OUTLINE

Week Topic Text Chapters

1. (9/18: 7:10-8:30PM; 9/20)

What is Law? Effective Decision-Making in a Legal Environment {Class Exercises on What is Law; Effective Decision-Making}

S&R 1, 2, 3

2. (9/27) Facilitating Exchange; Value of Contracts; Creating Enforceable Rights -- Mutual Assent Requirement

S&R 9, 10

3. (10/4) Facilitating Exchange; Fairness, Capacity, Legality as Effects Upon Mutual Assent {Discussion Question – Mutual Assent in Cyberspace}

S&R 11, 13, 14

4. (10/11)

Facilitating Exchange; Creating Enforceable Rights – The Bargaining Requirement; Interpreting Terms of the Deal; Third-Party Issues

S&R 12, 15, 16

5. (10/18) MIDTERM

6. (10/25) NO CLASS

7. (11/1) Facilitating Exchange; What Excuses Contract Performance? Rights When Transactions Break Down

S&R 17, 18

8. (11/8) Business Association; The Simple Case – Sole Proprietor + Agents; Introduction to Unincorporated Associations

S&R 19, 20

9. (11/15)

Business Association; Unincorporated Associations Cont’d -- Partnerships and Hybrids {Discussion Question – Franchising; To Control or Not to Control}

S&R 31-33

10. (11/20: 7:10-8:30PM; 11/22 – NO CLASS)

Business Association; Corporations – How to Form, Characteristics S&R 34, 35

11. (11/29) Business Association; Corporations – Governance, SOX, Fundamental Changes {Discussion Question – Makeup of Corporate Boards}

S&R 36, 37

WEEK 1: Introduction and Background on Law Reading and Resources: S&R Chapters 1, 2, 3 Outline: I. Syllabus Review -- Goals

A. Spot Issues Among Complex Commercial Facts

B. Identify Pertinent Areas of Law That Impact Business Goals, Results

C. Clear Thought/Statement/Concision to Define Risks, Compliance or Non-Compliance Costs, “Bargain-Around” Opportunities

II. What is Law?

A. Constitution B. Legislation/Statutes (+Administrative Agencies/ Regulations)

C. Court Decisions

1. Precedent/Stare Decisis 2. Common Law “Database” [STQ6 (1-3)]

D. The Role of Private Models (UCC, Restatements, Uniform Laws) – “Statutes in

Waiting” E. The International Context

1. Code-Based Systems

2. Common Law Systems

3. Socialist Systems

4. Religion-Based Systems

III. What Law Applies? [STQ1]

A. Some Intuitive Factors: Domicile, Activity, Hierarchy

B. General Rule: C>S>R>D [STQ6 (4,5)]

C. Application of Law 1. Jurisdiction; Power Over the Person

2. --; Power over the Subject Matter [STQ3-5]

D. Qualification: Intent of Parties

IV. Mechanisms of Law – Lawsuits and Lawmaking

A. Lawsuits = Disputes

1. Disputes = Facts + Law 2. Multiple Stages: Summons/Complaint, Answer, Discovery, Motions, Pretrial Conference, Trial, Appeal 3. Written Opinions = Common Law 4. Decision Criteria Vary

B. Lawmaking = Statutes, Regulations to Address “Public” Issues, Decisions V. Why is Law Important to Managers?

A. Definition of Enforceable Rights for Deal-Making, Conduct of Business

1. Minimize Information Costs 2. Minimize Transaction Costs 3. Starting Point for Bargains – e.g. UCC and “Default Rules”

B. Influences Behavior C. Direct Impact on Enterprise Value [Examples: Value-Depleting Investigations and

Lawsuits, The Role of Due Diligence and Purchase Agreements in Corporate Mergers and Acquisitions]

D. Criminal Liability!!

VI. Managerial Analysis of Legal Issues

A. “Legal Issues” = Disputes, Transactions, Activities B. Analytical Tools

1. Expected Value, Generally

a. Decision to Sue: Positive Expected Value v. Negative Expected Value.

Caution: Asymmetric or Incomplete Information

b. Decision to Settle: PEV vs. NEV. Caution: Game Theory

Issues [STQ7]

2. Decision Trees – “Should I do A or should I do B?”, Uncertain Outcomes/Multiple Options. [STQ8]

a. Simple decision trees do not take into account opportunism. b. Don’t bark up the wrong tree!

i. Is there a bigger or broader decision lurking beneath the facts? ii. Is the litigation merely a symptom of a bigger business issue? iii. Is the real decision one regarding alternative approaches to a

corporate policy?

c. Don’t be afraid to go out on a limb! i. Represent as many additional decisions and uncertain outcomes

as you can identify to round out a limb. ii. Examples – experts, consultants.

d. Don’t miss the forest, while focusing on the trees!

i. Remember GIGO (Garbage In; Garbage Out) -- decision tree analysis is only as good as the information it presents.

ii. Timing matters!

3. Game Theory – “My actions depend on what another person might do and I don’t know what that person will do?” [STQ9]

a. Value of Cooperation

b. Value of Information

Week 2: Facilitating Exchange; Creating Enforceable Rights – Mutual Assent

Reading: S&R Chapters 9, 10; Pay Particular Attention to Chapter Problems Referenced Below Outline: I. Contracts

A. Background

1. Economic Context

a) Exchange Relationships Prevalent

b) 2 Commodities (X and Y), 2 Consumers (A and B), Starting Point and

Optimal Position

1. Trade If…..

2. Trade Until ….

c) Complexity of Mutual Benefit

d) Why Should Law/Legal Process Intervene?

2. The “Laws” of Contracts

a) Common Law

b) The Uniform Commercial Code (UCC)

c) Managerial Significance – Concept of Default Rules

3. Some Definitions, Distinctions, Managerial Significance

a) “Contract” – “Promise or set of promises of which the law gives a remedy or the performance of which the law in some way recognizes as a duty.”

b) “Express Contract” vs. “Implied Contract”

c) “Unilateral Contract” vs. “Bilateral Contract”

d) “Executed Contract” vs. “Executory Contract”

e) “Formal Contract” vs. “Informal Contract”

f) “Valid,” “Void,” “Voidable,” and “Unenforceable” Contracts

4. Standard Requirements of Contract Formation

a) Mutual Assent – “Meeting of the Minds”

b) Consideration – “Bargained-For Exchange”

c) Legality of Object

d) Capacity

5. When Contract Requirements Not Met

a) Promissory Estoppel

b) Quasi Contracts

B. The Requirement of Mutual Assent – Mutual Assent Requires Offer and Acceptance – A

“Meeting of the Minds” [Example: Peerless Case (1864), 125 Bales of Cotton from Bombay, Negotiation in August, Peerless/October, Peerless/December.] Reason for Mutual Assent Rules -- To distinguish the defining moment of agreement from all prior bargaining, in order to protect the agreement arrived at from any party’s opportunistic effort to revisit bargaining. Factors most often contributing to disputes: (1) time elapses; (2) circumstances change; and (3) “haggling.”

1. Offer – The offeror is “master” of the offer! What does this mean?

a) Requirements of Valid Offer

i. Communication

ii. Intent – Discuss Story of Doug, Dave, and Bubble Puppy.

1) Preliminary Negotiations

2) Advertisements [S&R 10- Lefkowitz Case (pg. 183), Problems 7, 17]

3) Auction Sales

iii. Definiteness [S&R 10-Problem 4]

1) Open Terms

2) Output and Requirements Contracts

b) Duration of Offers

i. Lapse of Time

ii. Revocation [S&R 10-Problems 2,5,13]

1) Option Contracts

2) Firm Offers under UCC

3) Statutory Irrevocability

4) Irrevocable Offers of Unilateral Contracts

5) Promissory Estoppel

iii. Rejection [S&R 10-Problem 2]

iv. Counteroffer [S&R 10-Problems 1,3] – When an offeree purports to accept an offer but in doing so adds conditions and qualifications; such conditional acceptance is not binding on the offeror. Acceptance must be a “mirror image.” Is a counteroffer an end to negotiation? Complicating factors are silence, study, elapsed time.

v. Death/Incompetency

vi. Destruction of Subject Matter

vii. Subsequent Illegality

2. Acceptance of Offer – Once accepted, a valid offer becomes a contract, the defining moment of obligation for both parties. Until then, … [Example: Fairmount Glass Case – Give me “lowest price you can make us for 10 carloads of Mason green jars, complete, with caps, packed 1 dozen to a case.” Reply – “we quote you Mason fruit jars …pints $4.50, quarts $5…for immediate acceptance and shipment no later than 5/15.” Purchaser then ordered “10 carloads per quotation.” Seller’s inventory depleted, “impossible to book order.” Valid offer and acceptance?] a) Communication of Acceptance

i. General Rule – Word or Conduct

ii. Silence as Acceptance?

iii. Effective Moment [S&R 10 – Problem 6]

1) Stipulated Provisions in Offer

2) Authorized Means

3) Unauthorized Means

4) Acceptance Following Prior Rejection

b) Variant Acceptances [S&R 10 – Problem 14]

i. Common Law

ii. UCC

Week 3: Facilitating Exchange; Fairness, Capacity, Legality as Affecting Mutual Assent Reading: S&R Chapters 11, 13, 14 Outline:

3. Conduct/Status Affecting/Invalidating Assent – Presumptions of freedom (no coercion), self-knowledge (reasonable clarity about one’s own preferences), and information (subjective knowledge of the world to distinguish among alternatives).

a) Unfair & “Unconscionable” Situations

i. Duress [S&R 11 – Problems 4,20]

1) Physical Compulsion

2) Improper Threats

ii. Undue Influence [S&R 11 – Problem 9]

iii. Fraud [S&R 11 – Problems 1,2,5,6,10,11] 1) In the Execution 2) In the Inducement -- False Representation of a Material

Fact, with Knowledge of Falsity and Intent to Deceive, Plus Justifiable Reliance

iv. Nonfraudulent Misrepresentation [S&R 11 – Problem 17]

v. Mistake [S&R 11 – Problems 3,7,8,12]

b) Illegal Bargains

i. Violations of Statutes Specifically [S&R 13 – Problem 2,13] – Common

Examples: Licensing Statutes, Gambling Statutes, Usury Statutes

ii. Violations of Public Policy [S&R 13 – Problems 1,5,3,4,10,11]

1) Common Law Restraint of Trade a) Sale of Business b) Employment Contracts

2) Exculpatory Clauses 3) Unconscionable Contracts – Absence of choice + Unreasonable

advantage = Unconscionable. What if terms clear, even though no real choice?

iii. Illegal Contracts Unenforceable, Generally

c) Contractual Capacity

i. Minors [S&R 14 – Problems 1,2,5,6]

1) Liability on Contracts

a) Disaffirmance

b) Ratification

2) Liability for Necessaries

3) Liability for Misrepresentation of Age

4) Liability for Tort Connected with Contract

ii. Incompetent Persons [S&R 14 – Problem 8] iii. Intoxicated Persons [S&R 14 – Problem 9]

Week 4: Facilitating Exchange; The Bargaining Requirement; Interpreting Terms of the Deal; Third Party Issues

Reading: S&R Chapters 12, 15, 16 Outline: I. Contracts (Continued)…

C. The Bargained-For Exchange (Consideration) – All business deals are not protected by law! The law is concerned only with deals (and promises) that involve willful exchange, trading, or swapping of one thing for another -- a “bargain.” It is the bargaining that requires mutual assent. The bargained-for exchange can be a return promise (bilateral contract) or the actual performance of an act (unilateral contract). But people deal with each other in a multitude of complex ways over time. So, many legal default rules have developed around this notion of bargained-for exchange, or consideration.

1. Legal Sufficiency

a) Adequacy – “$1.00 and other valuable consideration…”

b) Unilateral Contracts

c) Bilateral Contracts

d) Illusory Promises [S&R 12 – Problems 5, 14]

i. Output and Requirements Contracts ii. Exclusive Dealing Contracts iii. Conditional Promises

e) Pre-Existing Obligations

i. Modification of a Pre-Existing Contract [S&R 12 – Problem 7a] ii. Substituted Contracts iii. Settlement of a Liquidated Debt [Distinguish Payment Plans] iv. Settlement of an Unliquidated Debt [S&R 12 – Problems 4, 7b, 8, 15]

2. Bargained-For-Exchange [S&R 12 – Problem 1]

a) Past Consideration [S&R 12 – Problem 7c]

b) Third Parties

3. Certain Contracts Without Consideration But Still Enforced -- Promises to Perform Prior Unenforceable Obligations, Promissory Estoppel, …

D. Interpretation of Terms of Deal

1. Statute of Frauds – Many transactions in daily life are based on contracts and entail binding spoken promises, even though no writing memorializes the parties’

understanding. All contracts need not be in writing to be enforced; some, however, must be in writing. Conversely, nearly all exchanges with material outlays or complexity (i.e. most commercial transactions) will be reduced to writing and signed by the parties or their agents; but they don’t necessarily have to be in writing. One rationale for writings, whether required or not, is that they can minimize ambiguity and/or counteract the impact of default rules.

a) Contracts Subject To Statute of Frauds – Writing Required

i. Suretyship Provision -- Guarantees[S&R 15 – Problem 1] 1) Original Promise

2) Main Purpose Doctrine

3) Promise Made to Debtor

ii. Executor-Administrator Provision

iii. Marriage Provision

iv. Land Contract Provision

v. One-Year Provision [S&R 15 – Problems 2,7]

1) Possibility Test 2) Computation of Time 3) Full Performance by One Party

vi. Sales of Goods

1) Admission 2) Specifically Manufactured Goods 3) Delivery or Payment and Acceptance

vii. Modification or Rescission of Contracts

b) Compliance with Statute of Frauds [S&R 15 – Problem 5]

i. General Contract Provisions

ii. Sale of Goods

c) Effect of Noncompliance

i. Full Performance

ii. Restitution

iii. Promissory Estoppel

2. Parol Evidence Rule – How much of the discussions leading up to a written deal are

actually part of the deal? Issues: alternate views, indefinite haggling, extensive negotiation, give and take, elapsed time; also, agreement on core terms, leaving remaining details to good faith. [S&R 15 -- Leitz v. Thorsen Case (270), Problems 8,9]

a) The Rule – Prior or contemporaneous oral or written negotiations or agreements

that vary the terms of an integrated, written contract are not admissible to change or vary the written contract

b) What Rule Does Not Apply To [Example: “Integration” clauses vs. true intent]

c) Supplemental Evidence

3. General Rules Used by Courts to Interpret Contracts [S&R 15 – Problems 10, 19] E. Third Parties to Contracts

1. Assignment of Rights

a) Law Governing Assignments

b) Requirements of Assignment

c) Rights Assignable

d) Rights Not Assignable [S&R 16 – Problems 1, 11, 19]

i. Assignments That Materially Increase Duty, Risk, Burden ii. Assignments of Personal Rights iii. Express Prohibition [S&R 16 – Aldana Case (pg. 284)] iv. Assignments Prohibited by Law

e) Rights of Assignee

i. Steps in Shoes of Assignor ii. Notice

2. Delegation of Duties -- [S&R 16 – Macke Case (pg.285), Problem 5]

3. Third-Party Beneficiaries – [Example: A, for consideration, promises C to pay money or

perform services for B; A & C sign a contract; B can sue A if A fails to perform.] Problems arise in distinguishing between intended beneficiaries and incidental beneficiaries (i.e. outsiders). Recognizing third party claims of incidental beneficiaries is undesirable because it imposes costs and risks on promisors that were not factored into expectations and contract price. [S&R 16 – Problems 2, 6, 18]

a) Intended Beneficiaries

i. Donee Beneficiary ii. Creditor Beneficiary iii. Rights of Intended Beneficiary

b) Incidental Beneficiaries -- [Example: A contracts with C to build a beautiful,

decorative fence on A’s lot line with B. The finished portion of the fence will face B’s property, by custom. Can B sue C if C fails to perform?]

Week 7: Facilitating Exchange; What Excuses Contract Performance; Rights When Transactions Break Down

Reading: S&R Chapters 17, 18 Outline :

I. Contracts (Continued)…

F. Performance, Breach, & Discharge – At this stage we’re assuming a valid contract is in effect. The question is whether a party has kept his or her promise. The common scenario is when one of the parties refuses to perform on the ground that her contractual obligations have been excused or terminated. The other party cries “foul” and the issue is whether the non-performing party’s refusal is indeed justified. Justification can be based on the circumstances outlined below.

1. Conditions – are all about “risk.” Who should bear the risk of non-performance of a condition? The party controlling the risk, generally, or the party risking forfeiture of value in the event of non-occurrence.

a. Express Conditions [S&R 17 – Problems 10, 11]

i. Satisfaction of Contracting Party

ii. Satisfaction of Third Party

b. Implied-in-Fact Conditions

c. Implied-in-Law Conditions

d. Concurrent Conditions

e. Conditions Precedent

f. Conditions Subsequent

2. Discharge by Performance

3. Discharge by Breach -- Contracts law, in general, favors the continuation of a contractual relationship once it has begun. So, to avoid opportunism (i.e. looking for an excuse not to perform) we need rules that distinguish between significant or “material” excuses and trivial or formalistic ones.

a. Material Breach [S&R 17 – Problem 6]

i. Prevention of Performance

ii. Perfect Tender Rule

b. Substantial Performance

c. Anticipatory Repudiation [S&R 17 – Problem 8]

4. Discharge by Agreement of Parties 5. Discharge by Operation of Law

a. Impossibility

i. Destruction of Subject Matter[S&R 17– Problems1,5]

ii. Subsequent Illegality

iii. Frustration of Purpose [S&R 17 – Problem 2]

iv. Commercial Impracticability

b. Bankruptcy

c. Statute of Limitations

G. Remedies – The general rule is that an injured party may recover from the breaching party a sum – called expectation damages, or the “benefit of the bargain” – sufficient to put him in as good a position as if the contract had been performed in full.

1. Interests Protected

2. Monetary Damages – [Example: C agrees to build O’s house for $100k. Material and labor cost to C is $80k. Profit is $20k.]

a. Compensatory Damages

i. Loss of Value – [Example: After house is partly built ($50k of work expended) C repudiates and O spends $55k to finish job. Damage to O?]

ii. Incidental Damages iii. Consequential Damages iv. Expenses Saved

b. Nominal Damages

c. Reliance Damages – [Example: O repudiates after C has spent $50k on wages

and materials. Damage to C?]

d. Damages for Misrepresentation

e. Punitive Damages -- Generally, not allowed. Is the breach and compensate scheme fair? Economically efficient?

f. Liquidated Damages vs. Penalty [S&R 18 – Problem 2]

g. Limitations on Damages – [Example: B contracts with S for 1,000 barrels of oil

at $20 per, to be delivered in 90 days. On delivery date, oil is $14 per in the market. B refuses to go ahead with the deal. What are S’s damages?]

i. Foreseeability of Damages ii. Certainty of Damages iii. Mitigation of Damages – [Example: 1. Must S dispose of oil at $14 per on B’s breach? 2. UCC’s Lost Volume Seller Exception. 3. Case of Shirley Maclaine, Bloomer Girl, and Big Country/Big Man.]

3. Remedies in Equity – The law of contracts compels performance in very limited circumstances.

a. Specific Performance [S&R 18 – Problem 6] b. Injunctions [S&R 18 – Problem 4]

4. Restitution 5. Limitations on Remedies

Weeks 8 and 9: Facilitating Exchange Through Business Association; The Simple Case – Sole Proprietor + Agents; Unincorporated Associations – Partnerships and Hybrids

Reading: S&R Chapters 19, 20, 31-33 Outline: II. Business Association

A. Some Economic Considerations of Business Association

1. Definitions

a) Owners and Residual/Equity Interest

b) Notion of Control

c) Joint Economic Enterprise (Association) vs. Hired Inputs

2. Bargaining Elements in Association Relationships – Adding Others

a) Risk of Loss

b) Return

c) Control

d) Duration

3. Bargaining Constraints

a) Conflict of Interest

b) Government Regulation

4. Additional Bargaining Considerations

a) Implied Contract vs. Written Agreement

i. Information Costs

ii. Transaction Costs

b) Structured Relationships – Intended and By Default

i. Written Contracts

ii. Regulatory Provisions

5. Pertinent Legal Forms/Legal Rules

a) Sole Proprietor

b) Agency Relationships c) Partnerships

d) Corporations e) Other Forms/Hybrids – Unincorporated Associations, LLC’s, LLP’s

B. The Simple Case of the One-Person Business: A Special Sole Proprietor

1. Ownership Attributes

a) Proprietorships as Organizations: Nexus of Associations/Contract Rights

b) Ownership and Management 2. Relationships with Creditors

a) Unlimited Liability

b) Open Accounts

c) Business and Personal Debt

d) Debt and Equity; Equity Attributes of Debt

e) Leverage

C. Adding Others to the Simple Case: Agency Relationships

1. Nature of Agency

a) Scope of Agency Purposes

b) Other Legal Relations

2. Creation of Agency a) Formalities

b)Capacity

c) Deal Point Considerations: Question of Risk and Control – Employee (Servant) vs. Non-Servant Agent Perspective

i. Principal’s Control – How Task Performed [S&R 19 – Problem 12] ii. Power to Terminate – Compare Ability to Fire Agent Serving Multiple Masters

iii. Duration of Relationship – Compare Liability for Damages to Agent iv. Incentives -- More Pertinent as Control Loosens v. Specificity in Direction vi. Availability of Replacements vii. Vicarious Liability

3. Duties of Agent to Principal a) Duty of Obedience

b) Duty of Diligence [S&R 19 – Problem 8]

c) Duty to Inform

d) Duty to Account

e) Fiduciary Duty

i. Conflicts of Interest [S&R 19 – Argovitz Case (pg.339), Problem 11] ii. Duty Not to Compete iii. Confidential Information iv. Duty to Account for Financial Benefits v. Principal’s Remedies

4. Duties of Principal to Agent

a) Contractual Duties

i. Compensation

ii. Reimbursement

iii. Indemnification

b) Tort Duties

5. Termination of Agency

a) Acts of the Parties

i. Lapse of Time

ii. Fulfillment of Purpose

iii. Mutual Agreement of the Parties

iv. Revocation of Authority [S&R 19 – Problem 5]

v. Renunciation by Agent

b) Operation of Law

i. Bankruptcy

ii. Death

iii. Incapacity

iv. Change in Business Conditions

v. Loss/Destruction of Subject Matter

vi Disloyalty of Agent

vii. Change in Law

viii.Outbreak of War

c) Irrevocable Agencies

6. Disputes Over Respective Rights/Obligations

a) Principal and Third Parties

i. Contract Liability of Principal

1) Types of Authority [S&R 20 – Problem 4] a) Actual Express Authority b) Actual Implied Authority

c) Apparent Authority

2) Delegation of Authority

3) Effect of Termination of Agency on Authority [S&R 20 – Problem 1]

4) Ratification [S&R 20 – Problem 12]

a) Requirements

b) Effect

5) Fundamental Rules of Contractual Liability

ii. Tort Liability of Principal [S&R 20 – Problems 7, 8] 1) Direct Liability of Principal

a) Authorized Acts of Agent

b) Unauthorized Acts of Agent

2) Vicarious Liability for Unauthorized Acts a) Respondeat Superior

b) Torts of Independent Contractor

iii. Criminal Liability of Principal

b) Agent and Third Parties

i. Contract Liability of Agent

ii. Tort Liability of Agent

iii. Rights of Agent Against Third Parties

Weeks 8 & 9 (cont.) Facilitating Exchange Through Business Association; Unincorporated Associations Partnerships and Hybrids

Reading: S&R Chapters 31-33 Outline: II. Business Association (Continued)…

D. General Partnerships and Resulting Relationships

1. Nature of Partnership

a) Definition b) Entity-Theory [S&R 31 – Problem 7]

i. Partnership as Legal Entity ii. Partnership as Legal Aggregate

c) Types of Partners

2. Formation of Partnership

a) Economic Rationale and Deal Points

i. Joint Ownership vs. Purchased Inputs ii. Need to Assemble At-Risk Capital iii. Control Follows Risk iv. Combining Capital and Personal Services

b) Formality vs. Informality: Articles of Partnership

i. Statute of Frauds ii. Firm Name

c) Tests of Partnership Existence [S&R 31 – Problems 1,4]

i. Association ii. Business for Profit iii. Co-Ownership

d) Partnership Capital and Property

e) Rights in Specific Partnership Property

f) Partner’s Interest in the Partnership [S&R 31 – Problem 6]

i. Assignability ii. Creditors’ Rights

3. Dissolution of General Partnerships [S&R 32 -- Problem 19]

a) Causes of Dissolution

i. Act of Partners

ii. Operation of Law

iii. Court Order

iv. RUPA and “Dissociation”

b) Effects of Dissolution

i. Authority

ii. Existing Liability

4. Winding Up

a) Right to Wind Up

b) Distribution of Assets [S&R 32 – Problem 6]

c) Marshalling of Assets

5. Continuation after Dissolution: Wrongful Dissolution, RUPA

6. Relationships Among Partners

a) Duties

i. Fiduciary Duty

ii. Obedience

iii. Care

b) Rights [S&R 32 – Problem 7]

i. Right to Share in Distributions [S&R 31 – Problem 11]

1) Right to Share in Profits

2) Right to Return of Capital

3) Right to Return of Advances

4) Right to Compensation

ii. Right to Participate in Management

iii. Right to Choose Associates

iv. Enforcement Rights

1)Right to Information and Inspection of Books

2)Right to Account [S&R 31 – Problem 10]

7. Relationship Between Partners and Third Parties

a) Contracts of Partnership

i. Authority to Bind Partnership [S&R 32 – Problem 1]

1) Actual Express Authority

2) Actual Implied Authority

3) Apparent Authority

ii. Partnership by Estoppel

b) Torts and Crimes of Partnership [S&R 32 – Problem 11]

c) Liability of Incoming Partner [S&R 32 – Problem 5]

E. Hybrids: Limited Partnerships

1. Formation -- Filing

2. Rights – Control, Voting, Choice of Associates, Distributions

3. Duties and Liabilities

4. Dissolution

5. Other Types of Unincorporated Business Associations -- Limited Liability Partnerships, Limited Liability Limited Partnerships

F. Hybrids: Limited Liability Companies

1. Formation – Filing, Publication, Operating Agreement

2. Rights of Members -- Profit and Loss Sharing, Management, Voting 3. Duties and Liabilities

4. Dissolution

Week 10: Facilitating Exchange Through Business Association; Corporations – How to Form, Characteristics

Reading: S&R Chapters 34, 35 Outline: II. Business Association (Continued)…

G. Corporations – the evolutionary step beyond agency, sole proprietor, and partnership relationships. There are new participants – shareholders, directors, officers – in addition to employees, non-servant agents, creditors. But the principles of contract and agency are still interwoven within corporate associations. And the deal points of risk vs. control are foremost in determining the nature of relationships among shareholders, directors, officers.

1. Nature of Corporations

a) Corporate Attributes

i. Legal Entity

ii. Creature of the State

iii. Limited Liability

iv. Free Transferability of Corporate Shares

v. Perpetual Existence

vi. Centralized Management

vii. As a Person

viii. As a Citizen

b) Classification of Corporations

i. Public or Private (Closely Held vs. Public Dichotomy)

ii. Profit or Nonprofit

iii. Domestic or Foreign [Tiller Construction Case (Pg. 660), S&R 34 – Problems 9, 10]

1) Doing Business 2) Scope of Regulation 3) Sanctions

iv. Publicly Held or Closely Held

v. Subchapter S Corporation

2. Formation of Corporations

a) Organizing the Corporation

i. Promoters [Coopers Case (Pg. 662; S&R 34 – Problem 2]

1) Promoters’ Contracts

2) Promoters’ Fiduciary Duty

ii. Subscribers [S&R 34 – Problems 4, 12]

iii. Selection of State for Incorporation

b) Formalities of Incorporation

i. Selection of Name

ii. Incorporators

iii. Articles of Incorporation

iv. Organizational Meeting

v. Bylaws

3. Recognition or Disregard of Corporate Status a) Defective Incorporation

b) Piercing the Corporate Veil [S&R 34 – Problem 14]

i. Closely Held Corporations

ii. Parent-Subsidiary Corporations

4. Corporate Powers

a) Sources of Corporate Powers [S&R 34 – Problem 8]

i. Statutory Powers ii. Express Charter Powers iii. Implied Powers

b) Ultra Vires Acts

c) Liability for Torts and Crimes

5. Financial Structure of Corporations – Stock Certificates, Bond Certificates, etc. are pieces of

paper – but they are tangible evidence of an important set of rights, interests, claims against assets in an incorporated business. Differences in the terms of arrangements with stockholders, debt holders, are driven by the way in which the various parties deal re: risk assumed by their investment vs. control bargained for to minimize this risk.

a) Debt Securities

i. Authority to Issue ii. Types

1) Unsecured Bonds 2) Secured Bonds 3) Income Bonds 4) Convertible Bonds 5) Callable Bonds

b) Equity Securities

i. Issuance of Shares

1) Authority to Issue [S&R 35 – Problem 2]

2) Preemptive Rights

3) Amount of Consideration for Shares [S&R 35 – Problem 4]

a) Par Value Stock b) No Par Value Stock c) Treasury Stock

4) Payment for Shares

5) Liability for Shares

ii. Classes of Shares

1) Common Stock

2) Preferred Stock -- Dividend Preferences, Liquidation Preferences [S&R

35 – Problem 1]

c) Dividends and Other Distributions

i. Types – Cash, Property, Stock, Liquidating Dividends

ii. Legal Restrictions

1) Earned Surplus Test

2) Surplus Test

3) Net Assets Test

iii. Declarations and Payment

1) Shareholders’ Right to Compel Dividend [S&R 35– Problem 9]

2) Effect of Declaration

iv. Liability for Improper Dividends and Distributions [S&R 35 – Problem 10]

Week 11: Facilitating Exchange Through Business Association; Corporations – Governance, Sarbanes-Oxley, Fundamental Changes

Reading: S&R 36, 37 Outline: II. Business Association (Continued)…

6. Management Structure of Corporations

a) Corporate Governance, Generally – Characterized by 3 groups – shareholders, directors, and officers – and by the broad delegation by shareholders, through directors, of authority over day-to-day matters to officers. A primary theme of this structure is the separation of ownership and control.

b) Role of Shareholders – The owners of a corporation’s residual or equity interest.

i. Voting Rights 1) Shareholder Meetings

2) Quorum and Voting

3) Election of Directors

a) Straight Voting b) Cumulative Voting

4) Removal of Directors 5) Approval of Fundamental Changes 6) Concentrations of Voting Power

a) Proxies b) Voting Trusts c) Shareholder Voting Agreements [S&R 36 – Problem 8]

7) Restrictions on Transfers of Shares

ii. Enforcement Rights [S&R 36 (Pg. 707)]

1) Right to Inspect Books and Records

2) Shareholder Suits

a) Direct Suits

b) Derivative Suits

3) Shareholder’s Right to Dissent

c) Role of Directors and Officers

i. Function of Board of Directors – Directors have the power and duty to manage the affairs of the corporation. They are not strictly agents of the shareholders or the corporation, but they have trustee-like (and agent-like) fiduciary duties.

1) Selection and Removal of Officers

2) Capital Structure

3) Fundamental Changes

4) Dividends

5) Management Compensation

ii. Election and Tenure of Directors

1) Election, Number, and Tenure

2) Vacancies and Removal

3) Compensation

iii. Exercise of Directors’ Functions

1) Quorum and Voting [S&R 36 – Problem 2]

2) Action Taken Without Meeting

3) Delegation of Powers [S&R 36 – Problem 3]

4) Directors’ Inspection Rights

iv. Officers -- Unlike directors, officers are agents of the corporation. Their authority

is set and delegated by the directors via by-law or board resolution.

1) Selection and Removal

2) Role

3) Authority -- Actual Express Authority, Implied Authority, Apparent Authority, Ratification

v. Duties of Directors and Officers – Fiduciary!

1) Obedience

2) Diligence

a) Reliance Upon Others

b) Business Judgment Rule – The broad delegation of corporate authority by shareholders, and the potential risk of constant second-guessing of business decisions, is counterbalanced by the Business Judgment Rule which largely immunizes good faith managerial decisions in the face of uncertainty from shareholder challenge and judicial intervention. [S&R 36 – Problems 1, 10]

3) Loyalty

a) Conflict of Interest [S&R 36 – Problems 5a, 6]

b) Loans to Directors

c) Corporate Opportunity [S&R 36 – Klinicki Case (Pg. 717); Problem

5(b)]

d) Transactions in Shares

e) Duty Not to Compete

4) Indemnification of Directors and Officers

7. Fundamental Changes of Corporations -- There is economic good sense in facilitating fundamental changes in corporations – to assist in efficient exchange and the overall allocation of resources to their best use. Fundamental changes, however, may have material impacts on the respective rights/risks/returns/control of shareholders, officers, and directors of the corporation. The law seeks to balance the interests of these stakeholders in an equitable manner in the face of these inevitable changes.

a) Charter Amendments

i. Approval by Directors and Shareholders

ii. Approval by Directors

b) Combinations

i. Purchase or Lease of All or Substantially All Assets

ii. Purchase of Shares

iii. Compulsory Share Exchange

iv. Merger [S&R 37 – Problem 3]

v. Consolidation [S&R 37 – Problem 4]

vi. Going Private

vii. Dissenting Shareholders

c) Dissolution

i. Voluntary Dissolution

ii. Involuntary Dissolution

iii. Liquidation

iv. Protection of Creditors