Реферат: Business associations

BUSINESS ASSOCIATIONS

Corporate bargain--limited liability

I.CHARACTERISTICS OF A CORPORATION

A.PRINCIPALCHARACTERISTICS OF A CORPORATION

a)Entity Status--acorporation is a legal entity created under the authority of legislature

b)Limited Liability--asa legal entity, a corp is responsible for its own debts; its sh’s liability islimited to their investment;

c)Free Transferability ofInterest--shares, representing ownership interests, are freelytransferable;

d)Centralized Managementand Control--a corp’s management is centralized in a board of dirs andofficers. Shs have no direct control over the board’s activities;

e)Duration--Continuityof Existence--a corp is capable of perpetual existence;

f)Taxation--a corp,as an entity, pays taxes on its own income; shs are taxed only on dividends;

g)Remember Attributes ofthe Corporation--CLIFF:

1)Centralization ofmanagement;

2)Limited liability;

3)Forever (perpetual duration);

4)Freely alienable (sharescan be sold).

B.CORPORATIONS DISTINGUISHED FROM OTHER FORMS OF BUSINESS ASSOCIATIONS.

1.GENERAL PARTNERSHIPS--in most states, p’ships are governed bythe Uniform Partnership Act (UPA). However, the Revised UPA (RUPA) has beenadopted by a few states

a)Aggregate Status--ap’ship is an aggregation of two or more persons who are engaged in business asco-owners. Although not a legal entity, a p’ship is treated as one for certainpurposes, e.g., ownership and transfer of property. RUPA confers entity statuson p’ships;

b)Unlimited Liability--everypartner is subject to unlimited personal liability on p’ship debts;

c)Transferability ofInterests--a partner cannot make a transferee a member of the p’ship.She can, however, assign his interest in the p’ship, thus permitting theassignee to receive distributions of profits. Because the assignee does notbecome a member of the p’ship, he is not entitled to participate in p’shipbusiness or management.

d)Duration and Dissolution--ap’ship cannot have perpetual existence. It is terminable at will unless adefinite term is expressed or implied, and is also dissolved by death,incapacity, or withdrawal of any partner.

1)Wrongful dissolution--p’shipscan also be dissolved in contravention of the p’ship agreement, by the expresswill of any partner, by a court or by a partner’s conduct. Upon wrongfuldissolution, nonbreaching partners may seek damages for breach and, if theychoose to do so, may continue the p’ship upon payment to the breaching partnerof the value of his interest.

1)Compare--dissociationunder RUPA--termination results in either the winding up of the p’ship orbuyout of the dissociating partner, depending on the event triggering thetermination. A buyout may be reduced by damages if dissociation was wrongful.

e)Management and Control--absenta contrary agreement, every partner has a right to participate equally in thepartnership management.

f)Autority--eachpartner, as an agent of the firm, may bind the p’ship by acts done for thecarrying on, in the usual way, the business of the p’ship.

1)RUPA--a p’ship isbound by a partner’s act for carrying on in the usual way either the actualp’ship business or a business of the kind carried on by the p’ship.

g)Ownership of Property--titlemay be held in the name of the p’ship, but property is owned by theindividual partners as tenants in p’ship. There is no tenancy in p’ship underRUPA, which provides that property acquired by p’ship is owned by p’ship, notindividual partners.

h)Capacity to Sue and beSued--under the UPA, a lawsuit may be brought by or against individualpartners, rather than p’ship. Partners are jointly and severally liable forwrongful acts and breaches of trust; they are only jointly liable for debts andobligations of the p’ship.

1)Statutory reforms--manystate statutes specifically allow a p’ship to be sued in its own name. Otherstates make all p’ship liabilities joint and several. Other reforms providethat not all joint obligors need to be joined in a suit.

2)RUPA--a p’ship maysue and be sued in its own name, and partners are jointly and severally liablefor all p’ship obligations. A claim against the p’ship cannot besatisfied from a partner’s personal assets unless p’ship assets have beenexhausted.

2.JOINT VENTURE--a p’ship formed for some limitedinvestment or operation, as opposed to a continued business enterprise. Jointventures are governed by the rules applicable to p’ships

3.LIMITED PARTNERSHIP--this is a p’ship consisting of two classesof partners: general partners (with rights and obligations as inan ordinary p’ship) and limited partners (with no control and limitedliability).

4.LIMITED LIABILITY PARTNERSHIPS--in a LLP, a general partner isNOT personally liable for all p’ship obligations arising fromnegligence, wrongful acts, and misconduct absent his involvement in themisconduct. There is no exclusion for liability for contractual obligations.

5.LIMITED LIABILITY COMPANIES--LLC is a non-corporate businessentity whose owners (members) have limited liability and can participateactively in its management. An LLC may be either for a term or at will. It canbe managed either by its members or nonmember managers. Depending on thestatute, distributions are made either equally to each member or in proportionto each member’s contribution.

a)Withdrawal andDissolution--some statutes provide that any event that terminates amember’s membership (death, resignation) causes dissolution. Other statutesdistinguish between fault events(member misconduct...) and non-fault events(death, bankruptcy), and some provide that dissolution can be avoided by payingthe withdrawing member fair value for his interest.

b)Advantages of LLCs--AnLLC for a business association, not publicly held, has strong advantages:partnership taxation, virtually no restrictions in structuring ownershipinterests and management, limited liability for owners and managers, and nolimitations on the number or nature of owners.

C.DISREGARDOF CORPORATE ENTITY--since a corp is a distinct legal entity, shs arenormally shielded from corporate obligations. In certain instances, however,the corporate entity will be disregarded.

1.PIERCING THE CORPORATE VEIL--(Suits by corporate creditorsagainst shs)--it’s more common incontract claims than in tort claims. The most important elements considered bythe courts:

a)Commingling of Assets--comminglingof corp assets and personal assets of shs (e.g., paying private debts with corpfunds) may lead to piercing of the corporate veil;

b)Lack of CorporateFormalities--whether basic corp formalities (e.g., regular meetings,corporate records maintained, issuance of stock) were followed is alsorelevant. Statutory close corps are permitted more flexibility regarding corpformalities;

c)Undercapitalization--ifthe corp was organized without sufficient capital or liability insurance tomeet obligations reasonably expected to arise, the corp veil may be pierced;

d)Domination and Control ByShareholder--the corp veil is often pierced when an individual or othercorp owns most or all of the stock, so that it completely dominates policy orbusiness decisions.

e)”Alter Ego,”“Instrumentality,” “Unity of Interest”--when no separate entity existsand the corp is merely the alter ego or instrumentality of its shs (could be acorporate shareholder), or when there is a unity of interest between the corpand its shs, the corp veil is often pierced. These terms are usually appliedonly if other grounds are present;

f)Fraud, Wrong, Dishonesty,or Injustice--generally, the veil will be pierced only if one of theseelements is available, e.g., no piercing of veil if there is a lack of corpformalities without resultant injustice. Piercing the veil usually involvescorps with a small number of shs.

2.PIERCING HAPPENS MOST OFTEN WHEN:

1)The number of shs issmall--the chance of one sh dominating the corp is greater;

2)Deception--There issome kind of deception;

3)Agency--individual isa “principal” and corp is his “agent”

4)Estoppel--outsiderwas led to believe that he was dealing with an individual, while in fact he was dealing withthe corporation.

5)Direct tort--individualand corp acted together and should be jointly/severally liable

6)Instrumentalityrequirement is satisfied:

I)control of a subsidiaryby parent

ii)to commit fraud

iii)to cause loss orinjury.

3.PIERCING THE WALL BETWEEN AFFILIATED CORPORATIONS--this occurswhen a P with a claim against one corp attempts to satisfy the claim againstthe assets of an affiliated corp under common ownership. This type ofaggregation is permitted only when each affiliated corp is NOT a free-standingenterprise but merely a fragment of an entity composed of affiliated corps.

4.USE OF CORPORATE FORM TO EVADE STATUTORY OR CONTRACT OBLIGATIONS--thecorp form may be ignored when it is used to evade a statutory or contractualobligation. The issue is whether the contract or statute was intended to applyto the shs as well as the corporation. Only third parties, not the corpor its shs, are generally allowed to disregard the corp entity.

5.TWO EXTREMES TO AVOID IN PIERCING THE CORPORATE WALL:

a)Old model--Superman(sh) used corp as his puppet;

b)New Model--Superman(sh) and corp are inseparable (alter ego)

D.SUBORDINATION OF SHAREHOLDER DEBTS--”DEEP ROCK” DOCTRINE--if a corp goes into bankruptcy, debts to its controlling shs maybe subordinated to claims of other creditors. When subordination occurs,shareholder loans are treated as if they were invested capital (stock).Major factors in determining whether to subordinate include fraud,mismanagement, undercapitalization, commingling, excessive control, etc.

II.ORGANIZING THE CORPORATION--generally, corps are created under and according to statutoryprovisions of the state in which formation is sought.

A.FORMALITIESIN ORGANIZING CORPORATION:

1.CERTIFICATE OR ARTICLES OF INCORPORATION--state law governs thecontent of the articles, which are filed with the secretary of the state.Usually, the articles must specify the corp name, number of shares and classesof stock authorized, address of the corp’s initial registered office, name of initialregistered agent, and the name and address of each incorporator.

a)Purpose Clause--undermost statutes, no elaborate purpose clause is needed. It is sufficient to statethat the purpose of the corp is to engage in any lawful business activity.

b)State of Incorporation--incorporatorsneed to consider how flexible the state’s corporate law is versus the costsassociating with incorporating in that state

2.ORGANIZATIONAL MEETING--filling the articles in proper formcreates the corporation, after which an organizational meeting is held byeither the incorporators or dirs named in the articles. Matters determined atmeeting:

1)Incorporators electdirectors, if no dirs are named in the articles;

2)Directors choose officers;

3)Directors ratifypre-incorporation transactions;

4)Directors authorize issuanceof shares

5)Directors adopt by-laws (ifnecessary), corporate seal and stock certificate

B.DEFECTS IN FORMATION PROCESS--”DE JURE” AND “DE FACTO” CORPS--when there is a defect or irregularity in formation, the questionis whether the corp exists “de jure,” “de facto,” “by estoppel,” or not at all.This issue usually arises when a third party seeks to impose personal liabilityon would-be shs. Another method of challenging corporate status, used only bythe state, is a quo warranto proceeding. Note: where there has not been compliance with the statute, we applyprinciples of de facto, de jure and corp by estoppel. Where there has beencompliance with the statute, we apply principles of disregard of corporatefiction, a/k/a “piercing the corporate veil,” which is an exception, ratherthan a rule.

1.DE JURE CORPORATION--this existswhen the corp is organized in compliance with the statute. Its statuscannot be attacked by anyone--not even the state. Most courts require only“substantial compliance”; others require exact compliance with the mandatoryrequirements.

2.DE FACTO CORPORATION (substantially abolished)--this existswhen there is insufficient compliance as to the state (i.e., state can attackin quo warranto proceeding), but the steps taken are sufficient to treat theenterprise as a corp with respect to its dealings with third parties.Requirements:

1)Colorable or apparentattempt;

2)Good faith;

3)Some use of corporatefranchise; Then ct will recognize status as to all but state

3.CORPORATION BY ESTOPPEL

a)Definition--estoppelis an equitable evidentiary rule which prevents a party from denying theexistence of a fact notwithstanding that he fact is not true. Thus, certainparties are estopped from asserting defective incorporation when they havedealt with the corp as though properly formed.

b)Example--shs whoclaimed corp status in an earlier transaction are estopped to deny that statusin a suit brought against the corp. The estoppel theory normally does NOT applyto bar suits against would-be shs by tort claimants or other involuntarycreditors.

c)Overlap With De Facto--manyof the facts which we would point to support a claim of de facto status are thesame ones we point for estoppel. However, substantial abolition of de factoconcept doesn’t necessarily abolish estoppel.

d)De Facto is For All;Estoppel is For One--estoppel depends on relationship between party andcorp.

4.WHO MAY BE HELD LIABLE--when a would-be corp is not a de jureor de facto or a corp by estoppel, the modern trend imposes personal liabilityagainst only those owners who actively participated in management of theenterprise.

5.EFFECT OF STATUTES:

a)On De Facto Doctrine--statesfollowing the prior version of the Model Act have abolished the de factodoctrine, thus making all purported “shs” jointly and severally liable for allliabilities incurred as a result of the purported “incorporation.” However,statutes based on Revised Model Business Corporation Act require a personacting on behalf of the enterprise to know that there was noincorporation before liability attaches.

b)On Estoppel Doctrine--theeffect of both acts is an unsettled issue.

c)On Liability--underthe prior Model Act, liability extends to investors who also exercise controlor actively participate in policy and operational decisions. It is expectedthat the Revised Model Act will be interpreted in the same manner.

III.LIABILITIES FOR TRANSACTIONS BEFOREINCORPORATION.

A.PROMOTERS--apromoter participates in the formation of the corp, usually arrangingcompliance with the legal requirements of formation, securing initial capital, andentering into necessary contracts on behalf of the corp during the time it’sbeing formed.

a)Fiduciary Duties to EachOther--Full disclosureand fair dealingare required between the promoters and the corp and among promoters themselves.

B.CONTRACTSMADE BY PROMOTERS ON CORP’S BEHALF

1.RIGHTS AND LIABILITIES OF CORPORATION:

a)English Rule--thecorp is not directly liable on pre-incorporation contracts even if laterratified. Rationale: the corp was not yet in existence at the time the promoterwas acting.

b)American Rule--thecorp is liable if it later ratifies or adopts pre-incorporation K.

c)Corporation’s Right toEnforce Contract--under either rule, the corp may enforce the contractagainst the party with whom the promoter contracted, if it chooses to do so.

2.RIGHTS AND LIABILITIES OF PROMOTERS.

a)Liability onPre-incorporation Contract--generally, promoters are liable if the corprejects the pre-incorporation contract, fails to incorporate, or adopts acontract but fails to perform, unless the contracting party clearlyintended to contract with the corporation only and not with the promotersindividually.

b)Right to Enforce Againstthe Other Party--if a corp is not formed, the promoter may stillenforce the contract.

C.OBLIGATIONSOF PREDECESSOR BUSINESS--a corporation that acquires all of the assets of apredecessor business does not ordinarily succeed to its liabilities, withexceptions:

a)Exceptions--thesuccessor corp may be liable for its predecessor liabilities if:

1)the new corp expressly orimpliedly assumes the predecessor obligations (the creditors of the old corpmay hold the new corp liable as third-party beneficiaries);

2)the sale was an attempted fraudon the creditors; or

3)the predecessor is merged intoor absorbed by the successor.

IV.POWERS OF THE CORPORATION.

A.CORPORATEPOWERS--generally, corporate purposes and powers are those expresslyset forth in the corporation’s articles, those conferred by the statute, andthe implied powers necessary to carry out the express powers.Transactions beyond the purposes and powers of the corporation are ultravires.

1.TRADITIONAL PROBLEM AREAS--the following three powers areparticularly significant express powers, since older statutes did notspecifically confer them:

a)Guarantees--modernstatutes confer the power to guarantee the debts of others if it is infurtherance of the corporate business;

b)Participation in aPartnership--present-day statutes explicitly allow the corp toparticipate with others in any corp, partnership, or other association;

c)Donations--becausethe general rule is that the objective of a business corporation is to conductbusiness activity with a view to profit, early cases held that charitablecontributions were ultra vires; the modern view permits reasonabledonations without showing the probability of a direct benefit to the corp.

B.AGENCY

1.DEFINITION--agency is the fiduciary relation which results fromthe manifestation of consent by one person to another that the other shall acton his behalf and subject to his control, and consent by the other to soact." Rest2dAg

a)Parties to an agency relationship--Principal& Agent. Thus, three essential elements of an agency relationship:

1)Manifestation by principalthat agent shall act for him in some undertaking;

2)Acceptance by the agent; and

3)Understanding that theprincipal is in control of the undertaking.

I)Note that these arefactual issues; if they are satisfied, then the relationship is one of agency,regardless of what the parties themselves call it (but the parties' labels mayprovide evidence of their intent)

2.CATEGORIES OF AGENCY

a)Actual Express Authority--authorityis the power of the agent to affect the legal relations of the principal byacts done in accordance with the principal's manifestations of consent tohim." Rest §7. Operative word is «manifestation». If he says,do something, it's express ‑‑ but the manifestation may includeimplied assent to other things as well, which is-->

b)Actual Implied Authority--unlessotherwise agreed, authority to conduct a transaction includes authority to doacts which are incidental to it, usually accompany it, or are reasonablynecessary to accomplish it." Rest § 35

c)Apparent Authority‑‑ a.k.a. «ostensible authority»--apparent authority isthe power to affect the legal relationships of another person by transactionswith third persons, professedly as agent for the other, arising from and inaccordance with the other's manifestations to such third persons." Rest§8. But note that the manifestation includes allowing the agent to representaccurately his own authority.

d)Inherent Authority--thisis the authority that inheres in an office. General agent (agent authorized toconduct a series of transactions involving continuity of service): P is boundif A is acting in the interests of P and A does an act usual or necessary withrespect to the authorized transactions ;

1)Unusual activities--depositingcorporate checks on a personal account is an unusual activity, and the bankshould make inquiry if the person is authorized to do that; otherwise, the bankis liable to the principal for lost money (Mohr)

e)Ratification--ratificationis the affirmance by a person of a prior act which did not bind him but whichwas done or professedly done on his account, whereby the act, as to some or allpersons, is given effect as if originally authorized by him." Rest § 82.The principal can affirm by words, or by deeds. This includes the failure torepudiate the subject matter when presented, suing to enforce the obligation,retaining the benefits of the transaction. Note several things:

1)Ratification assumes thatthe principal was not previously bound. If the principal had been previouslybound, then the liability would be based on another agency theory.

2)It doesn't matter to whomthe affirmance is made. It could be to the agent, to the third party, or anyoneelse or nobody at all. Why? Because what was lacking in the original contractwas merely his expression of assent to the relationship of agency. The termsare fixed, the third party believes he has an agreement, all that's missing isthe opposite party. So the President of the firm's note to himself that theaffirms may be sufficient. If there are some formalities required to authorizean act ‑‑e.g., sealed instruments, deeds ‑‑ then theremight be additional formality required for affirmance.

f)Estoppel--purportedprincipal either (a) intentionally or carelessly causes the belief that apurported agent is acting on his behalf, or (b) sits silently knowing that suchbelief exists without taking reasonable steps, and the third party reliesdetrimentally.

C.ULTRA VIRES TRANSACTIONS--thosebeyond the purposes and powers, express and implied, of the corporation. Undercommon law, shareholder ratification of an ultra vires transaction nullifiedthe use of an ultra vires defense by the corporation.

1.TORT ACTIONS--ultravires is NO defense to tort liability.

2.CRIMINAL ACTIONS--claims that a corporate act was beyond thecorp’s authorized powers are NO defense to criminal liability.

3.CONTRACT ACTIONS--at common law, a purely executoryultra vires contracts were NOT enforceable against either party; fullyperformed contracts could NOT be rescinded by either party; and, under themajority rule, partially performed contracts were generally enforceableby the performing party, since the nonperforming party was estopped to assertan ultra vires defense.

4.STATUTES--most states now have statutes that preclude the useof ultra vires as a defense in a suit between the contracting parties, butpermit ultra vires to be raised in certain other contexts:

a)Suits Against Officers orDirectors--if performance of an ultra vires contract results in a lossto the corp, it can sue the officers or dirs for damages for exceeding theirauthority.

b)Suit By State--theselimiting statutes do NOT bar the state from suing to enjoin a corp fromtransacting unauthorized business.

c)Broad CertificateProvisions--when the certificate of incorporation states that thepurpose is to engage in any lawful activity for which corp may be organized,ultra vires is unlikely to arise.

V.MANAGEMENT AND CONTROL

A.ALLOCATIONOF POWERS BETWEEN DIRECTORS AND SHAREHOLDERS

1.MANAGEMENT OF CORPORATION’S BUSINESS--corporate statutes vestthe power to manage in the board of directors, except as provided byvalid agreement in a close corp. He board’s power is limited to properpurposes.

2.SHAREHOLDER APPROVAL OF FUNDAMENTAL CHANGES--shs must approvecertain fundamental changes in the corp, e.g., amendment of articles, merger,sale of substantially all assets, and dissolution.

3.POWER TO ELECT DIRECTORS--shs have the power to elect dirs andto remove them for cause, absent provisions for removal without cause inthe certificate, bylaws, or in statutes. Some statutes also permit the board orthe courts to remove a dir for certain specific reasons (e.g., felonyconviction).

4.POWER TO RATIFY MANAGEMENT TRANSACTIONS--shs have the power to ratifycertain management transactions and insulate the transactions against a claimthat managers lacked authority, or shift the burden on the issue ofself-interest.

5.POWER TO ADOPT PRECATORY RESOLUTIONS--shs may also adoptadvisory but nonbinding (precatory) resolutions on proper subjects of theirconcern.

6.BYLAWS--shs usually have the power to adopt and amend bylaws,although some statutes give the board of dirs the concurrent power to do this.

7.CLOSE CORPORATION--this is a corp owned by a small number ofshs who may actively manage; it has no general market for its stock, and it hassome limitations regarding transferability of stock.

8.STATUTORY CLOSE CORPORATION STATUS--the basic requirements toqualify for special treatment under the statutes are that, in its cert ofincorp’n, a statutory close corp must identify itself as such, and must includecertain limitations as to the number of shs, transferability of shares, orboth.

a)Functioning As a CloseCorporation--there may be sh agreements relating to any phase of thecorp affairs.

B.DIRECTORS

1.APPOINTMENT OF DIRECTORS--initial dirs are either designated inthe articles of incorporation or elected at a meeting of incorporators.Subsequent elections are by shs at their annual meetings. The number of dirs isusually set by the articles or bylaws.

a)Qualifications--absenta contrary provision in the articles or bylaws, dirs need not be shs of thecorp or residents of the state of incorporation.

b)Vacancies--statutesvary, but under Model Act, a vacancy may be filled by either the shs or dirs.

1)Compare--removal:some statutes require that vacancies created by removal of a dir be filled bythe shs unless the articles or bylaws provide otherwise.

2.TENURE OF OFFICE

a)Term of Appointment--undermost statutes, office is held until the next meeting, although on a classifiedboard, dirs may serve staggered multi year terms.

b)Power to Bind CorporationBeyond Term--unless limited by the articles, the board has the power tomake contracts biding the corp beyond the dirs’ term of office.

c)Removal of DirectorDuring Term--at common law, shs can remove a dir for cause(e.g., fraud, incompetence, dishonesty) unless an article or bylaw provisionpermits removal without cause. a dir being removed for cause is entitled to ahearing by shs before a vote to remove. a number of statutes permit removalwithout cause.

1)Removal by Board--boardcan NEVER remove a dir unless authorized by statute;

2)Removal by Court--thereis a split authority as to whether a court can remove a dir for cause.

I)Statutes--some statutespermit courts to remove a dir for specified reasons. Usually, a petition forremoval can be brought only by a certain percentage of shs or the attorneygeneral.

3.FUNCTIONING OF BOARD

a)Meetings--absenta statute, dirs can act only at a duly convened meeting consisting of a quorum.In most jurisdictions, a meeting can be conducted by telephone or other meanswhereby participants can hear each other simultaneously. Most statutes alsoallow board action by unanimous written consent without a meeting.

1)Notice--althoughformal notice is unnecessary for a regular meeting, special meetings requirenotice to every dir of date, time, and place. Usually, notice can be waived inwriting before or after a meeting. Attendance waives notice unless the dirattends only to protest the meeting.

2)Quorum--a majority ofthe authorized number of dirs constitutes a quorum. Many statutes permitthe articles or bylaws to require more than simple majority or less than that.

3)Voting--absent acontrary provision, an affirmative vote of a majority of those present,not a majority of those voting, is required for board action.

b)Effect of NoncomplianceWith Formalities--today, most courts hold that informal butunanimous approval of a transaction is effective, as is a matterreceiving the explicit approval by a majority of dirs without a meeting, plusacquiescence by the remaining dirs.

c)Delegation of Authority--theboard has the power to appoint committees of its own members to act for iteither in particular matters or to handle day-to-day management between boardmeetings. Typically, these committees cannot amend the articles orbylaws, adopt or recommend major corporate changes (e.g., merger), recommenddissolution, declare a dividend, or authorize issuance of stock unlesspermitted by the articles or bylaws. Note that while the board may delegateoperation of the business to an officer or management company, the ultimatecontrol must be retained by the board.

d)Provisional Directors--somestatutes allow them to be appointed by court if the board is deadlocked andcorporate business is endangered. a provisional dir serves until the deadlockis broken or until removed by a court order or by majority of shs.

e)Voting Agreements--anagreement in advance among dirs as to how they will vote is void as contrary topublic policy. There are certain exceptions for statutory close corps.

4.COMPENSATION--dirs are NOT entitled to compensation unless theyrender extraordinary services or such compensation is otherwise provided for.Officers are entitled to reasonable compensation for services.

5.DIRECTORS’ RIGHTS, DUTIES, AND LIABILITIES

a)Right to Inspect CorporateRecords--if done in good faith forpurposes germane to his position as dir, this right is absolute.

b)Duty of Care--dirsmust exercise the care of an ordinarily prudent and diligent person in alike position, under similar circumstances. There is no liability (absent aconflict of interest, bad faith, illegality, or gross negligence) for errors ofjudgment (business judgment rule--the rebuttable presumption that actionwas taken on an informed basis, in good faith and exercising reasonable care),but the dir must have been reasonably diligent before the rule can be invoked (Shlensky)

1)The duty of carerequires:

I)Education--a dirshould acquire at least a rudimentary understanding of the business of thecorporation;

ii)Information--adir is under a continuing obligation to keep informed about the activities of thecorp;

iii)Participation--dirsmust “generally monitor” corporate affairs, but need NOT involve themselves inthe day-to-day operations; (i.e. they should attend board of dirs meetings withreasonable regularity).

iiii)Inquiry--a dir has a duty toinquire when circumstances would alert a reasonable person for the need ofinquiry.

iiiii)Action--wherewrongdoing is revealed, a dir should object, correct, or resign. Object to thecourse of conduct, steer toward correction, and resign if it isn’t corrected.

2)Extent of liability--dirsare personally liable for corporate losses directly resulting from their breachof duty or negligence in falling to discover wrongdoing. a director may seek toavoid being held personally liable for acts of the board by recording his dissent.

I)Many statutes permit thearticles to abolish or limit dir’s liability for breach of the duty of careabsent bad faith, intentional misconduct, or knowing violation of law.

3)Defenses to liability--theseinclude good faith reliance on management or expert’s reports. Disabilities maybe considered in determining whether the dir has met the standard of care.

c)Duty of Loyalty--acatch-all duty designed to prevent unfairness--the duty to act in good faith(BJR applies). Application:

1)Self-dealing transactions

I)Common Law:

(1)early absoluteprohibition against self-dealing renders transactions void or voidable;

(2)permissiveself-dealing: dirs and officers may contract with the corp if (a)done in “strictest goodfaith.”; (b)with full disclosure; and (c)consent of “all concerned.”

[1]--burden ofproof is on the dir to establish good faith, honesty & fairness;

[2]--courtsweigh self-dealing transactions with “closest scrutiny”

(3)self-dealingprohibition also applies to intercorporate transactions where dirs are common.

ii)Statutory (example):

(1)quasi-safe harborapproach (Iowa statute)--transaction is not void or voidable because ofdirs’ interest, if either:

[1]--interest isdisclosed and approval is made without counting the vote of the interested dir.

[2]--interest isdisclosed to shs and shs authorize

[3]--transactionis fair and reasonable

(2)Note--dir must stillestablish that he acted in good faith, honesty, and fairness

2)Domination of subsidiaryby parent--courts look at the transaction to see if self-dealing hasoccurred. Example (Sinclair Oil):

I)declaration of dividendsshared pro rata was NOT self-dealing; BJR applies

ii)contract between parentand sub was self-dealing; apply intrinsic fairness test

3)Manager’s compensation:

I)Ordinary corporations--conflictsare inevitable but all firms need to set compensation. The burden of proof isplaced on challengers as a matter of convenience.

ii)Close corporations--theincome generated by the firm may be diverted to salaries, so there is an optionfor self-dealing by the parties in control to take tax-advantaged compensationin the form of salaries (taxed once) as opposed to dividends (taxed twice).

d)Statutory Duties andLiabilities--in addition to general duty of care, federal and statelaws also impose certain duties and liabilities, e.g., registrationrequirements under the Securities Act of 1933, liability for rule 10b-5violations, liability for illegal dividends. Some statutes also impose criminalliability on corporate managers for unlawful corporate actions.

C.OFFICERS

1.ELECTION--officers are usually elected by the board of dirs.Some statutes permit election of officers by shs.

2.AUTHORITY OF CORPORATE OFFICERS (liability of corp tooutsiders)--only authorized officers can bind the corp. Authority may be: actual(expressed in bylaws or by valid board resolution), apparent (corp givesthird parties reason to believe authority exists), or power of position (inherentto position). If ratified by the board, even unauthorized acts can bindthe corp.

a)Authority of President--themajority rule is that the president has the power to bind the corp intransactions arising in regular course of business.

3.DUTIES OF CORPORATE OFFICERS--the duty of care owed by aofficer is similar to that owed by dirs ( and sometimes higher).

D.CONFLICTSOF INTEREST IN CORPORATE TRANSACTIONS.

1.DUTY OF LOYALTY--because of their fiduciary relationship withthe corp, officers and dirs have the duty to promote the interests of the corpwithout regard for personal gain.

2.BUSINESS DEALINGS WITH THE CORPORATION--conflict of interestissues arise when a corp transacts business with one of its officers or dirs,or with a company in which an officer or dir is financially interested.

a)Effect of Self-Intereston Right to Participate in Meeting--most statutes permit an“interested” dir to be counted toward quorum, and interested dir’s transactionsare NOT automatically voidable by the corp because the interested dir’s votewas necessary for approval.

b)Voidability Because ofDirector’s Self-Interest--today, such transactions are voidable only ifunfair to the corporation. The burden of establishing fairness is on theinterested director. Note that a dir’s failure to fully disclosematerial facts may be per se unfair.

1)Unanimous shareholderratification--if, after full disclosure, shareholder ratification isunanimous, the corp will be estopped from challenging the transaction with theinterested dir (except at to creditors).

I)Less-than-unanimousratification--courts then will look at whether the majority shares wereowned or controlled by the interested director. Courts are more likely touphold ratification by a disinterested majority so as to preclude thetransaction from being attacked by the corp or by a sh in a derivative suit.

2)Statutes--moststatutes provide that such transactions are NOT voidable if: (1)approved, afterfull disclosure, by a disinterested board majority or by majority of shs, or(2)the transaction is fair to the corp notwithstanding disclosure.

I)”Interested”--an“interested” dir or officer is one who has a business, financial, or familialrelationship with a party to the transaction that would reasonably affect theperson’s judgment so as to adversely affect the corp.

c)Remedies--thecorp may rescind, or affirm and sue for damages.

3.INTERLOCKING DIRECTORATES--generally, transactions betweencorps with common dirs are subject to the same rules of interested directortransactions. There is no conflict of interest if one corp is the wholly ownedsubsidiary of the other. However, a question of fairness arises where theparent owns only a majority of the subsidiary’s shares.

4.CORPORATE OPPORTUNITY DOCTRINE (Also see duty of loyalty)

a)Definition--CODbars dirs from taking any business opportunity belonging to the corp withoutfirst offering it to the corp… If the corp is unwilling to pursue anopportunity (after an independent board is fully informed of the opportunity),then the dir may pursue it.

b)Defenses(available in most, but not all jurisdictions):

1)Inability--If thecorp is legally or financially unable to take the opportunity, then thedir generally may take advantage of it. (But the question of who caused thefinancial inability is quite relevant. Example: Irving Trust Co--thedefense of inability was rejected).

2)Rejection, abandonment,or approval--then the fiduciary has a valid defense.

c)Remedies--constructivetrust or damages--the fiduciary must account to the firm for all the profits hehas made as a result of usurpation.

d)Definition of a CorporateOpportunity:

1)Line of business test--doesthe firm have fundamental knowledge, practical experience, and ability topursue the opportunity? If yes, then it is within the firm’s line of business.It should be a natural fit, and not a mere desire by a firm to pursue theopportunity.

2)Interest/expectancy test

e)Application--Guth Ruleand Corollary:

1)Guth rule (offered in corporatecapacity)--if there is presented to O/D a business opportunity whichthe corp is (1)financially able to undertake, which is from its nature (2a) inthe line of business and is of practical advantage to it OR (2b)is one in whichthe corp has an interest or reasonable expectancy (under an establishedcorporate policy or plan), and, (3)by embracing the opportunity theself-interest of the dir will be brought into conflict with that of his corp,then officer or dir may NOT take the opportunity.

2)Guth corollary (a safe harbor;satisfy all provisions and dir can take)--if a business opportunity (1)comes toO/D in his individual capacity and (2) is not essential to thecorp and is (3)one in which corp has no interest or expectancy, then the O/D cantreat it as his own, IF he has not taken corporate resources to pursue theopportunity.

I)”Essential”--indispensablynecessary to the continued viability of the firm;

ii)Individual orcorporate? Look at O/D capacity to determine how offer was made

5.COMPETING WITH CORPORATION--such competition by a dir orofficer may be a breach of fiduciary duty even when the competing business is nota corporate opportunity

6.COMPENSATION FOR SERVICES TO THE CORPORATION--the compensationplan must be duly authorized by the board, and its terms must be reasonable.Good faith and the BJR ordinarily protect disinterested dirs from liability tothe corp for approving compensation.

a)Publicly HeldCorporations--The SEC has authorized shs to make proposals aboutexecutive pay in management’s proxy statements. Further, the tax code nowlimits expense deductions for executive pay over $1mln, unless it is tied tothe corp’s performance.

b)Past and Future Services--compensationfor past services is generally invalid. Compensation for futureservices is proper if there is reasonable assurance that the corp willreceive the benefit of the services.

VI.INSIDER TRADING--purchase or sale of securities by someone with access to material

nonpublic information. It may be illegal.It affects corps with more than $1 mln in total assets and with at least500/750 shs.

a)Who may be hurt byinsider trading:

1)Target shareholders--theysell too early;

2)Other arbitrageurs--theylose a portion of the gain that they make from honest effort

3)Other issuers--theylose confidence in the stock market

4)The acquiring company--insidertrading drives up their cost of acquisition, since the target may adoptdefensive measures otherwise not in place.

b)Possible Sources ofLiability:

1)Common Law;

2)10b-5 traditional;

3)10b-5 misappropriationtheory (O’Hagan);

4)Mail or wire fraud;

5)14e-3;

6)Statutory liability under16(b)--insiders are forced to give their profits to the corp, if the y buy andsell securities within a 6-month period regardless of whether they areusing insider info. (Need to know 2, 3, 6)

c)O’Hagan--insidertrading violation where a partner in law firm took info rom his firm regardingthe firm’s client’s plans for acquisition of Pillsbury and used that info tobuy shares in Pillsbury

d)Penalties For InsiderTrading--ITSA (Insider Trading Sanctions Act)--3 measures:

1)Out-of-pocket measure--ifa sh buys a share for $10, while in fact it costs $9, his out-of-pocket expenseis $1.

2)Causation-in-fact--becausean insider engaged in insider trading, it caused a loss

3)Disgorgement--we lookat D’s profit. ITSA measures the damage to sh by the amount of profit that Dreceived from the transaction.

2)SEC civil penalties--trebledamages; SEC may seek penalty capped by three times profit gained or lossavoided.

A.COMMONLAW--under the majority rule, there was no duty to disclose to theshs inside info affecting the value of shares. Therefore, the protection ofinvestors was very weak.

a)For lability to existthere should be:

1)At least fraud or deceit uponpurchasers;

2)May also be a device orscheme;

3)May also be an impliedmisrepresentation.

b)Two Elements(relationship and unfairness):

1)Relationship--existenceof a relationship giving access, directly or indirectly, to information intended to beavailable for a corporate purpose and no other.

I)Insiders include atleast officers, dirs, controlling shs (In re Cady Roberts)

ii)Persons charged withconfidentiality by contractual or fiduciary relationship

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