Business Organizations

I. Agency

A. agency relationship

a. agent is a fiduciary of the principal

b. A subject to Pr’s:

i. control

ii. consent

c. quasi-agency relationships: actor not subject to Pr’s control

i. trustees

ii. guardians

iii. receivers

d. minor agents

i. as long as A has capacity to act, he is A

ii. 12 y.o. agent can sell my car. Not voidable by 3P (buyer) b/c he is contracting with Pr (who is 30 y.o.)

There must be actual authority (or a substitute) if Pr is to be bound/liable:

B. Actual Authority

a. A has power to affect Pr’s legal relations

b. manifestation (oral, written, course of conduct), when rzbly interpreted, causes A to believe that Pr desires him to so act

c. actual authority can be express (words, writing) or not (course of conduct)

d. power v. right

i. power: power to bind the Pr, make Pr liable, benefit the Pr; actual authority gives power

ii. right: if in accordance w/ Pr’s manifestations of consent, A had right to act, too; if apparent authority, A had power but no right

e. how created? manifestation of consent

i. objectively rzbly standard (focus: A’s rzbl belief)

ii. need not be written

1. equal dignitaries rules

a. if consent written, A’s consent to 3P needs to be written

b. not the rule in Texas

c. there are special Texas statues that cover

d. ex. Tx Prop Code: conveyance of land must be written

2. manifestation of consent in objectively rzbl standard (from A’s POV)

3. no consideration req’d (there is no K b/c no ¢, but there is still an A/Pr relationship); you don’t have to pay someone to be your A

C. Implied Authority

a. authority to do things rzbly necessary to effectuate actual authority given

b. ex. Pr’s gives A actual authority to sell car. Placing an ad in the paper is not actually authorized, but is impliedly authorized

D. Apparent Authority

a. Apparent Authority is created by conduct on the part of the Pr that would lead a rzbly prudent person using diligence and discretion to believe that Agent had authority to act for the Pr (focus: 3P’s belief)

b. elements

i. Pr manifests authority to a 3P (that purported A is his A)

ii. 3P relies on that manifestation (but not detrimental reliance)

c. doesn’t exist if 3P has notice of limitations of A’s powers

d. allows either party to bind the other

e. note: apparent authority is not actual authority

E. other sources of authority

a. ratification by estoppel

i. eventually, if Pr doesn’t reject, he is estopped from complaining

1. detrimental reliance and

2. retention of benefits (manifestation of consent to be bound)

3. failure to repudiate (manifestation of consent to be bound)

4. w/ knowledge of all material facts

ii. only works to allow 3P to bind Pr (not vice-versa)

b. ratification

i. A acts w/o authority

ii. effect: authority relates back

iii. elements

1. absence of actual or apparent authority

2. A intends to/purports to act for Pr

3. Pr is in existence at time of act and time of ratification (i.e. a corp. must have been created already; not really important)

4. Pr has knowledge of all material facts at time of ratification (or chooses to ratify knowing he lacks facts)

5. Pr expressly or impliedly manifests consent

6. Pr must ratify before 3P withdraws

7. Pr must ratify in full or not at all

8. ratification cannot cut off intervening rights of innocent 3Ps

c. inherent agency power

i. A’s power to bind Pr in absence of other authority (ct’s catch-all)

1. respondeat superior

2. A does something similar to, but in violation of his orders

ii. justification: fair to have Pr at risk than innocent 3P

F. Termination:

a. expiration of term (or rzbl time)

b. purpose of agency complete

c. condition fulfilled

d. mutual consent of Pr/A

e. revocation/renunciation by Pr

f. death, bankruptcy, adjudication of incompetency by Pr or A

g. destruction of s.m. of agency or other change in cirx that would allow A to rzbly infer Pr no longer consents to his exercising authority

h. note: you don’t have to terminate ratification; it’s occurrence-by-occurrence

II. Rights, Duties and Liabilities in the Agency Relationship

A. Pr & 3P

1. Pr liable to 3P: (3P v. Pr)

rules:

a. authority

b. authority substitute

i. express authority

ii. express by coc

iii. implied authority

iv. apparent authority

v. inherent agency power (PP need to have authority)

vi. ratification?

other remedies: (equitable remedies that don't require liability on the K)

i. restitution

ii. quantum meruit

iii. unjust enrichment

2. 3P liable to Pr: (Pr v. 3P)

rule:

a. authority

b. substitute

exceptions:

i. express provisions of K

ii. A fraudulently conceals Pr (A knows 3P wouldn't make K if disclosed)

iii. identity of UP materially alters K (personal services, ex. artist)

remedies:

iv. UP takes subject to 3P's defenses against A

v. equitable / other remedies

B. 3P & A

1. A liable to 3P: (3P v. A)

rules:

a. DP A not liable

i. A had no authority => no K formed

Pr not liable b/c no K

A not liable b/c fully DP

remedy: breach of implied W of authority

ii. A says he's just supposed to look, not buy. A doesn't say who Pr is. 3P puts on a high pressure sell and A buys.

No breach of implied W of authority b/c A disclosed enough info: that he didn't have authority.

b. PDP A liable

i. if A had authority, A & Pr are liable

ii. if Pr ratifies, A & Pr are liable

iii. if both liable, you can select to recover against either (not both)

c. UP A liable

i. if A had authority, A & Pr are liable

ii. if Pr ratifies, A & Pr are liable

iii. if both liable, you can select to recover against either (not both)

note: if Pr is non-existant => A personally liable to 3P

1. 3P liable to A: (A v. 3P)

a. DP: no b/c A not a party to the K

b. PDP, UP: yes, b/c A is a party to the K

C. A & Pr

1. A liable to Pr (Pr v. A)

a. A has a fiduciary duty to Pr

b. if the Agency relationship is Kual, then K rules apply

c. Pr can sue A for boK or boFD

2. Pr liable to A (A v. Pr)

a. for boK (if Kual relationship)

b. for q.m. or unjust enrichment if no Kual rights

c. Pr has duty to indemnify A for liabilities rightfully incurred

d. but Pr is not a fiduciary of the A.

D. Full Disclosure Required

1. assumed name certificates:

a. must file or subject to penalty (per statute)

b. but does nothing to put 3P's on notice

2. DP = knows there is a Pr and who the Pr is

3. it's A's affirmative duty to disclose

4. signing a K:

a. you must sign a K showing agency status and fully disclosing the Pr; if Pr was disclosed, but not in the K, PER keeps out that evidence

b. sole proprietorship: must include "Pr, d/b/a Tasty Deli" or some coc that 3P had acutal notice

c. corporations:

i. must have actual notice

ii. leaving out the "Inc" or "co" is probably not full disclosure

iii. if some other indication gives notice of status as a corp, you may be okay

5. signing checks:

a. signature line is understood to be signed by company reps.

b. check must "identify" represented person; don't have to state legal name of Pr on upper left of check

E. Equitable Remedies: (don't rely on a Kual relationship)

1. quantum meruit

a. can't recover on q.m. if a valid K covers the same s.m.

2. unjust enrichment

3. restitution

III. Business Entities

Types of Business Entities FT?

1. Sole Proprietorship

2. General Pship

3. LLP (Ltd. Liability Pship)

4. Limited Pship

5. LLP-LP

6. Corporation FT

7. Professional C..orp. (PC) FT

8. Professional Assoc. (PA)

9. Nonprofit Corp. usually exempt

10. Unincorporated Nonprofit Assoc.

(only besides SP & gen Pship that can be inadvertently formed)

11. Limited Liability Company (LLC) FT

A. Considerations:

1. how do I create?

2. what will my liability be?

3. taxes

· federal income tax

· state franchise tax

a tax that some bsns pay that the greater of:

1. 4.5% of "taxable earned suplus" but that really is a 4.5% income tax OR

2. .25% of "taxable capital"

includes bsns that filed with Tx SOS or bsns in another state doing bsns in Tx

· Federal Employment Tax: (i.e. SS, medicare); we will not discuss this - too complex

IV. Sole Proprietorship: individual as Owner conducts a bsns

A. Governing Laws:

1. no specific act

2. just agency rules

3. and isolated statutes here and there

B. Formation

C. Liability

D. Taxes

E. characteristics

· may have employees or may be one man only

· essence: a single individual carrying out a bsns without the benefit of any of the other forms or bsns or making it a separate entity

· they can be very formal and keep separate books, but that doesn't mean that there is any legal distinction btwn the bsns assets adn the personal assets

· an SP can use a bsns name, but the name will just be another name for an indivudal

· they have to file assumed name cert, but that doesn't affect anything (just civil penalty)

· A person can form an SP w/o even realizing it

· If their e'ee enters a K or commits a tort during scope of employment, the SP is liable

V. General Partnership (or just Partnership)

A. Governing Law:

1. TRPA, the Tex. Rev. Pship Act

2. Uniform Pship Act:

· pre '62: Pships governed by c/L

· 1962: Texas adopted TUPA [Tex. Rev. Civ. St. Art. 6132b]

· 1/1/1994: Texas adopted TRPA [6132b 1.01 et seq.]

· 1/1/99: TUPA expired comletely (now TRPA governs everything)

· 1/94 - 1/99

a) New Pships goverend by TRPA

b) Existing Pships goverend by TUPA (or by Trpa upon agreement of the Ps)

4. Authority Hypo: you have a case in 1999 and there is no Trpa or Tupa case, but there's an old c/L case from 1960. You can use it, but must prove to the judge that the law hasn't changed since then. You can also use cases from outside Tx jx and use other states cases if it's a "uniform" section.

5. Choice of law: what state's laws applies when:

a. Texas Pship doing bsns outside of Texas:

b. Out-of-state Pships doing bsns inside Texas:

c. Partners in a bunch of states, including Texas:

B. Formation

1. Labels not controlling: can arise w/o realizing that's what they've created and the legal consequences; sometimes ppl call themselves "partners" and they're not.

2. = an entity

3. K = Pship if K contemplates association of 2 or more persons to carry on as co-owners of a bsns for profit

4. Factors = Pship

a. #1 rt to receive a share of profits

b. #2 rt to participate in control of bsns

c. express intent to be Ps

i. firm literature

ii. how named on bank stuff

iii. how named on taxes

iv. how introduced to others

v. prior lawsuits (as P or D)

d. sharing or agreeing to share losses or liabilities for claims by 3Ps v. Pship

note: an agreement to share losses not necessary to create a Pship

e. agreeing to contrib. $/prp. to the Pship

5. Factors do not = Pship

a. right to receive a share of the profits as pymt of:

i. debt

ii. rent

iii. to former P

iv. int. on a loan

v. consideration for sale of bsns or prorty

b. co-ownership of property

c. sharing fgross returns or revenues

d. ownership of mineral proprty under a jt. operating agreement

C. Libilities:

1. Partners in a general Pship have complete personal liability for the Pship

2. P's may sue Pship

D. Taxes:

1. Federal Income Tax:

· the P's are assessed FIT on what they make, but the Pship itself is not subject to FIT.

· The Pship is a flowthrough/pass-through entity.

· The Pship's income is only taxed once (at the Partner level). The Pship may have to file an informational form, though, showing the allocation of the Pship's money to the P's.

· The Pship doesn't have to actually distribute money for that income to be taxed to a P. Every year the Pship's income has to be allocated to the Ps and they will be taxed but they may not actually have that money distributed to them!!

2. State Franchise Tax: Pships do not pay state franchise tax (all kinds of Pships)

3. Pships are not separately taxed entities ???

E. notice

1. knowledge = actual notice

2. notice =

a. knows the fact

b. has received communications of fact to bsns or place for receipt of communications

c. rzbly should have known

d. take steps rzbly calculated to inform; regardless of if it gest there

e. notice to P = notice to Pship (if related to Pship); so long as no fraud

F. Rights and Liabilites of a Pship:

1. Pship by Estoppel

a. representing you're in a Phips

b. 3P extends credit

c. relying on those reps.

d. they can recover on estoppel, agency, negligence, fraud, unjust enrichment

2. P binding the Pship

a. ordinary scope of bsns = P binds Pship

b. outside ordinary scope of bsns => Pship not bound; P personally liable

c. outside ordinary scope of bsns => if P's consented, one P can bind Pship (policy: 3P should be more careful for new unusual bsns)

d. act in ordinary scope: majority vote must stop it

e. act outside ordinary scope: majority vote must start it (50/50 is not a majority)

f. *if 3P knows P doesn't have authority => not binding on Pship

3. P's torts:

a. P is always liable for his own tortious conduct

b. Pship only liable if in ord. course + authority (actual or apparent) for PI, death, wrongful act/omission

c. Pship liable for property held by the Pship even if no authority b/c heigtened duties (baliee/trustee type duty)

ex. P embezzles $ given to Pship; no authority but Pship liable [if an associate took the $, no liability b/c not doing master's bsns]

4. VL and Pship liability:

a. Respondeat superior: employee acting in scope of employment

i. must be an employee - not indy K'or

· master control work of employee (not IC)

ii. scope of employement

1. kind of work he was employed to perform?

2. occurs substantially w/in authoritzed time/space limits

3. done to serve the master (at least partly)

4. if force used - was rzbly expected by master (ie. bouncer)

* exemplary damages:

1. authorized manner or

2. manager or

3. recklessly hired or

4. employer ratified/approved of act

iii. you don't need respondeat superior for these:

1. defamation: if authorized or apparently authorized by employer

2. misrepresentation: (apparently) authorized or inherent agency power

b. Pship liability: P acting in course of bsns (larger than scope of emp'mt)

5. what P's are liable?

a. all P's J&S liability

b. new P not liable if:

i. arose before P joined

ii. relates to action/omission before joined or

iii. arises under a K or committment entered into when not a P

iv. P is liable for:

i. liability incurred before w/drawal

ii. estate of decased P liable, too

iii. P liable to 3P if K made w/in 2 years after w/drawal & (1) 3P didn't have notice of w'drawal and (2) 3P rzbly believed w/drawn P was still a P at time of K

6. 3P recovery

a. authority of P

b. apparent authority

c. ratification

d. Pship by estoppel

e. P's wrongful conduct

f. Pship and P liability:

i. Pship & all P's J&S liable if

1. authorized act of P

2. in ordinary course of Pship bsns

ii. authority: P is agent of the Pship, so follow Pr/A rules

iii. an act of a P is an act of the Pship unless:

1. P lacks authority [outside ord. course & no express authority] and

2. 3P knows P lacks authority

iv. that's b/c P has apparent authority to do things in Pship's scope of bsns

g. enforcing liability:

i. P ship can be sued in Pship name or assumed name

ii. can only get judgment against:

1. Pship and

2. P's individually named and

3. or P who is personally served, even if not named

iii. if I sue P1 and P2 and later want to sue P3, res judicata? we don't know...

iv. a creditor may proceed against P's invidually if the claim could have been asserted against Pship if:

1. a judgment is obtained against the P and

2. a judgment based on the same claim is obtained against the Pship that:

A) has not been reversed or vacted and

B) remains unsatisfied for 90 days (unless bankruptcy, other special cirx, or for prsnl jj)

7. LLPs:

a. P's in an LLP are not individually liable

unless:

i. it is under P's supervision

ii. directly involved

iii. had notice & failed to take rzbl steps to cure

P individually liable on other grounds for:

i. liability on Pship property

ii. liability independent of P's partner status (prsnl K; P's own tort)

b. limits liability (today) for K and tort

i. K entered before 9/1/97 => all P's individually liable on K

c. procedure - revew every year; if you are late, all P's liable for liability that arises during that gap

d. $100k liability insurance for errors/omissions (not K's) req'd

e. governing law: where LLP formed

G. Rights of P's inter se

1. duties owed by P to other Ps

a. loyalty

i. accounting

ii. no self-dealing (dealing outside Pship interests)

iii. no competing w/ Pship

b. care - req's gross negligence

i. ordinarily prudent person would exercise unde similar cirx (like bsns jj rule) [error in judgment not a breach]

ii. GF

iii. best interests of the Pship

iv. not as high as Trustee

2. equal profit sharing (default rule -- can be altered)

1. divide profits (losses) equally (losses = 5k - 10k put in = -5k)

2. add contributions

* note - P's are not entitled to compensation for their services, uoa

but if a P pays/advances/incurs liability on behalf of Pship, he gets repaid + interest

3. Partner voting

a. matter in ordinary course = majority in interest

b. outside ordinary course = unanimous [new partners & amending Pship agreement req's a unanimous vote of Ps]

4. majority in interest?

a. uoa, Ps profit share = and have an = vote

b. if not = profit share => > 50% interest [uoa]

5. partnership agreements can arise written, oral, even course of dealing

H. Pship property & Pship interests

1. Pship property is not the property of the Partners (they only have a Pship interest)

2. Pship property or personal property?

a. acquired in Pship name or by a P in their capacity as a P, or with Pship assets => presumption that it is Pship property

b. if Pship not mentioned & acquired in P's name => personal property presumption

c. can always rebut w/ evidence of intent

3. transferring Pship interest:

a. a P may transfer and this is not an event requiring winding up

b. Tranferor keeps rt to participate in managment & keeps liablities

c. Tee does get distributions (or $ upon winding up) but doesn't take liabilities

4. Pship interest = community property (death => dwap; subj. to equitable division on divorce)

I. Events of Withdrawal & Events requiring Winding Up

1. cannot be changed in Pship ag.

2. withdrawal:

a. events of withdrawal (rightful)

1. at will

2. event occurs (e.g. retirement age)

3. expulsion under agreement

4. death, incapacity, personal bankruptcy

5. redemption of P's interests

6. P requested winding up and others agreed to continue

b. rightful withdrawal $: fair value at date of withdrawal (fair value = as a going concern)

c. events of wrongful withdrawal

1. breach of Pship agreement

2. withdrawal, expulsion, bankruptcy before term or undertaking completed

3. judicial expulsion

d. remedies of wrongful withdrawal:

1. P must pay damages

2. P gets lesser of:

a. winding up value (as if ending Pship) or

b. fair value as ongoing concern at date of w/drawal

3. if withdrew wrongfully before expiration of term => don't have to pay P until end of term

3. winding up

a. events requiring winding up

1. majority in interests decides (at-will Pship)

2. expiration of term / specified event

3. mutual agreement

4. bsns illegal to continue

5. judicial decree (not practicable to carry-on)

6. sale of substantially all Pship property not in ord. course

7. request of P in at-will Pship unless maj in interest agrees to continue (so in 50/50 2 man Pship, if one requests, other doesn't have maj. to veto)

b. effect

1. Pship continues until w/up complete

2. resolve suits, close bsns, dispose of property, pay liabilities, distribution of res

3. distribution: pay creditors (including P creditors) and distribute surplus (neg. balance)

c. authority:

1. notice of event requiring w/up terminates actual authority

a. if P had no notice => Pship can't get indemnified by P

2. to 3Ps: 3P has no notice => P still binds Pship

4. withdrawal and continuation: P requested winding up but Pship continues => that partner is withdrawn

a. an action by withdrawn P w/in 1 year from w/drawal binds Pship if:

i. 3P had not notice of withdrawal

ii. had done bsns w/ Pship in prior year

iii. rzbly believed w/drawn P was a P at time of transaction

b. a withdrawn P => liable to Pship

c. withdrawing doesn't change P's existing liability

VI. Corporations!

A. background

a. taxes:

1. corp's are taxed not as a flowthrough, but twice (often)

2. C corp: taxed on income & on dividends (soln: pay salaries)

3. S corp: flowthrough tax treatment

requirements:

a. 75 SH max

b. natural people

c. one class of stock

b. franchise tax (Texas) applies to all Texas corps (S, C, LLCs, PC; not SP's Pships)

c. choice of forum -- pick whose law you want to govern

d. liabilities: SH's only liable under exceptions (pierce veil, prsnly liable, didn't follow agency rules, breach of duty, improper dividends, improper incorporation, failure to pay franchise tax)

B. forming a corporation

1. incorporating & organizing

a. articles of incorporation

1. name (inc, co, corp)

2. duration

3. purpose

4. shares of stock (no. and classes)

5. officers

6. reqistered agent

b. organizational meeting: officers, bylaws, buy stock

2. ultra vires: invalidates transactions beyond purpose stated in aoi (now a practical nullity b/c eveyone puts "any lawful purpose"

3. prematurely commencing bsns. - must received at least $1k in ¢ for stock.

a. promoters

i. both know there is no corp. in existence yet:

A) default rule: A is party to the K

B) can change default rule to non-recourse A, best efforts A, novation, additional liability, etc.

ii. 3P doesn't know ther is no corp. in existence yet:

A) promoter breached the implied W that corp. exists or

B) promoter laible b/c he knowingly misreps his authority

b. acceptance of the K:

i. outright acceptance

ii. implied acceptance (adoption): if you pay rent on new lease for a couple mos. and then quit to find better deal, too late; you've adopted the K

c. defective incorporation: both parties think aoi filed properly, but wrong!

i. certificate of incorporation issued? okay (even if improperly issued)

ii. no certificate? Texas might recognize a "Corp. by Estoppel"

1. when the 3P sues the "corp" for a jj, the 3P is later estopped from denying it exists (and vice-versa)

2. TMCLA "if a corp. makes a 3PK before incorporated, the 3P can't get out of K by saying corp didn't exist.

d. directors are personally liable for the $1k they are supposed to get before starting bsns (only liable for that amt.)

C. Disregarding the Coporate Entity

1. Piercing the Veil

a. K cases (follow statute)

i. to show alter ego, sham to perp. fraud, or similar theory (enterprise liability, denuding, trust fund doctrine), must show actual fraud (by officers/SH that was committed primarily for personal benefit of perpetrators)

ii. failure to follow corp. formalities is not a piercing factor

b. Tort cases (follow Castleberry, but corp. formalities not factor!)

can pierce based on the following factors:

A) sham to perp. a fraud: constructive fraud breach of legal/equitable duty b/c of its tendency to deceive

B) alter ego (mere bsns conduit)

C) evading existing legal obligation

D) achieve monopoly

E) circumvent a statute

F) relied upon as protection of criminality or to justify a wrong

G) inadequate capitalization

H) enterprise liability (you can get assets of parent/sister corp)

I) common employees & offices & bsns name

J) central accounting; pymt. of wages by one corp to other corp's employees

K) services rendered by employee of one corp to other corp

L) undocumented transfer of funds between corps.

M) unclear allocation of profits (losses) btwn corps.

Alter Ego: K case Tort case

lack of separateness lack of separateness

injustice injustice

actual fraud -

1. intentional misrep

2. of a material fact

3. made to induce reliance

4. relied upon

2. other corporate disregard

i. fraudulent conveyance (Tufta) don't have to know (I give money away even though I have a debt)

ii. trust fund doctrine: upon dissolution, officers have duty to hold $ in trust for creditors

iii. breach of FD: another way to pierce corp veil - holds officers/directors personally liable; creditors can't assert this; only SH's have standing in a derivative suit

iv. denuding: SHs strip the co. of assets for themselves (e.g. excessive salaries) when creditors haven't beed paid

v. CERCLA

vi. Bankruptcy cases: bankruptcy cts have a lot of discretion (but it's not as harsh as piercing)...

A) equitable subordination: ct. will subordinate claims of insider over outside creditor

1. did the insider dominate the corp w/o regarding corp. formalities?

2. commingling?

3. under-capitalization?

B) equitable consolidation: will sometimes consolidate parent and subsidiary if equity demands

3. SOL tolling?

a. alter ego: suit filed on 1 coa; 2nd suit filed to pierce veil; SOL on suit 2 tolls from filing of suit 1 until final jj on suit 1

b. not alter-ego? not sure (P argue it's the same; D argue alter ego is like one person, so it makes more sense to toll)

4. choice of law - it's a good reason to incorporate in Texas!

D. Financial Matters & the Closely Held Corporation

1. characteristics of equity securities and debt financing

a. equity securities: vote not tax-deductible

b. debt financing: don't vote interest on debt is tax-deductible

2. pre-emptive rights: (default rule)

a. right to keep your % shares so your control is not dilluted

b. exceptions:

1. employee stock option plan

2. shares sold for something besides cash

3. shares! classes of stock

a. voting, non-voting

b. dividend preferences:

i. cumulative: gets dividends before anyone else can

ii. part cumulative: cumulates for one year

iii. non-cumulative: duh.

iv. participating: gets special dividends, but also get the same dividends everyone else gets (non-particip. is opposite)

c. treasury shares: issued but not outstanding (don't count for quorum)

4. distributions

a. distributions are authorized to be issued by BOD so long as distributions are not more than the surplus [directors voting for unauthorized distribs are liable for amt that shouln't have been distrb'd (unless relying in GF); cured when surplus reached]:

assets - liabilites = N.A.

Equity = S.C. = par value * issues shares [not T-shares]

Surplus = NA - SC

b. suppression of dividends, selective repurchase of shares

i. Texas: SH's do not owe each other a FD (only to corporation)

ii. Ct's will only compel dividends if P shows malice.

iii. if the SH is also a director, there may be a FD breached b/c the BOD owes a FD to the corporation (incl. SHs)

iv. majority SH duty to minority SHs?

1. there may be a FD based on other grounds (e.g. confidential relationship); Q for jury

2. one Tex. App. Ct found oppression and ordered maj. to buy minority SHs shares at fair value

oppression:

A) conduct that substantially defeats the expectations that, objectively viewed, were rzbl under the cirx & central to min SH's decision to joing the corp. or

B) burdensome, harsh & wrongful conduct; lack of fair dealing to the prejudice of some SHs; a visible departure from GFFD

C) note: firing could be oppressive, but never so held.; follows close to bsns jj rule

E. Management & Control of the Closely Held Corp.

1. SHs: own (aoi, elect BOD, BTIs)

a. informational rights: can view for "proper purpose" if

1. own 5% shares or

2. has been SH for 6 mos.

2. Directors: management and control

3. Officers: daily bsns running

F. Shareholder Voting:

A. notice 10 to 60 days before mtg.

B. quorum

1. majority of shares are present at the meeting

2. can change, but minimum = 1/3

C. ways to vote:

1. meeting (notice)

2. by proxy (counted as "present" for quorum)

a. regular proxies are revocable; they expire after 11 mos. default

b. irrevocable proxies coupled with an interest:

i. proxy holder is a pledgee (using share as collateral for loan, etc)

ii. proxy holder has purchased, will purchase or has an option to purchase shares

iii. designated "interested" by SH agreement

3. telephone conf. call

4. written consent of SHs

a. unanimous consent

b. AOI can allow things to be voted on w/o unanimous consent

D. needs to pass

1. BOD elections: plurality + cumulative voting

a. how many shares needed to get dir. on BOD? (S / D+1)+ (more than total shares voting in election over director spots +1); then multiply x no. of BOD slots and cast that many for your man

2. fundamental corp. changes or BITs (big ticket items):

a. default: 2/3 of those entitled to vote

b. can lower, but minimum = maj.

things requiring a 2/3 vote:

· amending AOI

· merger

· share exchanges

· sale of substantially all corp. assets outside ord. scope

· conversion

· dissolution

· reduction of stated cap (if no-par shares corp.)

3. other things --> maj. of shares voted (yes / yes,no,exp abst.)

a. majority of shares voted is required

SHs may vote on the following (require majority):

· amending bylwas

· filling director vacancy

· indemnifying directors

· interested director transactions

b. "shares voted"

1. yes/no = voted

2. expressly abstaining = voted

3. silent or not attending = non counted

note: silent counted for quorum if they attend

c. numerator = "voted for"

denominator = yes/no/exp. abstain

note: denominator can be changed by bylaws

d. ex. we're amending the bylaws; 600 outstanding shares

1. quorum = 300+ (301, 300.1)

2. pass? 200 for, 200 against => 200/400 fails

e. ex. 1 for, 399 silent = 1/1 => pass

4. directors & officers

A) directors:

a. BOD cannot vote by proxy

b. BOD can have unanimous written consent (but must be unan)

c. must have quorum (1 person = 1 vote) need maj.

floor = 1/3

d. can have committees as long as BOD isn't abdicating their decision making duties

B) officers:

a. need at least two;

b. elected by BOD;

c. officers (unlike directors) are agents!

i. officers need authority to enter into a K to bind the corporation

ii. BOD authorized Agent to make the K

iii. bylaws authorize the Agent (VP) to make Ks

iv. apparent authority (corp. manifestation to 3P)

1. course of dealing

2. agent thinks there is authority b/c made deals like this before

3. if first K with this 3P-company, probably no apparent authority (need express)

4. 3P should get written resolution from BOD or minutes where authorized!

5. Pres/CEO binds corp. in ordinary course of bsns generally

6. VP replaces pres. if needed & Sec and Treasurer generally don't bind corp.

v. corporation ratifies the K (e.g. make pymts.)

2. control devices:

a. superquorum & supermajority: can increase no. of votes needed (in bylaws??? or) aoi; gives a minority a veto right (careful...deadlock!)

b. voting trusts

i. all in trust transfer shares to Trustee

ii. T either follows vote of equitable share owners or votes per his discretion; look at trust ag.

iii. beneficial owners still get dividends, etc.

c. voting agreements

i. all in ag. vote per K

ii. not as safe as trust b/c if you don't vote per K the vote is messed up and the coa is boK

d. public policy:

i. voting agreements & trusts can generally be made by SHs

ii. voting ag's can be made by BOD if the ag. is be set forth in writing and authorized by all the SHs!!! (& not contrary to PP); valid for 10 years; person who buys shares in a corp like that who doesn't have knowledge of the ag. can rescind his purchase

ii. can't be made if publicly traded corp.

iii. must note conspicously on share certificates

e. classes of stock - some aren't allowed to vote

3. Close Corporation Statutes (§12)

a. this is a "close corp." in aoi

b. different rules

4. Share transfer restrictions: you can make a rzbl ag. that...

a. rt of first refusal/option to purchase

b. buy-sell ag. (if SH offers sale, corp. must buy-back)

c. push-pull: either you buy my stock or I'll buy yours - O'or sets price ("Texas shoot-out")

d. requires shareholder to consent to transfer of shares

e. prohibits selling shares to certain types of ppl.

f. keeps you as an S corp.

* must be conspicously noted on share certificates

5. dissension, deadlock & oppression

a. dissesion & deadlock: judicial remedies:

1. Ct will appoint a receivership if (in addition to all other remedies being inadequate!)

i. corp. is insolvent (or threat of imminent insolvency)

ii. BOD is deadlocked leading to irreparable harm

iii. illegal, oppressive or fraudulent acts by BOD

iv. corp. assets are being wasted or misapplied

v. can't elect BOD for 2 consecutive years

2. Ct may dissolve the corporation only if after another year (after recivership) there is no plan to fix the corporation

b. oppression: no clear law in Texas

1. maj. owes a FD to the corporation

2. maj. owes a FD to min. SH's only if there is another basis of duty (e.g. confidential relationship - something more than the usual relationship of two parties starting a corp.)

3. one Tex App Ct orderd buy-out for "oppression" (see above)

examples: squeeze out; mismanagement; fraud; illegality

F. open corporate records

1. can be inspectd by director if rzbly related to directorship

2. by SH's if 6 mos or 5% & "proper purpose"

G. director's fiduciary duties to the corporation

1. duty of care & the bsns. judgment rule

a. there must be gross negligence in the process of making the decision

b. Ct will not reveiw decisions made:

1. in GF

2. on an informed basis and

3. in a manner BOD beleived to be in corp's best interests

b. BOD can rely on professionals and other documents

2. limiting liability - aoi can do this

3. duty of loyalty and conflicts of interest

a. self-dealing: interested director has burden to show it was fair to corp.

1. maj. vote of disinterested directors who know material facts

2. SH maj. vote or

3. if it is proved "fair" to corp => valid even though no disclosure

b. usurping corporate opportunity:

1. usurper must fully disclose!

2. even if corp. wouldn't have taken opportunity, director still breached duty of loyalty

4. duty of obedience: only ultra vires

H. Derivative Suits

1. notice: BOD has 90 days to fix before suit brought

a. exception: SOL would run out

b. exception: irreparable harm

2. standing:

a. SH owns shares at time of bad act

b. Sh will fairly/adequately represent the corporation's interests

3. req'd independent review: may reccommend dismisal; settlement req's ct's approval; ct can award atty's fees

4. recovery is to corp! not SH

5. exceptions to derivative suit rules: closely held corp w/ 35 SH's or less - entire suit can be viewed as direct suit w/ recovery directly to SH

I. Indemnification

A. required: wholly successful

B. prohibited: found liable to corp or

for improper benefit & willful, intentional misconduct

C. permitted: B standards:

· good faith &

· rzbl belief this act was in corp's best interests

limited to expenses if found liable to corp or for improper benefit

D. Corp's have more discreation to indemnify officers.

J. Fundamental Changes - BTIs

A. amendment of aoi

· 2/3 of all shares entitled to vote

B. merger

· ZAP, Inc. could merge with Terminix, Inc. => everything of ZAP is absorbed into Terminix

· Plan of Merger: who are the merging parties, terms, who survives the merger

· effect on ZAP SHs: they can't own ZAP stock anymore b/c ZAP won't exist (sometimes $ sometimes new mergers shares, etc. the merger plan decides this)

· approval: (gets approved by both corp's SHs)

· plan of merger

· acted on by BOD (BOD could block by not submitted vote to SHs)

· SH 2/3 vote (of all entitled to vote!)

· file articles of merger

· surviving corporation's exceptions: if its a small merger that doesn't affect the Survivor too much & dependent upon the plan of merger, then we can get around a SH vote

· SH hold same no. of shares

· doesn't change voting proportions by more than 20%

· SH's right to dissent

· appraisal =>

· gets fair value on his shares

· you can merge a subsidiary into a parent; this also gets around SH approval (unless over 10% of the sub's shares are not owned by Terminix)

C. share exchange

1. just like the triangular merger

2. is a more direct way for ZAP to merge under Terminix w/o Term having to set up the subsidiary

3. it's a way for Terminix to force all the ZAP SH's to sell them their shares (but only req's a 2/3 vote)

D. sale of substantially all the assets outside the ord. course of bsns [outside scope = not going to continue any bsns]

· use this if the parent doesn't want to acquire any debts/liabilites of little corp.; they just want the assets and to acquire it as a going concern

· process:

· ZAP sells assets to Terminix; could even include selling its name to Terminix.

· Terminix gives cash to ZAP.

· ZAP, Inc. will usually dissolve, pay out the ¢ recv'd from sale, to the SHs. (Dissolution also requres 2/3 approval.)

· bod must submit and 2/3 must approve (if P doesn't want to => dissent & appraisal)

· successor liability***what about later arising liabilities??? too bad b/c Texas does not recognize 'de facto' mergers!

· what if tort occurs from product after dissolution? you can's sue anyone

E. Conversion

1. plan of conversion converst Inc. into an LLP

2. BOD submits, 2/3 vote

3. SHs can dissent

4. file art. of conversion & you're done!

F. Dissolution

1. BOD submits; 2/3 vote of SHs

2. pay off creditors/liabilities

3. then SHs split up rest of $

K. Foreign Corps - qualification to do bsns in Texas - must register

L. Pro se representation: corp's, Pships, associations only allowed to appear in ct. via licensed counsel

VI. Limited Partnerships

A. liability

1. limited to that P's contributions

B. not subject to Texas franchise tax

C. formation:

D. finances:

E. withdrawal of a general partner:

F. withdrawal of a limited P:

G. assigning intersts & new P's:

H. dissolution:

VII. Limited Liability Companies: LLCs

VIII. Overview - comparing the entities