dividends will be
paid
o Sale of Stock by Shareholders
 Stock may be transferred by its owner without
restrictions
 There is no economic reason to prohibit the transfer
of the shares
 Once a shareholder sells the stock, he has no further
interest and the buyer becomes the shareholder.
o Why do shareholders want to restrict alienablitiy
 1. Because of Management
 2. There may be regulatory reasons to ensure that a
corporation’s shareholders meet a certain criteria
Veil Piercing
 Where judgment is entered against the corporation, the creditor
can seize and sell corporate assets to obtain satisfaction
 Ultimately, a corporation’s creditors can force an insolvent
corporation into bankruptcy, which, although almost
guaranteeing that the creditors wil not be paid in full, at least
ensures an orderly an relatively consistent treatment of creditors
claims
 The availability or absence of these avenues of payment directly
affects the willingness of third parties to deal with corporations
o When 3rd party believes they must solely look to corp for
money:
 3rd party more likely to demand higher compensation
o If 3rd party believe they can look beyond corp for money:
 In some settings will be more willing to accept less
compensation
 A. The Current Setting
o 1. Individual Shareholder Liability by Piercing Corporate
Veil
 Courts assume that they have the power to hold
shareholders liable for corporate debts in certain
situations
 When this happens, corporation is said to be
disregarded
 This is when the corporate veil has been lifted
 Doctrine of Piercing Corporate Veil
 It is an equitable doctrine that holds a
corporation’s shareholders liable for the the
corporations debts if the corporation is unable
to pay.
o In practice it is only used for closely held
corporations
o Once the number of shareholders
increases above two or three, there is
little likelihood that a court will pierce
o It does not dissolve the corporation and
does not make shareholders liable for all
the corporation’s debts
 If applied, the doctrine renders the
shareholder’s liable only for the
plaintiff’s claims against the
corporation
 Two-part test
 (1) Was there such unity of interest and
ownership that the separate personalities of
the corporation and its shareholders, officers or
directors are indistinct and or non-existent;
and
o This prong:
 Determines whether the
stockholder and the corporation
have maintained separate
identities
 ‘In determining whether the
personalities and assets of the
corporation and the shareholders
have been blurred courts consider:
 (i): the degree to which the
corporate legal formalities
have been maintained
  (ii): the degree to which
individual and corporate
assets and affairs have been
comingled
 Four factors for determining
whether the first prong is met:
  (1) Undercapitalization
 (2) failure to observe
corporate formalities
 (3) absence of corporate
records
 (4) payment by the
corporation of individual
obligations
 If these factors are present
in sufficient number and or
degree, the first prong is met
and the court will consider
the second prong
 (2)would adherence to the fiction of separate
corporate existence sanction fraud, promote
injustice or inequitable consequences or lead
to an evasion of legal obligations?
o Known as the “fraud or inequitable
consequences” prong
o Factors of this prong include:
 Fraudulent misrepresentation by
corporation directors
 Undercapitalization
 Failure to observe corporate
formalities
 Absence of corporate records
 Payment by the corporation of
individual obligations
 Use of the corporation to promote
fraud, injustice or illegality
o Courts ask whether there s adequate
justification to invoke the equitable
power of the court
o The showing of ineuquity necessary to
satisfy the second prong must flow from
the misuse of corporate form
 It is only when the shareholders
disregard the separateness of the
corporate identity and when that
act of disregard causes the
injustice or inequity or constitutes
the fraud that the corporate veil
may be peirceed.
 o The two factors that are considered to
satisfy the this prong include:
 (1)fraudulent misrepresentation by
corporation directors;
 (2)use of the corporation to
promote fraud, injustice, or
illegalities
 Courts will pierce the corporate veil if the three parts
of the two prong test are met “by the strongest
evidence”
 Prongs of the test (for clarification)
 First: No separate corporate identity
 Second: Fraud or inequitable consequence
 Third: Court deems it appropriate to pierce
 Injustices that will suffice to pierce the veil (three
commonly cited factors)
 (1) Whether the corporation has observed the
requisite corporate formalities such as holding
shareholder and director meetings, appointing
officers and filing annual reports
 (2) evaluating whether the owner has
comingled property with the corporation
 (3)Undercapitalization: court will look to the
time when the corporation was first
incorporated, which might be some
considerable time before the debt in dispute
was incurred, to see whether the owner
provided enough equity, and insurance, to
cover reasonably foreseeable obligations that
the corporation might incur
o Deliberate undercapitalization may b
seen as an attempt to defraud others by
having the corporation engage in
activities as to which there is a
likelihood of situations in which the
corporation will be unable to satisfy its
obligations in full

Corporate Governance- Directors

What is covered in this section:
 Conceptual purposes of the board
 How directors are selected
 Mechanical actions of board actions
The role of the board of directors
 DGCL Section 141:
o The business and affairs of every corporation
organized under this chapter shall be managed by
or under the direction of a board of directors….
o The board is really the center of corporate activity
o Shareholders have the power so elect directors
o Very few corporations are organized without a
board although many corporations provide
limitations on the board’s power
 Questions to ask yourself:
o How is the power allocations different from the
business forms, the reasons for those differences,
and whether those differences can be justified.
 “Under the direction of”
o means that that the board itself need not to
perform, or even approve the performance of
every corporate act.

Mechanics of Board Action

 Board is a collective body
o Decision maker of corporation
o Cannot operate without the board (the brain of
the corp.)
 Each director, individually, has no power
and next to no rights
 Many rules on Board members and actions are found
only in common law and not statutory
 Boards take actions in two way
o (1) If they are unanimous in their intention, they
may act without a meeting
 this action is effected by having each
director execute a consent which, in
Delaware and many states, may be
electronic
 Best by written consent (this is called a
resolution)
o (2) In a meeting
 Four elements must be met for a board
action taken at a meeting to be valid:
 1. The meeting must be properly
called
  the call of the meeting is the
decision to hold a meeting at a
particular time and place and,
often, for particular reason
 No separate call is necessary for
regular meetings as they are
already called.
 The bylaws may also give the
power to call board meetings to
the chair or to other key
participants in the corporation’s
governance
o In the absence of such
provision., However, the
call us a board action that
must be made, as every
board action is, by
unanimous consent or at a
meeting
o Neither the DGCL nor the
MBCA addresses the call
or board meetings
 2. The corporation must give each
director proper notice
 because the directors are
presumed to be knowledgeable
about the corporation’s
business, the notice
requirements for board
meetings are minimal
 The MCBA provides a default
rule that no notice need be
given for regularly scheduled
board meetings
 The default rule for special
meeting is that the directors
must be given two days notice
of the location and time of the
meeting but need not be given
notice of the meeting’s purpose
 o Director who does not
receive proper notice
waives any objection by
attending the meeting
unless the director
immediately protests the
insufficient notice and
does not vote in favor of
any measure at that
meeting
 3. A quorum of directors must be
present at the meeting
 Board members do not have to be
physically present
 is the minimum amount of
voting power that must be
present at a meeting for actions
to be valid/
 quorum is defined by the
number of directors present
 Under Delaware statute and the
Model act , a quorum is a
majority of the total number of
directors.
 The number that constitutes a
quorum is measured by the
number of authorized director
positions, not the number of
directors currently in office
 4. The action must be approved by a
sufficient vote
 A board action must be
approved by a sufficient vote,
o It must do so unanimously
 If the board is acting at a
meeting, an action is approved
if it receives the assent of a
majority of directors present at
the meeting
  If the directors favoring the
proposal are insufficient to
constitute a quorum of the
board, may the opposing
directors thwart the proposal by
leaving the meeting?
o Yes. This is called
“breaking a quorum”
 Only Board members can remove board members

Corporate Governance-Officers

Current Settings
 Once a corporation’s board of directors has authorized
an act, someone must actually effect the corporation
 Corporation’s directors are not agents
o This is so because the board must act collectively
rather than individually and also because the
board is not under te control of the corporation
Officers
 Based on and governed by the law of agency
 Officers can have either actual or apparent authority or
both
o Officers are agent’s of the principal
o Officer holds office which in turn is a position to
which particular kinds of duties or power are
attached

Officers v. Agents
 Officers
o are held to fiduciary duties comparable to those of
corporate directors
o officers may be statutorily entitled to indemnity
and the corporation may be able to purchase so
called directors and officers insurance
o are sometimes expressly exposed to liability
under certain statutes
o statutes often provide that service of process on a
corporation may be effected by service on any
( or certain named) officers
 o Officers (or at least some of them) are usually
required to be named in the corporation’s annual
report filed with the secretary of state
o Officer may have both actual and apparent
authority
o Officers are appointed by the board
 MBCA 8.44
o Directors can revoke the powers of the inferior
agents they’ve appointed
 But the directors have no implied authority
to revoke the powers of those agents who
are appointed by vote of the shareholders,
or whose office is fixed and regulated by the
charter
 It does not follow that the directors have
authority to remove an agent of this
character merely because they appointed
him pursuant to the provisions of the
charter
 There should be an express provision
granting the power of removal
 The majority at a shareholders meeting
have no power to revoke the powers of the
inferior agents of a corporation because the
power of appointing and controlling these
agents is delegated to the board of directors
exclusively
 Agents
o are held to less explicit and stringent standard
o sometimes are entitled to indemnity, but such
protection is more vague
o service on an ordinary agent is typically
insufficient to bring about personal jurisdiction
over a corporation
 Statutes concerning officers
o A closer reading of the statutes reveal that the
corporation must have at least on office
 At least two in Delaware
o MBCA 8.40(c)
  Requires at least on office and its incumbent
“ has responsibility for preparing minutes of
the directors and shareholders meetings
and for maintain and authenticating records
of the corporation.
 That officer could have any title the
corporate planners desire
 But the statute refers to this
person as the “SECRETARY” of
the corporation.
 Three main officers you need for a
corporation
 Secretary:
 Authorizes signatures
 Takes minutes of board
meetings
 President
 Treasure
o Delaware
 Delaware Corporation must have at least
two officers:
 one of which must designated
“chairperson of the board of
directors,” “vice-chairperson of the
board of directors”, “president” or
“vice president”
 The other must be designated
“treasurer,” “assistant treasurer”
“secretary,” or “assistant secretary”