Business Organizations September Notes
September 1, 1999
Bookkeeping for partnerships:
Every partner has an account (§16401)
Default provision is that partner that does personal services ; no compensation for personal services. That person will get benefit through profits is the theory. Also can contract for different result.
If there is no agreement as to losses, they are to be shared as the profits are agreed to be settled.
Partner providing services - may expect compensation other than by way of profits; but default provision is no extra compensation
With respect to profits, if you have someone with lots of talent, and will only provide services, if the partnership collapses, that person who thought they were only going to contribute service, may end up having to pay cash to some of the other partners. This is because this partner would have a negative account.
- should fix this problem by making an agreement when the partnership is formed
Partners have fiduciary obligations to one another.
phrases to remember:
p79: Not honesty alone, but the punctilio of an honor the most sensitive, is then the standard of behavior.
- plaintiff is going to win if a judge uses this language
September 3, 1999
Fiduciary partners are subject to a stricter kind of control, than in an ordinary business transaction between two parties.
- this is because the risk is tremendous in a partnership
Can not eliminate the duty of loyalty
When you join a partnership you get:
One third share in profits and distributions
- this stuff can all be changed by agreement
- get right to share in losses
- get a transferable interest that can be sold
- can deliver financial interest in the partnership, but cannot sell management position. (interest in partnership is personal property)
consent to misrepresentation means person has to affirmatively do something
September 8, 1999
Assignment number 7 is where we are
All code sections in Assignment 7 are in 16000 section
If someone tells others that you are a partner, YOU must make some affirmative consent that yes, in fact you are a partner. Otherwise you will NOT be liable.
- there needs to be consent
- also the other person needs to rely on you being a partner
decisions in the “ordinary course of business” – must be decided by a majority
decisions OUTSIDE the ordinary course of business – must be decided by the consent of ALL partners
September 10, 1999
How agency principles impact partnership law
§16301 – every partner is an agent of the partnership and as such can bind the partnership
A partner cannot bind the partnership without the consent of the partners.
Is it possible to cut off potential liability of other partners? YES
- apparent authority to bind partnership can be cut off:
· notify third party, or third party has knowledge that the partner has no authority
· and in fact, the partner must not have authority to act
- how do you make is so another partner in fact does not have authority?
· simple majority of the partners can alter a routine business matters
· unanimous consent for stuff outside regular business decisions
How does one protect himself against a partner he has lost faith in?
- first decide what type of decision – major or minor
- it is a major decision so it requires a unanimous consent
- this problem is highlighted when there is a two person partnership
- when two parties, one person is not a majority
- need a majority in order to make a decision
What if a partner hires an employee against the other partner’s wishes?
- the decision was made without a majority
- the court held that the partnership could not hire the new employee
- have to have a majority decision to hire someone; one partner in a two partnership does not have majority
RULE: courts will generally say that the party that wants to alter the way business has been carried on will not win. One partner cannot change things without the consent of the other partner.
NEW TOPIC: what happens to end a partnership relationship? How does it come about? What are the consequences of trying to end a partnership one way versus another way?
15029. The dissolution of a partnership is the change in the relation of the partners caused by any partner ceasing to be associated in the carrying on as distinguished from the winding up of the business.
Under old law, if person is not related to the partnership anymore, then the partnership is dissolved.
15031 – types of dissolution
partnership is an entity under the new law
under the old law, the partnership was just an association of individuals, there was no legal entity
- one of the consequences is that the entity of the partnership can change without dissolving the partnership
- the partnership will not fall apart because the ownership interests have changed
A partner may dissociate himself from a partnership
How can a partner dissociate himself?
1. Can say you just want to leave; does not necessarily cause a dissolution of the partnership
2. You also just leave even though you have agreed to stay partner for a term
If a partner dissociates, what is the result of that?
1. the other partners are required to buy the dissociating partner out
2. §16701 – required buy out of the partner that has dissociated
September 15, 1999
May not bury the right of a court to wind up the partnership business.
Limited partnerships: one or more general partners, one or more limited partners, and a statute under which you can form the limited partnership.
- old uniform Limited Parternship Act
- CA revised Partnership Act
- limited partnerships are out of style now; because the tax laws changed
- formation of a limited partnership cannot happen without some formality; filing (as opposed to a general partnership which can occurr though a general agreement
- under revised statute, all that needs to be filed publically is a barebones document; the internal information such as sharing of profits is in other agreements that is not part of the public record
What does it mean to be a limited partner?
15507. (a) A limited partner shall not become liable as a general partner unless, in addition to the exercise of his rights and powers as a limited partner, he takes part in the control of the business.
[this paragraph is all the original Act consisted of]
- question becomes "what is control of the business?"
> hiring and firing authority
> and more factors....
CA amended this simple paragraph in order to give more protection to limited partners.
This section was added:
(b) A limited partner shall not be deemed to take part in the control of the business by virtue of his possessing or exercising a power, specified in the certificate, to vote upon matters affecting the basic structure of the partnership, including the following matters or others of a similar nature:
(1) Election or removal of general partners.
(2) Termination of the partnership.
(3) Amendment of the partnership agreement.
(4) Sale of all or substantially all of the assets of the partnership.
(c) The statement of powers set forth in subdivision (b) shall not
be construed as exclusive or as indicating that any other powers possessed or exercised by a limited partner shall be sufficient to cause such limited partner to be deemed to take part in the control of the business within the meaning of subdivision (a).
NOW we have 15632 which is the newest law; Revised Limited Partnership Act:
15632. (a) A limited partner is not liable for any obligation of alimited partnership unless named as a general partner in the certificate or, in addition to the exercise of the rights and powers of a limited partner, the limited partner participates in the control of the business. If a limited partner participates in the control of the business without being named as a general partner, that partner may be held liable as a general partner only to persons who transact business with the limited partnership with actual knowledge of that partner's participation in control and with a reasonable belief, based upon the limited partner's conduct, that the partner is a general partner at the time of the transaction. Nothing in this chapter shall be construed to affect the liability of a limited partner to third parties for the limited partner's participation in tortious conduct.
(b) A limited partner does not participate in the control of the business within the meaning of subdivision (a) solely by doing, attempting to do, or having the right or power to do, one or more of the following: [THIS SECTION HELPS DEFINE CONTROL:]
(1) Being (A) an independent contractor for or an agent or employee of, or transacting business with, the limited partnership or a general partner of the limited partnership, (B) an officer, director, or shareholder of a corporate general partner of the limited partnership, (C) a member, manager, or officer of a limited liability company that is a general partner of the limited partnership, (D) a limited partner of a partnership that is a general partner of the limited partnership, (E) a trustee, administrator, executor, custodian, or other fiduciary or beneficiary of an estate or trust that is a general partner, or (F) a trustee, officer, advisor, shareholder, or beneficiary of a business trust that is a general partner.
(2) Consulting with and advising a general partner with respect to the business of the limited partnership.
(3) Acting as surety for the limited partnership or for a general partner, guaranteeing one or more specific debts of the limited partnership, or providing collateral for the limited partnership or general partner, or borrowing money from the limited partnership or a general partner, or lending money to the limited partnership or a general partner.
(4) Approving or disapproving an amendment to the partnership agreement.
(5) Voting on, proposing, or calling a meeting of the partners for one or more of the matters described in subdivision (f) of Section 15636.
(6) Winding up the partnership pursuant to Section 15683.
(7) Executing and filing a certificate pursuant to Section 15625 or a certificate of dissolution pursuant to paragraph (3) of subdivision (a) of Section 15624 or a certificate of cancellation of certificate of limited partnership pursuant to paragraph (4) of subdivision (a) of Section 15624.
(8) Serving on an audit committee or committee performing the functions of an audit committee.
(9) Serving on a committee of the limited partnership or the limited partners for the purpose of approving actions of the general partner.
(10) Calling, requesting, attending, or participating at any meeting of the partners or the limited partners.
(11) Taking any action required or permitted by law to bring, pursue, settle, or terminate a derivative action on behalf of the limited partnership.
(12) Serving on the board of directors or a committee of, consulting with or advising, being or acting as an officer, director, stockholder, partner, member, manager, agent, or employee of, or being or acting as a fiduciary for, any person in which the limited partnership has an interest.
(13) Exercising any right or power permitted to limited partners
under this chapter and not specifically enumerated in this subdivision.
(c) The enumeration in subdivision (b) does not mean that any other conduct or the possession or exercise of any other power by a limited partner constitutes participation by the limited partner in the control of the business of the limited partnership.
September 17, 1999
what if someone erroneously believes a limited partnership has been formed?
- there legal relationship is going to viewed generally as general partners; and if so, each and every one of them will be limitlessly liable
Now what can be done (under the old law) ?
- the limited partner needs to "renounce" his interest in the partnership - there is uncertainty/unclear about what this really means
- the person must file a certificate to notify the world that it is a limited partnership - it will cut off any future liability
- if someone became a claimant BEFORE the certificate was filed, the limited partner might be liable; depends on if the limited partner knew... (CHECK STATUTE)
NEW TYPE OF BUSINESS: LIMITED LIABILITY PARTNERSHIP
- can only be used by attorneys, CPAs, and architects
- newest in series of attempts to have a non-corporate limited liability company is LLC
- provides limited liability for ALL of the owners
- are a subgroup of a general partnership; controlled by general partnership law
- the benefits are: individual partners are not personally liable for either tort or contract claims
- claimants can come after person responsible for the negligence only; in no way can any individual step away from liability that they caused through their own negligence
- POLICY: want professionals to be responsible for their activities
a partner in a registered limited liability partnership is not liable or accountable, directly
or indirectly, including by way of indemnification, contribution, assessment, or otherwise, for debts, obligations, or liabilities of or chargeable to the partnership or another partner in the partnership, whether arising in tort, contract, or otherwise, that are incurred, created, or assumed by the partnership while the partnership is a registered limited liability partnership, by reason of being a partner or acting in the conduct of the business or activities of the partnership.
September 20, 1999
- limited liability; this is the most important aspect
- no limitless liability anymore
- does not suggest the size of the company
- the law applies the same to large and small corporations
- only way to do it is through a state
- Delaware is a good state to incorporate in
Articles of Incorporation
- name of organization
- original incorporators
- agent that can receive on behalf of the corporation
- principle office
- kinds of securities that can be issued
- is on public file
- very basic information
- to amend this document requires going to the shareholders
- in addition to the articles of incorporation
- rules for internal governance of the corporation (ex: who the officers are)
- date of the annual meeting
- if the corporation has a seal
Ways to get money into the organization
- main ways: sell common stock, sell preferred stock, borrow money
- evidences ownership in the corporation
- common stock
- preferred stock – has rights only as explicit in the articles of incorporation
- options are limitless
- corporation can borrow money from the bank
Power structure in a corporation (who is responsible for what)
- owners (the shareholders) elect the board of directors
- the board of directors elect the officers (executives)
Promoters Contracts – a specific person that draws together the necessary elements in order to make a business happen
1. types of activities promoters are responsible for:
2. problems with promoters making contracts:
September 22, 1999
- pre incorporation contracts
corporation can adopt an agreement – this will make it binding
can the individual be held personally liable on pre-incorporation types of contracts (even if corporation comes into being)?
- yes, as long as they signed on behalf of the corporation; the third party will be able to go after the promoter personally; the promoter can be held personally liable unless:
- get the explicit agreement of the third party (EX: landlord) that it will not look to the promoter for any kind of fulfillment of the commitment; there will be no liability as to the promoter; this is referred to as a novation
these kinds of problems do not come up much any more because it is really easy now to form a corporation; you can easily create the corporation and then the corporation can sign all the contracts (instead of the promoter) – this is because there are lots of companies that will provide “canned” types of articles of incorporation and file the papers very quickly
- the articles can be altered later; it is most critical that the entity be incorporated
NEW TOPIC: defective incorporation: when there is a problem with how the business was incorporated
- when someone acts with the belief that they are a corporation and other businesses treat them as a corporation, the other businesses are estopped from suing them personally
- this type of estoppel is not quite the same as traditional estoppel because it is the “wrong” party is the one that is estopped.
- Estoppel argument is still used in CA
- Policy: if someone thought he was dealing with a corporation the party that was treated as a corporation should be treated as one even if they were not
De facto corporation – not used much anymore; had to meet three elements to be a de facto corporation
- not used anymore; lots of uncertainty about what constitutes a colorable attempt to be a corporation
- now people say you either are a corporation or not a corporation; the way you determine this is to look at the statute
- de facto is not used in CA anymore
- in 200(c)
Next time: will go over Ultra Vires
- should a corporation really have the power to do everything that is legal?
- Should they really have the power to give away the money of the shareholders?
September 24, 1999
Ultra vires doctrine – means “beyond the power”
- one problem has been executives misusing the shareholder’s money
- shareholders can sue if officers misuse their power
Owner of plant wants to destroy plant and sell the land to a developer. The shareholders are in favor of the plan but the Board of Directors is absolutely opposed to the plan.
- BOD is afraid of loosing their jobs most likely; they are not shareholders
- The interest of the shareholders are not always congruent with the BOD
- The shareholders do not have the ability to make major management decisions; they are not primarily policy makers
- The business is supposed to be operated by the board of directors which is elected by the shareholders
- The power to sell and convey could only be conferred by the Trustees when assembled and acting as a Board.
- The only way a corporate act can be authorized is through the BOD.
September 27, 1999
How would you actually go about getting the consent of the shareholders?
The number of people required to have a quorum can be changed by the corporation.
- usually it is a simple majority (51%) that is required
- in order to pass the resolution you need a majority of the quorum
If we increased number of seats on the board, who fills the vacancy? The board or the shareholders?
- the board has the right to choose the new members
How do shareholders remove board members?
The statute is organized so that it is the board plus the shareholders usually.
Another solution is to try dissolving the corporation. With 50% of the shares there can be initiated a voluntary dissolution.
NEW TOPIC: focus on the board of directors
- board is supposed to act as a whole because
- want to encourage communal decision making
September 29, 1999
Minimum quorum is at least one third of the directors (?)
Next thing to do is give 48 hours of notice
- what if we can’t give notice, what is the solution?
- Can get a waiver before or after the actual meeting; the directors should sign a waiver of notice before they go on vacation (once signed, this is as good as if notice were given)
- If a meeting cannot be held resolutions can be passed by mail as long as there is unanimous consent; all directors have to sign the resolution
- If you can get enough votes that would constitute a majority of the quorum anyhow, it does not matter if not everyone is present…
Quorum can’t be less than one third of the total number of directors
- can have committees to take care of routine stuff. Full board authorizes a portion of the board to act in a certain area; that committee can act on behalf of the board
- committees can not be limitless in their authority
- legislature has tried putting some limitation on their authority
- areas that you cannot have a committee make decisions: can’t fill vacancies on the board or the committee; can’t perform certain acts which require shareholder’s consent
If a corporation does not follow the requirements:
I. publicly held corporation - lack of notice or quorum, then whatever passed at those meetings will not be supported by the courts
II. privately held corporation (closely held) – much more unclear about what happens if you don’t follow the formalities