I.

General

A. What kind of Business is this? 1. Sole Proprietorship (SP) - a biz in which one person owns all the assets, owes all the liabilities, and operates in his or her personal capacity. a) Pros - Most common simplest structure; best if choosin to wor! alon ; easy to form, offers complete mana erial control "#$ ma!e all the decisions; %iz earnin s only ta&ed once 'no double ta&ation) b) Cons owner is PERSO A!!" !IAB!E for A!! financial obli ations of biz; places own assets at ris!; no liability protection; difficult to raise (; must depend on own financin sources 'loans, home e)uity, etc.); %an!s reluctant to ma!e biz loans to *+,s '1) E.#. - sells comic boo!s to . 'which is an *+), /am in middle as an a ent dealin w01rd party on behalf of 2. Partnership 3oluntary association of 2 or more person,s who 4ointly own 5 carry on a biz for profit. 6 ree to share in profits 5 losses of biz a) General Partnerships (GP) partners mana e the co. 5 assume responsibility for the +,s debts 5 other obli ations; Pros$ (%) 7ood for 2 or more parties who want to be acti3ely in3ol3ed 68- (&) 9asier to form b) !i'ited Partnership (!P) ser3e as :8;9*.#<* #8="; CO - 8# /#8.<#= o3er the co., but PRO> they,re not sub4ect to the same liabilities as 7+,s c) PROS> (%) *hared liability; (&) +ass throu h ta& losses are passed throu h to report on indi3idual income ta& returns d) CO s> (%) .<$*. :**$9*> #ne person can ma!e decisions w0o consultin other partner, bindin on +,ship; (&) each p personally liable for financial obli s of the biz 'li!e *+); (() More e&pensi3e to establish b0c re)uires more e&tensi3e le al 5 acct,in ser3ices '1) O)E> +robly 8ot best choice for a new biz b0c of (%) all the re)uired filin s 5 (&) admin comple&ities, $8=9** you e&pect to ha3e M68" +6**:;9 :8;9*.#<* 1. Corporation an entity 'usu. 6 biz) ha3in authority under law to act as a sin le person distinct from the shareholders who own 5 it 5 ha3in ri hts to issue stoc! 5 e&ist indefinitely? a) PROS - (%) o indi*idual lia+ilit, limited liability 'you,re only liable for the amt of your in3estment in the co., e. . buy starbuc!s for (2, 5 it oes out of biz, all you lose is (2); (&) 6bility to raise ( by sellin stoc!s, (() -uration> /orp,s continue I -E.I I)E!" e3en if shareholders die, sell shares, or become disabled '1) O)E> Su+/hapter /orporation (SCorp) a3oids double ta&ation by allowin income or losses to be passed throu h on indi3idual ta& returns, similar to a partnership b) CO S - (%) -ouble ta&ation ta&es on the profits (a) -i3idend to owners ets ta&ed too (&) 9&pensi3e to create corp @admin filin s etc.A B. 0,+rids +opular b0c they i3e you limited liability 68- less costly> ==/,s, =+,s, etc. B. 1e, )er's 1. -e+t a specific sum of money due by a reement or otherwise 2. Creditor one to whom a debt is owed 1. E2uit, - typically used in this class as some ownership interest in an entity, property, esp. in a biz; e. . 3alue in house, B. Shareholder same as e)uity owners0 stoc!holders one who owns or holds a share or shares in a co. C. O3ner one who has the ri ht to possess, use, and con3ey somethin D. Residual o3ner one who will reap the mar inal dollar of the firm,s ain or suffer the mar inal dollar of its losses a) 9. . Eome F mort a e, E; 'worth03alue) G 2HHI, Mt 'creditor), owe 1HHI, subtract, to et 1HHI, and you are residual owner; but if you owe more than its worth, then you are the lowest entity to et anythin
1

II. A#en/, Relationship> %6 111 <est. 2d JJ 1, 1; <est. 1d JJ 1.H11.H1

6. A#en/, Stru/ture$ .hree parties- +, 6, .hird +arty B. Is there a P4 an A4 and a (rd part,? C. -id P 'anifest assent for A to a/t on P5s +ehalf6in P5s /ontrol? -id A 'anifest assent or other3ise /onsent to a/t? 1. R7!E$ Restate'ent ()hird) 8 %.9%$ '1) a + '2) manifests assent to '1) an 6 '1) that the 6 shall act on the +Ks behalf and 'B) sub4ect to the +Ks control, and 'C) the 6 manifests assent or otherwise consents so to act. a) +Ks assent G une&pressed reser3ations or limitations harbored by the + do not restrict the +Ks e&pression of consent to the 6. '1) *o, if 6 is otherwise on notice of the meanin the + ascribes to a particular e&pression, that meanin is operati3e as between + and 6. '2) 6 +Ks manifestation of assent to an a ency relationship may be informal, implicit, and nonspecific b) Lmanifests assent or otherwise consents so to act,L G not necessary that 6 manifest assent to the +. &. -id P : A /all it ;A#en/,;? -oesn5t 'atter. Onl, a#en/, if ele'ents of 8 %.9% are present. 8 %.9& 1. Was assent :6or intent 'anifested? 8 %.9(-- written or spo!en words or other conduct. a) conduct '1) by a person '2) obser3able by others '1)which e&presses meanin 'broader than communication) b) *tate of mind may not be rele3ant if it is not manifested. B. Who is an A? <$=9> a party who a rees to act on +ehalf of a 2d party 5 su+<e/t to their /ontrol. Gorton v. Doty. @E.*. /oach borrows carA a) 0AR ER> a ency has> fact intensi3e determination, emphasis on control, 5 least cost a3oider C. Who is a P? <$=9> a ency relationship can be established w0o a I bein formed or w0o the parties intendin to be bound by the le al obli ations of that relationship. Jensen v. Cargill. /#8.<#=. a) 0AR ER> '1) ad3isin /ar ill in the futureM 'a) *et up a separate affiliate for financin , and be sure to respect the differences between your 2 mechanisms. NranchiseOassume liability, but ha3e more control. 'b) :f thereKs a default on a line of credit you e&tended, shut down the loan, collect what you can, and miti ate your ris!. D. /ommon :ssues> a) -oes a ency relationship e&ist %etween + 5 6M b) Phat conse)uences follow to + from interaction between 6 5 .M III. A#en/, Rel=t >> IS )0ERE A 1 BE)WEE A : )? !ia+ilit, of Ps to third parties in 1 A. W0A) 1I - O. A7)0ORI)" IS )0ERE? 1. -id P tell A to do so'ethin#? R7!E for AC7)A! A7)0ORI)"$ @'+6)A> when, at time of ta!in action that has le al conse)uences for the +, the A reasonably believes4 in a//ordan/e 3ith the P5s 'anifestations to the A4 that the P 3ishes the A so to a/t. J2.H1 a) Was it E?press? A/tual e?press- + tells 6 to do Q; 6 does Q; + is bound b) Was it I'plied? A/tual I'plied- :f, in order to do Q, 6 must ta!e some other steps, + is bound. '1) :mplied authority is actual authority that is pro3en circumstantially to indicate that the + intended to dele ate powers to the 6 that are necessary for carryin out the 6,s duties, and one ma4or circumstantial factor is prior wor! performed by 6 for +. Mill Street Church v. Hogan 'i) .wo thin s to consider w0 implied authority> 'a) past or present conduct of the + that the + wishes him to act a certain way 'b) .he nature or tas! of the 4ob 8&.9& S/ope of A/tual Authorit, 2. -id P5s a/tions /ause ) to think A had authorit,? R7!E for Apparent Authorit, @P )A$ '1) 1rd party reasonably believes, '2) that A or other actor has authority to act on behalf of the +, b0c '1) that belief is traceable P's manifestations.
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a) +Ks manifestation does not ha3e to be a direct statement. Dwec v. !asser @. thou ht +Ks atty could actA b) 6bsent !nowled e on the part of . to the contrary, an 6 has the apparent authority to do those thin s which are usual and proper to the conduct of the business which he is employed to conduct.L "hree#Seventy $easing @6Ks dealin w0 . was enou h to bind + despite lac! of +Ks si natureA. (. Was P undis/losed? R7!E for !ia+ilit, of 7ndis/losed P$ 8 &.9B a) '1) 6n undisclosed + is can be liable to a . who is %ustifiably in&uce& to ma!e a &etrimental change in 'osition by an 6 actin on the +Ks behalf and without actual authority, if the +, ha3in notice of the 6Ks conduct and that it mi ht induce others to chan e their positions, did not ta!e reasonable steps to notify them of the facts. b) '2) 6n undisclosed + may not rely on instructions i3en an 6 that )ualify or reduce the 6Ks authority to less than the authority a third party would reasonably belie3e the 6 to ha3e under the same circumstances if the + had been disclosed. '1) /anKt use a L: didnKt !now b0c : thou ht heKd rely on my instructionsL defense). (atteau B. WAS 1 RA)I.IE-? I.e. -id P #i*e after>the>fa/t a//eptan/e? 1. R7!E$ 8 C.9% Ratifi/ation -efined @meant to address the after-the-fact acceptance by a +A a) '1) <atification is the affirmance of a prior act done by another, whereby the act is i3en effect as if done by an 6 actin with actual authority. b) '2) 6 person ratifies an act by '1) 'a)@9&press affirmationA manifestin assent that the act shall affect the +Ks le al relations, #< '2) 'b) @:mplied 6ffirmationA /onduct that 4ustifies a reasonable assumption that the person so consents. 'a) acceptin benefits at a time when itKs still possible to decline the benefits 'b) silence or inaction when affirmati3e action e&pected 'c) by filin a lawsuit to enforce the I c) '1) <atification does not occur unless '1) 'a) 6 acted or purported to act li!e an a ent. J B.H1 ')oticello), '2) 'b) ratifier has capacity J B.HB '1) 'c) ratification is timely. J B.HC 'no circumstances occurred that would ha3e an ad3erse effect on the ri hts of .), and 'B) 'd) ratification encompasses the act in its entirety J B.HR 'self-e&planatory). d) E6<89<> <atificationKs two basic re)uirements> '1) 6 3alid affirmation by +, '2) to which the law will i3e effect. e) S7B R7!E$ 8 C.9& Effe/t of Ratifi/ation 'a) '1) *ub4ect to the e&ceptions stated in subsection '2), ratification retroacti3ely creates the effects of actual authority. 'b) '2) <atification is not effecti3e> 'i) 'a) in fa3or of a person who causes it by misrepresentation or other conduct that would ma!e a contract 3oidable; 'ii) 'b) in fa3or of an 6 a ainst a + when the + ratifies to a3oid a loss; or 'iii) 'c) to diminish the ri hts or other interests of persons, not parties to the transaction, that were ac)uired in the sub4ect matter prior to the ratification. '2) 8otes> Suestions to as! in a ratification case> 'a) '1) what types of acts constitute an affirmation by the +M 'b) '2) what effect should we i3e to that affirmationM f) Su+>Rule$ C.9B Suffi/ient 1no3led#e$ 8ot bound by ratification made without !nowled e of material facts when the person is not aware of such lac! of !nowled e /. R7!E$ ES)OPPE!$ Rest. (d 8 &.9D Estoppel to -en, E?isten/e of A#en/, Relationship> 6 person who has not made a manifestation that an actor has authority as an 6 and who is not otherwise liable as a party to a transaction purportedly done by the actor on that personKs account is sub4ect to liability to a . who 4ustifiably is induced to ma!e a detrimental chan e in position because the transaction is belie3ed to be on
3

the personKs account, if> 1. '1) the person intentionally or carelessly caused such belief, or 2. '2) ha3in notice of such belief and that it mi ht induce others to chan e their positions, the person did not ta!e reasonable steps to notify them of the facts. 1. E6<89<> 9lements> a) + creates, throu h intentional or ne li ent words, acts or omissions, appearance of authority b) . reasonably and in ood faith relies on appearance of authority c) . chan es her position in reliance on appearance of authority '1) E6<89<> %ottom line on estoppel- weKre not )uite as broad as *oos bros mi ht su est. 2.HC focuses on intentionally or carelessly caused such belief or has notice of the issue. 9stoppel is similar to apparent authority, but the difference is that in apparent authority we ha3e a +-6 relationship. B. A5s !ia+ilit, on the 1+ Atlantic Salmon A,S v. Curran a) JD.H1 -isclosed +--+ is the party to the I with ., not 6, unless 6 5 . a ree otherwise b) JD.H2 $nidentified +- + 5 6 are both parties to I w0 . unless 6 5 . a ree otherwise c) JD.H1 $ndisclosed +- + is a party unless e&cluded, 6 5 . are parties too d) JD.HB + -oes not 9&ist or lac!s capacity- a person who ma!es a I with a ., purportedly as an 6 on behalf of a +, becomes a party to the I if the purported 6 !nows or has reason to !now that the purported + does not e&ist or lac!s capacity to be a party to a I. Atlantic Salmon v. Curran IE. !ia+ilit, of P to )hird Parties in )ort A. R7!E$ Rest. (d 8 F.9( P5s !ia+ilit, > In General 1. '1) + is sub4ect to direct liability to a 1rd party harmed by 6Ks conduct when @no need for e0e or :/ distinctionA a) 'a) as stated in J R.HB, 6Ks conduct is within the scope of his actual authority #< ratifie& by P, 68'1) 'i) 6Ks conduct is tortious, #< '2) 'ii) 6Ks conduct, if that of the +, would sub4ect the + to tort liability; #< b) 'b) + is ne li ent in selectin , super3isin , or otherwise controllin 6 @J R.HCA; #< c) 'c) the + dele ates performance of a duty to use care to protect other persons or their property to an 6 who fails to perform the duty @J R.HDA. 2. '2) 6 + is sub4ect to 3icarious liability to a . harmed by an 6Ks conduct when a) 'a) as stated in J R.HR, the 6 is an employee who commits a tort while actin within the scope of employment @is it an e0e or i0c relationship @now ic nonemployee 6 3. i0c non6 ser3ice pro3iderA; #< b) 'b) as stated in J R.HT, the 6 commits a tort when actin with apparent authority in dealin with a . on, or purportedly on, behalf of the +. %. Su+>rule$ RS (rd 8F.9F -efinition of e'plo,ee$ @6An employee is an 6 whose + controls or has the ri ht to control the manner and means of the 6Ks performance of wor! /. Su+>rule$ RS (rd 8 F.9G Ei/arious !ia+ilit,$ + is sub4ect to 3icarious liability for a tort committed by an A in dealin or communicatin with a . on or purportedly on behalf of + when actions ta!en by 6 w0apparent authority constitute the tort or enable 6 to conceal its commission. @9. . Nraud, -efamation, etc.A D. Se2uential Anal,sis of )ort !ia+ilit,$ :s there and 6 ency relationship between + 5 6 :s + sub4ect to direct liabilityM :s + sub4ect to 3icarious liabilityM :s 6 +Ks employee or nonemployee 6M E. -eter'inin# E'plo,ee6 one'plo,ee A6 onA Ser*i/e pro*ider 1. *er3ice *tation /ases> a) Eumble #il9mployer @#il /oA09mployee @*tation #peratorA0*ubordinate @*tation wor!er0tortfeasorA b) *un #il+ @#il /o.A0 @:/A @*tation #peratorA0*ubordinate @*tation wor!er0tortfeasorA c) %ottom =ine--these two were close calls, but the focus is on control and le3el of ris!. .he more
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control, the more li!ely to be found liable. 2. 6 I doesnKt matter> 6 I sayin the parties are not +-6 'or master-ser3ant) does not matter if the + 'in this case franchiser) re ulates the 6 with such control as within the definition of a ency--the a ency relationship arises e3en thou h the parties e&pressly deny it.L Mur'hy v. Holi&ay -nns N. )ort !ia+ilit, and Apparent A#en/,>> + liable for acts of an apparent 6 if + held 6 out as such and . relied. Miller v. McDonal&'s E. A#ents as .idu/iaries 1. R7!E$ Rest. (d 88 G.9%> General .idu/iar, Prin/iple > 6n 6 has a fiduciary duty to act loyally for the +Ks benefit in all matters connected with the a ency relationship. 2. J G.9&> Haterial Benefit Arisin# Out of Position$ 6n 6 has a duty not to ac)uire a material benefit from a . in connection with transactions conducted or other actions ta!en on behalf of the + or otherwise throu h the 6Ks use of the 6Ks position. a) 6ny profit 6 earns while 3iolatin duty of loyalty to + belon s to + 'when he earns the ( solely throu h his position). .ea&ing v. .egem 1. 8 G.9( A/tin# As Or On Behalf Of An Ad*erse Part,$ 6n 6 has a duty not to deal with the + as or on behalf of an ad3erse party in a transaction connected with the a ency relationship. 6n employee will be held to his or her contractual duty of loyalty and their fiduciary duty would forbid them from en a in in acti3ities that are competiti3e with their employer. General Automotive v. Singer B. 8 G.9D 7se Of P5s Propert,I 7se Of Confidential Infor'ation$ 6n 6 has a duty '1) '1) not to use property of the + for the 6Ks own purposes or those of a third party; 68'2) '2) not to use0communicate confidential info of + for 6Ks own purposes or those of a 1rd party. "own / Country House / Home Service v. !ewberry C. 8 G.9G -uties Of Care4 Co'peten/e4 And -ili#en/e$ *ub4ect to any a reement with the +, an 6 has a duty to the + to act with the care, competence, and dili ence normally e&ercised by 6s in similar circumstances. '6Ks special !nowled e0s!ills will be factored in). @98- #N 6798/"A
EI. Partnerships

A. General$ 1. -efinition of Partnership$ a 3oluntary association of 2F persons to carry on as co-owners a business for profit. 'same in $+6 '1U1B), $+6 '1UUR)) 2. -ifferen/e fro' Corporations$ +artnerships '1) are not ta&ed, ains and losses ta&ed at partner le3el, '2) typically ha3e a limited life, '1) unlimited liability, 'B) interests nontransferable 1. Partnership as Entit,$ 6 partnership is an entity distinct from its partners. '$+6 '1UUR) J2H1'a)) B. Partnership Propert,$ +roperty ac)uired by a partnership is property of the partnership 5 not of the indi3idual partners. $+6 '1UUR) J 2H1 B. R7!E$ Who is a partner? 7PA (%JJF) 8 &9&(/) '1) 6 person who recei3es a share of the profits of a business is presumed to be a partner in the business, unless the profits were recei3ed in payment> o 'i) #f a debt by installments or otherwise; o 'ii) Nor ser3ices as an independent contractor or of wa es or other compensation to an employee. @0enwic . written LpartnershipL a reement at salonA; o 'iii) #f rent; o 'i3) #f an annuity or other retirement or health benefit to a beneficiary, representati3e, or desi nee of a deceased or retired partner; o '3) #f interest or other char e on a loan, e3en if the amount of payment 3aries with the profits of the business . . . @Martin v. PeytonA; #<
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o '3i) Nor the sale of the oodwill of a business or other property by installments or otherwise Su+>rules$ o :s a written a reement necessary to create a partnershipM 8o. 0enwic 'dicta). o :s the e&istence of a written a reement determinati3eM 8o. 0enwic . Nenwic! /ourt loo!ed at multiple factors> '1) intention of the parties, '2) ri ht to share in profits, '1) obli ation to share in losses, 'B) ownership 5 control of the partnership property and business, 'C) community of power in administration 'ri ht to in3est, or ma!e other mana ement decisions), 'D) lan ua e in the a reement 'not 4ust word Lpartner@shipAL but also what the rest says about the ri hts0duties of each), 'R) conduct of the parties toward third persons, 'T) ri hts of the parties on dissolution. :n Southe1, court also loo!ed at 'U) duration 'fi&ed, but renewable). EKAH )IP$ :f a )uestion has a written a reement sayin L+artnershipL second uess itV o Partnership +, estoppel$ creates a liability to third parties who rely upon representations that a partnership e&ists. Price(aterhouse. :n order to establish a partnership by estoppel, four elements must be pro3en> '1) e&press or implied Lholdin out,L '2) made by one sou ht to be char ed as a partner, '1) reasonable ood faith reliance, 5 'B) detrimental reliance C. Is there a dispute +et3een P(s) : (rd Part, as to 3hether a P a/ted 36 Authorit,? R7PA 8(9%$ 1. 9ach partner is an 6 of the partnership for the purpose of its business. 2. 6n act of a partner 'includin the e&ecution of an instrument in the partnership name) binds the partnership if itKs apparently for carryin on in> a) the ordinary course the partnership business, #< b) business of the !ind carried on by the partnership '1) $8=9**> '1) + had no authority to act in the particular matter, 68- '2) 1rd +arty new or ha& receive& a notification that the partner lac!ed authority. !at'l )iscuit v. Strou&. @ O)E$ Sli#ht -ifferen/e in %J%C>>;7nless (rd Part, ;had kno3led#e;A -. Is there a dispute +et3een Ps as to 3hether a P a/ted 36 Authorit,? R7PA (%JJF) 8 C9% . . . 'f) 9ach partner has e)ual ri hts in the mana ement and conduct of the partnership business . . . '4) 6 difference arisin as to a matter in the ordinary course of biz of a partnership may be decided by a ma4ority. 6n act outside the ordinary course of biz of a partnership #< an amendment to the + a reement may be underta!en only w0 consent of all partners. Summers v. Dooley. '1) Is there a li'it on P5s Authorit,? 6 partnerKs authority0e)ual ri hts in partnership can be limited by a partnership a reement to certain e&tents. 9. . authority to ma!e amendments or other decisions outside the ordinary course of business can be made with less than unanimity if the partnership a reement specifies the use of a committee, etc. Si&ley / Austin v. Day. &. R7!ES$ -is/losure a) 7PA (%J%C) 8 &9$ +artners shall render on &eman& true and full info of all thin s affectin the partnership to any partner or @his rep.A. +) 7PA (%JJF) 8 C9((/)$ Ea/h partner and the partnership shall furnish to a partner (or his rep)$ '1) w,o &eman&2 any info about the partnershipKs bi3,affairs reasonably re4uire& for the 'ro'er e1ercise of the 'artner's rights an& &uties under the + a reement or this @6ctA; 68'2) on demand, any other info concernin the partnershipKs biz0affairs, $8=9** the demand0info demanded is unreasonable0improper under the circumstances. E. R7!ES$ )he Partnership Interest 1. 7PA (%JJF) 8 C9%(i)$ a person may become a + only w0 consent of all partners 2. 7PA (%JJF) 8 D9%4 a + is not a co-owner of partnership property and has no interest in partnership property which can be transferred, either 3oluntarily or in3oluntarily.
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1. 7PA (%JJF) 8 D9&4 P5s )ransferra+le Interest$ +Ks only transferrable interest is the +Ks share of the profits0losses his ri hts to recei3e distributions. .he interest is personal property. Putnam v. Shoaf a) I'portant /a*eat4 In General, an assi nment or sale of a partnership LinterestL does not ma!e the assi nee a partner 'see $+6 '1UUR) CH1'a)'1). B. 7PA (%JJF) 8 D9((a)(&) codifies /= that transfer of an interest does not effect a dissolution of the partnership. a) 6 partner who has transferred his interest remains a partner. .. What is Partnership Propert,? R7!ES %. 7PA (%JJF) 8 &9C /odified the C!4 la,in# out ( rules @ oti/e these are not in sa'e order in statuteA$ o (%) 6ny asset ac)uired in the name of the partnership is partnership property if> 6 transfer directly to the partnership in its own name a transfer to one or more partners actin in their capacity as partners an& the name of the partnership appears on the transfer 2HB'a)'1), 'b) o '2) :f the partnership is not named, property ac)uired by one or more partners is partnership property if the document transferrin title indicates the buyer was actin in his capacity as a partner. 8 &9C(a)(&) o '1) +roperty purchased w0 partnership funds is presumed to be partnership property. 8&9C(/) Related Rule$ 7PA (%JJF) 8C9C(+)(%)$ + is trustee of partnership property @see duty of loyaltyA. 7. .inan/in# the Partnership$ problem of addKl capital is often hi hli hted in partnership conte&t b0c there are limited sources for addKl capital and no ability to sell new interests, absent consent. 1. /apital account> a runnin balance reflectin each partnerKs ownership e)uity. $+6 '1UUR) J BH1'a) 0. R7!ES$ Partnership Profits 1. 7PA (%JJF) 8 C9%(+) @paraphrasedA$ profits and are di3ided e)ually amon +s 5 losses follow. this pro3ision that can be 3aried by a reement, 8%9((a). I. Partnerships$ .idu/iar, -uties>>-ut, of Care and -ut, of !o,alt, 7PA (%JJF) 8C9C 'a) .he only fiduciary duties a partner owes to the partnership and the other partners are the duty of loyalty and the duty of care set forth in subsections 'b) and 'c). 'b) 6 partnerKs duty of loyalty to the partnership and the other partners is limited to the followin > o '1)to account to the partnership and hold as trustee for it any property, profit, or benefit deri3ed by the partner in the conduct and windin up of the partnership business or deri3ed from a use by the partner of partnership property, includin the appropriation of a partnership opportunity; o '2) to refrain from dealin with the partnership in the conduct or windin up of the partnership business as or on behalf of a party ha3in an interest ad3erse to the partnership; and o '1) to refrain from competin with the partnership in the conduct of the partnership business before the dissolution of the partnership. 6 partner has a duty to disclose partnership opportunities to allow other partners e)ual opportunity to ta!e ad3anta e of it. Meinhar& v. Salmon related Rule$ 7PA (%JJF) 8 %9((+)$ the partnership a reement may not '1) eliminate the duty of loyalty under BHB'b) . . . but 'i) the a reement may identify specific types or cate ories of acti3ities that do not 3iolate the duty of loyalty, if not manifestly unreasonable. 'ii) all of the partners or a number or percenta e specified in the partnership a reement may authorize or ratify, after full disclosure of all material facts, a specific act or transaction that otherwise would 3iolate the duty of loyalty
7

o <atification acceptable where interested party 3otes for mer er, b0c Lmanifestly unreasonableL lan ua e from subsection 'i) is not in subsection 'ii). Perretta v. Prometheus 'c) 6 partnerKs duty of care to the partnership and the other partners in the conduct and windin up of the partnership business is limited to refrainin from en a in in grossly negligent or rec less con&uct, intentional misconduct, or a !nowin 3iolation of law. o 8#.9> More than ne li ence. 'd) 6 partner shall dischar e the duties to the partnership and the other partners under this @6ctA or under the partnership a reement and e&ercise any ri hts consistently with the obli ation of ood faith and fair dealin . o 6 partner can act in his own best interests when plannin to lea3e the partnership but is still sub4ect to his duty of ood faith, and canKt lie to the other partners about lea3in or use the partnerships resources to start his other company. Meehan v. Shaughnessy o 8o cause e&pulsion pro3ision in a partnership a reement is o!ay, and +artners e&pellin another partner act in ood faith, re ardless of moti3ation, when they do not withhold money or property le ally due the e&pelled partner. $awlis 'drun! lawyer e&pelled after other partners tried to see him throu h his addiction). . . .@left out other sections, not importantMA L. Is the Partnership !ia+le? 1. 8(9D(a)$ 6 partnership is liable for loss0in4ury caused to a person, for a penalty incurred, as a result of wron ful act or omission, or other actionable conduct, of a + actin in the ordinary course of biz of the partnership #< w0 authority of the partnership &. 8(9D(+)$ If4 in the /ourse of the partnership5s +iM OR 3hile a/tin# 36 authorit, of the partnership4 a P re/ei*es or /auses the partnership to re/ei*e N or propert, of a (rd part,4 and it is 'isapplied +, a P4 the partnership is lia+le for the loss. 1. :s the partner liableM a) 8(9B$ 'a) +s are all 4ointly and se3erally liable for all obli ations unless chan ed by a reement, 'b) a + entered the partnership after the obli ation was incurred, or 'c) @not on testMA. 1. Endin# a Partnership$ -issolution or -isasso/iation %. -issolution$ a) 7PA (%J%C) 8 &J> dissolution is the chan e in the relation of the partners caused by any partner ceasin to be associated in the carryin on as distin uished from the windin up of the business +) 8 (%$ -issolution is /aused$ '1) without 3iolation of the a reement> 'a) by the termination of term or occurrence of e3ent specified in the a reement, 'b) by the e&press will of any partner when no term or e3en specified, 'c) by the e&press will of all partners who ha3e not assi ned their interests or lost them to debts, before or after term or e3ent specified in a reement 'd) by e&pulsion of a partner in accordance with such e&pulsion pro3isions in a reement '2) :n contra3ention of the a reement, where no other section of $+6 '1U1B) calls for dissolution, by the e&press will of any partner at any time; '1) %y any e3ent which ma!es it unlawful for the business of the partnership to be carried on or for the members to carry it on in partnership 'B) %y the death of a partner 'C) by the ban!ruptcy of any partner or the partnership 'D) %y decree of the court /) 8(& -issolution +, -e/ree of Court$ '1) on application by or for a partner the court shall decree a dissolution whene3er . . . 'a) 'c) a partner has been uilty of such conduct as tends to affect pre4udicially the carryin on of the business
8

'b) 'd) a partner willfully or persistently commits a breach of the partnership a reement, or otherwise so conducts himself in matters relatin to the partnership business that it is not reasonably practicable to carry on the business in partnership with him, . . . 'c) 'f) other circumstances render a dissolution e)uitable. +Ks refusal to do his share of the wor!, tal!in about pressurin another + out of the biz 5 ta!in ( beyond a reed amounts is enou h. 5wen v. Cohen. Mere bad blood between +s is not enou h. Collins v. $ewis. +ower to dissol3e sub4ect to fiduciary duties. Page v. Page d) -issolution5s effe/t on partnership$ '1) 6fter dissolution, the partnership must be wound up, absent a reement amon the +s to carry on the biz. '2) 6ssumin that the business will not be continued, the windin up process enerally contemplates that the firm,s assets will be distributed to the +s. '1) 6uthority of +s to act on behalf of partnership terminated e&cept in connection with windin up of partnership business. $+6 '1U1B) J 11; $+6 '1UUR) J THB. e) continuation per 6 reement> 9ffect on +artnership '1) .echnically creates a new partnership '2) creditors of former partnership automatically become creditors of new partnership. $+6 '1U1B) J B1'B) '1) Must consider the ri hts of the departin partner f) .erm +artnerships> '1) e&plicit term> 'a) durations specified in partnership a reement 'b) specific purpose0ob4ect specified in partnership a reement '2) :mplicit term 'a) :n 5wen, the court found an implied term where one partner loaned (RHHH into the partnership to be repaid out of the prospecti3e profits as soon as it could reasonably be paid. 'b) :n Page, the court held that a (B1I distribution by each partner did not constitute an implied term to e&pire when obli ations were paid, instead it was at will, b0c there was no e3idence of an intent to end when the obli ations were paid. '1) Eow do you !now if you ha3e an at will or term partnershipM 'a) e&plicit term or implied term established by reliable e3idence of one or more specific underta!in s to be accomplished prior to end of business relationship. $+6 '1U1B) J 11; $+6 '1UUR) J DH2. 'i) :f at will, a partner can lea3e at any time. $sually w0o dama es unless bad faith conduct. 'a) thus, canKt form a partnership to benefit from essentially inside information than e&it the partnership to the detriment of copartners. 'ii) :f term, enerally canKt lea3e w0o penalty, but can always lea3e with penalty 'a) =iable for dama es> $+6 '1U1B) J 1T; $+6 '1UUR) JJ DH2, RH1 'i) May include anticipated dama es flowin from future business operations. 'iii) :f you lea3e 'at will or term) liability to creditorsM 'i3) "es for e&istin obli ations J1D, RH1 'a) 7enerally no liability for future obli ations, %$., if for term and wron ful departure, dama e calculations may consider future obli ations of business. 2. 6fter -issolution> a) ac)uisition of assets0%usiness by some partners '1) +artners can buy business after it is dissol3ed 'in ood faith) Prentiss v. Sheffel. '2) /ontinuation followin wron ful dissolution> $+6 '1U1B) J1T'2)> Phen dissolution is caused in contra3ention of the partnership
9

a reement the ri hts of the partners shall be as follows> o 'a) 9ach partner who has not caused dissolution wron fully shall ha3e, ? ::. .he ri ht, as a ainst each partner who has caused the dissolution wron fully, to dama es for breach of the a reement. o 'b) .he partners who ha3e not caused the dissolution wron fully, may continue for the a reed term if they secure bond or pay out the + who left, minus liabilities 5 dama es for lea3in o 'c) 6 partner who has caused the dissolution wron fully shall ha3e> ? ::. :f the business is continued the ri ht to his interest as mentioned abo3e, but in ascertaining the value of the 'artner's interest the value of the goo&#will of the business shall not be consi&ere&. Pav#Saver v. 6asso 8ote> J RH1 is different. 8o reduction for 3alue of oodwill J BH'b)> sub4ect to contrary a reement, upon dissolution partnership assets should be distributed as follows> ':) .hose owin to creditors other than partners, '::) .hose owin to partners other than for capital and profits, ':::) .hose owin to partners in respect of capital, and ':;) .hose owin to partners in respect of profits. J BH'd)> Lpartners shall contribute, as pro3ided by @J1T'a)A the amount necessary to satisfy the liabilities @set forth in J BH'b)A. . . .L 1o*a/ik Rule> $pon loss of the money the party who contributed it is not entitled to reco3er any part of it from the party who contributed only ser3ices. *ovaci v. .ee&. o EKCEP)IO S$ /ourts do not apply the *ovaci rule where '1) the ser3ice partner was compensated for his wor!, or '2) the ser3ice partner made a capital contribution, e3en if it was nominal 7PA (%JJF) 8C9% Co''ents$ the default 'profit0loss) rules apply where one or more of the partners contribute no capital, althou ht there is case law to the contrary @citin *ovaci A. @98- #N +6<.89<*E:+A

EII. )0E CORPORA)IO

A - !IHI)E- !IABI!I)" A. General 1. -efinition$ Corporation$ 6n entity 'usually a business) ha3in authority under law to act as a sin le person distinct from the *Es who own it and ha3in ri hts to issue stoc! and e&ist indefinitely. &. Criti/al Attri+utes$ a) !e#al Personalit,, !i'ited !ia+ilit, Separation of o3nership : /ontrol M%/6 J T.H1'b)> %d of -irs e&ercises powers 5 mana es, li2uidit, secondary tradin mar!ets '8"*9, etc.) b) .le?i+le /apital stru/ture can issue0pac!a e securities in many ways. 1. N:-$/:6<" -$.:9*--'Phen *ol3ent) N=#P N<#M %- #N -:<* .# #P89<* B. Pro/ess of In/orporation$ draft 5 file 6o:> C. Post>In/orporation$ -raft %ylaws 'M%/6 J2.HD), Ea3e or aniz meetin 'M%/6 J2.HC)-, :ssue *toc! B. !ia+ilit, for Pre>In/orporation A/ti*it,$ a) Corporation +, Estoppel$ treat firm as thou h it were a corp if the person dealin w0the firm '1) thou ht it was a corp all alon , 68- '2) would earn a windfall if now allowed to ar ue that the firm was not a corp. Camcraft. b) !ia+ilit, of Pro'oter$ 6 promoter is liable for the acts of the to-be corporation until released from liability by both the corporation and the third party.
10

R. Wh, in/orporate? +ros> limited liability; cons> more formalities and rules, and double ta&ation. a) +ros for *Es> a3oid personal liability, minimize monitorin costs, downplay Lfree riderL issue T. !i'ited !ia+ilit, : Pier/in# the Corporate Eeil (;PCE;) a) !i'ited !ia+ilit,$ HBCA 8 B.&&(+)$ $nless otherwise pro3ided in the 6o:, an *E of a corp is not personally liable for the acts or debts of the corp e1ce't that he may become 'ersonally liable by reason of his own acts or con&uct +) PCE Rule$ )3o re2uire'ents$ '1) unity of interest and ownership Lalter e oL> 'a) Nactors> /ommin lin of funds, $ndercapitalization, treatin assets of corp as those of the p3t person or other corp, or -isre ard for corporate formalities. '2) adherence to limited liability would sanction a fraud or promote 4ustice. 'a) in the absence of proof of fraud, pro3in in4ustice re)uires more than proof that some creditors will o unpaid. . Sea $an& 'i) e&amples of in4ustice> un4ust enrichment, intentional scheme to put assets into a liability-free corp 5 heap liability on an asset-free corp, parent corp causes a subKs liability and the subKs limited assets allow them to escape the liability. '1) Su+>rule$ +iercin corporate 3eil can be effectuated a ainst a person '*E) or lar er corp 'if the corp that harmed you was one of se3eral small corps controlled by a bi er corp--enterprise liability). (al ovs3 y v. Carlton 'multiple ta&i companies) (C) Su+>rules for parent>su+sidiar, Alter E#os$ 'a) use a totality of circumstances test to determine if sub is alter e o of parent> 'i) '1) common -irs0#ffs, '2) common biz departments, '1) file consolidated financial statements and ta& returns, 'B) +arent finances the sub, 'C) +arent caused the incorporation of the sub, 'D) *ub operates w0 rossly inade)uate capital, 'R) +arent pays the salaries0other e&penses of the sub, 'T) *ub recei3es no biz e&cept from the parent, 'U) +arent uses the subKs property as its own, '1H) -aily operations of the 2 corps are not !ept separate, '11) *ub doesnKt obser3e the basic corp formalities. -n .e )reast -m'lants 'a) Eowe3er, parents are e&pectedOindeed re)uiredOto e&ert some control o3er their subsidiaries. =imited liability is the e&ception, not the rule. 'b) L8o res'on&eat su'erior amon subs.L ..C. Archbisho' of San 0ran 'c) 0AR ER$ some 4urisdictions rela& the 2nd element of +/;, particularly w0parent-subs. (D) Wa,s to prote/t a#ainst PCE$ 'a) /anKt +/; to officers of corp that acts as 7+ for an =+ e3en where some of the limited +s are the officers in the corp, thus limitin their liability and allowin them to control the partnership at the same time. 0ri&gi&aire case. 'b) 6d3ice to person startin corp and wantin to a3oid +/;> 'i) 63oid personal liability> respect the corp formalities 5 ta!e out the min insurance 'ii) 63oidin enterprise liability 'more difficult)> 8eed separate boo!s and ban! accounts for each corp, plus careful accountin for supplies, borrowin of prop, etc U. ),pes of li'ited lia+ilit, entities$ !i'ited Partnerships$ 7+s still carry personal liability, but =im +s enerally do not a) =im +s can be held liable as 7+s if they e&ercise si nificant control of the biz. Hol3man '1) E?/eption$ Re*ised 7nifor' !P A/t$ =im + only liable to those 1rd parties who reasonably belie3e . . . that the limited partner is a 7+. 1H. ),pes of li'ited lia+ilit, entities$ !!Cs (!i'ited !ia+ilit, Co'panies)$ Eybrid> ta& ad3anta es of partnership w0limited liability of corp. a) Capital$ Mems contribute one or more forms of capital. $==/6 J BH1. b) Is He' lia+le? only for loss of capital contrib, not personal assets, e&cept under 6 ency law if ==/ status undisclosed. (estec v. $anham. c) !!C Created? file 6rticles of #r anization in desi nated state. $==/6 J2H2'a), choose name 'include L==/), office for ser3ice of process, draft operatin a reement.
11

d) He'+er5s Ri#hts$ 'a, in/lude$ '1) finan/ial interest, i.e. ri ht to distributions and li)uidation participation, 68-0#< (a) can be assi nedbut assi nee ets other ri hts if admitted as member by consent of all other members or by pro3ision of the operatin a reement. 'li!e partnership rules). $==/6 JJ CH1-H1. '2) 'ana#e'ent ri#hts. '1) Profit and !oss Sharin#$ absent contrary a reement, most statutes allocate based on 3alue of memsK contributions 'a) $nder $==/6 JBHC'a), distributions must be made in e)ual shares 'B) Withdra3al> mem may P- and demand payment of his interest by i3in ade)uate notice 'see statute or ==/Ks operatin a reement) 'C) Hana#e'ent Ri#hts> 'a) He'+er>'ana#ed (default rule)$ 6bsent contrary a reement, each member has e)ual ri hts in the mana ement of the ==/, $==/6 J BH1'a)'1) 'i) most matters decided by ma4ority 3ote, 'a)'2) 'ii) *i nificant matters re)uire unanimous consent J 'c) 'b) Hana#er>'ana#ed !!C option 8 C9C(+)$ 'i) can be structured as %d of -irs, /9#, or both 'a) mana er's) can ma!e all decisions other than those in BHB'c) w0o member 3ote 'b) mana er's) added or remo3ed by ma4ority 3ote of members. 'ii) must be specified in 6rt of #r . (B) -isso/iation *. -issolution$ (a) -isso/iation$ 3ithdra3al or e?pulsion of a 'e'+er. 7!!CA 8 B9% 'i) =i!e <$+6, not $+6. ==/ can buy-out dissociated membersK interests. (+) -issolution 'i) windin up of ==/ tri ered $==/6 J TH1. (ii) E*ents of dissolution +, la3$ 'a) e3ent specified in operatin a reement, 3ote of members 'as specified in operatin a reement), #< if unlawful to carry on the business (iii) E*ents of -issolution +, /ourt order$ 'a) economic purpose frustrated, #< misconduct by members e) R7!E for .reedo' of 1 in !!C A#ree'ents$ ==/Ks power to I in a reement will not be circum3ented by courts unless it e&pressly 3iolates a statute. 7lf v. Jaffari f) R7!ES for Pier/in# the !!C$ '1) PCE /an +e used in !!C Conte?t$ .here is no law or policy sayin +/; should be different for ==/s than /orps. *aycee case. 'e3en thou h no statute e&pressly calls for +/; w0 ==/s) 'a) L6 member or mana er is not personally liable for a debt, obli ation, or liability of the company solely by reason of bein or actin as a member or mana er.L $==/6 J 1H1'a) '2) PCE Re2uires Hore )han Hinor )rans#ressions$ .he failure of an ==/ to obser3e the usual company formalities or re)uirements relatin to the e&ercise of its powers or mana ement of its biz is not a round for imposin personal liability on the members or mana ers for liabilities of the company. $==/6 J 1H1'b) #) .idu/iar, -uties$ '1) Hana#er>'ana#ed$ mana ers ha3e duty of care 5 loyalty 'usually mems ha3e no duty to ==/0other mems) '2) He'+er>'ana#ed> all members ha3e a duty of care and loyalty. (() .idu/iar, o+li#ation a+sent a#ree'ent to the /ontrar,$ 7!!CA 8 C9J(+) (+)(%)$ Oto account to the ==/ ... for ... any property, profit, or benefit ... deri3ed from a use by the member of the ==/,s property, incl. the appropriation of an opportunityP (+)(()$ Oto refrain from competin w0 ==/ in the conduct of its biz before dissolution
12

(a) Su+>rule$ members of an ==/ can a ree to limit the scope of the fiduciary duty they owe to the ==/$//=6 1H1'b)> operatin a reement may not> '2) eliminate duty of loyalty, but may call for procedures to determine what does0doesnKt 3iolate it; '1) unreasonably reduce duty of care; #< 'B) eli'inate o+li#ation of #ood faith and fair dealin#4 +ut 'a, deter'ine ho3 that o+li#ation is 'easured as lon# as the, are not 'anifestl, unreasona+le. McConnell v. Hunt @6o#r pro3ision said mem could compete w0==/A @8#.9> ;ery ;ery *imilar .o /orp Niduciary -utiesA EIII. .idu/iar, -uties in the Corporate Conte?t> General 6. General> HBCA 8 G.9% all corp powers, mana ement and ownership are 3ested in the bd of dirs. 1. /orp -irectors owe two primary fiduciary duties a) -uty of /are b) -uty of =oyalty '-o=) '1) ood faith is a subpart of -o= in -9 'Stone v. .itter), but is a separate duty in some courts. 2. Pho are the beneficiaries of the dirsK fiduciary dutiesM a) :f *ol3ent+rimarily *Es-irsK duty to M6Q:M:W9 *E ;6=$9 b) :f :nsol3ent primarily creditors c) :f in LWone of :nsol3encyL-epends 1. -irs Hust$ maintain fairness to employees 5 competiti3eness in the mar!etplace C. A#en/, Prin/iple$ -IRS ARE As O. )0E CORP4 W0IC0 IS A P IK. .idu/iar, -uties in the Corporate Conte?t> -ut, of Care (-oC)$ 6. HBCA 8 G.(9(a) Standard of Condu/t @AspirationalA$ -irs shall act> '1) in ood faith, 5 '2) in a manner the -ir reasonably belie3es to be in the best interests of the corp. 1. Must e&ercise the de ree of s!ill, dili ence and care of a reasonably prudent businessperson '1) 'similar to ne li ence, but different b0c itKs a reasonably prudent Lbusiness personL and tempered by the %X<.) b) Su+>rule for Withholdin# -i*idends$ 6 court wonKt interfere in -irsK business decisions re di3idends unless it would G fraud or breach of ood faith. Do&ge v. 0or& 5 *amin v. Ame1 c) BLR$ @6A presumption that in ma!in a business decision, the -irs of a corp acted on an informed basis, in ood faith 5 in the honest belief that the act ta!en was in the best interests of the corp. '1) + has no ri ht to sue, unless %X< is rebutted. (rigley. '2) 0o3 Can P re+ut BLR? Nraud0/onflcit ' o to -o=) #< if decision is :lle al, 9 re ious, $niformed, Pasteful, #< there was a Nailure to -ecide 'or failure to monitor) 'a) When is it uninfor'ed? -irs must ather0re3iew all materials Lreasonably a3ailableL 6an Gor om. 0AR ER$ PROCESS : -ISC!OS7RE. 'i) :f -ecision was not well-informed, 5 -s canKt show entire fairness, /orp is liable, but -irs probably arenKt 'in -9)> -7/= J 1H2'b)'R)> 6o: can include pro3ision that -irs are not liable for breaches $8=9** -o=, or %ad Naith '-o/ 3iolations not onna cut itV) (b) -oC : o -e/ision6I#noran/e of -ir$ %X< protects decisions 'to act0not act) but not a complete failure to ma!e any decision. -ir has a duty to understand basics of the biz i norance is no e&cuse. 0rancis 'c) -oC : Caremark -ut, to Honitor$ '1) sustained0systemic failure to e&ercise o3ersi ht, #< a failure to implement an o3ersi ht system. Caremar . 'd) If P ;1no/ks -o3n; BLR Wall$ - must pro3e Lentire fairnessL of the transaction. 'i) .a/tors$ timin , initiation, ne otiation, and structure of the transaction, the disclosure to and appro3al by the board 5 the *Es. '1) Re/on/ilin# -oC and BLR$ -o/ tells -irs LdonKt be ne li ent,L and %X< insulates -irs from ne li ence liabilityOliable only for fraud or self-dealin or ross ne li ence. (C) BLR O*er*ie3$ (a) :s there e3idence of fraudM :f yes%X< <ebutted; :f no/ontinue (b) :s there e3idence of /onflict of :nterestM :f "es<ebutted; :f 8ocontinue
13

(c) :s there :lle ality, 9 re ious decision, uninformed decision, waste, no decisionM :f 8o, %X< 6pplies, /ourt abstains; :f "es %X< <ebutted-id - 3iolate -o/M :f "es, calculate dama es '6an Gor om); :f 8o, - wins. d) HBCA 8 G.(% Standards of !ia+ilit, @8 G.(9 is 3hat 3e 3ant -irs to do4 G.(% deter'ines 3hether the,5re lia+le in /ourtA$ %asically codifies the %X< and says that -irs only personally liable if plaintiff !noc!s the %X< wall down throu h one of the methods mentioned abo3e 68- there is no 1H2'b)'R)-type pro3ision 'or M%/6 J2.H2'b)'B) which is 3ery similar to 1H2'b)'R)) precludin liability. '1) .hus, if there is a 1H2'b)'R)-li!e pro3ision, -irKs wonKt be personally liable for -o/ 3iolations. I. .idu/iar, -uties in the Corporate Conte?t> -ut, of !o,alt, 6. Is there a -o!? - 6 person,s duty not to en a e in self-dealin or otherwise use his or her position to further personal interests rather than those of the beneficiary. 1. Self>-ealin# - dealin in a way that benefits oneself instead of another who is owed a fiduciary duty B. Is there a Confli/t of Interest (CoI)? 1. :f so, it <ebuts %X< 5 *hifts %urden of +roof to - to +ro3e entire fairness or <atification. )ayer v. )eran @/o: didnKt e&ist 4ust b0c -irKs wife was in3ol3ed--- showed entire fairnessA a) O)E$ Proof of Entire .airness e?tin#uishes A " -o! or -oC Clai'A &. Are 3e in -E : Was there Ratifi/ation? -GC! 8 %CC @Shifts Burden Ba/k to P to sho3 3asteA Questions$ Was there a 2uoru'? Was there -isint -ir6S0 ratifi/ation? Was it other3ise fair? a) @6 deal between a /orp 5 one of its own -irs0#ffs 'or a biz they own0mana e) will not be 3oid03oidable 4ust b0c @iA that conflict e&ists, @iiA the conflicted -ir0#ff was present0participated in the deal meetin , #< @iiiA the conflicted -ir0#ffKs 3ote was counted in the deal, if> '1) @6ll material facts were disclosed and a ma4ority of disinterested -irs 'ma4ority of total, not 4ust present) 3oted to authorize the deal in ood faith, e3en thou h the disinterested -irs be less than a )uorum; or '2) all material facts were disclosed to the '3ote-capable) *Es 5 they 3ote in ood faith to appro3e; or @8#.9> <atification ille itimate if a ma4ority of *Es are interested parties. 0leiglerA '1) .he deal is fair as to the corp as of the time it is authorized, appro3ed or ratified, by the %d of -irs, a committee or the *Es. used to ratif, 3hen> '1) no re)uisite ma4ority of disinterested -irs0*Es, or '2)thereKs defecti3e disclosure of material facts. 3hat is a ;fair transa/tion;? P0i the ran e of terms that parties bar ainin at armslen th mi ht reach. b) 'b) conflicted -irs may be counted toward a )uorum. '1) Suorom G ma4ority of total -irs, unless 6o: or bylaws re)uire more O)E$ Xudicial re3iew is not precluded by ratification, 4ust less reasons for a deal to be 3oid or 3oidable. O)E$ Nailure to ratify does not mean a failure to authorize '-7/= J 1B1), 4ust that the authorized transaction will be 3oidable and thus more sub4ect to liti ation later . C. Was there a Corporate Opportunit,? Corporate Opportunit, -o/trine (CO-)$ 1. O+<e/ti*e$ to deter appropriations of new business prospects Lbelon in toL the corp 2. )ar#ets$ -irs0#ffs 5 -ominant *Es who ta!e dominant role in mana in the corp 1. R7!E$ )he BroM )est> 6 /# e&ists where> a) Corp is finan/iall, a+le to take the opportunit, b) Opportunit, is in the /orp5s line of +usiness 'fundamental !nowled e, practical e&perience and ability to pursue). :n3estin was La line of businessL of e%ay, e3en thou h not their main purpose b0c they in3ested a lot. -n re e)ay. %ut not in line of business of Martha *tewart c) Corporation has an interest 'firm has a le al ri ht) or e?pe/tan/, 'would come to the corp in the ordinary course of thin s @harder to pro3e than an interestA) in the opportunit,
14

:n )ro3, no interest or e&pectancy where corp was ettin out of that biz, had sold of similar franchises, 5 !ey players told %roz it was o!. :s corp '1) in need of '2) see!in #< '1) e3en remotely interested in the oppM Martha Stewart d) E'+ra/in# the opp 3ould /reate a CoI +et3een the -irs : the Corp :+# shares created conflict b0c they were basically a !ic!bac! from 7oldman *achs to the -irs for brin in their business to 7oldman. -n re e)ay. /ourts may allow -irs0#ffs to buy0sell stoc! in their corp at will as lon as in ood faith. Martha Stewart. 8ote> .his is a totality of the circumstances test. -onKt need all B, but prob more than 1. B. Su+>Rule for CO- -is/losure6Re<e/tion$ 6 -ir0#ff can le ally appropriate a /rop #pp if he discloses the #pp to the %d of -irs and they properly re4ect the #pp. 5. /#- <oadmap Suestions> :s the prospect a /orp #ppM :f no, no breach, :f yes -id Niduciary -iscloseM :f no, - is in breach if he appropriates, :f "es-id /orp +roperly <e4ectM :f no, - is in breach if he appropriates, :f yes, no breach if - appropriates. -. -ut, of !o,alt, for S0s 1. *Es actin as *Es owe one another no fiduciary duties, %$. /ontrollin *Es owe duties to the minority a) 2 types of controllin *Es> '1) CH.1YF of stoc!, #< '2) ZCH.1Y but dominates throu h actual control 2. Corp as S0$ -GC! 8%&($ 6 corp can own some or all of the shares in another corp a) if LsomeL is [CHY G +arent 5 ma4ority-controlled subsidiary 'minority-owned if less than CHY) '1) other stoc! owners are minority *Es b) if LallL G +arent 5 wholly-owned subsidiary /) Is there a -eal Bet3een Parent : Su+? )est for -o'ination$ '1) If self-dealin by +arent> %o+ on +arent to show intrinsic 'LentireL) fairness. '2) :f no self-dealin > %X< is used, 5 + has burden to show ross o3erreachin . Sinclair 5il. 'a) 8#.9> =oo! for self-dealin separately in each transaction if there are more than one. '1) Su+>Rule$ :f nonenforcement of I had been appro3ed by a ma4ority of the disinterested directors and then also by a ma4ority of the disinterested *Es 'a!a a ma4ority of the minorityL)M *hifts %o+ to + to show deal was unfair. (heelabrator. d) Su+>rules for S0s -o'ination$ Ma4ority *Es 'indi3s or /orps) owe a fiduciary duty to the minority 4ust li!e directors when they control corp decisions. 8ahn v. "ransamerica. E. -ut, of !o,alt,>>Good .aith 1. .ailure to A/t in Good .aith- where the fiduciary '1) intentionally chooses not to ad3ance the best interests of the corp, '2) intentionally 3iolates the law, #< '1) intentionally fails to act in the face of a !nown duty to act, demonstratin a conscious disre ard for his duties 'includin '1) utterly failin to implement any reportin or information system or controls, #< '2) ha3in implemented a system or controls, consciously failin to monitor or o3ersee its operation thus disablin themsel3es from bein informed of ris!s or problems re)uirin their attention). Disney2 Stone, Caremar . a) =ac! of ood faith is more than ross ne li ence '-o/) it is a subset of -o=. b) 7ood faith is the other route to -o= when thereKs no apparent /onflict of :nterest. c) 0AR ER$ )ake a3a, fro' -isne,> we want corps to use best practices, but de3iation from those will not result in liability unless there is other e3idence of breach of duty of loyalty. 2. Ad*isor .ees: fees o!ay unless they bear no reasonable relationship to the ser3ices rendered.
II. -eri*ati*e !iti#ation$ O*er*ie3 and -e'and Re2uire'ent

A. -eri*ati*e *. -ire/t$ )oole, )est$ 1. Who suffered the alle#ed har'$ the corp or the suin stoc!holders, indi3iduallyM a) dilution of 3otin ri hts constitutes direct in4ury to *E, thus direct suit. 7isenberg.
15

2. Pho would recei3e the 'direct) benefit of any reco3ery0remedy, the corp or the *Es, indi3iduallyM a) Is in<ur,$ dire/tl, /orp4 not S0? +) If in<ur, is to the /orp$ S0 /an5t sue dire/tl,4 +ut /an sue deri*ati*el,. /) Co'plainant 'ust +e a S0. Creditors re'ed, is PCE. 3. If -ire/t -raft Co'plaintI If -eri*ati*e -oes H, Client Heet Re2uire'ents a) Was H, Client a S0$ '1) at time of wron doin 'M%/6 R.B1), R '2) when suit be an 'M%/6 R.B2), R '1) throu h final 4ud ment 'some states), R 'B) is he fair representati3e 'M%/6 R.B2)M C. Is it State or .ed Case? Erie Issue$ a) Nederal law o3erns procedural issues0*tate law o3erns substanti3e issues. Cohen. '1) so if state claim in Ned court for di3ersity, state law re)uirin payment for suit is 3alid b0c it is substanti3e 'i.e. creates new liability for +--to pay cost of suit) not proceduralM +) Is ,our /lient a -ir6Off of Corp : S/ared of -eri*ati*e Suits for thin#s other than -o!6.raud? !e#al Ad*i/e$ c) Han, dire/tors /an +e inde'nified. -7/= J 1BC d) Can #et -:O Insuran/e D. -e'and Re2uire'ents$ -e'and Re2uired 7nless E?/used4 E?/used 3hen .utile a) What5s the Re2uire'ent? /omplaint shall alle e the efforts + made to obtain the action desired from the /orp0-irs0@if necessaryA*Es, and the reasons for +Ks failure to obtain the action or for not ma!in the effort. N</+ 21.10-el. </+ 21.1 b) .7)I!I)" O)E$ o for Nutile 1st, b0c itKll et wai3ed if , 5 can ma!e demand afterward if it failsV (%) .utilit, Standards$ P /an /lai' futilit, if$ 'a) -E Standard (Grimes)$ .easonable &oubt as to> '1) ma4ority of %d has material financial0 familial interest, '2) ma4ority of %d is incapable of bein indep b0c of reason li!e domination0control, #< '1) the underlyin transaction is not the product of a 3alid e&ercise of biz 4ud ment. 'b) " Standard (Marx)$ '1) Ma4ority of -irs interested, '2) -irs failed to inform themsel3es, #< '1) challen ed transaction could not ha3e been product of sound biz 4ud ment '1) +rimary differences between 8" and -9> 8" has no reasonable doubt re)uirement, + 4ust has to plead 1 of the 1 w0 particularity, 68- \2 differs in each test. 'c) So'e States$ $ni3ersal -emand <e)uirement (&) -id P Hake -e'and? letter fro' S0 to Bd. of -irs askin# to +rin# suit for alle#ed CoA$ '1) Hini'u' Re2uire'ents$ '1) :- the alle ed wron doers, '2) describe factual basis of the wron ful acts and harm caused to the corp, 68- '1) re)uest remedial relief. 'a) Must be sufficiently specific to inform %d of the nature of the /o6 5 allow them to e3aluate its merits. (4) If P /an su//eed on futilit, and 'ade de'and Bd /an sue or refuse to sue If Bd refuses to sue4 P /an ar#ue 3ron#ful refusal If /ourt finds no 3ron#ful refusal4 stop$ no suitI B7) If /ourt finds 3ron#ful refusal4 P /an sueS B. -eri*ati*e !iti#ation$ S!Cs @.or Bd to Re#ain Control When -e'and E?/usedA %. )hree Standards of Re*ie3 for Refusin# -e'and *ia S!C$ a) " Standard (Auerbach)$ *how that your *=/ is '1) disinterested0independent, 5 '2) has a process, 68- "#$ P:== %9 6%=9 .# <9N$*9 -9M68'1) Auerbach /ourt> *=/ members were disinterested b0c they were added to the %d after the challen ed transactions, 5 *=/ too! substantial steps 'process) bB dismissin deri3ati3e suit. b) -E Standard (Zapata) )WO>S)EP )est$ (%) /ourt should in)uire into 'a) the independence and ood faith of the *=/, 68- 'b) the bases supportin the *=/Ks recommendations@'a)F'b) essentially G Auerbach .estA, A - (&) /ourt may o on to apply its own biz 4ud ment as to whether the case is to be dismissed.
16

'1) 7nder step &> /ourt may decide that public policy calls for suit to o forward e3en if /orpKs *=/ seemed to satisfy criteria in step 1. '2) )he Corp has BoP to sho3> independence, ood faith, and reasonable in3esti ation. c) -E Rule for Independen/e$ whether a -ir is, for any substantial reason, incapable of ma!in a decision with only the best interests of the corporation in mind. .hat is, ? focus on impartiality and ob4ecti3ity. 5racle. @too many colle ial0other connections between *=/ 5 -s G not independentA '1) Su+>rule$ 5racle standard only applies where demand was already e&cused. Martha Stewart
III. Se/urities>

A. General$ 1. 1e, Statutes$ K11 6ct 'offerin 0sale of new securities) 5 K1B 6ct 'secondary mar!et acti3ity) 2. 7ni*erse of Corp Go*ernan/e> a) .ed !a3$ -isclosure 5 *ome +rocedures 'pro&y contest 5 tender offers) b) State !a3$ Most #ther :ssuesONiduciary -uties, ;otin <i hts, =imited =iability, -issolution %. Is the thin# in 2uestion a Se/urit,? *ecurity G L6ny note, stoc! . . . bond, debenture, . . . in3estment contract . . . or, in eneral, any interest or instrument commonly !nown as a Ksecurity.KL 1. So'eti'es4 the thin# is a per se se/urit,4 e.#. a sto/k4 B7)4 other ti'es it5s not that /lear4 so a) If it5s so'ethin# like an in*est'ent 1 or s/he'e4 use the Howey Test to see if it5s a se/urit,$ '1) a I, transaction or scheme whereby a person in3ests money, '2) in a common enterprise, 'a) 0oriMontal /o''onalit,$ -id S0s of a /orp pool their interests? loo!s to the relationship betwn the indi3id. in3estor 5 the other in3estors who put ( into the scheme 'b) Eerti/al Co''onalit,$ Were the in*estor and pro'oter of the s/he'e in a /o''on enterprise? loo!s to the relationship betwn the in3estor 5 the promoter of the scheme. '1) A - is led to e&pect profits 'B) solely @or substantially 'added by courts)A from the efforts of the promoter or a 1rd party @i.e. is the in*estor passi*eA 'a) Is the in*est'ent for an interest in an !!C? :n3estors in ==/s tend to be acti3e @i.e. w0 controlA, thus donKt need protection of the securities statutes. .obinson v. Glynn. (%) As to in*est'ents in GPs4 Cir/uit Split$ 'i) (rd Cir$ Bri#ht line rule--not securities b0c partners ha3e le al ri ht to control, 'ii) Dth Cir$ Balan/in# )est>>6 security may be present if '1) 7+ a reement limits his control, '2) heKs too ine&perienced0un!nowled eable to !now his le al ri hts, #< '1) heKs dependent on some uni)ue entrepreneurial0mana erial ability of the promoter. C. Purposes of Se/urities !a3s$ -is/losure : .raud Pre*ention$ %. IS )0ERE -ISC!OS7RE? 1E" Q7ES)IO .OR A!! SEC7RI)IES PROB!EHS a) 5(( A/t>>Was there -is/losure in the re#istration state'ent? +) 5(C A/t>>Was there dis/losure in transa/tions? -. Are 3e dealin# 36 intial sales of the Se/urit,? 5(( A/t Issues$ 1. Pre>re#istriation>> 8o sellin Post>re#iatration +ut Pre>Appro*al +, SEC>> offers o!, but no sales; *9/ re3iews <e *tatement Re#istration Effe/ti*e>> sales allowed, must deli3er prospectus 2. Re#istration E?e'ptions$ & ),pes$ '1) entire security. '2) particular transactions of a security a) )ransa/tional E?e'ption$ Pri*ate Offerin# E?e'ption>>C .a/tor )est> '1) the \ of offerees 5 their relationship to each other 5 the issuer, '2) the \ of units offered, '1) the size of the offerin , 'B) the manner of the offerin . '1) ke, to the test> -is/losureS $nder element '1), were offerees i3en, or had access to, all rele3ant info that would ha3e been in the re . statement if it was a public offerin M Doran (. .raud in the Re#istration State'ent$ a) 5(( A/t 8 %%(a) if there is a material misrepresentation0omission in the re statement, the corp is liable 'buyer ne3er has to read it). -irectors and e&perts in3ol3ed in creatin the re statement can
17

be sued as indi3 -s. b) %%(+) :ssuer '/orp) is liable for fraud in the re statement, but indi3s are not liable if> (() (A) on>e?pert$ had a reasonable belief, after a reasonable in3esti ation, that there was not material falsity0omission (B) E?pert 3ho drafted part of the re# state'ent in 2uestion$ 'i) had a reasonable belief, after a reasonable in3esti ation, that there was no material falsity0omission, #< 'ii) such re statement did not fairly represent the e&pert portion he created (C) E?pert 3ho did not draft part in 2uestion$ 'i) had no reasonable ound0belief that there was any material falsity0omission, or 'ii) that the part of the re statement was not a fair0accurate 3ersion of that created by the other e&pert. )arChris. ]])he 1e,s are$ materiality 'a3 prudent in3estor thin! it importantM), reasonable in3esti ation 'as to 11'b)'6)5'%)) 5 reasonable belief 'as to 11'6)-'/)) -. Rule %9+>D$ Cause of A/tion for Se/urities .raud (Pri*ate Ri#ht is i'plied *ia SCO)7S /ases) 1. Statutor, !an#ua#e of the Rule (paraphrased)$ unlawful for Lany personL @toA> a) employ any de3ice, scheme, or artifice to defraud, a) falsely state0omit a material fact necessary in order to ma!e the statements made, in the li ht of the circumstances under which they were made, not misleadin , or b) en a e in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person, in connection with the purchase or sale of any security. &. 0AR ER5S EERSIO O. )0E E!EHE )S$ a) a 'aterial 'isstate'ent or o'ission4 @fraudI de*i/e4 s/he'e or artifi/e to defraudA (%) materiality depends on the si nicance the reasonable in3estor would place on the withheld0misrepresented information. 'a) Basic Test$ assess '1) the probability that the e3ent will occur'indicia of interest at hi hest le3els of the corp) and '2) the anticipated ma nitude of the e3ent'size of the two corp entities and of the potential premiums o3er mar!et 3alue). b) 'ade 3ith s/ienter ':ntent to defraud0<ec!less disre ard of falsity of statement) /) in /onne/tion 3ith the pur/hase or sale of se/urities4 d) on 3hi/h the plaintiff relied4 and '1) omission cases> reliance is presumed; '2) misrepresentation cases> we presume under fraud-on-the-mar!et-theory 'presumption that in3estor relied on the inte rity of the mar!et price--so in3estor need not ha3e seen misrepresentation). )asic. @)asic is the federal law, but some states 'e. . -9 5 /6) ha3e re4ectedA e) that /aused the plaintiff5s in<ur, '1) Must pro3e 2 types of causation> 'a) transa/tion /ausation$ but for the fraud, + would not ha3e in3ested 'or sold, etc.) 'i) closely related to reliance; where reliance is presumed, court will also presume transaction causation 'b) loss /ausation$ the fraud caused the loss 'i) what do you ha3e to pro3eM .hat there would ha3e been a differential if the info in )uestion was added0corrected. 'ii) not presumed. Eow do you pro3eM 'iii) 6 fraudulent statement needs to be made publicly for holders to claim loss. (est v. Pru&ential Securities. f) O)ES$ ) 'anipulation6de/eption re2uire'ent$ +rea/h of a fidu/iar, dut, alone is a state la3 issue not for federal la3. Sante 0e -n&us. '1) manipulation are practices that artificially affect mar!et acti3ity for the purposes of misleadin in3estors.
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h) Standin# re2uire'ent$ must be a holder of a security 'doesnKt ha3e to be a stoc!), and must be tradin durin the time of the alle ed misrepresentations. KII. Insider )radin#>> @Eiolation of %9+> SEC <urisdi/tion4 p*t suits are rare.A A. Who is an insider? 1. Was he an e'plo,ee of the issuer 3hose shares are +ein# traded? #ne who has a fiduciary duty, i.e. an employee, has duty to disclose0abstain insider info. 2. Was he a none'plo,ee tipee? a tipee assumes a tipperKs fiduciary duty, 5 must disclose0abstain if> a) the tipper breached a fiduciary duty by disclosin to the tipee for the purpose of a benefit, direct or indirect, from his disclosure, 68'1) -irect0:ndirect benefits G ( ain, enhanced reputation that will G future (, #< ifts b) the tipee !nows or has reason to !now of the breach of duty. Dir s. 1. Was he a 'isappropriator? 6 fiduciaryKs undisclosed use of information belon in to his + @the source of his insider infoA, without disclosure of such use to the +, for personal ain constitutes fraud in connection with the purchase or sale of a security and thus 3iolates <ule 1Hb-C. 5'Hagan @#KEa an was a lawyer who traded on insider info of his frimKs clientA a) 'isappropriates under %9+D>& if> '1) a rees to maintain confidence, #< '2) recipient should !now0has reason to e&pect that info is i3en in confidence b0c thereKs a history0pattern0practice of confidential info e&chan ed between he and the sharer, #< '1) the info is from a spouse0parent0child0siblin , unless recipient shows history0pattern0practice of no e&pectation of confidentiality. +) I'portant otes$ '1) Misappropriation can occur without in3ol3in an insider as the source or the ille al trader '2) +ermission from the + is a defense to misappropriation B. Was he like O50a#an But 3ith Per'ission? #KEa an was also uilty of insider tradin under <ule 1Be-1> +rohibits insider tradin durin a tender offer and thus supplements <ule 1Hb-C. '1) #nce substantial steps towards a tender offer ta!en, <ule 1Be-1'a) prohibits anyone, e&cept the bidder, who possesses material, nonpublic information about the offer from tradin in the tar et,s securities 'a) <ule 1Be-1'd) prohibits anyone connected with the tender offer from tippin material, nonpublic information about it. 'b) 8#.9> 1Be-1 is not premised on breach of a fiduciary duty, but #KEa an court upheld it any way. B. Was infor'ation 'aterial? (see Basic test a+o*e) : -id Insider -is/lose or a+stain? 1. R7!E$ when insider has material nonpublic information he must either '1) disclose before tradin , #< '2) abstain from tradin until the info has been disclosed. a) O)E$ the choice to disclose0not disclose insider info is a business 4ud ment of the directors, so itKs not li!ely to be problematic unless they trade on it before disclosin . 2. -irs of companies owe fiduciary duties to the corp, but are not trustees for the *Es. :tKs not ille al for an insider to buy stoc! in an open mar!et 'e. . thru a bro!er) before speculati3e information is re3ealed publicly. Good3in *. A#assiM. (. E*olution of state /o''on la3 a) ;Ha<orit,; Rule @not a 'a<orit, an, 'ore4 +ut people still /all it thatA$ #fficers and directors may trade with *Es w0o disclosin material information. b) .ed !a3 uses State ;Hinorit,; Rule$ insiders ha3e a duty of full disclosure of material information whene3er they purchase shares from *Es. c) Spe/ial Cir/u'stan/es Rule$ -uty to disclose where there were special circumstances 'e. . purchaserKs identity not re3ealed. KIII. Pro?, A//ess and /ontests 6. General$ ;+ro&yL has two meanin s> '1) the *EKs 3otin 6; '2) the written instrument by which the *E desi nates that 3otin 6.
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%. Pro?, .i#hts$ insur ent roup solicits pro&ies to 3ote their rep onto the %d 'and incumbent off the %d) 1. Is )here a Pro?, Contest? R7!E for Pro?, .i#ht E?penditures$ :n a policy contest 'not 4ust a personal power stru le) -irs may ma!e reasonable an& 'ro'er e1'en&itures to solicit pro&ies. .osenfel& a) Su+>rule for rei'+urse'ent @After pro?, fi#htA$ '1) In/u'+ents$ can be reimbursed for fi ht-related e&penses, win or lose '2) Insur#ents$ can be reimbursed for fi ht-related e&penses only if they win /. Is )here a S0 Proposal? R7!E %Ca>G (SEC Rule pro'ul#ated under 5(C A/t 8 %C)$ 6llows )ualifyin *Es to put a proposal before their fellow *Es 5 ha3e pro&ies solicited in fa3or of them in the corp,s pro&y statement '9&pense thus borne by the corp). %. Can Board E?/lude the proposal? a) Is the Proposal E/ono'i/>related? Rule %Ca>G(i)(D)$ :f the proposal relates to operations which account for less than CY of the corp,s total assets at the end of its most recent fiscal year, 68- for less than CY of its net earnin s0 ross sales for its most recent fiscal year, 68- is not otherwise si nificantly related to the company,s business. Lsi nificantly relatedL is not limited to economic si nificance. $ovenheim v. -ro4uois @less than CY 5 CY o!ay if otherwise si nificantA b) Is the Proposal Ele/tion>related? Rule %Ca>G(i)(G)$ precludes proposals relatin to an election for membership on the corp,s %d of -irs '*Es precluded from nominatin -irs) A0SCM7 v. A-G2 -nc. &. Potential Responses +, Bd of -irs to Proposal4 other than e?/lusion$ a) '1) :ncl. w0opposin statement, '2) 8e otiate with proponent 'wide ran e of compromises), '1) 6dopt proposal as submitted 1. otes on Pro?, A//ess and Contests on S0 Proposals$ +ro&y fi hts are difficult b0c challen ers need (, effort, disclosure, etc. %$., *E proposals can be an alternati3e way to at least influence the corpKs decisions 'as lon as it oes to policy and not elections). KIE. S0 Eotin# Ri#hts A. General %. Strai#ht *. Cu'ulati*e @ho3 S0s /an use their *otesA$ a) Strai#ht$ : can 3ote up to each of my @n \ ofA shares, but no more, for each -ir candidate. b) Cu'ulati*e$ : ha3e T 3otes, can use them any way : want> more power for *E than strai ht &. Pluralit, *. Ha<orit, @ho3 -irs are ele/ted +, the *otesA a) Pluralit,$ Phoe3er ets the most 3otes are elected b) Ha<orit,$ 8eed to ha3e C1Y of outstandin share 3otes 'can be applied to each -ir candidate) B. Sto/kholder5s Ri#hts$ 1. e/ono'i/$ (%) recei3e di3idends, '2) residual claim on assets li)uidation 2. *otin# ri#hts$ (%) elect directors4 (&) appro3e some e&traordinary matters (. Pa/ka#in#$ a) need at least 1 class of stoc! w0unlimited 3otin ri hts 5 at least 1 class w0 the residual claim on assets 'the 2 may be the same class, but need not be). M%/6 J D.H1'b) '1) non3otin stoc! 5 other 3ariants on one-share-one-3ote are authorized. M%/6 J D.H1'c) 'a) M%/6 is 3ery liberal, some states are more restricti3e. b) /orps can brea! up 3otin stoc! and economic stoc!, or limit the amount of 3otes the 3otin stoc! retains, to maintain power o3er the corporation. Stroh /. Closel,>held Corps$ (%) stoc! in a few hands 'or a few families), 5 '2) shares are rarely 'if e3er) dealt 1. General$ no secondary mar!et for shares, o3erned by state statutes. &. Solutions to deadlo/k$ a) *otin# trust$ *Es a ree to transfer all shares to a trustee, who becomes nominal record owner '1) .he trustee 3otes the shares in accordance w0 the the trust a reement, if any, 5 is responsible for distributin any di3idends to the beneficial owners '2) trust document must be filed with the state. -7/= J 21T +) S0 a#ree'ents$
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'1) a#ree'ents relatin# to ele/tion of Bd of -irs (aka *ote poolin# a#ree'ents) 'a) /ourts may hold that *Es are bound by their a reements, but are reluctant to tell people how to 3ote their shares. .ingling. '2) a#ree'ents relatin# to li'itation on the Bd of -irs5 dis/retion 'a) Are there 'inorit, S0s other than the parties to the a#ree'ent? R7!E$ when there are minority *Es other than those who are parties to the a reement, a reements limitin the independent business 4ud ment of directors are 3oid for public policy. Mc9ua&e v. Stoneham 'i) a reein to 3ote for each other as directors is o!ay 'li!e a 3ote poolin a reement), but a reein on policy decisions and business 4ud ments 'officer salaries, etc) not o!ay. 'b) Are the parties to the a#ree'ent the onl, S0s? R7!E$ Phere there are no minority *Es, the Mc9ua&e rule is unnecessary 'freedom of I).

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