BUSINESS ASSOCIATIONS

OUTLINE
Business Associations Outline

What law governs?

-Agency = Restatement
-Partnership = UPA
-Corporations = MBCA
-Securities = SEC Regulations and statutes

I. Agency
A. Who is an Agent?
1. Agency applies to all business organizations
2. The fiduciary relationship that arises when one person (principal) manifests assent to another
person (agent) that the agent shall act on the principal’s behalf and subject to the principal’s
control, and the agent manifests assent or otherwise consents to act (RS § 1.01)
a. Requires:
o Manifestation from Principal to Agent
o Agent’s consent
3. Gorton v. Doty (woman let football coach borrow her car and car owner is sued after an
accident)
a. When the woman said you could use the car and the coach drove it an agency
relationship was created
o Manifestation of assent that coach acted on owner’s behalf and subject to her
control
o Coach consented to drive the car (implied when he drove it)
4. Gay Jenson Farms Co v. Cargill (Cargill and Warren had revolving line of credit and Warren
contracted with farmers to sell grain; when farmers don’t get paid they sue Cargill)
a. An agency relationship can be formed even if you don’t know you are doing it
b. Must be an agreement, but a contract (written/oral) is not needed  meeting of the
minds
c. Falls under “other conduct” of manifestation
o Acting on Cargill’s behalf by buying/selling grain and seed and the financing deal
o Subject to Cargill’s control because Cargill had right of first refusal, needed
Cargill’s approval for deals, correspondence with orders, and financing
everything for the business
5. Creditors
a. RS § 140: A creditor becomes a principal when it assumes de facto control of the debtor
6. Suppliers
a. RS § 14K: One who contracts to acquire property from a third person and convey it to
another is the agent of the other only if it is agreed that he is to act primarily for the
benefit of the other and not for himself
B. Liability of Principal to Third Parties in Contract
1. Agent’s Authority
a. When an agent acting with actual or apparent authority makes a contract on behalf of a
disclosed principal (1) the principal and the third party are parties to the contract; and
(2) the agent is not a party to the contract unless the agent and third party agree
otherwise (RS § 6.01)
b. Agent’s acting with authority may bind principals  authority is the starting point for
the analysis
o Third party must prove: (1) agency relationship existed; and (2) agent had
authority

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o Type of authority irrelevant: actual (express/implied), apparent, inherent,

estoppel, and/or ratification
c. Actual authority: an agent acts with actual authority when the agent reasonably
believes, in accordance with the principals manifestations to the agent, that the
principal wishes the agent so to act (RS § 2.01)
o Created by a principal’s manifestation to an agent (RS § 3.01)
o An agent has actual authority to take action designated or implied in the
principal’s manifestations to the agent and acts necessary or incidental to
achieving the principal’s objectives as the agent reasonably understands, the
principal’s manifestations and objectives when the agent determines how to act
(RS § 2.03(1))
d. Mill Street Church of Christ v. Hogan (parishioner hires his brother to assist him in
maintenance at church and brother is injured falling off a ladder)
o Implied authority includes such powers that are reasonably necessary to carry
out duties  it was a two person job so it was reasonably necessary to hire
someone
o Implied authority can be created where an agent acted based on past or present
conduct where he had authority  was allowed to hire his brother in the past
e. Apparent Authority: the power held by an agent or other actor to affect a principal’s
legal relations with third parties when a third party reasonably believes the actor has
authority to act on behalf of the principal and that belief is traceable to the principal’s
manifestations (RS § 2.03)
o (1) What the third party reasonably believes
o (2) Manifestation by Principal to third party
o Can be established through:
 Direct communication from Principal to Third Party; silence or inaction
by Principal; placing Agent in position with customary powers; course of
conduct
f. Implied Authority: authority arising solely from the designation of the principal of a kind
of agent who ordinarily possesses certain powers
o Implied actual authority: Act of putting agent in such a position that the agent
reasonably believes he has that authority
o Implied apparent authority: act of putting agent in such a position leads third
party to reasonably believe agent has authority
 If an employee quits/is fired you need to disclose to existing clients that
the employee no longer works for you and take back business cards,
letterhead, etc
g. Three Seventy Leasing Corporation v. Ampex (Joyce signs contract to sell equipment to
Ampex; contract is signed by the salesman)
o Reasonable for third parties to believe that a salesman has the authority to bind
its employer to a sale
o *You must always look at how the third party learned of the agent’s alleged
authority and ask whether the principal reasonably can be said to have been the
source of that knowledge
 Here, letters from Ampex said financing and deals went through
salesman
h. Inherent Authority: indicating the power of an agent which is derived not from
authority, but solely from the agency relation and exists for the protection of persons
harmed by or dealing with a servant or other agent

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o Typically found in situations of undisclosed principals or where agent exceeds

his authority
o RS 3d rejects inherent authority
i. Watteau v. Fenwick (π sold goods to a pub manager under the belief that he was the
owner; π then sought to collect from the actual owner when the goods were not paid
for)
o Undisclosed principal is liable for acts which are within the authority usually
confided to an agent of that character
2. Ratification
a. Ratification: 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
o A person ratifies an act by:
 Manifesting assent that the act shall affect the person’s legal relations,
or
 Conduct that justifies a reasonable assumption that the person so
consents
b. Agent acts without authority (of any kind) and there are no grounds for estoppel
c. Principal will be bound only if he ratifies the contract
d. Requires:
o A valid affirmation by Principal
 Can be express or implied
 Principal must have reason to know all material facts
o To which the law will give effect
 Will be denied legal effect where necessary to protect the innocent
third party
o *Must ratify entire contract
e. Ratification is not effective unless it precedes the occurrence of circumstances that
would cause the ratification to have adverse and inequitable effects on the rights of
third parties; including:
o Any manifestation of intention to withdraw from the transaction made by the
third party
o Any material change in circumstances that would make it inequitable to bind
the third party, unless the third party chooses to be bound (RS § 4.05)
f. Ratification is not effective:
o In favor of a person who causes it by misrepresentation other conduct that
would make a contract voidable
o In favor of an agent against a principal when the principal ratifies to avoid a loss;
or to diminish the rights or other interests of persons, not parties to the
transaction, that were acquired in the subject matter prior to the ratification (RS
§ 4.02(2))
o Unless it encompasses the entirety of an act, contract, or other single
transaction (RS § 4.07)
g. Botticello v. Stefanovicz (∆s are husband and wife who each own undivided half interest
in property; husband entered into a lease to buy with π and did not know that the wife
also owned the land; wife had previously said what she would/would not sell for and did
not know the specifics of the sale – she never consented to the sale)
o Marital relationship not enough to establish agency relationship  being
married does not make you agent of each other
o No apparent authority because π never knew that wife was a principal

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o No ratification by wife of husband’s conduct because she never knew the terms
of the deal
3. Estoppel
a. (1) Acts of omissions by the principal, either intentional or careless, which created an
appearance of authority in the purported agent; (2) the third party reasonably acted in
reliance on such appearance of authority; (3) the third party changed his position in
reliance upon the appearance of authority
o Purported agent (imposter) has no actual or apparent authority, but principal is
bound due to his own fault (designed to protect the innocent third party)
b. Hoddesson v. Koos Bros (π bought furniture from an imposter salesperson at ∆’s
furniture sale and seeks reimbursement)
o Principal still has a duty of care to ensure that someone entering into principal’s
store will be served by a real salesperson and not an imposter
4. Agent’s Liability on the Contract
a. Liability of a Disclosed Principal
o When an agent acting with actual or apparent authority makes a contract on
behalf of a disclosed principal: (1) the principal and the third party are parties to
the contract; and (2) the agent is not a party to the contract unless the agent
and third party agree otherwise (RS § 6.01)
b. Liability of an Unidentified Principal
o When an agent acting with actual or apparent authority makes a contract on
behalf of an unidentified principal: (1) the principal and the third party are
parties to the contract; and (2) the agent is a party to the contract unless the
agent and third party agree otherwise (RS § 6.02)
c. Liability of Undisclosed Principal
o RS 3d rejects inherent agency
o Exists to protect innocent third parties
o Classic scenarios: third party does not know that he is dealing with an agent (so
no apparent authority) and the agent is violating the principal’s instructions (so
no actual authority)
o A principal is undisclosed if, when an agent and a third party interact, the third
party has no notice that the agent is acting for a principal (RS § 1.04(2)(b))
o When an agent acting with actual authority makes a contract on behalf of an
undisclosed principal: (1) unless excluded by the contract, the principal is a party
to the contact; (2) the agent and the third party are parties to the contract
o An undisclosed principal is subject to liability to a third party who is justifiably
induced to make a detrimental change in position by an agent acting on the
principal’s behalf and without actual authority if the principal, having notice of
the agent’s conduct and that it might induce others to change their positions,
did not take reasonable steps to notify them of the facts (RS 2.06(1))
o An undisclosed principal may not rely on instructions given an agent that qualify
or reduce the agent’s authority to less than the authority a third party would
reasonably believe the agent to have under the same circumstances if the
principal had been disclosed
d. Atlantic Salmon A/S v. Curran (∆ held himself out to πs as an agent for one or more
principals – all of which were non-existent or dissolved at some point)
o Agent is personally liable for the actions which are purportedly performed on
behalf of a principal
o If the agent does not inform the other party who the actual principal is, the
agent is liable
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C. Liability of Principal to Third Parties in Tort

1. Employee vs. Nonemployee Agent
a. Employee: an agent whose principal controls or has the right to control the manner and
means of the agent’s performance of work; and the fact that work is performed
gratuitously does not relieve principal of liability
o *High level of control
b. Non-employee agent
o Satisfies definition, but is not an employee
o Subject to limited control by principal and principal specifies the end result
c. Independent contractor
o Does not satisfy agent definition
d. Steps for analysis:
o Extent of control?
o Paid by job or by the hour?
o Does “agent” have his own distinct business?
o Agent’s work part of principal’s ordinary business?
o Is this type of work customarily done with or without supervision?
o Skill required?
o Who supplies the tools and location?
o Length of time for work
o *Think of who benefits from the profits or the transaction
e. An employer is subject to vicarious liability for a tort committed by its employee acting
within the scope of employment
f. Humble Oil v. Martin (car is at service station and rolls back and causes injuries;
question if the guy who operates the service station is an agent of Humble Oil)
o Humble Oil paid part of bills, Schneider had to give reports, hours of operation
were set by Humble Oil, and contract requires duties are to be performed as
specified (supervision)
o Yes, agency relationship
g. Hoover v. Sun Oil Company (car on fire at service station; Barone operated the station)
o Rent was paid by Barone, no reports needed, Barone set the hours of operation,
Barone hired subordinates, Sun Oil can make recommendations but Barone
does not have to follow them  Independent contractor
o Test: Whether the parent company retained the right to control the details of
the day-to-day operation of the service station  CONTROL
h. Murphy v. Holiday Inns (suit brought against Holiday Inn franchise after slip and fall)
o Franchisee/Franchisor relationship
 Franchisor controls the distribution of goods/services through
standardization
 An agency relationship can be established if the franchisor has enough
control
o Here, franchisor had no control over how work was done; no control over day-
to-day activities
i. *An agent is subject to liability to a third party harmed by the agent’s tortious conduct
 just because you’re an agent of someone else does not mean that you are off the
hook

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ANALYSIS OF TORT LIABILITY

Is there an agency relationship between the purported principal and agent?
If so, is the agent the principal’s employee?
If so, was employee’s conduct within the scope of employment?
o

2. Scope of Employment
a. An employee acts within the scope of employment when performing work assigned by
the employer or engaging in a course of conduct subject to the employer’s control. An
employee’s act is not within the scope of employment when it occurs within an
independent course of conduct not intended by the employee to serve any purpose by
the employer

SCOPE OF EMPLOYMENT ANALYSIS

Whether conduct:
Was of the kind employee is employed to perform
Occurred substantially within authorized time and space limits
Was actuated, at least in part, by a purpose to serve the employer
If force is intentionally used by the employee against another, was the use of force not unexpectable by the employer

b. Ira S. Bushey & Sons v. US (drunken sailor returns to the ship and turns some valves
which floods the ship)
o Question is what is reasonably foreseeable  foreseeable that crew members
crossing the dock could do damage intentionally/negligently (plus sailors get
drunk all the time)
o Yes, agency relationship
o TEST:
 If some harm is foreseeable  liable even if the particular type of harm
was unforeseeable
 Conduct by employee which does not create risks different from those
attendant on the activities of community in general will not give rise to
liability
 Conduct must relate to the employment
c. Arguello v. Conoco (racial discrimination at gas stations)
o Conoco does not participate in day-to-day activities  no agency relationship
o Station employees were on duty, the purpose of their interactions with
customers was to sell gas, and they were performing customary functions of gas
station clerks  within the scope of employment
3. Torts of Nonemployee Agents
a. A principal is subject to direct liability to a third party harmed by the agent’s conduct
when,
o The agent acts within actual authority or the principal ratifies the agent’s
conduct and the agent’s conduct is tortious;
o The principal is negligent in selecting, supervising, or otherwise controlling the
agent; or
o The principal delegates performance of a duty to use care to protect other
persons or their property to an agent who fails to perform the duty

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b. Principal is vicariously liable for tort of agent in dealing with a third party when actions
taken by agent with apparent authority constitute the tort
c. General rule: Principal is not liable for torts committed by an independent contractor or
employees thereof
o Exceptions:
 Principal retains control over aspect of work in which tort occurs
 Principal engages an incompetent contractor
 Activity contracted for is nuisance per se or inherently dangerous
 *If hiring an independent contractor for a dangerous activity you need
to indemnify (and get insurance)
d. Majestic Realty Associates v. Toti Contracting (building was being demolished and
another building was hit)
o Demolishing buildings is inherently dangerous  principal liable
D. Fiduciary Obligations of Agents
1. Agent’s Duty of Loyalty
a. Agent avoids loyalty breach by getting principal’s consent if
o Agent acts in good faith, discloses all material facts, and otherwise deals fairly
with the principal; and
o Principal’s consent concerns a specific act or transaction within ordinary course
of agency relationship
b. An agent acting for more than one principal in a transaction has a duty to deal in good
faith and fairly with each principal and to disclose to each principal the conflict and all
other facts
o Ex: Real estate agent representing the buyer and seller
o Dual agency is a bad idea, but it can be allowed
2. Agent’s Other Fiduciary Duties
a. Comply with contract
b. Care, competence, and diligence
c. Act within actual authority to comply with instructions
d. Good conduct
e. Provide information
3. Principal’s Duties
a. Indemnify agent in accordance with agency contract; and unless otherwise agreed, (a)
for payment made by agent within actual authority or that is beneficial to principal; (b)
for loss suffered by agent that fairly should be born by principal in light of their
relationship
b. Deal fairly and in good faith
4. Reading v. Regem (army man transporting stuff illegally using his army uniform)
a. Sergeant is using the uniform and his position for this venture  only could engage in
the activity/make money by virtue of his employment  breach of fiduciary
5. Fiduciary duties include:
a. Not to act as or on account of an adverse party without the principal’s consent
b. Duty not to compete with the principal
c. Duty to deal fairly with the principal in all transactions between them
6. Rash v. JV Intermediate (manager of a business selects bids for subcontractors from other
businesses he owns)
a. Rash was acting on behalf of an adverse party and needed to act fairly and not just
throw himself business  breached fiduciary duty
b. Rash needed to disclose his interest in the other business and get consent from the
business to avoid breach of fiduciary duty
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7. Town and Country v. Newberry (∆ worked for π for a number of years and then started his own
business that was exactly the same as ∆’s business)
a. π was directly soliciting customers  using trade secrets  breach of fiduciary duty
8. Grabbing and Leaving
a. You can contact people you have had a personal relationship with or clients that are
public knowledge AFTER quitting; before you are violating your duty of loyalty

II. Partnerships
A. What is a Partnership? Who are the Partners?
1. Partners vs. Employees
a. A partnership is the:
o Association of two or more persons
o To carry on as co-owners
o A business for profit
b. Relations among/between the partners are governed by the partnership agreement
o Formal written agreement not required (even where there is a written
agreement it’s not determinative)  imply agreement from conduct
c. To the extent the partnership agreement does not otherwise provide, the UPA governs
o UPA = default rules, but some can be modified
o Cannot:
 Restrict partner’s right of access to books and records
 Eliminate duty of loyalty (can limit)
 Unreasonably reduce the duty of care
 Eliminate obligation of good faith and fair dealing (can set standards of
measurement)
 Vary power to disassociate as a partner under UPA § 602(a)
 Vary right of court to expel a partner for events in UPA § 601(5)
 Vary requirement to wind up partnership in cases of UPA § 801(4, 5, 6)
 Vary law applicable to an LLP
 Restrict rights of third parties
d. Profit Sharing
o Someone who receives a share of the profits is presumed to be a partner in the
business unless the profits were received in payment of a debt; for services of
an independent contractor or of wages to an employee; rent; interest on a loan;
for the sale of the goodwill of a business or other property
 Presumed, but can be rebutted
e. Focus analysis on profit sharing and control
f. Fenwick v. Unemployment Compensation Commission (beauty shop employee entered
into “partnership” with her employer in order to share profits because she wanted a
raise)
o Sharing profits is not enough to establish a partnership agreement
 Needed to show something more like sharing losses, contributing
capital, or being able to exercise control
 Her rights were the same as when she was an employee, did not
have any managerial control, and no third party would think this
was a partnership
o Even if a written agreement describes someone as a “partner” courts look at the
actual facts of what is happening, not what the parties call it
2. Partners vs. Lenders

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a. Martin v. Peyton (PPF loaned $2.5 million in marketable securities to KNK; KNK was paid
40% of profits in dividends, an option to buy, and inspection/veto rights)
o Profit sharing not enough  payment of a debt or interest on a loan
o Not a partner (if they were a partner they would be jointly and severally liable)
3. Partnership by Estoppel
a. People who are not partners to each other are not liable as partners to third persons
(except for estoppel)
b. In order to establish a partnership by estoppel four elements must be proven:
o π must establish a representation that one person is the partner of another
o The making of the representation by person sought to be charged as a partner
or with his consent
o A reasonable reliance in good faith by the third party upon the representation
o A change of position with consequent injury by the third party in reliance on the
representation
c. Can only be used by innocent third party
d. Young v. Jones (money invested in Price Waterhouse Bahamas; money disappears so π
sues alleging that PW-US and PW-Bahamas are partners)
o The fact that the company uses the PW name globally will not imply a
partnership  here, looks like a franchise
o Would need a representation by PW-US that they are partners and reliance
B. Fiduciary Obligations of Partners
1. Partners’ Fiduciary Duties
a. Loyalty:
o Must account for profits, benefits, and opportunities derived by partner from
any transaction connected with partnership
o Refrain from adverse dealings with partnership on own account or on behalf of
third party, and from competing with partnership
o Duty of loyalty can be bargained away (but not entirely eliminated)
o Partners can authorize or ratify a specific act that otherwise would violate the
duty of loyalty after full disclosure of all material facts
b. Care:
o Partners owe the partnership and other partners the duty of care
c. Good faith:
o Partners must discharge duties in good faith and fair dealing
d. Partners must give true and full information of all things affecting the partnership to any
partner
e. Meinhard v. Salmon (Meinhard and Salmon enter into a joint venture regarding
property; Salmon renewed lease and screwed over Meinhard)
o Salmon had all the managerial powers; Meinhard seemed like an investor
o When lease was renewed, Salmon excluded his co-adventurer from any chance
to compete or enjoy the benefit
 Needed to DISCLOSE and give opportunity to share
o Breach of fiduciary duty
f. Sandvick v. LaCrosse (four guys enter into a lease agreement; two end up getting a
better lease on the same property)
o Original leases were term leases and the intent in purchasing them was to sell
them  shows it is a limited business plan = joint venture, not partnership
o Breach of fiduciary duty/loyalty  needed to notify the other guys and give an
opportunity to share in the venture
2. Grabbing and Leaving
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a. Meehan v. Shaugnessy (two law partners leave to start their own firm; solicited other
lawyers at the firm while still working at the firm)
o Agreement said if you leave you can take clients, but have to tell clients they
have a choice in representation  didn’t give clients a choice
o A partner has an obligation to render on demand true and full information of all
things affecting the partnership  lied about leaving
 No obligation to reveal (as long as you aren’t recruiting clients or
employees), but you cannot lie
o Used position of trust and confidence to steal clients
o Breach of fiduciary duty
b. Acceptable actions in grabbing and leaving:
o Locating office space, keeping plans confidential (if asked about cannot deny),
take desk files (client files are property of client), or negotiate with other firms
o CANNOT contact clients before you announce departure (secretly competing)
3. Expulsion
a. Lawlis v. Kightlinger & Gray (partner in law firm became an alcoholic; he signed
agreement he wouldn’t drink for a second chance and then was forced out)
o No predatory purpose in letting him stay on  gave him months to find a job,
let him keep insurance, and paid him severance
o Expulsion was okay
b. Express expulsion provision is not necessary in a partnership agreement
c. Right to expel by agreement or statute is subject to duty of good faith and dealing
o Guillotine provisions are valid so this doesn’t really mean whole lot
C. Partnership Property
1. A partner is not a co-owner of a partnership property and has no interest in partnership
property which can be transferred either voluntarily or involuntarily
2. The only transferable interest of a partner in the partnership is the partner’s share of the profits
and losses of the partnership and the partner’s right to receive distributions
a. Another person can only become a partner with consent of all the partners  even if
you assign your profits that person does not get right to manage, demand information,
or inspect books
b. A person could only become a partner with the consent of all the partners
3. Putnam v. Shoaf (woman conveys her partnership interest; the business is then sold and she
decides she wants profits from the sale even though she no longer has her interest)
a. She does not have any property interest because she was no longer a partner
o Same way she would no longer be liable for debts or a lawsuit
4. Personal assets of a partner can be attached to collect debt
a. If both a partnership and personal creditor is knocking then Bankruptcy Code says that
partnership has priority and that creditor must share ratably with personal creditor
5. Personal creditor of a partner can attach the firm’s assets (that partner’s share of profits) to
collect on a debt
6. Initial capital contribution is not required (some partnerships one partner contributes only
labor)
7. Capital account: running balance reflecting partner’s ownership equity (initial capital
contribution plus allocations of profits, minus allocations of losses and distributions)
D. Profits
1. Default rule is that profits are divided equally – can modify
2. Profits follow losses is default rule – can modify
a. Does not matter if one partner contributes 60% or does 60% of work; if it is not specified
both will split profits equally
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E. Rights of Partners in Management

1. Each partner has equal rights in the management of the partnership business
2. Voting:
a. Something in ordinary course of business (like hiring a secretary)  majority vote
b. New partner  unanimous
c. Amending partnership agreement  unanimous
d. Act outside ordinary course of business  unanimous
e. *Partnerships are informal – sometimes discussions can rise to the level of “voting”
3. Ordinary Acts
a. Each partner is an agent of the partnership for the purpose of its business and can bind
partnership to third party for acts in ordinary course of business
b. An act of a partner for apparently carrying on in the ordinary course of the partnership
business of business of the kind carried on by the partnership binds the partnership
o Unless the partner had no authority to act for the partnership in the particular
matter and the person with whom the partner was dealing knew or had
received a notification that the partner lacked authority
c. Partnership shall indemnify a partner for liabilities incurred by the partner in the
ordinary course of business of the partnership
d. Disagreement as to a matter arising in ordinary course of business may be decided by
majority of the partners
o Burden is on the party wishing to change the status quo (majority vote)
o If the act is outside the ordinary course of business or the partnership
agreement is being amended there has to be a unanimous vote
4. Extraordinary Acts
a. An act of a partner which is not apparently for carrying on in the ordinary course the
partnership business or business of the kind carried on by the partnership binds the
partnership only if the act was authorized by the other partners
5. Day v. Sidley & Austin (law firm goes through a merger; Day previously ran DC office and after
the merger he lost that authority)
a. Should have put it in the agreement
b. No breach of fiduciary duty to disclose a change in the internal structure of the firm
because the concealment does not produce any profit for the offending partners nor
any financial loss for the partnership as a whole  just a bruised ego
6. NABISCO v. Stroud – Third party vs. Partner (two partners running a grocery store; one tells a
supplier he will no longer be liable for purchases; other partner purchases stuff and then the
first one gets sued for payment)
a. To change ordinary parts of business there needs to be a majority vote  one partner
out of two could never have majority vote
o Burden is on the person wishing to change the status quo so because there was
no majority vote he never lost his authority to buy bread  liable to pay for
bread
b. The letter did not say the other partner did not have authority to buy bread  did not
inform the third party that he lacked authority
c. *Could have solved the deadlock by contract  require unanimous consent, tie breaker
provision, vote based on capital contribution etc
7. Summers v. Dooley – Partner vs. Partner (two guys form partnership for trash collection; one
wants to hire an employee and the other refuses; he hires an employee anyways)
a. Each partner has equal rights in management and conduct of partnership business (UPA)
b. Disagreement on matter in ordinary course of partnership business is decided by a
majority vote of partners (UPA)
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o No majority decision  Summers did not have authority to hire an employee

c. Solution: dissolution (could have solved by contract too)
8. Partners’ Tortious Conduct
a. A partnership is liable for loss or injury caused to a person as a result of a wrongful act
or omission of a partner acting in the ordinary course of business of the partnership or
with authority of the partnership
b. A partnership shall indemnify a partner for liabilities incurred by the partner in the
ordinary course of the business of the partnership
c. All partners are liable jointly and severally for all obligations of partnership
F. Dissolution
1. Right to Dissolve
a. Partners always have the power to disassociate, but not always the right to do so
b. A partner is disassociated from a partnership upon:
o Partner’s express will to withdraw as a partner
o Event agreed to in the partnership agreement
o Partner’s expulsion pursuant to the partnership agreement
o Partner’s expulsion by unanimous vote of other partners if there has been a
transfer of all or substantially all of that partner’s transferable interest in the
partnership
o Court decree
 A partner can be expelled by judicial determination because (i) the
partner engaged in wrongful conduct that adversely and materially
affected the partnership business; (ii) the partner willfully or
persistently committed a material breach of the partnership agreement
or of a duty owed to the partnership or the other partners; or (iii) the
partner engaged in conduct relating to the partnership business which
makes it not reasonably practicable to carry on the business in
partnership with the partner
o Partner’s bankruptcy
o Partner’s death or incapacity
c. A disassociater cannot trigger dissolution unless they disassociated by express will
d. Wrongful Disassociation - A partner’s disassociation is wrongful only if:
o It breaches an express provision of the partnership agreement; or
o In a partnership for definite term or particular undertaking, if partner
disassociates by express will, judicial order, or bankruptcy before end of
term/undertaking.
o *A partner who wrongfully disassociates is liable for damages
e. Owen v. Cohen (partners in bowling alley can no longer get along)
o Duties of the partnership required cooperation, coordination, and harmony 
they could no longer get along in order to effectively run the business so the
court issued a judicial decree of dissolution
o Business is sold (a buyout provision in their agreement would have been
beneficial to provide for this situation because insiders will always pay more)
f. Implied vs. Explicit Term Partnerships
o Explicit: duration, purpose/object is specified in partnership agreement
o If there is no implied term dissolution will occur at express will, but must be in
good faith
g. Giles v. Giles Land Company (family partnership; family sues to expel one of the sons
when he is uncooperative and made threats against family)

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o Total distrust of partners  valid reason for dissolution because how could they
run the partnership if none of them could get along
2. Consequences of Dissolution
a. If dissociation does not result in dissolution and winding up, then partnership continues
as same entity and:
o Disassociating partner’s rights in management and duty of loyalty end
o Disassociating partner’s interest must be bought
 Price of partnership equal to greater of liquidation value, or value based
on sale of entire business as a going concern
 Deduct damages if wrongful dissolution
o Disassociating partner is liable for partnership debts incurred prior to
disassociation, unless released by creditors
o A new partner is liable for partnership’s old debts, but only satisfied out of
partnership property (will not be personally liable unless they agree to it)
b. Dissolution and winding up is caused by:
o In a partnership at will, express will of a partner
o In a partnership for a definite term or undertaking
 By express will of at least half of remaining partners after partner’s
death, bankruptcy, or wrongful dissolution;
 Express will of all the partners; or
 End of term or completion of undertaking
 *Can be a wrongful disassociater if you disassociate from a
partnership for an express term
o By event agreed to in a partnership agreement
o By judicial decree upon application by partner that
 Economic purpose of partnership is unreasonable frustrated;
 Partner’s conduct makes it not reasonably practicable to carry on; or
 Otherwise not reasonably practicable to carry on partnership
o By judicial decree upon application by a transferee of a partner’s transferable
interest
c. Unanimous vote of partners, including any disassociating partner other than a
wrongfully dissociating partner may waive right to have business wound up
d. Winding up:
o Dissolution terminates authority of partners to act for partnership except in
winding up
o After partnership’s creditor’s paid, any remaining surplus distributed to the
partners
o If assets less than amount owed to creditors, partners must contribute
 Losses follow profits unless otherwise agreed to
e. Prentiss v. Sheffel (partnership was being dissolved after one partner did not contribute
to losses; the two other partners filed a motion to continue partnership; court orders
judicial sale of partnership)
o Does not matter that the two partners doing the buy out had to pay way less
because of their large interests  guy being bought out’s interest grew by
having insiders purchase the partnership
o No reason that partners could not bid on/buy partnership at judicial sale
f. Pav-Saver Corporation v. Vasco (partnership agreement for “permanent” partnership
that could only be terminated on mutual assent)
o Court ignored the fact that the partnership was “permanent” because that was
really meaningless; but the fact that the agreement provided that if one partner
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unilaterally wanted out they had to pay damages was followed because that
partner was a wrongful dissolver

3. Sharing of Losses
a. Kovacik v. Reed (guys go into partnership where one provided all the capital
contribution, one provided labor, and both would share in profits equally)
o If one partner provides only capital and one provides only labor then the capital
partner pays the losses
o Goes against the UPA rule of losses follow profits  UPA specifically rejects this
case, but you can modify an agreement to avoid the default rule
4. Buyout Agreements
a. G&S Investments v. Belman (partners had filed a complaint for dissolution against
cocaine using partner and before they were dissolved cocaine user died; partners want
buy out)
o Partners were bound by their partnership agreement so they had to pay for the
buy out per the agreement

Disassociation Is it a All partners, other than

occurs YES
dissolution event? wrongful dissolver, YES Partnership continues as
event? waive winding up?
if no dissolution

NO
NO
Partnership continues;
Disassociated partner
ceases being partner and Partnership must
interest is bought (minus be wound up
damages if wrongful
disassociation)

 They wanted the modern rule to apply which says you apply the buy out
cost minus the damages from the wrongful conduct

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III. Corporations
A. The Corporate Entity
1. Veil Piercing
a. Alter ego liability typically requires:
o The corporation was the controlling shareholder’s alter ego (or, such unity of
interest that the separate personalities of the corporation and the shareholder
no longer exists); and
o Adherence to limited liability would sanction fraud or promote injustice
b. Enterprise liability requires:
o Such unity of interest between two entities that their separate corporate
existences have ceased; and
o Treating the entities as separate corporations would sanction fraud or promote
injustice
c. Factors for analyzing unity of interest:
o Failure to maintain adequate corporate records or to comply with corporate
formalities
 Failure to keep separate accounting books
 Failure to adopt bylaws, issue stock, etc
 Failure to appoint a board
 Failure to hold board meetings or shareholder meetings
 Failure to keep minutes of those meetings
o Comingling of funds or assets
 Alter ego: shareholder treats corporation’s assets as his own
 Enterprise: One corporation treats another’s assets as his own
o Undercapitalization (siphoning money into own pocket and not leaving enough
money for the corporation to pay its bills)
o *Comingling and undercapitalization are the strongest to show unity of interest;
failure to maintain records/formalities will help, but likely is not strong enough
on its own
2. Southern Gulf Marine v. Camcraft (Southern Gulf and Camcraft enter into contract to build a
boat; SG was not incorporated at the time of the contract)
a. Camcraft wants to deny the corporate existence of SG
o Violates estoppel theory because if SG is not a corporation than Camcraft would
earn a windfall
B. Limited Liability
1. Unless otherwise provided in the articles of incorporation, a shareholder of a corporation is not
personally liable for the acts or debts of the corporation except that he may be personally liable
by reason of his own acts or conduct (MBCA)
a. *Creditors can always avoid limited liability  ask for personal guaranty or jack up the
rate
2. Walkovsky v. Carlton (fleet of taxis owned by ten different small corporations; π is trying to
allege that they are all acting as one enterprise)
a. Not improper to split up a company to limit the exposure of each company  no fraud
or injustice
b. Corporate veil was not pierced
3. Sea-Land Services v. Pepper Source (Pepper Source was dissolved after failure to pay taxes; π
goes after the owner of Pepper Source alleging that the four other businesses he owned were
alter egos of Pepper Source)
a. Businesses are run out of same office with the same phone line, expense account, etc
b. Corporations all borrow money from each other
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c. (Provided injustice could be proven) corporate veil pierced

4. In re Silcone Gel Breast Implants (Bristol is sole shareholder of MEC; MEC is facing a products
liability suit so π wants to show that they are alter egos)
a. Bristol’s name on the ads and products make it look like MEC is Bristol
b. Bristol was MEC’s banker, set employment policies, audited, and purchased insurance
 all show unity of interest
5. Frigidaire Sales v. Union Properties (Mannon and Baxter are directors, officers, and
shareholders of Union Properties, Inc; Union Properties is general partner of Commercial
Investors, LP; Mannon and Baxter are limited partners in Commercial Investors, LP)
a. Mannon and Baxter’s actions were not in a personal capacity  they separated out
which actions were for the corporaion and which were personal
b. No general liability for Mannon and Baxter  by making a corporation a general partner
it gives the general partner limited liability (rabbit hole)
o Would have to show veil piercing or (more difficultly) show that the control of
the LP = general partnership
C. Shareholder Derivative Actions
1. Direct Shareholder Lawsuit: filed by shareholder in their own name
a. Cause of action belongs to shareholder individually
b. Arises from direct injury to shareholder
2. Derivative Shareholder Lawsuit: filed by shareholder on corporation’s behalf
a. Cause of action belongs to the corporation
b. Arises from an injury to corporation
c. *Gives shareholders a remedy against directors
d. Ex: Treasurer embezzles all of a corporation’s money and now the shareholders’ stock is
worthless  action is derivative because the stock being worthless is a harm to the
corporation; the fact that share price went down is an indirect harm
3. Delaware Test for Direct vs. Derivative
a. Who suffered the alleged harm?
b. Who would receive the benefits of any remedy?
4. Plaintiff Qualifications
a. Must be a shareholder (creditor cannot file)
b. Most states have to remain a shareholder throughout lawsuit
c. Must be a shareholder during the alleged wrong
5. Cohen v. Beneficial Industrial Loan Corp. (diversity case with a choice of law issue leads to Erie
analysis; NJ requires security for expenses, but the fed/FRCP did not require security for
expenses)
a. The law of the state of incorporation governs the internal workings of a corporation
6. Eisenberg v. Flying Tiger Line, Inc (Eisenberg owned stock in Flying Tiger which re-organized and
created new subsidiaries so Eisenberg only had stock in the holding company, not the operating
company  lost his vote)
a. Filed a direct action because he lost his vote  personal harm to him, not the company
7. Requirement of Demand on the Directors
a. MBCA requires universal demand  No shareholder may commence a derivative
proceeding until: (1) a written demand has been made upon the corporation; (2) 90 days
have expired from the date the demand was made unless the shareholder has earlier
been notified that the demand has been rejected or unless irreparable injury to the
corporation would result by waiting for the expiration of the 90-day period (MBCA)
b. Demand requirement separates cases in which board is disabled by conflicts of interest
from making an independent decision in best interests of corporation
o Initial sorting function (MBCA sorts at a later time)
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c. If demand is
d. Delaware excuses demand if its futile:
o Majority of board has material interest
o Majority of board lacks independence; or
o Challenged transaction not product of valid exercise of business judgment
(Grimes)
e. If a derivative proceeding is commenced after a determination has been made rejecting
a demand by a shareholder, the complaint shall allege with particularity facts
establishing either (1) that a majority of the board of directors did not consist of
qualified directors at the time the determination was made, or (2) that the
requirements of § 7.44(a) (SLC) were not met (MBCA)
f. Qualified director: one who does not have (i) material interest in the outcome of the
proceeding, (ii) a material relationship with a person who has such an interest (MBCA)
g. Grimes v. Donald (two alleged breaches of fiduciary duty by the Board: abdication of
board powers to managers and excessive compensation)
o Abdication of board powers to managers is a direct action because the
shareholder is seeking an injunction
o Excessive compensation is a derivative action because of the monetary harm to
the company
o Must allege particularized facts creating reasonable doubt that
 Majority of board has material interest or familial interest in challenged
transaction; or
 Majority of board lacks independence (e.g., domination and control by
wrongdoers); or
 Challenged transaction not product of valid exercise of business
judgment
8. Role of Special Committees
a. MBCA: Courts may dismiss if a group below has determined in good faith, after
conducting a reasonable inquiry that the maintenance of the derivative action is not in
the corporation’s best interests:
o Majority vote of qualified directors if they constitute a quorum
o Majority vote of a committee consisting of two or more qualified directors
appointed by majority vote of qualified directors regardless of quorum
o Panel appointed by court upon motion of the corporation
b. Auerbach v. Bennett – NEW YORK (after directors were making political bribes, Board
creates an SLC of three new director members and appoints them to the committee;
question if BJR applies)
o Ultimate decision covered by business judgment rule  limits judicial inquiry 
only permitted as to:
 Disinterested independence of SLC
 Adequacy of investigation by SLC
 They had records, they interviewed the effected parties, and
hired experts
 Plaintiff has burden
c. Zapata v. Maldonado – DELAWARE (π brought litigation against company and they
appointed an SLC; SLC decides not to prosecute)
o Delaware reviews SLC recommendation to dismiss
o Step 1:
 Inquire into independence and good faith of SLC
 Inquire into bases for SLC’s recommendation (adequacy of investigation)
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 Corporation has burden

o Step 2:
 Court may apply its own business judgment as to whether case should
be dismissed
d. In Re Oracle Corp (insider trading allegations; SLC is comprised of two Stanford
professors; company had close relationship with Stanford)
o Follows the Zapata test
o Questions the independence of the SLC and tries to cast doubt on the
independence of the SLC by trying to show a financial tie between the SLC and
the company
e. *SLCs typically will decide not to prosecute because it looks bad to the public and
potential shareholders, costs of litigation exceeds recovery, and effects other business
decisions like mergers
9. Role and Purposes of Corporations
a. A.P. Smith Mfg. v. Barlow (company appropriated $1,500 to be appropriated to
Princeton and stockholders questioned it)
o Corporate laws adopted subsequent to incorporation can affect governance of
firm
 So-called “reserve power”
 Statute must be in public interest
o Unreasonable amount and/or contribution to “pet charity” would be invalid
o Can argue corporations benefit from donations from goodwill and ensuring a
properly trained workforce
b. Dodge v. Ford (Dodge brothers were shareholders in Ford; Ford did not declare extra
dividend and instead used money to expand/build plants)
o Ford wanted to build/expand plants to make cars cheaper for the public 
corporation designed to make money for shareholders and trying to reduce the
cost made it charitable
o Only limit on making profits for shareholders is illegal stuff
c. Shlensky v. Wrigley (Cubs did not have lights so shareholders sued saying they could
make more money if they could play at night)
o Business judgment rule preserves Wrigley’s decision
o How Shelensky could have one: show it was a personal preference that baseball
was a daytime sport or that it was putting the community’s interest ahead of
the company’s

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Business Associations Outline

DERIVATIVE LITIGATION DECISION TREE

Direct or Derivative?

Direct Derivative

π sues Demand
futility

Demand Demand
excused required

π sues Demand
SLC cases made?

YES
Board disabled by NO
some conflict, but Usually stay
can Board regain Demand of action
control later? refused? while make
YES demand
NO

BOD sues Refusal

wrongful?

NO YES

Stop suit π sues

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IV. Duties of Officers, Directors, and Other Insiders

A. Business Judgment Rule
1. Presumption that in making corporate decisions directors acted on an informed basis, in good
faith, and in the corporation’s best interests
a. Presumption rebutted if π shows directors breached their fiduciary duties of care,
loyalty, of good faith or shows decision involved fraud, illegality, or waste
b. If presumption is rebutted, burden shifts to directors to prove that the challenged
transaction was entirely fair to the corporation and its shareholders (Disney)
2. To rebut the business judgment rule, a shareholder plaintiff assumes the burden of providing
evidence that directors, in reaching their challenged decision, breached any one of the triads of
their fiduciary duty—good faith, loyalty, or due care. If a shareholder plaintiff fails to meet this
evidentiary burden, the business judgment rule attaches to protect the director’s decisions and
our courts will not second-guess these business judgments. If the rule is rebutted, the burden
shifts to the defendant directors to prove the entire fairness of the transaction. (Cede and Co)
3. MBCA does not use the phrase BJR, but it is similar
B. Standard of Liability
1. A director shall not be liable to the corporation or its shareholders for any decision to take or
not to take action, or any failure to take any action as a director unless the party asserting
liability in a proceeding establishes that no defense based on exculpation and the challenged
conduct consisted or was the result of a decision which the director did not reasonably believe
to be in the best interests of the corporation or as to which the director was not informed to an
extent the director reasonably believed appropriate in the circumstances (MBCA)
a. Presumption that director is not liable
b. Essentially encompasses the BJR
2. MBCA: The challenged conduct consisted of or was the result of:
a. A lack of objectivity to due to the director’s familial, financial, or business relationship
with, or lack of independence due to the director’s domination or control by, another
person having a material interest
b. Sustained failure of the director to devote attention to ongoing oversight of the business
and affairs of the corporation, or a failure to devote timely attention, by making (or
causing to be made) appropriate inquiry, when particular facts and circumstances of
significant concern materialize that would alert a reasonably attentive director to the
need therefore; or
c. Receipt of financial benefit to which the director was not entitled or any other breach of
the director’s duties to deal fairly with the corporation
C. Duty of Care
1. MBCA
a. Director must use the care than an ordinarily prudent person in a like position would
exercise under similar circumstances
b. Director liable if not informed to extent the director reasonably believed appropriate in
the circumstances or commits a sustained failure to devote attention to oversight of
business
2. Delaware
a. Director liable if grossly negligent in failing to inform of all material information
reasonably available (Van Gorkom)
b. Process of due care only, not the actual merits or best practices (Disney)
c. Directors must supervise, read and understand financials, and object to misconduct
(Francis)

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3. Exculpation
a. Corporations may limit or eliminate the personal liability of directors for monetary
damages for breaches of the duty of care (MBCA)
o Only monetary damages
o Must include in certificate of incorporation
4. Reports
a. Directors may rely on reports and other information from corporate officers or
employees, outside experts, or board committee if reasonably believe to be reliable and
competent (MBCA)
5. Kamin v. American Express (Amex bought stocks for investment which plummeted; Amex
declared a special dividend to distribute these stocks; πs want them not to declare dividends so
they can be a tax loss which would save money)
a. Question of declaring dividends is for the Board  BJR
b. No breach of duty of care  directors acted after due deliberation and had a rational
basis for decision
o Loss would effect net incomes, would effect market value of stock, and Board
looked at the whole picture  shows it used its best judgment
6. Smith v. Van Gorkom (company involved in corporate takeover and trying to value stock;
VanGorkom says its worth $55, but nothing supports this; Board does not read anything)
a. π must prove directors were grossly negligent by failing to inform themselves of all
material information reasonably available to them (focus on the process)
b. Breach of duty of care  board lacked an informed deliberative process in making a
final period of decision (sale of company)
o They based everything on one 20 minute presentation and never read any of
the documents
c. *After this case exculpatory provisions allowed to limit or eliminate the personal liability
of a director for monetary damages for breaches of the duty of care
o Have to include in articles of incorporation and only applies to duty of care
7. Francis v. United Jersey Bank (reinsurance company – mom is on Board and two sons come in
and start taking “loans” from company – embezzling – mom does nothing)
a. Business judgment rule did not apply because failed to make a decision (lack of
oversight)  different from situation where board decides not to act (she literally did
nothing)
b. π had to prove that director breached the duty of care
c. Duty of care was breached because Lillian was inattentive
o The whole business is focused on other people’s money so there is a duty to
protect that money
d. Duty of care required director to be informed:
o Basic knowledge and supervision of corporation
o Read and understand financial statements
o Object to misconduct
D. Duty of Loyalty
1. Directors and Managers
a. Under MBCA, director liable if π proves director:
o Made decision which director did not reasonably believe to be in corporation’s
best interests
o Lacked objectivity due to familial, financial, or business relationship with, or
director’s domination by, someone having material interest in challenged
conduct

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 Which relationship or domination reasonably expected to have affected

the director’s judgment and director does not show that the challenged
conduct was reasonably believed by the director to be in the
corporation’s best interests
o Received financial benefit to which director was not entitled or breached duty
to deal fairly with corporation
b. Conflicted Interest Transactions
o Conflicted interest transaction: director or person related to director is a party
to transaction with corporation, or has a beneficial financial interest in the
transaction (MBCA)
o Control: power to elect a majority of board or entitled to majority of residual
returns
o Fair to the corporation: transaction as a whole was beneficial to the corporation,
taking into account whether it was (i) fair in terms of the director’s dealings with
the corporation, and (ii) comparable to what might have been obtainable in an
arm’s length transaction
o Required disclosure: disclosure of (i) the existence and nature of the director’s
conflicting interest, (ii) all facts known to the director respecting the subject
matter of the transaction that a director free of such conflicting interest would
reasonably believe to be material
o Absent a conflict of interest, π has burden of proof and must overcome the BJR
o Given an unratified conflict of interest, directors have burden of proving that
challenged transaction was fair to the corporation (Bayer)
o Under MBCA, to uphold a conflicted interest transaction, interested director
must make required disclosure and it must be ratified by
 Majority of disinterested directors (at least 2)
 Majority of disinterested shareholders
 Otherwise a director must prove it was fair to corporation (compare it
to arms length bargaining)
o If the transaction with a conflict of interest is ratified (by disinterested directors
or shareholders), then π has burden of proof and must overcome BJR
c. Bayer v. Beran (πs file a shareholder derivative action contesting the directors’ decision
to pay for radio advertising using a director’s wife)
o Business judgment rule rebutted because assumed all directors had conflict of
interest  because the husband is everyone’s boss it is assumed he has control
over them
o For a duty of loyalty claim:
 Directors had burden of proof because it was a conflict of interest
 Conflict of interest for all of them since they are inside directors
 Directors had to prove transaction was fair to corporation
o If directors are involved in an interested transaction:
 Full disclosure and seek approval of majority of disinterested directors
 If all directors are disinterest, seek approval of shareholders
2. Corporate Opportunities
a. Corporate opportunity exists where:
o Corporation is financially able to take the opportunity
o Opportunity is in the corporation’s line of business
o Corporation has an interest or expectancy in the opportunity
 Interest: something to which corporation has a better right

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 Expectancy: something which, in the ordinary course of things, would

come to the corporation
o Embracing the opportunity would create a conflict between director’s self-
interest and corporation’s interest
o *No factor is dispositive  balance all of them (Beam)
o *MBCA does not define business opportunity
b. How to get safe harbor:
o Required disclosure of opportunity and corporation’s interest in the opportunity
is disclosed by
 Majority of qualified directors (no less than 2); or
 Majority vote of qualified shareholders
 *Board approval protects the decision under the BJR
c. Broz v. Cellular Information Systems (Broz was sole shareholder/president of RFBC and
the director of CIS)
o Broz has opportunity to buy cell franchise in his capacity as the shareholder of
RFBC – so question becomes if it was also an opportunity for CIS
o CIS did not have an interest or expectancy because they were selling all of their
similar interests
o Could only prove it was in the corporation’s business, not any of the other
factors
d. In re eBay Shareholders Litigation (Goldman Sachs did a lot of business with eBay and
offered them certain investments; eBay was in the practice of building up its capital by
making a lot of investments on IPO shares)
o Looks like a bribe to the officers to keep getting business from them
o Can meet all of the factors here  eBay regularly used their assets to make
investments like this so it was part of their usual business activities
3. Dominant Shareholders
a. Shareholders acting as shareholders do not owe one another fiduciary duties
b. Controlling shareholders owe fiduciary duties to the minority shareholders
c. Sinclair Oil v. Levien – DELAWARE (Sinclair Oil was a holding company with multiple
subsidiaries each in a different country; Sinclair owned 97% of Sinven)
o Minority shareholders objected to the relationship between Sinclair and Sinven
because Sinven declared large dividends, Sinven was prevented from expanding
(one country only), and the breach of contract was between Sinvin and another
Sinclair subsidiary
o Business judgment rule used if no self-dealing
 π bears burden
o Intrinsic fairness used if majority shareholder has received a benefit to the
exclusion and at the expense of minority shareholders
 ∆ bears burden
 *Almost impossible to show fairness
d. Zahn v. Transamerica Corporation (∆ majority shareholder, redeemed π’s Class A shares
at $80 per share prior to the liquidation of the business; value of the shares would have
been substantially higher at point of liquidation)
o Directors owe a duty to every shareholder
o Directors were acting on ∆’s behalf when they redeemed the shares
4. Ratification
a. Directors’ Ratification (MBCA)
o Affirmative vote of a majority (but no fewer than two) of the qualified directors,
after disclosure by the conflicted director
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 Qualified directors must have deliberated and voted outside the

presence and without the participation of the interested directors
 Can be a committee made up of qualified members of BOD or a
committee appointed by the affirmative vote of a majority of the
qualified directors
o Shareholders’ Ratification (MBCA)
 If a majority of the votes cast by the holders of all qualified shares are in
favor after notice and communication to the shareholders entitled to
vote on the transaction of the information that is the subject of the
required disclosure
 A director with a conflicting interest must inform the corporation of the
shares he knows are not qualified and the identity of those shareholders
 Qualified shares excludes shares held by a director with a conflicting
interest or a person related to the director
b. Board meeting requires a quorum
o Delaware: a majority of the total number of directors (unless the articles or
bylaws require a greater number)
 Delaware: Common or interested directors may be counted in
determining a quorum
o MBCA: majority of the number of directors unless articles or bylaws require a
greater number (can be 1/3 or more)
 MBCA: In approving a director’s conflicting interest transaction, a
majority (but no fewer than two) of all the qualified directors on the
board of directors, or on the committee, constitutes a quorum
c. Majority vote typically required at board meeting
o Delaware: majority of the directors (unless articles or bylaws require a greater
number)
o MBCA: majority of the directors (unless articles of bylaws require a greater
number)
d. Fliegler v. Lawrence (directors are involved in leasing mine operations that likely could
have been a corporate opportunity; look for shareholder ratification to approve of
transaction)
o Majority of the directors were not disinterested  shareholder approval
o Transaction was fair to the corporation  prove fairness by comparing it to any
other arms length transaction
o Shareholder ratification of a transaction between the corporation and an
interested party will not be legitimate if the shareholders are the interested
parties
E. Obligation of Good Faith
1. Directors shall act in good faith (MBCA)
2. Directors are liable for actions not in good faith (MBCA)
3. Delaware recognizes two types of bad faith (Disney):
a. Conducted motivated by subjective bad faith (an actual intent to do harm)
b. Intentional dereliction of duty, a conscious disregard for one’s responsibilities
c. *Bad faith violates the duty of loyalty (Stone v. Ritter)
4. Compensation
a. In re Walt Disney (Disney contracted employment deal with Ovitz; things went sour
early on and the way the contract was written they had to pay him a lot of money for
firing him)

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o No breach of duty of care  court reviews the process that Disney went
through (were they adequately informed of all reasonably available
information?) not the merits of the decision it came to
o No breach of duty of good faith  no subjective bad faith/intent to do harm
and no intentional dereliction of duty
o No waste  would have had to get nothing in return; no reasonable business
person would have approved
o Solution: calculate risk, research the worst case scenario, educate yourself, and
document everything
b. Officers’ compensation should be set by directors who are not officers
c. Directors’ compensation should be set by shareholder ratification
5. Oversight
a. Stone v. Ritter (two people were running a Ponzi scheme through a bank; bank had no
compliance system and had to pay huge fine; shareholders sue)
o Duty of good faith is not a separate claim
o Duty in all cases to take steps to make sure that all laws are being complied with
 you have to have some sort of compliance program
 Start with the compliance laws specific to that business
 Theft/embezzlement – need some kind of monitoring system
o After this case, can bring an oversight claim when the board is not properly
monitoring, failing to act on misconduct, or failing to prevent misconduct from
happening again  compliance system needs to evolve
F. Indemnification and Insurance
1. Exculpation
a. MBCA: A corporation’s articles of incorporation may set forth a provision eliminating or
limiting the liability of a director to the corporation or its shareholders for money
damages for any action taken, or any failure to take any action, as a director, except
liability for
o The amount of a financial benefit received by a director to which he is not
entitled
o An intentional infliction of harm on the corporation or the shareholders
o For an unlawful distribution; or
o An intentional violation of criminal law
b. Applies only to directors
c. Limits only the monetary liability of directors
o Equitable remedies are still available
d. Exculpates only breaches of the duty of care
o Not breaches of the duty of loyalty, intentional infliction of harm, or intentional
violations of the law
e. Exculpation provision is raised as a defense

V. Trading in Securities
A. Disclosure and Fairness
1. Purpose of securities statutes: full disclosure so investors have all the information they need to
make informed decisions
2. Securities and Exchange Commission: independent agency that enforces securities laws and
promulgates the rules and regulations to implement those laws more effectively
3. Definition of a Security
a. 1933 and 1934 acts only apply to a “security,” but both similarly define security
o Specific items such as note, stock, bond, debenture
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 (Landreth) Stock: something that is called a stock with the usual

characteristics of a stock
 Right to receive dividends of profits
 Negotiability and ability to be pledged
 Conferring voting rights in proportion to shares
 Capacity to appreciate in value
o SEC v. Howey Catch-all terms (investment contract):
 Contract/transaction whereby a person invests money
 Any legal consideration is fine
 In a common enterprise
 Pooling interest/money into one venture in hopes of making a
return
 And is led to expect profits
 Not necessarily monetary (i.e. lower taxes)
 From the efforts of the promoter or a third party
b. Robinson v. Glynn (π alleged that ∆ committed securities fraud when he sold him a
partial interest in an LLC)
o Stock?  NO – π got a preferential return; not freely transferable; and contract
calls it a membership interest
o Does not fit “from the efforts of the promoter or third party”  π is not just a
passive investor – he has two seats on the board and a role on the executive
committee
4. Rule 10b-5
a. 10b-5: It shall be unlawful for any person, directly or indirectly, by the use of any means
or instrumentality of interstate commerce, or of the mails or of any facility of any
national securities exchange,
(a) To employ any device, scheme, or artifice to defraud
(b) To make any untrue statement of a material fact or to omit to state a
material fact necessary in order to make the statements made, in the light of
the circumstances under which they were made, not misleading, or
(c) To engage in any act, practice, or course of business in which operates or
would operate as a fraud or deceit upon any person
o In connection with the purchase or sale of any security
b. Shareholders can sue corporation or insiders for violating 10b-5
c. Violation of Rule 10b-5 can result in
o Private suit – damages or rescission (no punitive damages)
o SEC civil action – disgorge profits and treble damages
o Criminal prosecution by the DOJ
 Up to 10 years in jail and fines of up to $1 million
 Fines of up to $2.5 million for corporations
d. Generally two types of Rule 10b-5 actions
o Material misstatement – usually by issuer
o Material omission – insider trading
o Private plaintiffs cannot sue aiders/abettors, but government may sue for aiding
and abetting
e. Elements of 10b-5
o Jurisdictional nexus: interstate commerce or national securities exchange
 Excludes intrastate face-to-face transactions
o Transactional nexus:
 “In connection with the purchase or sale of any security”
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 Focus is on a sale or purchase by plaintiff

 Non-trading defendant (issuer) can be held liable
 Excludes potential purchasers who did not buy (because of fraud)
 Excludes shareholders who refrain from selling (because of fraud)
o Material representation or omission
 Whether substantial likelihood that a reasonable investor would
consider it important in making investment decision
 If uncertain or contingent facts, balance probability that event will occur
and anticipated magnitude of event (Basic)
 *A small change in stock price is still material (just means lower
damages)
o Reliance/Causation
 Rebuttable presumption of reliance for omissions
 Disclose/Abstain
 Tipping
 Misappropriation
 Rebuttable presumption of reliance for public misrepresentation
 Fraud of the market theory – presumption that price of stock
traded in an efficient market reflects all public, material
information (Halliburton)
 To avoid misrepresentation: either stay silent or say “no
comment”  need an actual statement
 Rebut reliance/causation by showing
 *Sever the link
 Market not deceived (price not affected)
 Corrective statement
 Plaintiff would have sold anyway, even with full disclosure
 Other reasons caused change in stock price
o Scienter
 Intent to deceive, manipulate, or defraud; or
 Reckless disregard of falsity of statement
f. Santa Fe Industries, Inc. v. Green
o Conduct only violates 10b-5 if manipulative or deceptive
 Breach of fiduciary duty without fraud is not a violation of 10b-5 (need
fraud to bring the claim)
 No “federal fiduciary principle” – once full disclosure is made, the
fairness of the transaction is not an issue under federal law
 Bring a state law claim for breach of fiduciary duty
 *Seems to conflict with insider trading cases
B. Inside Information
1. Insider Trading
a. Liability premised on omission of material fact
o Only imposed when ∆ had a duty to disclose
o Silence is not fraudulent (absent a duty to speak)
b. Modern insider trading rule (Chiarella & Dirks)
o Disclose or abstain when you have a duty to disclose
o Duty to disclose arises from relationship of trust and confidence with issuer
corporation or its shareholders
o No general duty to disclose before trading on material nonpublic info
c. When may insiders trade?
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o When information is effectively disclosed in a manner that insures availability to

the public (i.e. when it goes across the Dow Jones ticker)
d. Inside vs. Market Information
o Inside information originates within the firm and relates to the firm’s assets,
earnings, and the like
o Market information is everything else; information from sources other than the
issuer and involves events affecting price or market other than earnings/assets
2. Who is an Insider?
a. 1934 Securities Exchange Act § 16(b): officers, directors, and 10% shareholders
b. Rule 10b-5 after Chiarella and Dirks:
o Fiduciary relationship to issuer corporation and its shareholders (directors,
officers, employees)
o Constructive insiders (lawyers, accountants, etc)
 Obtain material nonpublic information from the corporation with
 An expectation on the part of the corporation that the outsider will
keep the disclosed information confidential and
 The relationship at least implies such a duty
o Examples: director, administrative assistant, outside expert hired by
corporation, janitor for corporation learning information from trash, lawyers,
consultants, accountants, etc
 Remember: a farmer observing the activity on the corporation’s land is
getting closer, but still is really an outside observation
 Arms-length negotiations are not insider information
3. Tipping – Dirks
a. Tipper is liable when he breached a fiduciary duty by receiving a personal benefit from
disclosing information
b. Tippee’s liability is derivative of the tipper’s  “arising from his role as a participant
after the fact in the insider’s breach of a fiduciary duty”  liable when:
o Tipper breached a fiduciary duty by receiving a personal benefit from disclosing
information; and
o Tippee knows or has reason to know of the breach
4. Misappropriation – O’Hagan
a. Misappropriation theory is a valid basis for imposing federal insider trading liability
o A fiduciary’s undisclosed use of information belonging to his principal,
o Without disclosure of such use to the principal,
o For person gain
o Constitutes fraud in connection with the purchase or sale of a security and thus
violates Rule 10b-5
b. Disclosure to source of information is all that is required to avoid liability – even if the
source objects (do not need consent)
o Source may have claim against agent for breach of the duties of loyalty and
confidentiality
5. Rule 10b-5(2)
a. Chestman says that a family relation alone ≠ fiduciary duty
b. Rule 10b-5(2) provides a non-exclusive list of 3 situations in which a person had a duty
of trust or confidence for purposes of the misappropriation theory:
o Whenever person agrees to maintain the information in confidence;
o Whenever the person communicating information and the person to whom it is
communicated have a history, pattern, or practice of sharing confidences, such
that the recipient of this information knows or reasonably should know that the
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person communicating the information expects the recipient to maintain

confidentiality; or
o Whenever information is obtained from a spouse, parent, child, or sibling,
unless the recipient shows that the history, pattern, or practice indicates no
expectation of confidentiality
C. Short Swing Profits
1. § 16(b) applies to:
a. 1934 Act: registered companies  shares traded on a national exchange, or more than
$10 million in assets and a class of securities held by either 2000 persons or 500 persons
who are not accredited investors
b. Officers, directors, and 10% shareholders
c. Equity securities only – stocks, options, convertible debt
2. Recovery
a. Any recovery goes to the company
b. Courts interpret § 16(b) to maximize the gains the company recovers
c. Shareholders can sue derivatively and lawyer can get contingent fee from any recovery
or settlement
3. Strict Liability
a. Do not need proof of the use of inside info  strict liability
4. Sale and purchase within six months
a. *There has to be a sale or purchase or this does not apply
b. § 16(b) applies regardless of order (sale then purchase or purchase then sale)
c. Maximize recovery by matching highest sale and lowest buy
5. 10% shareholder (of one class of stock)
a. Must own 10% at the time of the purchase and sale
o So calculate if they were a 10% shareholder the moment before making each
trade
6. Directors and officers (President, CEO, CFO, VPs)
a. Percentage of ownership is irrelevant
b. Liable if they held office at the time of the purchase or sale
c. But not liable for transactions that took place before they took office

VI. Problems of Control

A. Control in Close vs. Public Corporations
1. Public Corporations
a. Usually own a small percentage of shares within a diversified portfolio
b. Interested in share price
c. Little influence on Board or management
d. If dissatisfied, typically sell shares rather than fight
2. Closely Held Corporations
a. Often undiversified
b. Interested in company’s performance and dividends, not share price
c. Minority shareholders may have little influence on Board or management
d. Conflicts can lead to deadlock or oppression
B. Directors
1. Board of directors has right to manage the corporation (unless varied by the shareholder
agreement) – MBCA
2. Quorum = majority of directors (MBCA)
a. Articles of bylaws may set a higher or lower number, but it cannot be less than a third
3. Voting = majority of directors present (MBCA)
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a. Articles or bylaws may require a greater number

4. Unanimous written consent (MBCA)
a. Board can take action without a meeting if all directors agree
5. Can create committees of the board (MBCA)
C. Shareholder Voting Control
1. Articles of incorporation – amend by vote of directors and vote of shareholders (MBCA)
2. Bylaws – amend by a vote of either the directors or shareholders
a. But articles may reserve this power to the shareholders (MBCA)
3. Although the board of directors has the right to manage the shareholders (unless varied by
shareholder agreement), shareholders have the power to:
a. Elect directors
b. Remove directors (with or without cause)
c. Modify or repeal bylaws
d. Approve fundamental corporate changes
4. Shareholder Inspections
a. Why should a shareholder inspect?  proxy contests, shareholder litigation (to
investigate possibility of corporate wrongdoing; to meet requirement of pleading with
specificity)
b. Shareholder entitled to inspect and copy these records if they give the corporation five
business days written notice of demand (regardless of the purpose):
o Articles of incorporation, bylaws, minutes of shareholder meetings,
communications to shareholders, list of directors and officers, and annual
reports (MBCA)
c. Shareholder also entitled to inspect these records if demand is in good faith and for
proper purpose:
o Excerpts from board or committee meeting minutes, accounting records, and
shareholder lists (MBCA)
o Proper purposes: investigate misconduct, wage proxy contest, collect
information relevant to valuation of shares
o Improper purposes: personal benefit (get a mailing list; trade secrets),
discovering proprietary business information for the benefit of a competitor,
institute strike suits
d. Cannot limit by articles or bylaws
e. Crane Co. v. Anaconda Co. (stockholder announced plan to purchase more shares by
exchanging shares; wanted to examine register as part of purchase)
o Proper purpose determined from shareholder, not corporation’s perspective
o Was a proper purpose  a qualified shareholder is allowed, when in good faith,
to inspect a corporation’s stock register in order to notify shareholders of
exchange and solicitation offers for stock
f. Pillsbury v. Honeywell (shareholder wanted to inspect the corporate records to identify
the fact that the company was making things for the Vietnam War)
o Improper purpose: only wanted to look at the records to start a grievance about
Vietnam involvement (high burden on corporation)
o Would have been proper if it were for investment purposes
D. Stock Rights
1. Economic rights
a. Receive dividends when declared by the Board
b. Residual claim upon liquidation of corporation
2. Voting Rights
a. Elect directors
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b. Approve extraordinary matters (e.g. mergers)

3. MBCA 6.01(b) requires
a. At least one class with unlimited voting rights
b. At least one class with residual claim
c. May be the same class, but need not be
4. MBCA 6.01(c) authorizes nonvoting stock and other variations on the “one share-one vote”
standard
5. Par value: minimum price at which shares may be sold as specified in the articles of
incorporation
a. There can be “no par” stock  Board sets the value
E. Quorum and Voting
1. Voting at shareholder meetings: annual and special
2. For shareholder action, there must be a quorum at the meeting
a. Quorum = majority of shares entitled to vote (MBCA)
b. Articles may set a greater quorum (MBCA)
c. If the quorum is met, matter is approved if votes cast in favor exceed the votes cast
against (MBCA)
d. MBCA does not count absentions
e. Articles may set a greater vote requirement
3. Director Elections
a. Straight voting for each open director seat  top vote getter is elected even if they fail
to get a majority of votes
b. Cumulative voting allowed if the articles so state (MBCA)
o Everyone votes according to the number of shares they have
c. Voting by groups occurs when there are multiple stock classes
4. Stroh v. Blackhawk Holding (shareholders argue that their class of shares was invalid because it
had no economic right, just voting rights)
a. Class of stock was valid because you only need one thing: control, money, or distribution
of assets
b. Because that type of stock existed in the articles of incorporation, the shareholders
chose to buy the stock knowing its limitations
5. *All states permit non-voting stock
F. Voting Trusts and Agreements
1. Voting Trust (MBCA)
a. One or more shareholders agree to transfer their shares to a trustee who becomes the
shares’ record owner and votes the shares according to the trust agreement
b. Must file trust agreement with corporation’s registered office
c. 10 year limit, but can extend for additional 10 year terms
d. Advantage: avoids dead lock
e. Disadvantage: loss of control
2. Ringling Brothers
a. Family members who have voting trust go against what the arbitrator ordered
b. Solution: make it clear that what the arbitrator says is binding OR combine the vote
pooling with the arbitrator as a proxy
3. Voting Agreements (MBCA)
a. 2 or more shareholders agree how to vote all their shares (pool them together
b. Specifically enforceable
c. No requirement to file with the corporation and no time limit
G. Shareholder Agreements (MBCA)
1. Shareholders agree on aspects of management
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a. Ex: eliminate board, restrict board’s powers, authorize distributions, establish

directors/officers, etc
2. Agreement shall be set forth in
a. Articles of bylaws and approved by all shareholders; or
b. A written agreement that is signed by all shareholders and is made known to the
corporation
3. Amend if all shareholders agree, unless agreement provides otherwise
4. Valid for 10 years, unless agreement provides otherwise
5. Agreement must be noted conspicuously on share certificates
6. Ceases to be effective when corporation goes public
7. McQuade v. Stoneham (shareholders had agreement to elect each other as directors and then
as officers; McQuade ended up fired, not re-elected, and frozen out)
a. Shareholder agreement to elect each other as directors and officers at set salaries
b. Void because directors must exercise business judgment on behalf of all shareholders 
advance agreement on how to vote as directors harms minority shareholders that are
not parties to the agreement
c. *Could have achieved the same goals by having employment contracts where you could
only be fired for cause and buy back provisions
8. Clark v. Dodge
a. Shareholder agreement to elect each as directors and officers
b. Valid because there were no minority shareholders  no way to exclude them
9. Galler v. Galler
a. Shareholder agreement on directors, dividends, and death benefit
b. Valid because unanimity is not required if minority shareholder does not object and the
terms are reasonable
o Slightly modifies McQuade
c. Inconsistent with the MBCA
H. Shareholders’ Fiduciary Duties
1. Shareholders acting as shareholders typically owe each other no fiduciary duties
2. Delaware: controlling shareholders owe fiduciary duty to minority shareholders
a. If controlling shareholder received a benefit to the exclusion and at the expense of the
minority shareholders, ∆ must prove intrinsic fairness (Sinclair Oil)
b. If no self-dealing, business judgment rule applies
c. No special close corporation duties (Nixon v. Blackwell)
3. Massachusetts and Other States – Wilkes
a. Close corporation shareholders owe duty of good faith
o If an act is challenged, majority must show legitimate business
o If so, burden shifts to minority to show purpose could have been achieved
through an alternative less harmful to minority’s interest
o If so, court balances the legitimate business purpose against the practicability of
the proposed alternative
b. Remedy is equal treatment (even out the wrongful conduct)
4. Brodie v. Jordan (Brodie died and his wife inherited his interest; other directors froze her out so
she sued for breach of fiduciary duty)
a. Property remedy is damages not buy out  restore her where she was before
o Buying her out would give her an improper benefit because it would create an
artificial market for shares in a close corporation which really have little or no
market value
b. Solution: give the wife a seat on the Board (still have majority so can always out vote
her)
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I. Control, Duration, and Statutory Dissolution

1. MBCA permits shareholder to seek involuntary dissolution if:
a. Directors are deadlocked, shareholders are unable to break the deadlock, and
irreparable injury to the corporation is threatened because of the deadlock;
o Director Deadlock:
 Directors must be evenly divided and therefore unable to make
corporate decisions
 Shareholders must be unable to resolve the deadlock; and
 Deadlock must threaten irreparable injury to the corporation or prevent
its business from being conducted to advantage shareholders
o Shareholder Deadlock:
 Shareholders must be evenly divided; and
 Because of their division, the shareholders must be unable to elect a
board of directors for two consecutive years
b. Directors or those in control of corporation have acted in manner that is illegal,
oppressive, or fraudulent;
o Oppression: conduct that substantially defeats a minority shareholder’s
reasonable expectations
 More than mere disappointment
 Reasons for participating have been defeated
c. Shareholders are deadlocked and have failed to elect directors for at least two
consecutive annual meetings; or
d. Corporate assets are being wasted
2. Remedy: liquidation (a lot of courts use buyout as an alternative)
3. Alaska Plastics v. Coppock (ex-wife got half of her husband’s share in the divorce; other
directors never told her about shareholder meetings)
a. Remedy: buy her out and put her back where she would have been but for the wrongful
conduct
4. Stuparich v. Harbor Furniture (sister wants to separate the two family businesses because only
one is making money)
a. Could not get a decree for dissolution because the brother was not doing anything
wrong: no oppression, allowed vote, no deadlock, and no breach of fiduciary duties
b. Just a dispute over how to run a business

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