Agency
What is an Agent?
An agent is a person who is authorized and agrees to act on behalf of and subject to the control of another (their principal)
What is a general partnership?
“The association of two or more persons to carry on as co-owners a business for profit forms a partnership, whether or not the persons intend to form a partnership.” Revised Uniform Partnership Act 202(a)
What do you call the owners of an LLC?
Members
What is a closely held corporation?
A corporation whose shares are owned by a small number of shareholders and do not have access to the public securities markets (i.e. stock exchanges)
What are Shareholder Agreements?
Shareholder agreements are simply agreements among the shareholders to define the control aspects of the corporation.
The goal of most shareholder agreements is to protect minority shareholders
What are some types of
Agency relationships?
Employer/employee
Lawyer/Client
Broker/Client
Real Estate Agents
Board/Officers &
Shareholders
1. Inadvertent partnerships: they are so simple to form that
people may have formed a partnership without being aware that
they have formed a partnership.
No written documents are needed to form one and no
documents need to be filed with the state.
2. No Limited Liability: partners are personally liable for the
debts of the partnership’s obligations!
What does personal liability mean? They can go after each
partner’s individual assets, even if they are not part of the
business.
What are the basis of an LLC?
LLCs are formed through a formal filing of a certificate (or
articles) of organization or certificate of formation with the
state, RULLCA §201(a); DLLCA §18-201(a).
Three common ways of allocating control in closed
corporations
1. Shareholder agreements
2. Transfer restrictions
3. Voting Controls (we’ll cover these on Tues)
• Voting trusts
• Cumulative voting
• Supermajority requirements
• Preemptive rights
• Deadlock Rule
How to Remove Directors?
Shareholders have the right to elect directors. [MBCA §8.03(c)] The shareholders may also remove a director, with or without cause, at any time (unless the articles of incorporation provide that directors may be removed only for cause). [MBCA §8.08(a)
When is a principal vicarious liable for an agent?
A principal is liable for the actions of its
agents performed within the scope of the agency relationship
In general partnerships, which partner or partners have the right to manage the business?
General Rule: In the absence of an agreement to the contrary, all partners have equal rights in the management and conduct of the partnership business. RUPA §401(h
What are the implications of improper formation?
Unlike agency relationships and general partnerships, LLCs cannot be created informally, so if the filing of the articles of organization is never made, the default rules of the underlying LLC statute do not apply
The default entity would then be a general partnership if 2 or
more people OR a sole proprietorship if only 1 person
What are the Supermajority Voting Requirements?
A supermajority is an amendment to a company's corporate charter requiring a larger than normal majority of shareholders to approve important changes in the company.The percentage required is usually between 67% and 90%
Define a Proxy, Proxy Statement,
A shareholder may vote his shares either in person or by appointment of a proxy executed in writing by the shareholder or his attorney-in-fact. [MBCA §7.22]
Generally,these rules require a proxy statement describing the matter being submitted to a vote of the security holders together with the proper form of proxy on which the holders can vote for or against each matter
being submitted
What does the duty of loyalty include? AND What is the remedy for breaching?
The duty of loyalty includes:
1. a duty not to communicate confidential information of the
principal for the agent’s own purposes or those of a third party
(RTA 8.05),
2. a duty not to compete with the principal in any matter within the
scope of the agency relationship (RTA 8.04), and
3. a duty not to act as an adverse party to the principal in a
transaction connected with the agency relationship (RTA 8.03).
If the agent breaches the duty of loyalty, the principal’s main
remedies are:
• (1) Damages
• (2) Disgorgement of profit
What happens if partners disagree about typical things regarding the management of the business?
How do partners amend the partnership agreement?
If partners disagree about ordinary matters within the scope of the partnership business, the vote of a majority of partners controls. RUPA §401(k).
Unanimous consent of other partners is required to add partners or
amend the partnership agreement. RUPA § 401
Unanimity is required for “extraordinary acts” that are unusual and
not in the ordinary course of business (i.e. letting a partner buy a
personal vehicle.)
What controls if the operating agreement conflicts with the articles of organization?
What if the LLC documents conflict with a statute?
Under RULLCA §107(d) the operating agreement controls with respect to members, dissociated members, transferees, and managers, while the articles of organization controls with respect to third parties who reasonably rely on it
If the articles of organization or the operating agreement conflict with a state statute, the state statute prevails for mandatory provisions, and the agreements between the parties prevails with respect to nonmandatory provisions. RULLCA §105.
What is Cumulative Voting, Rule for Director Elections and Director Elections?
This method allows shareholders to cast all of their votes for a single nominee for the board of directors when the company has multiple openings on its board.
Each shareholder may cast a number of votes equal to the number of the stockholder’s shares times the number of directors to be elected
Unless the articles provide otherwise, directors are elected by a plurality of the votes cast at a meeting at which there is a quorum.
How do shareholders handle lawsuit?
Shareholders enjoy a dual personality. They are entitled to enforce their own claims against the corporation, officers, directors, or majority shareholders by direct action. Shareholders are also the guardians of the corporation’s causes of action, provided no one else in the corporation will assert them.
Principal’s duties include (1) performance of contract obligations, (2) indemnification, sometimes, and (3) good faith and fair dealing
Agent’s duties:
1. Performance of contract obligations
2. Duty of Care
3. Duty of Competence
4. Duty of Diligence
5. Duty of Disclosure
6. Duty of Loyalty
What do partners owe each other?
• Duty of loyalty
• Duty of good faith & fair dealing
• Duty of obedience (to the partnership)
• Duty of care
• Duty to allow inspection of books
• Duty to share profits
• Duty to contribute and indemnify other partners
• And other obligations that don’t fit into a category
What are the managements of LLCs and describe both? And the defualt?
Member-Managed LLCs are the Default under RULLCA § 407
Member-managed simply means that each member gets a vote,like in a partnership.
The LLC hires managers who make the decisions on things in
the ordinary course of business
Directors Rule, How are they selected, what happens with vacancies, how are they removed, how do they meet?
The board of directors of the corporation has general responsibility for the management of the business and the affairs of the corporation.
The board of directors may consist of one or more individuals, as the articles or bylaws provide
Absent a contrary provision in the articles, a vacancy on the board may be filled by either the shareholders or the board. If the directors remaining in office constitute fewer than a quorum, they may fill the vacancy by the affirmative vote of a majority of all the directors remaining in office. [MBCA §8.10(a)]
A majority of the board of directors constitutes a quorum for the meeting unless a higher or lower number is required by the articles of incorporation or the bylaws, but a quorum may be no fewer than one-third of the board members. [MBCA §8.24]
What are the circumstances under which a shareholder may owe a fiduciary duty despite the general rule that they owe no such duty to the corporation or fellow shareholders?
1) Unpaid stock;
2) A pierced corporate veil; and
3) Absence of de jure corporation when the shareholder knew that there was no incorporation