1

l 8uslness AssoclaLlons Cenerally

1 Can be LhoughL of as a nexus of conLracLs Lhey're noL really Langlble [usL many lnpuLs under
one obllgaLlon
2 1ypes of 8uslness AssoclaLlons
a Sole roprleLorshlp preLLy sLralghLforward and noL covered ln Lhls class
b arLnershlp
l eople can form wlLhouL meanlng Lo
ll Covered by uA and 8uA (mosL sLaLes use 8uA lndlana uses uA)
lll Several varleLles general parLnershlp L LL LLL
c CorporaLlon LnLlLles LhaL have legal personallLy llmlLed llablllLy separaLlon of
ownershlp and conLrol LransferablllLy flexlble caplLal sLrucLure
d LLC can have LralLs LhaL make lL look llke any of Lhe above cross beLween parLnershlp
and corporaLlon
e Soclal 8uslness 8CC8 or LLLC
3 Slze ls noL a good lndlcaLor of whaL Lhe buslness ls
ll Agency
1 1here are frequenL problems lnherenL wlLh agency MosL commonly Lhere are confllcLs of
lnLeresL beLween agenLs and prlnclpals
2 MonlLorlng one way Lo Lry Lo reduce Lhe agency problems one problem ls LhaL Lhe waLchlng ls
cosLly
3 no conLracL ls necessary Lo esLabllsh an agency relaLlonshlp Also [usL because Lhere ls a
walver LhaL ls noL golng Lo be dlsposlLlve 1he key ls noL wheLher Lhe parLles Lhlnk Lhey are
agenLs or wanL Lo be agenLs Lhelr lnLenLlon ls lrrelevanL A walver mlghL be evldence buL has
Lo be worded preLLy carefully
4 LsLabllshlng an agency relaLlonshlp
a Lxamlnlng relaLlonshlp of agency have Lo look aL relaLlonshlps beLween agenLs
prlnclpals and Lhlrd parLles
l rlnclpal AgenL relaLlonshlp ls A an agenL? WhaL klnd of agenL? MasLer
ServanL (8sL 2
nd
) or LmployerLmployee (8sL 3
rd
)
ll AgenL 1hlrd arLy relaLlonshlp WhaL dld A and 1 do?
lll rlnclpal 1hlrd arLy relaLlonshlp ls legally llable Lo 1?
b CotJoo v uoty
l 1eacher leL Coach drlve her car Lo Lake Lhe fooLball Leam Lo a game Coach was
negllgenL ln drlvlng lor Lhe Leacher Lo be llable Lhe coach has Lo be Lhe
Leacher's agenL
ll lor deLermlnlng agency look Lo 8sL 2
nd
1 8sL 3
rd
101
1 Agency |s a re|at|onsh|p that resu|ts from
2

a 1he man|festat|on of consent by to A that A sha|| act on s
beha|f and sub[ect to s contro|
b As consent to so act
lll CourL says Coach was acLlng on 1eacher's behalf she wanLed Lhe Leam Lo geL
Lo Lhe game so she beneflLLed Also Coach was sub[ecL Lo 1eacher's conLrol
she gave hlm a condlLlon he was Lhe only one LhaL was allowed Lo drlve Lhe car
lv Also we can lnfer Coach's consenL Lo so acL because he Look Lhe car and drove
lL
v Pow could she flx nexL Llme? uon'L glve Lhe condlLlon Lurn lL ln Lo a commerclal
LransacLlon (LhaL way Lhe money can be whaL lnduced her Lo loan Lhe car)
c Coy Ieoseo lotms co v cotqlll loc
l Craln elevaLor owned by Warren Carglll had a Lwo parL relaLlonshlp wlLh
Warren Lhey had a llne of credlL exLended Lo Warren and also Lhey had a rlghL
of flrsL refusal on all of Lhe graln LhaL Warren geLs Warren has ks wlLh all Lhe
lndlvldual farmers Warren defaulLed on Lhese conLracLs larmers sued Carglll
as Warrens prlnclpal for Lhe amounL owed
ll uoes an agency relaLlonshlp exlsL? Carglll lnLerfered wlLh Lhe way Warren ran
Lhelr buslness and kepL lendlng money lf a credlLor geLs Loo lnvolved Lhey can
become a prlnclpal Same LesL applles you have Lo have A acL on s behalf
sub[ecL Lo s conLrol and As consenL Lo so acL
lll CourL here llsLs several facLors of Lhe relaLlonshlp LhaL Laken LogeLher polnL Lo
an agency relaLlonshlp 1he conLrol over W's buslness and flnances ls probably
Lhe blggesL Carglll should go one way or Lhe oLher exerclse less conLrol and
noL be a prlnclpal or exerclse more conLrol and accepL Lhe agency
3 AuLhorlLy
a AuLhorlLy ls whaL leLs us dlsLlngulsh when a prlnclpal should be llable and when Lhey
shouldnL be llable
b 1ypes of auLhorlLy under 8sL 2
nd

l AcLual AuLhorlLy
1 Lxpress
2 lmplled Lhere ls auLhorlLy Lo do someLhlng LhaL ls express buL by
lmpllcaLlon Lhere ls some oLher auLhorlLy granLed
ll ApparenL AuLhorlLy 139 may or may noL be acLual lL appears LhaL Lhe agenL
has power buL Lhey do noL
1 Lxpress
2 lmplled
lll lnherenL
lv 8aLlflcaLlon 82 raLlfles a k enLered lnLo by an agenL or non agen
v LsLoppel ls esLopped from denylng LhaL A had auLhorlLy Lo enLer Lhe k
c 1ypes of auLhorlLy under 8sL 3
rd

l AcLual
3

1 202(1) An A has actua| author|ty to take act|on des|gnated or
|mp||ed |n the s man|festat|ons to the A and acts necessary or
|nc|denta| to ach|ev|ng the s ob[ect|ves as the A reasonab|y
understands the s man|festat|ons
ll ApparenL
1 Apparent author|ty |s a man|festat|on from the to the th|rd party
1he man|festat|on has to be fa|r|y traceab|e to the 1h|s depends on
what the th|rd party reasonab|y be||eves
lll LsLoppel of an undlsclosed
lv 8aLlflcaLlon
v LsLoppel
d ,lll 5t cbotcb v noqoo
l Church hlres 8lll Lo palnL Lhe church 8lll hlres hls broLher Pls broLher ls ln[ured
on Lhe [ob lf 8lll had Lhe auLhorlLy Lo hlre hls broLher Lhe broLher ls an
employee and can collecL workers comp
ll ln order Lo esLabllsh acLual auLhorlLy Lhere has Lo be a manlfesLaLlon from Lhe
church Lo 8lll LhaL he can hlre hls broLher 8lll had lmplled acLual auLhorlLy 1he
church dldnL say LhaL he could hlre someone else buL Lhere was conLexL 8lll
reasonably LhoughL based on Lhe manlfesLaLlons of Lhe church LhaL he could
hlre someone Pe couldnL palnL Lhe roof of Lhe church by hlmself so he
assumed he could Also he had hlred people before on behalf of Lhe church
lll Could Sam reasonably belleve LhaL 8lll had Lhe auLhorlLy Lo hlre hlm? 8lll had
hlred Sam ln Lhe pasL so lL ls reasonable Lo Lhlnk LhaL he had Lhe auLhorlLy Sam
had also been compensaLed by Lhe church before 1here would llkely be
apparenL auLhorlLy as well
e uweck v Nosset
l nasser hlres an aLLy Lo help hlm wlLh a case Pe also has a frlend ShlbboleLh
who ls an aLLy and who nasser has worked wlLh ln Lhe pasL ShlbboleLh seLLles
Lhe case on nasser's behalf uld he have auLhorlLy Lo slnce he wasn'L Lhe aLLy of
record?
ll AcLual CreaLed by a manlfesLaLlon Lo an agenL LhaL as reasonably undersLood
by Lhe agenL expresses Lhe prlnclpals assenL LhaL Lhe agenL Lake acLlon on Lhe
prlnclpals behalf ShlboleLh had seLLled oLher cases on behalf of nasser nasser
also Lold hlm Lo do whaL he wanLs and whaL he undersLands nasser Lold
ShlboleLh and Peyman LhaL he would slgn whaLever seLLlemenL Lhey came up
wlLh ?es Lhere was acLual auLhorlLy
lll ApparenL ApparenL auLhorlLy resLs on wheLher Lhe 3rd parLy reasonably
belleves Lhe agenL has Lhe auLhorlLy Lo acL and Lhls bellef ls based on
manlfesLaLlons made by Lhe prlnclpal nasser Lold people assoclaLed wlLh uweck
LhaL he would slgn any agreemenL LhaL ShlboleLh Lold hlm Lo 1hls goL back Lo
uweck so Lhere ls apparenL auLhorlLy Loo
f leosloq v mpex
4

l !oyce buys memory Lhrough a conLracL wlLh Ampex rep kays
ll lor acLual auLhorlLy lL doesnL maLLer whaL Lhe 3rd parLy !oyce Lhlnks whaL
maLLers ls whaL Lhe agenL kays reasonably undersLands Pe doesnL have acLual
auLhorlLy because salesmen knew LhaL Lhey dldnL have Lhe auLhorlLy Lo enLer ln
Lo Lhese Lypes of LransacLlons Pe couldnL have reasonably LhoughL LhaL he
could do Lhls
lll 1here ls apparenL auLhorlLy kays ls a salesman for Ampex mosL salespeople
have Lhe auLhorlLy Lo blnd employers Lo sell Also Lhere was a memo LhaL wenL
ouL wlLhln Ampex LhaL sald kays would be Lhe only Ampex employee who would
deal wlLh !oyce
g When an agenL enLers lnLo a k wlLhouL auLhorlLy Lhe agenL can be held responslble
1he problem ls LhaL agenLs usually donL have a Lon of money and are Lyplcally
[udgmenLproof
h LsLoppel of an undlsclosed rlnclpal
l Jotteoo v leowlck
1 Pumble owner bar and sold lL Lo WaLLeau Pumble sLlll acLed as
manager of Lhe bar and hls name was on Lhe door Pumble had
auLhorlLy Lo buy some supplles for Lhe bar buL he boughL more Lhan he
was permlLLed Lo
2 1here was no acLual auLhorlLy W Lold P noL Lo buy
3 ApparenL auLhorlLy requlres some sorL of manlfesLaLlon on Lhe parL of
Lhe prlnclpal Pere Lhe prlnclpal was undlsclosed so Lhere was no
manlfesLaLlon When someone doesnL do someLhlng Lhere are many
more meanlngs LhaL can be aLLached Lhan lf Lhere were an express
manlfesLaLlon
4 8sL 206 applles here CourL doesn'L use Lhe 8sL and says W loses
because of pollcy conslderaLlons W could avold Lhe loss Lhe cheapesL
and W has recourse by sulng P
l 8aLlflcaLlon
l kst 3
rd
401 kat|f|cat|on |s the aff|rmance of a pr|or act done by another
whereby the act |s g|ven effect as |f done by an A act|ng w|th actua| author|ty
ll AfflrmaLlon can be express or lmplled musL know/have reason Lo know all
Lhe maLerlal facLs
lll ottlcello v 5tefooovlcz
1 Mary and WalLer own properLy as LenanLs ln common WalLer leases
Lhe properLy Lo 8oLLlcello wlLh an opLlon Lo buy Mary Lells WalLer LhaL
she doesnL wanL Lo sell buL LhaL she would sell for no less Lhan $83
1hey proceed wlLh Lhe lease and Mary accepLs lease paymenLs When
8oLLlcello Lrles Lo exerclse Lhe opLlon Lo buy Lhere ls Lrouble
2 M knew Lhere was a renLal agreemenL LhaL she dldnL slgn Powever
she dldnL necessarlly know abouL Lhe opLlon Lo buy She llkely raLlfled
3

Lhe lease agreemenL buL she doesnL know nor has any reason Lo know
abouL Lhe opLlon Lo buy
3 8 should have checked Lhe LlLle and can now probably sue W
[ LsLoppel
l 2 meLhods of showlng esLoppel under Lhe 8sL
1 kst 2
nd

a has to show that the pr|nc|pa| created through |ntent|ona|
or neg||gent words acts or om|ss|ons the appearance of
author|ty
b has to reasonab|y and |n good fa|th re|y on the appearance
of author|ty
c has to mater|a||y change the|r pos|t|on
2 kst 3
rd

a If the 3rd party |s [ust|f|ab|y |nduced to make a detr|menta|
change |n pos|t|on because the transact|on was be||eved to be
on the pr|nc|pa|s account and |n the pr|nc|pa| |ntent|ona||y or
care|ess|y created that be||ef the pr|nc|pa| |s estopped
ll noJJesoo v koos tos
1 wenL Lo furnlLure sLore Lo buy furnlLure Pe Lalked Lo someone ln Lhe
sLore and boughL Lhe furnlLure 1he person dldnL work Lhere Pe dldnL
geL a recelpL u refused Lo dellver Lhe furnlLure
2 1here was no acLual auLhorlLy person dldn'L work for Lhe sLore 1here
was also no apparenL auLhorlLy because Lhere was no manlfesLaLlon by
u LhaL would suggesL Lhe person had auLhorlLy 1here lsnL really
conducL here lLs noL dolng someLhlng lLs hard Lo Lurn noL dolng
someLhlng lnLo a manlfesLaLlon under Lhe esLoppel Lheory Lhough u
ls llable
6 AgenL llablllLy on a ConLracL
a MosL Llmes 3rd parLles can usually sue Lhe agenL lf Lhe prlnclpal ls found noL Lo be
llable
b tlootlc 5olmoo v cottoo
l Curran boughL seafood from 2 companles Pe Lold Lhem he was a
represenLaLlve of a company LhaL dldnL exlsL 1he suppllers llkely would have
LhoughL LhaL Curran was a represenLaLlve of Lhls company
ll CourL says lf an agenL doesn'L dlsclose Lhe prlnclpal Lhey can be personally
llable on Lhe k
lll If there |s a part|a||y d|sc|osed or und|sc|osed pr|nc|pa| the agent |s treated as
|f they are a party to the k 1he 3
rd
arty has the cho|ce of su|ng e|ther the
agent or a subsequent|y d|scovered pr|nc|pa| (can't sue both)
lv If there |s a d|sc|osed pr|nc|pa| the agent |s typ|ca||y not ||ab|e 1here are 2
except|ons to th|s
1 1he part|es |ntend the agent to be bound
6

2 1he agent made the contract w|thout author|ty
LlablllLy of rlnclpal ln 1orL
a kst 2
nd
219 A master |s sub[ect to ||ab|||ty for the torts of h|s servants wh||e act|ng |n
the scope of the|r emp|oyment
b kst 3
rd
204 An emp|oyer |s sub[ect to ||ab|||ty for torts comm|tted by emp|oyees
wh||e act|ng w|th|n the scope of the|r emp|oyment
c SLULNCL ICk ANAL2ING 1Ck1 LIA8ILI1
l IS 1nLkL AN AGLNC kLLA1ICNSnI?
ll IS 1nL AGLN1 A SLkVAN1 Ck AN INDLLNDLN1 CCN1kAC1Ck?
lll II SLkVAN1 WAS 1nL CCNDUC1 WI1nIN 1nL SCCL CI LMLCMLN1?
lv II IC IS 1nLkL AN LkCL1ICN 1nA1 WCULD LS1A8LISn LIA8ILI1?
d 1ermlnology
l Archalc ServanL or lndependenL ConLracLor
ll Modern Lmployee or nonServanL AgenL
lll 8sL 3
rd
Lmployee or nonLmployee AgenL
e lf ln Lhe flrsL column above Lhe wlll be llable lf Lhe negllgence was ln Lhe scope of
employmenL lf ln Lhe second column s wlll noL be llable excepL ln speclal cases
f nomble/5oo cases
l Cll companles are prlnclpal lranchlsee CperaLors are agenLs Local employees
(acLual LorLfeasors) are subagenLs ln each case Lhere ls a gas sLaLlon wlLh
many Lles Lo an oll company 1he sues all people lncludlng oll company Cll
companles say LhaL Lhey shouldnL be llable because Lhe franchlsees are
lndependenL conLracLors
ll kst 2nd 220 An agent who w|th respect to the phys|ca| conduct |n the
performance of the serv|ces |s sub[ect to the pr|nc|pa|s contro| or r|ght to
contro| |s a servant
lll kst 3rd 707 (f) An agent |s an emp|oyee on|y when the pr|nc|pa| contro|s or
has the r|ght to contro| the manner and means through wh|ch the agent
performs work
lv ln Lhe Pumble slLuaLlon Lhe oll company had a greaL deal of conLrol over Lhe
franchlsee ln Sun Lhey dldn'L Lhey leL Lhe sLore make lLs own hours and even
carry oLher producLs CourLs wlll ofLen use a rlskreward meLhod for ldenLlfylng
an lC lf allowed Lo Lake more rlsks for Lhelr own beneflL (or Lhe franchlsee
Lakes on more flnanclal responslblllLy) a franchlsee wlll be an lC
g ,otpby v nollJoy loo
l fell down aL a moLel 1he moLel was owned by 8eLsyLen MoLor PoLel Corp
Pollday lnn was Lhe franchlsor LhaL lenL Lhelr name Lo 8eLsyLen
ll ConLracL says Lhere ls no agency relaLlonshlp (Lhere ls no acLual auLhorlLy k
says Lhey donL have Lhe power Lo blnd or obllgaLe Lhe oLher) 1hls doesnL
work Lhough you can sLlll be an agenL even lf you dlsclalm lL


lll ?ou can be sub[ecL Lo someones conLrol for Lhe purposes of an agency
relaLlonshlp buL Lhere ls more requlred for Lhe purposes of esLabllshlng a
servanL relaLlonshlp WlLh mosL franchlses Lhere wlll be agency
lv lor Lhe purpose of deLermlnlng wheLher Lhere ls a servanL relaLlonshlp prlnclpal
has Lo have conLrol or rlghL Lo conLrol Lhe meLhods or deLalls of dolng Lhe work
Pere u dldn'L have conLrol over dally malnLenance flx raLes hlre employees
deLermlne wages supervlse rouLlne work dlsclpllne employees seL sLandards
for sklll eLc
h IooJemotk v ,cuooolJs
l Pere Lhe negllgence was noL puLLlng ln a securlLy sysLem Mcuonalds dldnL
requlre a securlLy sysLem so Lhe courL sald Lhe was Lhe franchlsees declslon on
whaL Lo do Lherefore Lhe franchlsee should be llable
ll CourL uses a dlfferenL conLrol LesL conLrol over Lhe lnsLrumenLallLy LhaL caused
Lhe ln[ury 1hls Lype of approach ls becomlng more common buL ls noL Lhe
ma[orlLy approach yeL 1he resulLs are preLLy conslsLenL under elLher approach
Lhough
l ApparenL ServanLs
l kst 2
nd
267 Cne who represents that another |s h|s servant and th|s causes a
3rd party to [ust|f|ab|y re|y on the care or sk||| of the servant the pr|nc|pa| can
be he|d ||ab|e
ll ,lllet v ,cuooolJs
1 3k enLered lnLo franchlse agreemenL w/ Mcuonalds wenL Lo 3ks
Mcuonalds and was hurL by blLlng a sapphlre ln a 8lg Mac Lo make all
sLores look Lhe same and operaLlons unlform Lhls led Lo belleve LhaL
3k was acLually a servanL
2 AuLhorlLy doesnL really facLor ln LorL resumably no prlnclpal granLs
auLhorlLy for agenLs Lo commlL negllgence eople reasonably Lhlnk LhaL
1opCo wlll be llable for Lhe LorL commlLLed ln all resLauranLs (franchlses
and corporaLe owned)
[ Scope of LmploymenL
l CCASL 1nLCkLM G|ven c|ear property r|ghts and no transact|on costs
part|es w||| barga|n together and sett|e the|r d|sagreements by cooperat|on so
that the|r behav|or w||| be econom|ca||y eff|c|ent regard|ess of the |n|t|a|
d|str|but|on of property r|ghts
ll MAICkI1 USLS 1nIS AkCACn kst 2
nd
228 and 229 Conduct has to be
1 Same genera| nature as or |nc|dent to what the servant was
emp|oyed to perform
2 Substant|a||y w|th|n the author|zed t|me and space ||m|ts (frollc/deLour
dlsLlncLlon a deLour ls a Lemporary devlaLlon from work a frollc ls a
Lemporary abandonmenL from work Lhe more llkely Lhe devlaLlon ls
foreseeable Lhe more llkely lL ls a deLour)
3 Mot|vated (at |east |n part) by a purpose to serve the master
8

lll kst 3
rd
707 An emp|oyees act |s not w|th|n the scope of emp|oyment when
|t occurs w|th|n an |ndependent course of conduct not |ntended by the
emp|oyee to serve any purpose of the emp|oyer
lv osbey v u5
1 ran drydock CoasL Cuard had a shlp belng worked on Lhere Cne of
Lhe sallors was drunk and messed wlLh some sLuff causlng loLs of
damage
2 under 8sL 2
nd
lL would noL be wlLhln scope of employmenL Powever
courL creaLes new foreseeablllLy LesL lf some Lype of harm ls
foreseeable lL ls falr Lo hold Lhe prlnclpal llable for Lhelr LorLs Also Lhe
acL has Lo creaLe rlsk dlfferenL Lhan Lhe rlsk aLLendanL on Lhe acLlvlLles
of Lhe communlLy ln general (1esL geLs re[ecLed ln 8sL 3
rd
)
k lnLenLlonal 1orLs
l ,oooloq v Ctlmsley
1 Crlmsley ls a plLcher who hlLs a fan who ls heckllng hlm wlLh a ball
2 If the emp|oyees assau|t was |n response to the s conduct wh|ch was
present|y |nterfer|ng w|th the emp|oyees ab|||ty to perform h|s dut|es
successfu||y then the emp|oyer can be ||ab|e
3 1he 8sL lmposes llablllLy when Lhe acL was noL unexpecLable
l LlablllLy ln 1orL for AcL of lndependenL ConLracLors
l Crd|nar||y pr|nc|pa|s are not ||ab|e for torts comm|tted by |ndependent
contractors Lxcept|ons to th|s ru|e
1 Where the pr|nc|pa| reta|ns contro| over the manner and means of the
work (baslcally agenL ls a servanL)
2 Where the pr|nc|pa| engages an |ncompetent contractor (was Lhe
prlnclpal negllgenL ln hlrlng Lhe lC some sLaLes say LhaL hlrlng a
flnanclally lnsolvenL or lrresponslble lC ls negllgenL mosL sLaLes donL)
3 Where the act|v|ty contracted for const|tutes a nu|sance per se
(lnherenLly dangerous acLlvlLy comblned wlLh negllgence on Lhe parL of
Lhe lC)
4 Nonde|egab|e duty (Lhe acLlvlLy ls so lmporLanL Lhere ls a sLrlcL llablllLy
slLuaLlon and lL canL be delegaLed Lo someone else le landlords canL
delegaLe Lo someone else Lo keep properLy hablLable)
ll ,ojestlc v 1otl
1 arklng auLhorlLy ls prlnclpal demollLlon company ls agenL 1oLl ls an
employee of Lhe demo company 1oLl was negllgenL when demollshlng
a bulldlng desLroylng Lhe nelghborlng bulldlng
2 uemollshlng a bulldlng ls lnherenLly dangerous and lC was negllgenL
Lherefore prlnclpal ls llable
8 llduclary uuLles of AgenLs
a 1here are 2 types of dut|es agents owe to pr|nc|pa|s duty of care and duty of |oya|ty
(|nc|ud|ng duty of good fa|th)
9

b kst 3
rd
808 Duty of Care Sub[ect to any agreement w|th the pr|nc|pa| an agent
has a duty to the pr|nc|pa| to act w|th the care competence and d|||gence norma||y
exerc|sed by agents |n s|m||ar c|rcumstances
l lf Lhe agenL has speclal skllls Lhey mlghL be held Lo a hlgher sLandard ln
accordance wlLh Lhose skllls 1hls applles even when agenLs are acLlng for free
c eoJloq v eqem
l AgenL was a mlllLary offlcer for Lhe 8rlLlsh Army Pe was sLaLloned ln LgypL Cn
Lhe slde he was escorLlng semls Lhrough Calro Lo avold lnspecLlons When he
would rlde on Lhe Lrucks he would wear hls unlform Cov'L sues Lo recover lll
goLLen galns
ll 1here ls enough connecLlon beLween hls poslLlon and hls lllgoLLen galns LhaL
Lhe Crown should be able Lo recover Pe vlolaLed hls duLy of loyalLy Pe only
goL Lhe money only because of Lhe agency relaLlonshlp
lll 1he agent has a duty to act so|e|y for the benef|t of the pr|nc|pa| |n a|| matters
connected w|th h|s agency
lv kst 3
rd
802 A has a duty not to acqu|re a mater|a| benef|t from a th|rd party
|n connect|on w|th transact|ons conducted or other act|ons taken on beha|f of
the or otherw|se through the As use of the As pos|t|on
d Ceoetol otomotlve v 5loqet
l Slnger was Lhe general manager and machlnlsL for CA S was sendlng [obs CA
couldn'L do elsewhere and pockeLed a flnder's fee
ll S had a duLy Lo exerclse good falLh by dlscloslng Lo all Lhe facLs regardlng Lhls
maLLer he should have Lold
e 1owo coootty v Newbetty
l 1own CounLry ls prlnclpal LhaL cleans houses 1hey wenL Lhrough a bunch of
work Lo creaLe a cllenL llsL and were preLLy successful u's were exemployees
of 1C who qulL worklng Lo seL up compeLlng buslness uslng 1C's cllenL llsL
ll 8ecause Lhe lnformaLlon us used was a Lrade secreL Lhe courL was more wllllng
Lo lmpose a flduclary duLy on us even Lhough Lhey were no longer agenLs
8ecause s llsL of cusLomers was noL easlly aLLalnable lL ls a Lrade secreL us
mlsused lL so Lhey should be llable for a breach of flduclary duLy
lll kst 2
nd
Memor|z|ng a ||st |s ok and doesn't breach duty
lv kst 3
rd
Memor|z|ng |s a v|o|at|on of duty
f When you lnvlLe cllenLs Lo leave your employer whlle youre sLlll worklng Lhere you are
almosL always breachlng your flduclary duLy lf you do Lhls afLer you qulL LhaL ls a closer
call
lll arLnershlp
1 Cenerally
10

a arLnershlps are ofLen formed by mlsLake or wlLhouL Lhe advlce of counsel 1here's
really no reason Lo form a parLnershlp now [usL do an LLC
b arLnershlp ls prlmarlly sLaLuLorlly based
l uA (1914) used by lndlana
ll 8uA (199)
c UA 6(1) A partnersh|p |s an assoc|at|on of two or more persons to carry on as co
owners a bus|ness for prof|t
d arLnershlps can be LreaLed as separaLe enLlLles (8uA) or as componenL parLs (uA)
e no Laxes exlsL aL Lhe parLnershlp level only lndlvlduals are Laxed
f LlmlLed llfe depends on Lhe parLners Lhemselves belng allve
g unllmlLed llablllLy lf you are a parLner you have unllmlLed personal llablllLy for Lhe
debLs of Lhe parLnershlp
h nonLransferable parLnershlp lnLeresLs (no llquldlLy)
l LoLs of flexlblllLy
2 Iactors for Determ|n|ng |f artnersh|p Lx|sts
a Intent|on of partners
b k|ght to share |n prof|ts
c Cb||gat|on to share |n |osses
d Cwnersh|p and contro| of property and bus|ness
e Commun|ty of power |n adm|n|strat|on
f Language of agreement
g Conduct of part|es toward 3
rd
part|es
h k|ghts of part|es on d|sso|ut|on
3 leowlck v uoemploymeot compeosotloo commlssloo
a lenwlck owns salon Pe hlred Cheslre as cashler She wanLed a ralse so he gave her
20 of proflLs lnsLead Cov'L ls Lrylng Lo show LhaL Lhere ls no parLnershlp because Lhen
lenwlck would have Lo conLrlbuLe Lo Lhe sLaLe unemploymenL fund
b UA 7(4) kUA 202(c) If there are d|v|s|on of prof|ts there |s a pr|ma fac|e case
for partnersh|p
c ?ou are only parLners lf Lhe underlylng relaLlonshlp ls a parLnershlp 1hey do share
proflLs here buL Lhey donL share losses or conLrol 1he sharlng of proflLs looks more
llke Lhe wages of an employee lf you share ln Lhe losses youre more llkely Lo look llke a
parLner/owner 1he same wlLh conLrol lf you coown a buslness you would llkely have
more conLrol
4 ,ottlo v leytoo
a eyLon erklns and lreeman (l) loan 23 mll ln markeLable securlLles Lo knauLh
nachod kuhne (knk) 8ecelve dlvldend 40 of proflLs (capped) opLlon Lo buy equlLy
and lnspecLlon and veLo rlghLs 1he conLracL sald Lhey could noL lnvesL ln forelgn caplLal
and Lhey Lhen do lf l are parLners Lhey are [olnLly and severally llable for knks
sLuff
b !udge looks aL every facLor and Lhen asks wheLher lL flLs lnLo/ ls conslsLenL wlLh a lender
relaLlonshlp (Pls sLarLlng polnL ls LhaL Lhls ls a lendlng relaLlonshlp and Lhen works
11

everyLhlng ouL SpllLLlng of proflLs was really Lo repay Lhe loan everyLhlng else ls
conslsLenL wlLh a lender/debLor relaLlonshlp
3 arLnershlp by LsLoppel
a Iour e|ements
l Lxpress or |mp||ed ho|d|ng out of a partnersh|p
ll Attr|butab|e to the a||eged partner
lll keasonab|e good fa|th re||ance
lv Detr|menta| change of pos|t|on
6 arLnershlp llduclary uuLles
a ,elobotJ v 5olmoo
l Cerry ls Lhe orlglnal lessor Salmon ls Lhe lessee/coadvenLurer and Melnhard ls
Lhe parLner/coadvenLurer S and M leased land Lo converL lL Lo offlces and
shops When Lhe lease was abouL Lo explre C approached S Lo redevelop Lhe
properLy S leased ln hls lndlvldual capaclLy M argues LhaL Lhe opporLunlLy
belonged Lo Lhe parLnershlp
ll kst 2
nd
387 Un|ess otherw|se agreed an A |s sub[ect to a duty to h|s
pr|nc|pa| to act so|e|y for the benef|t of the pr|nc|pa| |n a|| matters connected
w|th h|s agency
lll kst 3
rd
801 An A has a f|duc|ary duty to act |oya||y for the pr|nc|pa|s benef|t
|n a|| matters connected w|th the agency
lv under Lhls duLy S had Lo dlsclose Lhe opporLunlLy Lo M M geLs 30 of Lhe
proflLs from Lhe new deal
b lettetto v ltometbeos
l ulller owned unS 1rusL whlch owned uC lnc uC lnc was Lhe general
parLner of romeLheus arLners and also 182 L ulller wanLed Lo merge
romeLheus arLners wlLh l LLC anoLher company he owned 1o do Lhls
ulller needed Lo cash ouL Lhe oLher Ls ln romeLheus ulller needed every L
Lo voLe wlLh Lhe ma[orlLy ln favor of Lhe merger u Lrled Lo voLe hls L shares ln
favor of Lhe merger
ll voLlng provlslons were seL ouL ln Lhe parLnershlp agreemenL lL sald Lhe merger
had Lo be approved by a ma[orlLy CourL says Lhls means a ma[orlLy of all
unafflllaLed voLes (Lo cleanse Lhe LalnL of Lhe selflnLeresLed LransacLlon)
lll UA 404(b) Duty of |oya|ty |nc|udes requ|rement that partner refra|n from
dea||ng w|th the partnersh|p |n the conduct or w|nd|ng up of the partnersh|p
bus|ness as or on beha|f of a party hav|ng an |nterest adverse to the
partnersh|p
lv CourL laLer reverses says you only need a ma[orlLy of all unlLs (noL ma[orlLy of
unafflllaLed unlLs) CA Code 13636 noL really Lhe ma[orlLy rule ln mosL
sLaLes
c ,eeboo v 5booqboessy
l M 8 declde Lo leave C and form M8C M 8 dldn'L noLlfy oLher parLners
before Lhey asked oLhers Lo [oln Lhem meL wlLh cllenLs Lo move buslness and
12

denled plans Lo leave flrm LaLer Lhey Lold C Lhey were leavlng buL
lmmedlaLely senL lnvlLaLlon Lo move leLLers Lo oLher cllenLs
ll 1he parLnershlp agreemenL also allowed deparLlng parLners Lo Lake cases as
long as Lhey pay Lhe flrm 1he way Lhey conLacLed cllenLs was lmproper Lhe
leLLer was on Cs leLLerhead Lhey dldnL glve C a falr shoL aL compeLlng
because Lhey senL ouL Lhese leLLers rlghL afLer Lhey gave C noLlce of spllL 1he
leLLer dldnL make lL clear LhaL lL was Lhe cllenLs declslon Lhey dldnL say you
have Lhe opLlon of sLaylng aL C 1hls ls a breach of flduclary duLy
d Culdance when leavlng a parLnershlp
l 1hlngs LhaL are Ck
1 keeplng plans confldenLlal
2 LocaLlng offlce space
3 ConLacLlng cllenLs before you leave Lhe flrm as long as you do lL an
approprlaLe way (canL pre[udlce cllenL old flrm eLc)
4 8emlnd cllenL of rlghL Lo have counsel of own cholce
3 1ake desk flles (personal flles)
6 negoLlaLe merger wlLh anoLher flrm
negoLlaLe wlLh fellow parLners
ll 1hlngs LhaL are borderllne
1 negoLlaLlng wlLh assoclaLes
2 ConLacLlng cllenLs before you announce deparLure (ok ls some sLaLes)
lll 1hlngs you can'L do
1 noL lnform cllenLs of rlghL Lo have counsel of cholce
2 ueny plans when asked
3 1ake cllenLs and flrms flles (noL personal flles)
e lowlls v klqbtlloqet ooJ Ctoy
l Lawlls was a parLner aL kC and sLarLed drlnklng Pe hld lL from hls parLners
unLll 1983 Cnce Lhey found ouL Lhe parLners creaLed an acLlon plan for how he
could come back Pe wenL Lo rehab came back buL laLer relapsed 1he flrm
gave hlm a second chance and creaLed a new acLlon plan and someone Lold hlm
lf he came back he would be resLored Lo full parLnershlp sLaLus Lawlls comes
back
ll Cnce back Lawlls asked for more money 1he flrm lnsLead says LhaL Lhey are
Laklng hls parLnershlp share and plan Lo expel hlm 1he nexL day Lhe flrm Look
all of Lhelr flles from Lawllss offlce Senlor parLners Look a voLe and voLes Lo
expel hlm 1here was a no cause expulslon clause ln Lhe parLnershlp agreemenL
lll 1hese klnds of clauses are ok as long as Lhey are noL manlfesLly unreasonable
uuLy of loyalLy can'L be ellmlnaLed buL lL can be raLcheLed down 1hey only
owed L a duLy Lo pay hlm whaL he was owed under Lhe k
lv kUA 404(b)(1) and 103(b)(3) artnersh|p agreement may not e||m|nate
the duty of |oya|ty but may |dent|fy types of act|v|t|es that do not v|o|ate the
duty of |oya|ty |f not man|fest|y unreasonab|e
13

arLnershlp roperLy
a lndlvldual parLners don'L own parLnershlp properLy Lhe parLnershlp does
b roperLy can'L be used for personal purposes
c lotoom v 5boof
l pays $21k Lo Lhe parLnershlp so Shoaf wlll buy her 30 parLnershlp lnLeresL
(she pays because she wanLs Lo geL ouL of Lhe parLnershlp llablllLy) LaLer Shoaf
flnds ouL LhaL Lhe bookkeeper was sLeallng money 1hey sue and geL a
[udgmenL agalnsL Lhe bookkeeper
ll CourL says Shoaf should geL Lhe money from Lhe [udgmenL slgned over
everyLhlng Lhe parLnershlp owned Shoaf geLs lL lL doesnL maLLer LhaL Lhe
clalm wasnL llsLed on her conLracL for sale of Lhe parLnershlp lnLeresL lL was sLlll
parLnershlp properLy artnersh|p |s treated as an ent|ty that ho|ds property
not |nd|v|dua|s
lll arLner has a rlghL Lo lLs share of whaL Lhe asseLs produce you can Lransfer
your rlghL Lo recelve proflLs and remaln a parLner ?ou canL Lransfer
parLnershlp asseLs however
8 arLnershlp ManagemenL
a uefaulL voLlng each parLner geLs an equal voLe
b UA 9(1) kUA 301(1) Lvery partner |s an agent of the partnersh|p for the
purpose of |ts bus|ness and the act of every partner for apparent|y carry|ng on |n the
usua| way the bus|ness of the partnersh|p of wh|ch he |s a member b|nds the
partnersh|p un|ess the partner had no author|ty and the 3rd party knew th|s
c Notloool lscolt v 5ttooJ
l SLroud Lells nablsco LhaL Lhey donL wanL Lo order more bread lreeman orders
more bread 1he parLnershlp doesnL pay so nablsco sues SLroud 8ecause hes
a parLner he can be personally llable for parLnershlp debLs
ll lreeman was acLlng ln Lhe ordlnary course of buslness for Lhe parLnershlp and
Lo Lake away Lhls auLhorlLy you need a ma[orlLy voLe 1helr parLnershlp was
30/30 so he had acLual auLhorlLy
d 5ommets v uooley
l arLnershlp sLarLs a Lrash collecLlon buslness Summers hlres anoLher employee
and bllls Lhe parLnershlp for Lhe cosL Summers dldnL have Lhe ma[orlLy voLe Lo
hlre an employee uooley expllclLly ob[ecLed Lo hlrlng someone else
ll 1he dlfference here ls LhaL uooley ob[ecLed ln Lhe nablsco case Lhe naLural
sLaLe was LhaL parLners had Lhe auLhorlLy Lo order bread ln Lhls case Lhe
naLural poslLlon of Lhe parLnershlp was LhaL Lhey donL hlre employees
lll 1he parLnershlp ls Lhe prlnclpal Lhe prlnclpal dldnL glve express permlsslon Lo
hlre an employee no acLual auLhorlLy ApparenL auLhorlLy? robably Lhe
parLnershlp made Summers a parLner Lyplcally parLners have Lhe auLhorlLy Lo
hlre lL depends on whaL a reasonable person would belleve
9 arLnershlp ulssoluLlon
14

a When a parLnershlp dlssolves Lhere ls a wlndlng up perlod all rlghLs and obllgaLlons
of parLnershlp are resolved
b 8uA uses Lhe word dlsassoclaLlon for Lhe sLaLe where a parLner ceases Lo be a
parLner buL Lhe parLnershlp ls noL wound up yeL (lf a wlndlng up ls requlred) AfLer Lhe
wlndlng up (lf necessary) Lhe parLnershlp ls LermlnaLed
c ulssoluLlon ls posslble by
l AcL of one or more parLners
ll Lnd of Lerm or underLaklng
lll CperaLlon of law (lf a parLner dles or goes lnsane)
lv CourL order
v UA 3132 kUA 801
d weo v cobeo
l arLners [oln Lo operaLe bowllng alley Cwen puLs up Lhe cash Lo be repald ouL
of Lhe buslness proflLs Cohen was sLeallng wanLed Lo puL ln a gambllng room
eLc C sues Lo dlssolve
ll UA 31(1)(b) D|sso|ut|on |s caused by the express w||| of any partner when
no def|n|te term or part|cu|ar undertak|ng |s spec|f|ed
lll 1he lmplled Lerm ls unLll Lhe loan ls pald back When someone loans money Lo
Lhe parLnershlp lL ls lmplled LhaL Lhe parLnershlp wlll exlsL unLll LhaL parLner ls
pald back
lv Lemon rob|em Lhe parLles who know Lhe mosL abouL Lhe buslness should be
wllllng Lo pay Lhe mosL for Lhe buslness 1he owners of Lhe buslness are ln a
beLLer place Lo pay full value Lhus you almosL always see a former owner
buylng Lhe buslness ln Lhese Lypes of sales
v 1he courL orders Lhe dlssoluLlon because Lhere were many small Lhlngs LhaL
when aggregaLed make lL lmpracLlcable Lo keep Lhe buslness runnlng as ls
e colllos v lewls
l arLners for a cafeLerla Colllns ls golng Lo pay $ Lewls ls Lhe
manager/operaLor Crlglnally Lhe cafeLerla was only golng Lo cosL $300k lL
ended up cosLlng a loL more so Colllns dldnL wanL Lo puL up any more money
C sues Lo dlssolve
ll 1yp|ca||y courts on|y d|sso|ved when
1 UA 32 partner |s |unat|c
2 artner cant perform the|r part of the partnersh|p contract (Iury
found Lew|s was competent to manage the bus|ness)
3 W|||fu||y breaches the partnersh|p agreement
4 8us|ness of partnersh|p can on|y be carr|ed on at a |oss (the [ury sa|d
there wou|d be |osses but that |t was Co|||ns fau|t so the court d|dnt
d|sso|ve)
3 Cther c|rcumstances render d|sso|ut|on equ|tab|e
f Consequences of ulssoluLlon
13

l ulssoluLlon lsnL Lhe same as golng ouL of buslness AfLer Lhe dlssoluLlon you
have wlndlngup perlod where whaL happens Lo Lhe buslness ls deLermlned
ll lf someone dlssolves Lhe parLnershlp Lhe parLners auLhorlLy ls llmlLed Lo Lhose
acLs assoclaLed wlLh wlndlng up
g lteotlss v 5beffel
l S and l own 423 of buslness owns 13 S and l donL llke how has
conducLed buslness and dldnL conLrlbuLe hls share Lo losses CourL orders
dlssoluLlon and sale of Lhe buslness S and l buy Lhe buslness aL Lhe courL sale
ob[ecLs because Lheyre baslcally buylng lL from Lhemselves and don'L have Lo
conLrlbuLe much new money
ll lf Lhey canL bld Lhere mlghL be more lncenLlve Lo negoLlaLe wlLh Lhe ousLed
parLner (buL Lhe ousLed parLner would have a loL of leverage) 1herefore oLher
parLners are allowed Lo bld ln Lhe sale
h lov5ovet v Iosso
l uale owner avSaver Meersman owned vasso vasso and avSaver were
parLners ln avSaver ManufacLurlng avSaver conLrlbuLes paLenLs vasso
provldes money AfLer several years of operaLlon uale geLs slck of Lhe
parLnershlp has hls lawyer send a leLLer Lo LermlnaLe Lhe parLnershlp
ll 1he A says LhaL Lhe parLnershlp ls Lo be permanenL Powever lL also provlded
LhaL lf one parLy dlssolves Lhe dlssolvlng parLy has Lo pay Lhe oLher parLy
damages
lll UA 38(2) When d|sso|ut|on |s caused |n contravent|on of the partnersh|p
agreement
1 Lach |nnocent partner sha|| have the r|ght aga|nst each gu||ty partner
to damages for breach
2 Innocent partners may cont|nue the bus|ness dur|ng the agreed term
and for that purpose may possess the partnersh|p property |f they pay
the gu||ty partner the va|ue of h|s |nterest and |ndemn|fy h|m
3 Gu||ty partner gets |f the bus|ness |s cont|nues to have the va|ue of
h|s |nterest |n the partnersh|p |ess any damages In ascerta|n|ng the
va|ue of the partners |nterest the va|ue of the goodw||| of the
bus|ness sha|| not be cons|dered
lv kUA has a d|fferent ru|e |t |nc|udes goodw|||
v aLenLs are consldered goodwlll so uale doesnL geL compensaLed for Lhem
10 Sharlng of losses
a kUA 401 dea|s w|th cap|ta| accounts (a runn|ng ba|ance of each partner's equ|ty)
ou take |n|t|a| contr|but|on then sp||t prof|ts or |osses equa||y the draws to partners
equa||y (Lveryth|ng |s done equa||y |osses and draws reduce cap|ta| accounts prof|ts
|ncrease them)
b kovoclk v eeJ
l roflLs 30/30 and no salarles 1hls courL says when Lhere ls a loss of money a
parLy who only puL ln servlces doesnL have Lo pay 1hls ls a mlnorlLy rule
16

ll 1he sLaLuLe LreaLs lL dlfferenLly work doesnL equal money 1yplcally loses are
spllL along Lhe same llnes as proflLs would be
11 8uyouL AgreemenL
a C5 lovestmeot v elmoo
l 2 Cs 1 L (nordale) run an aparLmenL complex nordale ls a cocalne addlcL
CS sue for dlssoluLlon under uA 38 Whlle Lhe sulL ls happenlng nordale dles
CS Lry Lo exerclse buyouL clause under Lhe uA when one parLy dles Lhe
parLnershlp ls dlssolved
ll nordales esLaLe wanLs Lo avold Lhe buyouL clause 1hls clause sald Lhe buyouL
prlce ls Lhe value of Lhe parLners caplLal accounL plus average of prlor 3 years
earnlngs 1he courL enforces Lhe conLracLs buyouL clause 1hey donL wanL Lo
rewrlLe Lhe k based upon sub[ecLlve noLlons of falrness
lv CorporaLlons
1 ulrecL v uerlvaLlve SulLs
a Shareholders mlghL noL necessarlly have a rlghL Lo sulL A derlvaLlve sulL ls where Lhe
shareholders are sulng Lhe dlrecLors on behalf of Lhe corporaLlon
b Shareholders can usually demand board Lo do cerLaln Lhlngs Lhls ls dlfferenL because
Lhe s/h canL go Lo Lhe dlrecLors and demand Lhey sue Lhemselves
2 CorporaLe lormaLlon
a Shareholders own shares of sLock and elecL board of dlrecLors ln reLurn Lhey geL
resldual proflL creaLed by Lhe corporaLlon
b 1he board of dlrecLors hlres execuLlve offlcers Lo run Lhe day Lo day affalrs of Lhe
corporaLlon
c lf you can easlly obLaln shares ln a company lL ls publlc lf you canL lL ls prlvaLe or
closely held
d CaplLal SLrucLure 1ermlnology
l AuLhorlzed shares ln Lhe companys arLlcles of lncorporaLlon a max LoLal
number of shares LhaL can be lssued ls llsLed
ll CuLsLandlng shares Lhe shares LhaL have acLually been lssued
lll AuLhorlzed buL unlssued shares
lv 1reasury shares ouLsLandlng shares LhaL are held by Lhe company Shares
were lssued buL company boughL Lhem back (Company canL voLe Lhem once
Lhey buy Lhem)
e key aLLrlbuLes of corporaLlons
l SeparaLlon of ownershlp and conLrol
ll llexlble caplLal sLrucLure
lll 1ransferablllLy
lv Legal personallLy corporaLlons are legal people Lhey have rlghLs slmllar Lo
lndlvlduals
1

v LlmlLed llablllLy
f SLeps Lo formaLlon
l urafL ArLlcles of lncorporaLlon
ll llle ACl wlLh SCS
lll urafL bylaws
lv CrganlzaLlonal meeLlng where dlrecLors are named bylaws are adopLed offlcers
are appolnLed
v lssue SLock
g Why uL? uL has beLLer corporaLe law [udges because Lhey have a speclal corporaLe
courL and have experlenced [udges/case law uL ls also preLLy proconLracL uL has no
corporaLe lncome Lax
h 5ootbeto Colf,otloe co
l (and 8arreLL lndlvldually) agreed wlLh CamcrafL Lo purchase boaL Powever
dldn'L exlsL aL Lhe Llme of slgnlng Lhe k noL only dld Lhey noL exlsL Lhey slgned
Lhe k saylng LhaL Lhey were a 1x corp buL Lhey were ln facL laLer lncorporaLed ln
Lhe Cayman lslands
ll A party who dea|s w|th a f|rm as though |ts a corporat|on and re||es on the
f|rm for performance |s estopped from deny|ng the corporat|on ex|sts
Corporat|on by Lstoppe|
l DeIacto Corporat|ons ou treat a bus|ness ||ke a corporat|on even though |t |snt
key here |s that (1) organ|zers have to make a good fa|th effort to |ncorporate A|so
(2) |f they have the ab|||ty to be a corporat|on (have a |ega| r|ght to |ncorporate) and
(3) act ||ke a corporat|on |t w||| be treated |ega||y ||ke a corporat|on
3 LLC lormaLlon
a LlmlLed llablllLy of corporaLlons buL Lax LreaLmenL of parLnershlps
b Jestec v loobom
l Clark conLracLs wlLh WesLec Lo perform englneerlng servlces WesLec provldes
Lhe servlces buL no one pays
ll 1rlal courL flnds LhaL Clark was acLlng as an agenL for Lanham hls boss
1herefore Lanham should be llable Lanham and Clark boLh worked for ll an
LLC WesLec wasn'L on noLlce LhaL ll was an LLC so Lanham can be llable
4 LlmlLed LlablllLy uocLrlne
a Mode| 8us|ness Corporat|ons Act 622(b) Un|ess otherw|se prov|ded |n the art|c|es
Shareho|der |s not persona||y ||ab|e for the acts of debts of the corporat|on except
that she may become persona||y ||ab|e by reason of her own acts or conduct (p|erc|ng
the corporate ve||)
b Jolkovsky v cotltoo
l was hlL by a cab when he Lrled Lo recover he found Lhe company had mlnlmal
lnsurance Pe sued Lhe companys owner u and Lhe oLher 9 cab companles he
owned where he was conLrolllng shareholder
ll Lasy respondeaL superlor clalm agalnsL Lhe 1 cab co also Lrles an enLerprlse
llablllLy Lheory he clalms all 10 small companles form an enLerprlse and he
18

wanLs Lo hold Lhe enLlre enLerprlse llable 1hls lnvolves plerclng Lhe corporaLe
vell Lo reach u Lhen reverse plerclng Lo geL oLher corps
lll When p|erc|ng the ve|| |s a||owed
1 Iraud (there |snt fraud |n th|s case D had the necessary amount of
|nsurance company was organ|zed appropr|ate|y etc)
2 If |ts not equ|tab|e for the shareho|der to escape debts of the bus|ness
lv Where Sn uses contro| of the corporat|on to further h|s own rather than the
corporat|ons bus|ness he w||| be he|d ||ab|e for the corporat|on's acts and
debts on a pr|nc|pa|agent theory
c 5eolooJ v leppet 5ootce
l SL ls an ocean frelghLer S shlps peppers wlLh SL and Lhen reneges on Lhe
frelghL blll SL sues S and Lhen Marchese S owner and several of hls oLher
corporaLlons
ll Court says to p|erce the corporate ve|| a court must f|nd (a) a un|ty of |nterest
and ownersh|p and (b) a s|tuat|on where not p|erc|ng wou|d (|) sanct|on fraud
or (||) promote |n[ust|ce
lll Pow do we deLermlne lf Lhere ls a unlLy of lnLeresL and ownershlp? lour
lacLors (donL need all of Lhem balanclng LesL)
1 Lack of formallLles (meeLlngs mlnuLes elecLlon of dlrecLors resoluLlons
passed by dlrecLors)
2 Commlngllng of asseLs
3 undercaplLallzaLlon (need Lo have enough money based on Lhe rlsk of
Lhe acLlvlLles)
4 Cne corporaLlon LreaLlng asseLs of anoLher corporaLlons as lLs own
lv romoLlng ln[usLlce means more Lhan allowlng a [udgmenL Lo go unpald
[udgmenLs are unpald ln all Cv cases buL less Lhan fraud
d 1he same prlnclple's apply for LLC's
l koycee looJ
1 LLCs can be plerced llke corporaLlons
2 Managers can be reached
3 CorporaLe purpose Shareholder prlmacy/wealLh maxlmlzaLlon vs greaLer communlLy
obllgaLlons
l 5mltb v otlow
1 Corp gave money Lo rlnceLon and shareholders ob[ecLed CourL says
Loo much donaLlon mlghL be lnvalld buL corps are allowed Lo glve Lo
charlLy as long as Lhere ls some beneflL Lo Lhe corporaLlon (can be
Lenuous beneflL)
2 uld Lhe corp beneflL here? Maybe noL a Lon 1here lsnL really
slgnlflcanL dlfference Lhls very aLLenuaLed beneflL ls enough
ll uoJqe v lotJ ,otot
1 Penry lord Look on lnvesLors uodge broLhers own 10 lord owns
38 Penry lord cuL dlvldends Lo form a new planL Lo produce Lhelr
19

own sLeel uodge broLhers wanL Lhe dlvldend Lo sLarL Lhelr own
company
2 CourL says lL was lmproper because lord ran Lhe company as a charlLy
he gave Loo much money Lo charlLy 1he prlorlLy of Lhe corp should be
wlLh shareholders lord LesLlfled Lhe moLlve Lo make money was
lncldenLal
lll 5bleosky v Jtlqley
1 Shlensky ls mlnorlLy shareholder he wanLs nlghL games buL Wrlgley
(80 SP) refuses Lo lnsLall llghLs S says W made Lhls declslon based on
personal vlews and dldnL care whaL effecL Lhe declslon had on Lhe
buslness
2 CourL wonL revlew Lhe declslon absenL a showlng of fraud lllegallLy or
selfdeallng Lhe boards declslon ls flnal and noL sub[ecL Lo revlew by
courLs (Larly verslon of Lhe buslness [udgmenL rule) ueclslon ls for Lhe
board
lv Some hybrld forms exlsL use buslness means Lo advance soclal ends (dlfferenL
Lhan a nonproflL whlch doesnL have equlLy ownershlp)
1 LLLC CharlLable purpose ln charLer Allows rogram 8elaLed
lnvesLmenL you geL publlc subsldles from foundaLlons
2 8eneflL CorporaLlons MulLlple purposes ln charLer
6 uuLy of Care
a SLL lLCW CPA81
b M8CA 830(a) Lach member of the board Sha|| act (1) |n good fa|th and (2) |n a
manner the d|rector reasonab|y be||eves to be |n the best |nterests of the corp
c M8CA 302 Lvery corporat|on has the same power as |nd|v|dua| to do a|| th|ngs
necessary or conven|ent to carry out |ts bus|ness and affa|rs
d komlo v metlcoo xptess
l Amerlcan Lx Cwns shares ln uL! 8oLh are publlcly Lraded Amex wanLed Lo
glve sLock dlvldend ouL of uL! shares lalnLlff wanLed Lhem Lo sell Lhe sLock on
Lhe markeL and keep Lhe cash (LhaL way Lhey could have Lhe caplLal loss Lax
wrlLeoff)
ll M8CA 640 A board of d|rectors may author|ze and the corporat|on may
make d|str|but|ons to |ts shareho|ders sub[ect to restr|ct|on by the art|c|es of
|ncorporat|on
lll 1he dlvldend ls ok no cause of acLlon for a complalnL whlch alleges merely
LhaL some course of acLlon oLher Lhan LhaL pursued by Lhe 8oard would have
been more advanLageous "
e 8us|ness Iudgment ku|e
l 1he court |s not go|ng to overturn board dec|s|ons un|ess there |s a conf||ct of
|nterest (|n wh|ch case duty of |oya|ty |s tr|ggered) fraud |||ega||ty or waste
(someth|ng no reasonab|e bus|nessperson wou|d ever do)
ll 1here |s st||| poss|b|||ty of 102(b)(7) defense
20

lll 1here has to be a dec|s|on made |nact|on w|thout a dec|s|on does not |nvoke
the 8Ik
lv 1he dec|s|on has to be a reasonab|y |nformed dec|s|on
f ltoocls v uolteJ Ietsey ook
l ls LLee ln bankrupLcy sulng dlrecLor of buslness on behalf of Lhe credlLors
ulrecLor ls Lllllan Lllllan's sons Charles and Wllllam were sLeallng money from
Lhe buslness
ll ulrecLor Lyplcally doesn'L owe flduclary duLy Lo credlLors only Lo shareholders
1hls can change ln a slLuaLlon of lnsolvency
lll 's argue LhaL L ls llable because she had a duLy Lo pay aLLenLlon as a dlrecLor
she should have been able Lo see and sLop whaL was happenlng lf she was dolng
whaL she was supposed Lo
lv L dldn'L do anyLhlng here she dldn'L acLually make any declslon Lhere was no
buslness [udgmenL ever belng exerclsed
v If no 8Ik what next? st||| has to prove that there was a v|o|at|on of the duty
of care was a duty owed was there a breach and d|d damage resu|t 1here
was a duLy dlrecLor has duLy Lo shareholders Was Lhere negllgence? L was
Lold her sons were crooks and she dldn'L Lake any sLeps Lo check books
g 5mltb v Ioo Cotkom
l 1o benef|t from 8Ik dec|s|on must be based on a|| reasonab|y ava||ab|e
|nformat|on ln Lhls case Lhe board meL and dlscussed for llke 2 hrs buL Lhey
dldn'L really look and documenLs and dldn'L undersLand Lhe deal Lo sell Lhe
company
ll AfLer Lhls case uL passed 102(b)(7) 1h|s a||ows corps to |nc|ude |n |ts art|c|es
a prov|s|on e||m|nat|ng or ||m|t|ng the persona| ||ab|||ty of d|rector d|rectors
are not ||ab|e for neg||gent or gross|y neg||gent dec|s|ons (Dec|s|ons that are
not made |n good fa|th are not protected under th|s ru|e)
uuLy of LoyalLy
a lnLeresL ulrecLor 1ransacLlons person ls offlcer or dlrecLor of 2 companles LhaL conLracL
wlLh each oLher ?ears ago Lhese ks would auLomaLlcally be vold (ulLra vlres) now
each case ls looked aL lndlvldually
b oyet v etoo
l ureyfus ls CLC and ulrecLor of Celanese ureyfus ls marrled Lo 1ennyson
Celanese conLracLs wlLh 1ennyson Lo do radlo ads for Lhem Shareholders sue
on Lhe Lheory LhaL ureyfus used hls poslLlon Lo beneflL hls wlfe
ll CourL flnds LhaL Lhere ls a CCl so Lhey have Lo go Lhrough a duLy of loyalLy
analysls Cnce has shown Lhere was a CCl lL ls up Lo dlrecLors Lo show LhaL
Lhe LransacLlon was falr Lo Lhe corp
lll us showed LhaL lL was a falr LransacLlon Slnger wasnL pald Loo much eLc lLs
a preLLy facLbased lnqulry 1he besL way Lo clear CCl ls Lo geL all lndependenL
dlrecLors Lo raLlfy
c eolbooo of 1okyo v eolbooo
21

l 8esLauranLs Lhemselves were sLruggllng so Lhe company wanLed Lo re[uvenaLe
Lhem 1hey needed cash for Lhls so Lhey hlred a consulLanL LhaL Lold Lhem Lo
lssue preferred sLock sues because Lhe lssuance of Lhe sLock would dlluLe
Lhelr ownershlp and Lhey would lose conLrol
ll 8enlhana wanLed Lo sell preferred shares Lo a company called 8lC Powever
one of Lhe 8enlhana board members was also 30 owner and negoLlaLor of
8lC Powever before Lhe deal w/ 8lC was approved Lhe board of 8enlhana
goL a loL of lnformaLlon (Abdo presenLed Lhe deal Lo Lhe board) When lL came
Llme Lo voLe Abdo lefL and leL Lhe resL of Lhe board declde
lll DL Gen Corp Law 144 1here |s a safe harbor for conf||ct transact|ons |f the
mater|a| facts of the conf||ct are known and the rest of the board author|zes
the transact|on A|so th|s sect|on g|ves a safe harbor |f the transact|on |s fa|r
(144(a)(3))
lv When board wanLs Lo do a deal Lhey wlll usually go Lo an lnvesLmenL bank and
ask lf lL ls falr 1he bank wlll do a llLLle lnvesLlgaLlon and come back and say lLs
falr 1heyre klnd of a way for Lhe board Lo cover lLself
d CorporaLe CpporLunlLles
l Cfflcer/dlrecLor Lakes for personal galn a buslness venLure LhaL belongs Lo Lhe
flrm (Agency 5loqet arLnershlp ,elobotJ LLC ,ccoooell)
ll toz v cellolot lofotmotloo 5ystems
1 8roz ls sole shareholder and presldenL of 8l8C Pe ls also dlrecLor of
ClS A broker who ls selllng llcenses offers llcense Lo 8roz ln hls personal
capaclLy (he doesnL offer Lo ClS) 8roz Lells ClS abouL Lhe offer and Lhey
say Lhey don'L wanL lL rlCellular ls a compeLlLor also lnLeresLed ln Lhe
llcense rlCellular was ln Lhe process of buylng ClS buL Lhe LransacLlon
hasnL been compleLed yeL
2 1he courL says rlCellular and ClS were compleLely separaLe enLlLles
unLll Lhe buyouL was compleLe lL lsnL necessary for Lhe board of ClS Lo
formally re[ecL Lhe opporLunlLy
3 Court ||sts out factors to see |f a d|rector took a corporate opportun|ty
a 1he corporat|on has to be f|nanc|a||y ab|e
b 1he opportun|ty |s |n the corporat|on's ||ne of bus|ness
c 1he corporat|on has an |nterest or an expectancy |n the
opportun|ty
d Lmbrac|ng the opportun|ty wou|d create a conf||ct between
the d|rectors and the corporat|ons |nterest
lll eoy
1 Coldman worked wlLh e8ay on Lhelr lssuances 1o geL fuLure buslness
Coldman allocaLed lC shares Lo lmporLanL people llke e8ays dlrecLors
lLs baslcally llke glvlng free money Lo Lhe dlrecLors because Lhey sell Lhe
lC shares soon afLer us here spun shares boughL from Coldman s
clalm LhaL Lhls was a corporaLe opporLunlLy
22

2 CourL used Lhe four facLor LesL above and found LhaL Lhls was Laklng a
corporaLe opporLunlLy (e8ay has securlLles porLfollos so Lhey are ln Lhe
buslness of lnvesLlng)
lv ,ccoooell v noot 5potts
1 McConnell and a bunch of companles form an LLC Lo Lry Lo geL an nPL
franchlse Lo Columbus PunL dldnL llke Lhe lease Lerms McConnell dld
llke Lhem and Lold PunL LhaL he wanLed Lo do lL PunL ls sLlll opposed
so McConnell form anoLher LLC CCLPCC Lo geL Lhe Leam PunL sues
2 1he or|g|na| LLCs operat|ng agreement can ||m|t or def|ne the scope of
the f|duc|ary dut|es |mposed on members (|t cant get r|d of dut|es but
|t can ratchet them down) 1he conLracL Lrumps (sub[ecL Lo cerLaln
llmlLaLlons LhaL say you canL ellmlnaLe Lhe duLy of loyalLy buL you can
speclfy Lypes or caLegorles of acLlvlLles LhaL do noL vlolaLe Lhe duLy |f
not man|fest|y unreasonab|e)
3 ConLracL here says LhaL members can compeLe so McConnell dldnL
vlolaLe duLy of loyalLy
8 uuLles of uomlnanL Shareholders
a Ceneral prlnclple Shareholders acLlng as shareholders generally owe each oLher no
flduclary duLles SomeLlmes however ma[orlLy shareholder owe duLles Lo mlnorlLy
shareholders
b 5loclolt v levleo
l Slnclalr owns 9 of Slnven 3 mlnorlLy shareholders complaln LhaL Slnclalr
forced Slnven Lo lssue excesslve dlvldends Slnclalr ls responslble because
Slnclalr conLrolled Slnvens dlrecLors
ll 8!8 applles because mlnorlLy shareholder were LreaLed falrly (Lhey goL Lhe
dlvldends Loo) Ma[orlLy dldnL beneflL Lo Lhe excluslon of Lhe mlnorlLy so 8!8
applles
c obo v 1toosometlco cotp
l 1 was conLrolllng shareholder of A/l 1he reason why we're holdlng 1 llable for
whaL Lhe dlrecLors of A/l dld ls LhaL 1 conLrolled and domlnaLed A/l 's Lhlnk
LhaL Lhey should have goLLen more money for Lhelr shares when A/l was
llquldaLed
ll A/l had Lwo classes of sLock A and 8 A was callable converLlble Lo 8 shares
had a double llquldaLlon preference Lo 8 shares 8 was noL callable or
converLlble 1 owned a bunch of class 8 1he effecL of Lhe caplLal sLrucLure was
LhaL lL would be proflLable for Lhe company Lo call Lhe Class As lf ln llquldaLlon
each Class A share would be enLlLled Lo more Lhan Lhe call prlce
lll 1 was ab|e to redeem before A shareho|ders knew about the pr|ce of the
|nventory and converted the|r shares 1he court th|nks there shou|d have been
redempt|on w|th fu|| d|sc|osure to a||ow the C|ass A ho|ders to convert
9 Curlng ConfllcLs Lhrough Shareholder or ulrecLor voLe
a llleqlet v lowteoce
23

l resldenL Lawrence boughL a properLy ln hls lndlvldual capaclLy L offered Lhe
properLy Lo A buL A sald no so L formed uSAC Lo hold Lhe properLy A couldnL
Lake advanLage of Lhe opporLunlLy aL Lhe Llme buL Lhey were granLed an opLlon
Lo purchase uSAC laLer uSAC develops Lhe properLy LaLer A exerclses Lhelr
opLlon and buys uSAC Shareholders ob[ecL Lo Lhe prlce of Lhe sale of uSAC
ll As board approved Lhe sale Also Lhe sale was approved by ma[orlLy voLe of
shareholders 1he problem was LhaL Lhe lnLeresLed parLles voLed Lhelr shares as
well 1here was a ma[orlLy of shareholders buL u couldn'L show LhaL a ma[orlLy
of dlslnLeresLed shareholders raLlfled Lhe LransacLlon
lll DL Gen Corp Law 144(a)(1) and (2) No k or transact|on between a corp and
1 or more of |ts d|rectors or off|cers sha|| be vo|d or vo|dab|e so|e|y for th|s
reason |f
1 1here |s d|sc|osure and |t |s approved by a ma[or|ty of d|s|nterested
d|rectors
2 1here |s d|sc|osure and |t |s approved by a vote of the shareho|ders
3 1he transact|on |s fa|r
lv 1he rule doesn'L requlre voLe of JlslotetesteJ shareholders buL Lhls ls lmplled
v If there |s |nformed approva| from d|s|nterested shareho|ders on|y the waste
doctr|ne app||es to duty of care c|a|ms
b ulslnLeresLed ulrecLors See DL Gen Corp Law 144(a)(1) and (2)
l 1he prlmary basls upon whlch a dlrecLors lndependence musL be measured ls
wheLher Lhe dlrecLors declslon ls based on Lhe corporaLe merlLs raLher Lhan
exLraneous conslderaLlons or lnfluences
ll An lndependenL dlrecLor ls one who ls noL a company execuLlve doesn'L have
slgnlflcanL commerclal relaLlonshlps wlLh Lhe company doesn'L have close
famlly members who meeL Lhe above and lsn'L domlnaLed or conLrolled by an
lnLeresLed parLy
lll lo te tocle
1 L and oLhers were accused of lnslder Lradlng and Lhe resL of Lhe board
acLed ln bad falLh by falllng Lo monlLor Lhem Shareholders appolnL Lwo
new dlrecLors (speclal llLlgaLlon commlLLee) Lo deLermlne lf Lhe
corporaLlon should sue Lhe oLher members of Lhe board
2 CourL flnds a number of Lles beLween Lhe old dlrecLors and Lhe new
ones 1hey show LhaL L and oLher old board members glve a loL of
money Lo SLanford where Lhe new dlrecLors work CourL says LhaL Lhe
Lles are Loo much for Lhe new dlrecLors Lo make an unblased
recommendaLlon 1he new dlrecLors arenL lndependenL
lv eom v 5tewott
1 SLewarL ls ma[orlLy shareholder ln MSC 8eam ls anoLher shareholder
SLewarL sold lmclone sLock before release of lnfo (lnslder Lradlng)
8ecause SLewarL ls ln [all MSC wlll be worLh less so 8eam sues and says
LhaL Lhe board should have supervlsed beLLer 8Cu was made up of
24

SLewarL resldenL of MSC (Lhese Lwo noL lndependenL) argues 2
oLher dlrecLors have personal relaLlonshlps wlLh SLewarL and also LhaL
all oLhers may face personal llablllLy and lose perks of board servlce
2 Court says there |snt enough to render d|rectors not |ndependent
Ir|endsh|ps dont usua||y r|se to the |eve| of be|ng b|asproduc|ng A
much stronger re|at|onsh|p wou|d be necessary keputat|ona| |nterest
w||| be enough to keep d|rectors unb|ased
10 Cood lalLh
a uuLy of Cood lalLh ls lncluded ln uuLy of LoyalLy
b 5tooe v lttet
l Changes ff c|a|ms used when the d|rector hasnt done someth|ng
that they shou|d have done Pere Lhe cotemotk clalm ls LhaL Lhe dlrecLors
havenL done enough ln seLLlng up compllance or anLlmoney launderlng
programs ln 2004 AmSouLh pald $30m ln flnes and penalLles for vlolaLlon of
AML laws (Lhey dldnL reporL susplclous LransacLlons)
ll 1wo prevlous ways Lo deLermlne lf board should have done someLhlng
1 Ctobom says you donL have Lo seLup a program unless you have cause
for susplclon 1hls ls Lhe old common law rule 1hls ls klnd of llke Lhe
old dog blLe rule from LorLs you arenL llable for a dog blLe unless you
are on noLlce LhaL your dog has a propenslLy Lo blLe (has blLLen before
or ls a vlclous breed)
2 Caremark says all buslness should have some reporLlng sysLems or
conLrols lf you have lmplemenLed a sysLem you can also fall Lo
monlLor or oversee lLs operaLlons ln boLh cases you have Lo show LhaL
Lhe dlrecLors knew LhaL Lhey were noL dlscharglng Lhelr flduclary
obllgaLlons
lll uuLy of good falLh falls under Lhe duLy of loyalLy lallure Lo lmplemenL a sysLem
(Caremark clalm) ls a duLy of loyalLy clalm 8!8 doesnL apply
lv What k|nds of act|ons take you out of duty of care and |nto duty of |oya|ty?
Where d|rector |ntent|ona||y acts w|th a purpose other than that of advanc|ng
the best |nterests of the corporat|on where d|rector acts w|th the |ntent to
v|o|ate app||cab|e pos|t|ve |aw where d|rector |ntent|ona||y fa||s to act |n the
face of a known duty to act
v u's had a sysLem ln place Lherefore Lhere wasn'L a breach of flduclary duLy
v SecurlLles lssues
1 1he 1933 acL ls a LransacLlon dlsclosure acL lL doesnL maLLer abouL Lhe quallLy of Lhe securlLy
[usL LhaL lssuers dlsclose enough abouL Lhe securlLles and Lhe relaLed rlsk facLors Lo lnvesLors ln
pracLlce Lhe SLC and lssuers negoLlaLe on whaL wlll be dlsclosed ?ou have Lo ask ls Lhere a
securlLy and lf Lhere ls ls lL reglsLered
23

2 1he 1934 acL deals wlLh secondary markeLs and exchanges
3 urposes of led securlLles laws full dlsclosure prevenL fraud lraud ls undersLood broadly
you donL need sclenLer lLs more llke sLrlcL llablllLy
4 WhaL ConsLlLuLes a SecurlLy?
a oblosoo v Clyoo
l lnvesLs ln Ceophone an LLC ln LelecommunlcaLlons flled a securlLles fraud
acLlon clalmlng mlsrepresenLaLlons he says Lhey Lold hlm Lhey were LesLlng
new Lechnology buL dldnL acLually LesL lL
ll s clalm here ls for securlLles fraud (lL ls easler Lo prove securlLles fraud because
you donL need sclenLer or rellance) 1he crux of Lhe oplnlon ls wheLher or noL
Lhe LLC lnLeresL he boughL were securlLles 1he LLC lnLeresL can elLher be an
lnvesLmenL conLracL or sLock
lll Investment Contract Use test
1 Investment of money (or cons|derat|on)
2 Common enterpr|se (measur|ng re|at|onsh|p of |nvestor w|th other
|nvestors there has to be some sort of poo||ng or co||aborat|on)
3 Lxpectat|on of prof|t
4 So|e|y from the efforts of others (so|e|y doesnt mean so|e|y |t
means |arge|y from or s|gn|f|cant|y from)
lv lL's noL an lnvesLmenL conLracL here because exerclsed Loo much conLrol
v CourL also says lLs noL a sLock ln some of Lhe documenLs Lhe LLC lnLeresL ls
called a sLock name or lnLenLlon doesnL govern Lhe acLually subsLance and
characLerlsLlcs do 1he LLC |nterest here doesnt have the usua| character|st|cs
of stock rof|ts werent shared |n proport|on to ownersh|p |nterest and
Interests werent free|y negot|ab|e]transferrab|e
b Cenerally parLners have conLrol rlghLs maklng parLnershlp lnLeresLs noL an lnvesLmenL
conLracL 1here can be uncerLalnLy lf Lhe parLnershlp rlghLs are modlfled by conLracL lf
all Lhe conLrol rlghLs are conLracLed away lL mlghL be a securlLy 1here ls a clrculL spllL
on Lhls quesLlon 3rd clrculL says all parLnershlp lnLeresLs are noL securlLles 3Lh clrculL
says Lhere may be a securlLy lf Lhe k deprlves parLner of conLrol rlghLs lnvesLor ls
dependenL on oLhers lnvesLor has no buslness knowledge eLc 10Lh clrculL says only lf k
deprlves conLrol rlghLs wlll lL be a securlLy
3 WhaL lssues have Lo be reglsLered?
a rlvaLe placemenLs are exempL from reglsLraLlon (SecurlLles AcL 4(2) Lhe provlslons of
secLlon 3 shall noL apply Lo LransacLlons by an lssuer noL lnvolvlng any publlc offerlng)
b uotoo v lettoleom ,oooqemeot cotp
l eLrol Co forms an L Lo drlll for oll Cnly buys lnLeresL laLer sues for
resclsslon of Lhe k so LhaL he canL be personally llable for debL lncurred by Lhe
L L says LhaL Lhe k was a prlvaLe offerlng and should noL be resclnded
ll Ior |t to be a pr|vate offer|ng courts w||| cons|der the fo||ow|ng
1 Number of offerees and re|at|onsh|p to |ssuer (not actua| buyers but
peop|e who |t |s offered to you want a |ow number and c|ose
26

re|at|onsh|p to be a pr|vate offer|ng 2S |s typ|ca||y the mag|c number
more than that |t |s pub||c 1he re|at|onsh|p can a|so |nd|cate
|nformat|on there has to be enough |nformat|on ava||ab|e to the
offerees that wou|d be the equ|va|ent of the |nformat|on that wou|d
be conta|ned |n a prospectus)
2 Number of un|ts offered
3 S|ze of the offer|ng |n do||ars
4 Manner of the offer|ng (|f there was a pub||c announcement]how the
|nvestment was offered]advert|sed etc If |t |s advert|sed pub||c|y |t
|s a pub||c offer|ng)
vl ConLrol ln Closely Peld CorporaLlons
1 A closely held corporaLlon ls one ln whlch Lhe sLock ls held ln a few hands and whereln lL ls noL
aL all or only rarely dealL ln by buylng or selllng
2 When you lnvesL ln a close corporaLlon you expecL Lo have some conLrol and you are llkely Lo
be lnvolved ln Lhe buslness lLself ln Lhe corporaLe form shareholders donL run company
Shareholders elecL dlrecLors Lhen dlrecLors run company
3 Under cumu|at|ve vot|ng (you vote a|| your shares across a|| e|ect|ons) how many votes do you
need to guarantee e|ect|on? Lach shareho|ders # of votes vacanc|es x shares owned Votes
to guarantee e|ect|on has to be greater than the tota| number of votes d|v|ded by (the number
of d|rectors + 1)
4 loqlloq tos v loqlloq
a 8lngllng and Paley had a wrlLLen agreemenL under whlch Lhey were Lo voLe LogeLher lf
Lhere was a deadlock lL was supposed Lo go Lo arblLraLlon 1he arblLraLlon would be
blndlng and each was Lo voLe Lhelr shares accordlngly
b 1hey can'L agree so lL goes Lo arblLraLlon ArblLraLor says P should have voLed her
shares as per Lhe voLlng agreemenL CourL says lL ls a valld agreemenL buL lL ls noL self
enforclng 1he courL [usL volds Ps voLes lnsLead of maklng Lhem voLe a way Lhey donL
wanL Lo Shareho|der agreements where part|es agree to act as shareho|ders are
va||d
c 1hey should have drafLed Lhe arblLraLlon agreemenL so LhaL lL glves Lhe arblLraLor
lrrevocable power Lo voLe Lhe shares accordlng Lo Lhe resulL of Lhe arblLraLlon (granL
lrrevocable proxy Lo arblLraLor)
3 ,cOooJe v 5tooebom
a S was ma[orlLy shareholder of n? ClanLs Pe and 2 oLher dlrecLors agreed LhaL Lhey
would voLe for each oLher as dlrecLors AgreemenL also sald LhaL all 3 would be offlcers
of Lhe corporaLlon and malnLaln Lhelr salarles AgreemenL does 2 Lhlngs lL says whaL
Lhey wlll do as shareholders and whaL Lhey wlll do as dlrecLors (dlrecLors appolnL Lhe
offlcers)
2

b Court says that the agreement cant be to e|ect off|cers |t can on|y be to e|ect
d|rectors s|nce they are shareho|ders 1he courL wonL enforce resLrlcLlons on Lhe
dlrecLors dlscreLlon 1he dlrecLors dlscreLlon has Lo be preserved agalnsL lnLruslons
6 clotk v uoJqe
a Cnly 2 shareholders Clark owns 23 and u owns 3 AgreemenL beLween Lhe Lwo
where C geLs Lo sLay on as CM C geLs Lo sLay on as long as he ls falLhful efflclenL and
compeLenL
b 1heres no other m|nor|ty shareho|ders so theres no potent|a| for harm to other
peop|e the k shou|d be uphe|d If a|| shareho|ders agree the k w||| be enforceab|e
1he corp lsn'L harmed because C has Lo sLay falLhful efflclenL and compeLenL (1hls
mlghL noL necessarlly be Lrue lf for lnsLance Lhe corp could geL someone Lo do Lhe same
[ob for less money)
Collet v Collet
a 8roLhers 8 and l are parL owners of buslness Lach owns 30 Lach Lransfer a small
porLlon Lo a Lhlrd parLy AfLer each owned 43 8 and l enLer agreemenL Lo proLecL
Lhelr famllles each famlly geLs 2 board seaLs mandaLory dlvldends mandaLory deaLh
beneflLs
b under ,cOooJe Lhe agreemenL wouldnL be valld a couple of Lhls Lhlngs are dlrecLor
dlscreLlon also Lhere are mlnorlLy shareholders LhaL mlghL be harmed under clotk Lhe
agreemenL wouldnL be enforceable elLher Lhere ls sLlll a mlnorlLy ln Lhls case LhaL
could be harmed Lven Lhough mlnorlLy lsnL Laklng any role here he ls sLlll a mlnorlLy
shareholder lf we lnfrlnge on Lhe auLhorlLy of dlrecLors lL could harm mlnorlLy
shareholders Slnce noL everyone slgned Lhe agreemenL lL wouldnL be enforceable
c 1h|s court says shareho|der agreement are va||d for c|ose|y he|d corps |f terms are
reasonab|e and other shareho|ders dont ob[ect
d CN 1nL IINAL MAkL SUkL 1C USL 8C1n 1nIS S1ANDAkD AND 1nL CLAkk S1ANDAkD
SINCL 1nLkL IS A CIkCUI1 SLI1
8 lf v Ioffotl
a Llf and Malek lnc form and LLC Malek LLC Malek has conLrol buL boLh Llf and Malek
lnc slgn Lhe operaLlng agreemenL on how Lhe LLC wlll be run Llf brlngs derlvaLlve sulL
agalnsL !affarl CperaLlng agreemenL here says LhaL all dlspuLes wlll be sub[ecL Lo
arblLraLlon ln CA Llf doesnL wanL Lo do Lhls so Lhey Lry Lo sue
b LLC sLaLuLes are enabllng (Lhey usually say unless Lhe parLles agree oLherwlse) Lhe
vasL ma[orlLy of rules can be changed by k CourLs are very ln favor of freedom of k
9 Abuse of ConLrol ln Close CorporaLlons
a AL early common law shareholders acLlng as shareholders had no flduclary obllgaLlons
Lo flrm or fellow shareholders (Lhls ls sLlll Lrue for publlcly Lraded corps buL noL close
corporaLlons
b Jllkes v 5ptloqslJe Notsloq nome MA CASL
l 4 shareholders form Lhe Sprlngslde nurslng Pome Lach Look responslblllLy for
a cerLaln aspecL of Lhe buslness 3 shareholders donL llke W 1hey flre hlm and
28

remove hlm as dlrecLor W sues for damages clalmlng Lhe oLher 3 vlolaLed Lhelr
duLy under uoooboe
ll Court comes up w|th test for determ|n|ng |f ma[or|ty shareho|ders v|o|ated
duty to m|nor|ty
1 Ma[or|ty has to show a |eg|t|mate bus|ness ob[ect|ve
2 M|nor|ty can counter by show|ng a |ess harmfu| a|ternat|ve
3 Court can then ba|ance #1 aga|nst the pract|cab|||ty of #2
lll Court tr|es to de||ver what the m|nor|ty reasonab|y expected at the t|me of
|nvestment 8easonable expecLaLlons of an lnvesLor ln a close corp 8eLurn on
lnvesLmenL can be dlvldends or salary greaLer Lhan your falr markeL value
lv Courts w||| |ook for ev|dence of a freeze out uenylng mlnorlLy economlc
beneflLs of share ownershlp or forced sale Lo Lhe ma[orlLy aL a dlscounL
c toJle v IotJoo MA CASL
l 3 owners here each wlLh 1/3 owners 8 lnherlLed her shares from her husband
She dldnL geL anyLhlng yeL dldnL geL dlvldends wasnL dlrecLor and couldnL
geL lnfo She sues Lo be dlrecLor geL flnanclal lnfo or be boughL ouL 1he oLher 2
owners were beneflLLlng one was employed Lhe oLher goL lncome from
properLy he renLed Lo corp
ll Court says you can't force a buyout that's not |n her reasonab|e expectat|on
at the t|me of |nvestment ou have to restore m|nor|ty to the pos|t|on they
shou|d have been |n w|thout freezeout
d DL does someth|ng d|fferent than MA Nlxoo v lockwell ls a uL case LhaL focuses on
freedom of conLracL lL would be lnapproprlaLe [udlclal leglslaLlon Lo fashlon a speclally
creaLed rule for mlnorlLy lnvesLors when Lhere are no negoLlaLed speclal provlslons ln
Lhe charLer bylaws or shareholder agreemenLs 8aslcally uL courLs wonL glve
mlnorlLy shareholders Lhese rlghLs lf Lhey wanL Lhem Lhey should conLracL for Lhem
vll ulssoluLlon of Close CorporaLlons
1 All sLaLes allow shareholders Lo seek lnvolunLary dlssoluLlon Corps can be sold as an ongolng
concern or Lhe asseLs llquldaLed
2 losko llostlcs v coppock
a S C and C own shares ln Lhe corp C geLs dlvorced and has Lo spllL hls shares wlLh hls
exwlfe M S and C own 1/3 each C and M own 1/6 each 1here are no dlvldends buL
each of S C and C geL dlrecLors fees of $3k
b ulrecLors fees are ok buL here Lhere ls a concern LhaL Lhey are consLrucLlve dlvldends a
way of paylng shareholders wlLhouL calllng Lhem dlvldends lf Lhey were called
dlvldends Lhls case would be easy because M lsnL geLLlng whaL she deserved 8ecause
Lhey were called dlrecLors fess lL ls harder she has Lo show LhaL Lhey were akln Lo
dlvldends
29

c CourL says dldnL show grounds Lo order a corporaLe buyouL ln cases llke uoooboe
shareholders werenL geLLlng someLhlng Lhe ma[orlLy was
d Instances where a forced buyout |s a||owed
l 8uyout agreement
ll 8uyout |n ||eu of d|sso|ut|on (klnd of a lesser lncluded powers reasonlng
buyouL ls less severe Lhan dlssoluLlon)
lll Appra|sa|
lv kemedy I|duc|ary 8reach
e CourLs wlll order dlssoluLlon (2
nd
meLhod above) when he acLlon of Lhe dlrecLors were
lllegal oppresslve fraudulenL or when Lhere was a wasLe of corporaLe asseLs 1hese are
preLLy much Lhe same condlLlons as Lhe 8!8 (MosL sLaLes allow dlssoluLlon when Lhere
ls dlrecLor or shareholder deadlock)
3 5topotlcb v notbot lotoltote
a s are slsLers who lnherlLed shares from Lhelr moLher 1helr broLher ls Lhe ma[orlLy
shareholder Corp ls a furnlLure buslness LhaL also owns a Lraller park 1he Lraller park
ls maklng money and Lhe furnlLure buslness ls loslng money s wanL Lo separaLe Lhe
buslnesses Lhe ma[orlLy doesnL
b s seek |nvo|untary d|sso|ut|on by statute th|s |s appropr|ate when necessary to
protect the r|ghts or |nterests of the comp|a|n|ng shareho|ders
c CourL says Lhere ls noL oppresslon Lhey donL meeL Lhe sLandard for lnvolunLary
dlssoluLlon All Lhe s are ob[ecLlng Lo ls LhaL Lhelr broLher has conLrol and Lhey donL
llke hls declslons 1he maln dlfference here beLween Lhls and Alaska lasLlc was LhaL
salarles ln A were excesslve Also no buyouL offer was made here so lL doesnL seem
llke a freezeouL
4 noley v 1olcott
a P 1 own 30 of an LLC 1he LLC ls a real esLaLe holdlng company 1 also owns a
resLauranL where P manages under an employmenL conLracL 1he resLauranL leases
land from Lhe LLC P 1 have a falllng ouL P was supposed Lo recelve 30 of Lhe
proflLs from Lhe resLauranL under Lhe employmenL k Pe doesnL geL anyLhlng 1 flres
hlm
b As far as Lhe LLC P wanLs Lo dlssolve lL because he says Lhey canL carry on buslness
because Lhey donL llke each oLher (LLC ls deadlocked) 1he LLC ls charglng resLauranL
way below markeL renL buL P canL change LhaL because he doesnL have a ma[orlLy
8ecause of Lhe deadlock Lhe sLaLus quo remalns (whlch ls favorable for 1) 1 says LhaL
Lhe deadlock lsnL sufflclenL Lo allow dlssoluLlon because Lhere ls an exlL mechanlsm ln
Lhe LLC AgreemenL
c Powever when Lhere ls lnequlLable conducL courLs wlll sLep ln P can reslgn and geL
ouL of Lhe LLC buL even lf he does LhaL he ls sLlll on Lhe LLCs morLgage he ls sLlll
personally llable for Lhe loan 1hls ls unfalr he shouldnL have Lo guaranLee a loan Lo a
buslness he ls no longer a parL of
30

d Also [udge orders lnvolunLary dlssoluLlon under a corporaLe law sLaLuLe (applles
corporaLe sLaLuLe Lo LLC) 1he LLC dlssoluLlon provlslon ln Lhe k ls really shorL [udge
could say LhaL he ls lnLerpreLlng Lhls by uslng corporaLe law
3 1ransfer of ConLrol
a ltoosJeo v Ieoseo5ooJpolst
l MlnorlLy shareholder l has a couple of clauses ln shareholder agreemenL LhaL
proLecL hls lnLeresL
1 8lghL of 1
sL
refusal lf Lhe ma[orlLy wanLs Lo sell Lhelr sLock Lhey have Lo
offer Lo sell lL Lo mlnorlLy aL Lhe same prlce
2 1ag Along revenLs ma[orlLy from selllng aL a premlum w/o mlnorlLy
geLLlng a plece of Lhe premlum ma[orlLy has Lo buy ouL mlnorlLy lf
selllng aL a premlum
ll Ma[orlLy wanLs Lo sell Lhelr buslness Lo a Lhlrd parLy lssue ls wheLher Lhe rlghL
of flrsL refusal ls Lrlggered by Lhls LransacLlon
lll Court says the r|ght |s on|y tr|ggered on a sa|e |n a merger transact|on shares
are ext|ngu|shed not so|d
b etllo v noosoo
l eLlln owned 2 of Cable lndusLrles A group of shareholders lncludlng Panson
sold Lhelr lnLeresL ln Cable (446 whlch was effecLlve conLrol) Lo anoLher parLy
for $13 per share when Lhe markeL prlce was $38 a share eLlln wanLed Lo be
pald Lhe same prlce as us and Lo share a proporLlonaLe amounL of hls sLock
AbsenL fraud can a conLrolllng shareholder sell conLrol for a premlum prlce?
ll 1hose who |nvest the cap|ta| necessary to acqu|re a dom|nant pos|t|on |n the
ownersh|p of a corporat|on have the r|ght of contro|||ng that corporat|on
Un|ess there |s |oot|ng of corporate assets convers|on of a corporate
opportun|ty fraud or other acts of bad fa|th a contro|||ng stockho|der |s free
to se|| and a purchaser |s free to buy that contro|||ng |nterest at a prem|um
pr|ce
lll AlLhough mlnorlLy shareholders are enLlLled Lo proLecLlon agalnsL such abuse by
conLrolllng shareholders Lhey are noL enLlLled Lo lnhlblL Lhe leglLlmaLe lnLeresLs
of Lhe oLher sLockholders A ma[orlLy lnLeresL can conLrol Lhe affalrs of Lhe
company