Biz Org Outline - Agency
Agency
I.
II.
Who is an Agent
A. Rule  An agency relationship is created once a party agrees to act on behalf of a second party subject to the
second party’s control.  Gorton v. Doty
a. Agency means more than mere passive permission.
i.
It involves request, instruction or command.
B. Restatement of Agency § 1 (older restatement)
1. Basic Standard Test
a. Agency is the fiduciary relationship which results from the manifestation of consent by one
person (Principal) to another that the other shall act on his behalf (Agent) and subject to his
control and consent by another so to act.
Agent Authority
A. Rule  A fiduciary agency relationship merely requires a “manifestation of consent by one person to another that
the other shall act on his behalf and subject to his control, and consent by the other so to act,” regardless of
whether a contract was formed or the intent of the parties was to be bound by the legal obligations of that
relationship.  A. Gay Jenson Farms co. v. Cargill, Inc.
1. 3-part test a. Did they act on the behalf of the company;
b. Did they subject control over the company;
c. Did they have control by consent?
B. In agency, instrument stating agent’s authority, typically nature + extent
1. Agent need not be a lawyer
a. Ex.
i.
Health care power of attorney might give child of elderly parent right to confidential
medical information, right to make medical decisions under specified circumstances
such as patient incapacity.
C. Actual Authority
1. An agent acts with actual authority when, at time of taking particular action or actions have legal
consequences for principal, the agent reasonably believes, in accordance with the principal’s
manifestations to agent, that the principle wishes the agent to take that particular action or actions.
2. Scope of Actual Authority:
a. An agent has actual authority to take action designated or implied in principal’s manifestations
to agent, and, acts necessary or incidental to achieving principal’s objectives, as agent
reasonably understands principal’s manifestations and objections – at the moment when agent
determines how to act.
b. An agent’s understanding of principal’s objectives is reasonable if consistent with principal’s
manifestations, and, inferences that a reasonable person in agent’s position would draw from
circumstances creating agency.
i.
A change in circumstances can make it reasonable for the agent to exceed the “stated”
authority by principal.
ii.
Long-Time Agent: It may be reasonable for an agent to interpret principal’s instructions
as tolerating a certain degree of deviation even from explicit restrictions.
1) What is reasonable is determined by course of dealing, not necessarily agency
law.
3. Express Authority  Restatement §2.01
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Biz Org Outline - Agency
a.
III.
Principal tells agent to do X, Agent does X, Principal is bound to pay for X or is liable for X’s
purchase or action.
4. Implied Authority  Restatement § 2.01 & 2.02
a. If a principal tells an agent to do something, then the agent can do what is necessary to carry out
instructions.
i.
Must be reasonable and necessary and incidental
D. Apparent Authority  Restatement §2.03, §3.03
1. Apparent Authority depends on the communication between the principal and the third party.
a. Reasonable to believe that A has the right to act on behalf of P
i.
Words, behavior, anything that conveys someone has authority.
b. The third party believes that the agent has the authority to deal for the principal due to the
actions of the principal.
i.
Note  Has to be traceable to some manifestation by the principal.
ii.
Apparent authority created by principal’s manifestation that agent has authority to act
with legal consequences for principal who makes manifestation.
iii.
If third party reasonably believes agent to be authorized and belief is traceable to
principal’s manifestation.
1) In some circumstances, manifestation could simply be failure to disavow
actions of someone who might reasonably be thought to be an agent.
2) Principal may also make manifestation by placing agent in defined position in
organization.
2. You can have both apparent and actual authority and normally will want to plead both.
3. NOTE: Where the instructions are clear, precise and imperative, they should be followed strictly and
exactly, and a violation of definite instructions canoe be excused by a custom ore usage in the business
and makes the agent liable for loss resulting therefrom.
E. Limiting Authority
1. To limit authority of Agent you need to make all interested parties aware of the limits of the agent’s
authority.
Liability of Principal to Third Parties in Contract
A. The Agents Authority
1. Implied Authority
a. Rule  Implied authority is actual authority that is proven circumstantially to indicate that the
principal intended to delegate powers to the agent that are necessary for carrying out the
agent’s duties, and one major circumstantial factor is prior work performed by agent for
principal.  Mill Street Church of Christ v. Hogan
2. Apparent Authority
a. Rule  An agent has the apparent authority to act in a manner that is reasonable for a person in
the agent’s position, and a third party can rely on those actions when a principal indicates
through its actions that an agent had the appropriate authority.  Three Seventy Leasing v.
Ampex
3. Undisclosed Agent
a. Rule  An undisclosed principal can be held liable for the actions of an agent who is acting with
an authority that is reasonable for a person in the agent’s position regardless of whether the
agent has the actual authority to do so.  Watteau v. Fenwick
b. If you conceal or do not disclose that the agent is your principal, you are liable for everything
they do.
B. Ratification
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Biz Org Outline - Agency
1.
2.
3.
The adoption or by a principal of an act performed on his behalf by an agent which act was performed
without authority.
a. The ratification by the principal of unauthorized act of his agent is equivalent to an original grant
of authority.
b. On acquiring knowledge of the unauthorized act of an agent, the principal should promptly
repudiate the act; otherwise, it will be presumed that he has ratified and affirmed the act.
Ratification  is adoption by principal of act performed on his behalf by agent without authority and
result is equivalent to original grant of authority.
a. Implications Include:
i.
Agent not party to the contract;
ii.
Contract binding on principal and counterparty;
iii.
Agent generally not liable for exceeding authority.
b. Requires acceptance of the results of the act with intent to ratify, and with full knowledge of all
the material circumstances.
Rule  Ratification of an agency relationship by the principal requires full knowledge of the material
circumstances, regardless of the principal receiving the proceeds or benefits of the agent’s work. 
Botticello v. Stefanovicz
a. Ways to ratify
i.
Express affirmation
ii.
Implied affirmation through acceptance of the benefits
1) When it is possible to decline the benefits
iii.
Implied affirmation through silence or inactions
1) You cannot wait forever
iv.
Implied affirmation by trying to enforce the contract yourself.
v.
Ratification is an all or nothing deal
C.
IV.
V.
Estoppel
1. Rule  Absent proof of an agency relationship, a party may still have a duty of care for the other party to
ensure that the other party is not disadvantaged in dealing with the party.  Hoddeson v. Koos Bro
a. There is a duty of care to protect your customers from injury.
2. Must have  1) tortious dereliction of duty or  Negligence and 2) Detrimental Reliance
Agents Liability on Contract
A. Agents are liable when they violate their fiduciary responsibility
B. Rule  If an agent does not disclose the principal when he is acting as an agent, he can be held personally liable
for all the debts.  Atlantic Salmon v. Curran
C. Disclosure Rules
1. If you are fully undisclosed – Don’t know that there is a principal
a. the Principal Pays
i.
Principal hides behind the agent
2. Is partially disclosed – you know there is a principal just don’t know who
a. the agent pays
Liability of Principal to third parties (Torts)
A. If there is an employer / employee relationship there is a liable relationship
1. Rule  Determining whether a master-servant relationship exists, rather than an independent contractor
relationship, is a question of fact that will be answered in the affirmative when the master exerts a
considerable amount of control over the responsibilities of the servant.  Humble Oil & Refining Co. v.
Martin
Page 3 of 25
Biz Org Outline - Agency
Rationale  master much more reliable source of compensation for victims, and corresponding expense
becomes cost of doing business.
B. If there is an employer – Independent Contractor you need to look at the relationship.
1. Rule  A master-servant relationship does not exist when an independent contractor controls the day-today operations of the entity that is responsible for damages suffered by a plaintiff.  Hoover v. Sun Oil
Company
2. Rule  When establishing an agency relationship through a contract, the nature and extent of the control
agreed upon will determine whether the agency exists.  Murphy v. Holiday Inns, Inc.
a. Instrumentality Rule
i.
A franchisor is not negligent if they had no control over the instrument that injured the
plaintiff.
ii.
This is a minority rule – it was emerging, but it stopped.
3. In some circumstances, a principal can be held liable for an independent contractor’s actions when the
principal’s manifestations suggest that I.C. is servant of principal.
C. Amount of Control
1. Rule  A franchise agreement that goes beyond the stage of setting standards, and allocates to the
franchisor the right to exercise control over the daily operations of the franchise, an agency relationship
exists.
a. If you have the right to control it, then you are on the hook and are liable.  Miller v.
McDonald’s Corp.
D. Scope of Employment
1. Rule  An employer will be held liable if the actions of the employee arise out of the course of his
employment.  Ira S. Bushey & Sons Inc. v. United States
a. Bushey 3 part test  if act was done in scope of employment
i.
If some harm is foreseeable, the principal is liable for his agent’s damage.
ii.
Conduct by the servant that doesn’t create risks different from others generally will not
give rise to liability.
iii.
The conduct must relate to the employment.
2. Rule  An employer is liable for damages resulting from an assault by an employee when the assault was
in response to a plaintiff’s interference of the employee’s duties.  Manning v. Grimsley
a. The further you get away from the present interference (geographically or time) the harder it will
be to bring in the former employer.
Liability for Torts of Independent Contractors
A. Rule of Law  Some actions are so inherently dangerous that a party cannot delegate their liability for the duty of
care to another party.  Majestic Realty Associated, Inc. v. Toti Contracting Co.
1. There are 3 exceptions when we will hold a Principal liable for the act of an Independent Contractor:
a. If the principal exercises to much control
b. If they hire an incompetent contractor  Incompetency
c. Negligence Per Se  Inherently dangerous activities
Fiduciary Obligations of Agents
A. Duties During Agency
1. Duty of Loyalty
a. Rule  An employer has a fiduciary duty, as the employer’s agent, to disclose to the employer
what the employer, as principal, has a right to know.  Duty of Loyalty
b. Restatement (Second) of Agency § 387:
i.
Unless otherwise agreed, an agent is subject to a duty to his principal to act solely for
the benefit of the principal in all matters connected with his agency.
2.
VI.
VII.
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Biz Org Outline - Agency
c.
2.
3.
Restatement (Second) of Agency § 13:
i.
The employee has a duty to deal openly with the employer and to fully disclose to the
employer information about matters affecting the company’s business.
d. Rule  An agent has a duty to act solely for the master, and any profit earned while violating
this duty belongs to the master. Reading v. Regam  Secret Profit
e. Remedy  If an agent has received a benefit as a result of violating the duty of loyalty, the
principal is entitled to recover from him what he has so received, its value, or its proceeds, and
also the amount of damage thereby caused, except that if the violation consists of the wrongful
disposal of the principal’s property, the principal cannot recover its value and also what the
agent received in exchange therefor.
i.
Note  In the absence of proven damages, the court may order the return of any
compensation the agent earned over the course of the agency.
1) Not always a remedy; it’s an equitable decision by court.
Duty of Good Conduct
a. Rule  An agent has a duty, within the scope of the agency relationship, to act reasonably with
the facts that the agent knows, has reason to know, or show know when:
i.
Subject to any manifestation by the principal, the agent knows or has reason to that
principal would wish to have the facts or the facts are material to the agent’s duties to
the principal.
b. Remedy  Standard remedy for breach is termination, even if agent has contractual right for
fixed employment.
i.
Statutory state employment law considerations may also be relevant.
Duties after Termination of Agency Agreement
a. Rule  An employee can owe a fiduciary duty to their employer for the employer’s trade secrets
after their service has been terminated.  Town and Country House & Home Service, Inc. v.
Newbury
i.
You may not steal your employer’s customers, knowledge of pricing, knowledge of time,
etc...
Page 5 of 25
Biz Org Outline - Partnerships
Partnerships
I.
Basics
A. A partnership is an association of two or more persons to carry on as co-owners a business for profit.
1. Needs a profit motive.
2. Intent does not matter.
a. Whether or not the persons intend to create partnership is irrelevant, unless, the association or
entity is formed under other entity laws (i.e. corporations, LLC, LP)
b. Partnership may be created despite explicit disclaimer.
3. Default partnerships are General Partnerships.
4. Partnership agreement  means an agreement, whether:
a. Written,
b. Oral, or
c. Implied,
. . . among partners concerning partnership, including amendments to partnership agreement.
B. Duration
1. Generally, has a limited life
a. Death can end a partnership or duration in a partnership agreement.
C. Transferability
1. Limited
a. The only thing that can be transferred is profits and losses
i.
You cannot sell rights to control.
D. Structure
1. Flexible
a. Operation is less standardized
E. Formation
1. Status Formation
a. Do not need to affirmatively file or do something.
b. Most court traditional determine if there is a partnership
i.
must have sharing of control and profits
ii.
however, there is no magic formula to decide if there is a partnership or not
1) Must have a little of each but there is no standard test to determine how much
of each is needed.
c. You can become partners regardless of intent.
F. Liability
1. The real issue is liability
a. You don’t want to accidently become a partner with someone as you incur liability for their
actions.
b. In a typical case, despite joint and several liability of partners for partnership obligations, to get
partner’s assets in claim based on partnership:
i.
Sue & win v. partnership;
ii.
Sue & win v. partner; and
iii.
Judgment v. partnership remains unsatisfied for specified period (usually 90 days)
2. Limited Partnership: General Partner has unlimited liability and limited partners have limited liability.
Whereas, Limited Liability Partnerships are different in the sense that each partner is limited in terms of
liability to the amount of their investment. LLP’s only for specified professionals.
Page 6 of 25
Biz Org Outline - Partnerships
G. UPA and RUPA
1. Uniform Partnership Act (revised UPA) is like the UCC.  Default Rules
a. Indicators of partnerships  according to RUPA (1997)
i.
Shared Property (does not in itself establish a partnership, but good indicator)
ii.
Gross Returns being shared. (does not in itself establish a partnership, but good
indicator)
iii.
Profit Shares presume partnership
1) Unless
a) payment of debt
b) payment of wages
c) payment for rent
d) payment of annuity
e) payment of interest
f) Payment for independent contractor services
2. RUPA  gives supremacy to partnership agreement in almost all situations.
a. Largely a series of default rules that govern relations among partners in situations they have not
addressed in the partnership agreement.
b. Primary focus of RUPA is the small, often informal partnership.
i.
Larger partnerships generally, have a partnership agreement addressing, and often
modifying, many provisions of RUPA.
c. Under RUPA, there is not necessarily a “new” partnership just because membership changes.
d. RUPA entity approach:
i.
Partnership can sue and be sued in name of partnership
ii.
Partners who embezzle from partnership are now subject to some criminal penalties as
shareholders who embezzle from corporations.
H. ORS 67.042
1. Partnership agreement may NOT entirely remove –
a. Partner’s access to books and records,
b. Duties of:
i.
Loyalty;
ii.
Care;
iii.
Good faith & fair dealing.
c. Partner’s ability to withdraw,
d. Court’s normal capacity to expel partnership, or
e. Certain triggers for terminating partnership.
2. Partnership agreement does not modify rights of third parties with respect to partnership.
a. This principle mainly important for contract or tort.
I. ORS 67.050(1)
1. A partnership is an entity distinct from its partners.
2. The entity theory is one of two main theories governing the law’s treatment of partnerships.
a. The partnership is “a distinct entity interposed between partners and the partnership assets.”
3. The aggregate theory was traditionally applied in the common law and posits that partnerships are
“nothing more than a conduit for a collection of individuals.” Int’l Marine Underwriters v. ABCD Marine,
313 P.3d 395 (WA. 2013).
a. A partnership is not a separate legal entity.
b. Aggregate theory continues to govern he personal liability of partners
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Biz Org Outline - Partnerships
c.
d.
ORS 67.105(1) holds partners jointly and severally liable for all partnership’s obligations.
In contrast, with a corporation or an LLC, there is typically no personal liability beyond the
individual shareholder or member’s stake in the entity.
J.
II.
III.
IV.
ORS 67.060
1. Property acquired by partnership is property of partnership – not of individual partners.
K. ORS 67.065
1. Partnership property if acquired:
a. In partnership’s name,
b. By a partner with indication in transfer document of
i.
Partner’s capacity as partner, or
ii.
Existence of partnership, 0r
c. Presumptively, if partnership assets used to obtain.
2. Otherwise, property acquired in partner’s name presumed separate property.
What is a partnership and who are considered partners
A. Creation of Partnership
1. Rule of Law  The determination of whether a partnership exists requires an analysis of an extensive set
of factors that indicate the extent of the relationship in question.  Southex Exhibitions, Inc. v. Rhode
Island Builders Association (RIBA), Inc.
2. Court looks at several elements when deciding partnership
a. Intent
b. Profit Share
c. Share in losses  Risk
d. Ownership and Control of property
e. Exclusive Control of Management
f. Language in Agreement
g. Conduct towards third parties
h. Rights upon dissolution.
i. Investments in to the business
3. Court must look at all the elements in the entirety of the situation.
4. Rule  The sharing of profits does not alone create a partnership, despite the parties’ intentions. 
Fenwick v. Unemployment Compensation Commission
B. Partners v. Lenders
1. Rule  An agreement that offers a degree of control by a first party to protect first party’s assets should
not be considered a partnership if factors as a whole indicate that the other party still maintains day-today control of the business.  Martin v. Peyton
Partnership by Estoppel
A. Rule  Partnership by estoppel creates a liability to third parties who rely upon representations that a partnership
exists. To a third party, are the 2 entities holding themselves out in a way that a 3 rd party could expect and rely on
them being partners.  Young v. Jones.
1. Need reasonable expectation and reliance
The rights of partners in Management
A. Default Rule  majority rule.
1. no partner can act unilaterally
B. Rule  Each partner has an equal right to the management of the business and any business performed under the
scope of the partnership can only be contravened by a majority of the partners.  National Biscuit Company v.
Stroud
1. Both partners have buying and selling rights and all actions by one partner are binding on the other.
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Biz Org Outline - Partnerships
V.
VI.
VII.
VIII.
IX.
X.
a. Each partner is an agent of the partnership.
C. Rule  A partner will not be permitted to recover expenses that benefit the partner individually rather than
benefiting the partnership.  Summers v. Dooley
1. If you go outside the partnership you bare the liability and risk
D. Rule of Law  The fiduciary duty in a partnership ensures that a partner does not profit for themselves at the
expense of the partnership.  Day v. Sidley & Austin  Partners sue each other.
Partnership Property
A. In a partnership, the partnership owns the property.
1. The partners do not own the property individually but own interest in the partnership
B. Rule of Law  A conveyance of partnership property by one partner held in the name of the partnership is made
in the name of the partnership and not as a conveyance of the individual interests of the partners.  Putnam v.
Shoaf
Fiduciary Obligations of Partners
A. Rule of Law  Members of a partnership owed duty of loyalty to each other and so must disclose opportunities
that arise in order for both to have an equal chance to take advantage of it.  Meinhard v. Salmon
1. The duty extends to further than just the market place and honesty.
2. Partners owe each other a heightened duty of loyalty.
Partnership Grab and Go
A. The principals of partnership apply to joint ventures.
1. Joint Ventures  no formal significance, and the same as a partnership.
2. Joint ventures breach their fiduciary duty of loyalty to co-joint ventures where they take for themselves
an opportunity that belongs to the joint venture without giving their co-joint ventures the chance to
participate in the opportunity.  Sandvick v. LaCrosse
Exiting a Partnership
A. Rule  A partner has the obligation to render a true and full accounting of business affecting the partnership.
1. The partner breaches his fiduciary duty by using his position of trust and confidence to the disadvantage
of the partnership.  Meehan v. Shaughnessy
B. In the case of a general partnership, partnership status is non-transferable.
Expulsion from a Partnership
A. Rule  When a partner is involuntarily expelled from a business, his expulsion must have been in good faith for
dissolution to occur without violating the partnership agreement.  Lawlis v. Kightlinger & Gray
Partnership Dissolution
A. When Judicial Dissolution is Proper
1. Rule  Courts of equity may order the dissolution of a partnership where there are
a. quarrels and disagreements of such a nature and to such extent that all confidence and
cooperation between the parties has been destroyed;
b. Where one of the partied by his misbehavior materially hinders a proper conduct of the
partnership business.  Owen v. Cohen
2. Rule  A partner can move to dissolve a partnership if another partner’s conduct undermines or
breaches the partnership agreement.
B. When Partner dissolution is proper
1. Rule  Unless specified, a partnership may be dissolved at will by any partner providing the partner is
exercising good faith.  Page v. Page
C. When Dissolution is not allowed
1. Rule  A partner does not have the right to dissolve a partnership when his conduct is the only conduct
that is adversely affecting the business.  Collins v. Lewis
a. Just because there is bad blood does not mean we will break up the partnership.
Page 9 of 25
Biz Org Outline - Partnerships
XI.
XII.
XIII.
XIV.
XV.
XVI.
Dissociation (kicking a partner out)
A. Rule  A partner is dissociated from a partnership upon the occurrence of any of the following events.
1. On application by the partnership or another partner, the partner’s expulsion by judicial determination
because
a. Wrongful conduct that adversely and materially affected the partnership business
b. The partner engages in conduct which makes it not reasonably practicable to carry on the
business in partnership with the partner.  Giles v. Giles Land Company
B. URPA 602  get from statute book
1. If you walk away wrongfully, you will need to pay for it.
a. If you do it on your own, you will still be on the hook if done wrongfully.
The Consequence of Dissolution
A. Rule  Absent bad faith or an agreement that states otherwise, a partner may bid on the resale of the
partnership.  Prentiss v. Sheffel
B. Rule  A party responsible for the dissolution of a partnership is not entitled to collect for the value of goodwill.
 Pav-saver Corp (PSC) v. Vasso Corporation
Transfer of Ownership
A. Transferor partner can be removed from partnership if all other partners consent. ORS 67.220(4)(b).
B.
Sharing of Profits & Losses
A. OLD Rule  In a partnership wherein one partner contributes capital and the other labor, the partner contributing
capital cannot hold the other accountable for money lost, just as the partner responsible for services cannot hold
the other responsible for any losses he suffered.
1. Neither party is liable to the other for contribution for any loss sustained.  Kovacik v. Reed
B. New Rule LOSSES NOW SHARED EQUALLY
1. Section 401 (b)  Each partner is entitled to an equal share of the partnership profits and is chargeable
with a share of partnership losses in proportion to the partner’s share of the profits.
2. subject to any contrary agreement, upon dissolution, liabilities of the partnership shall be paid in the
following order
a. 1) payments go to creditors outside partnership
b. 2) Then to partner-creditors
c. 3) Then to capital payback
i.
Pay capitol evenly based on contributions
1) This will be paid in the ratio of what was contributed.
d. 4) Then to profits due
3. Both profits and losses are to be shared equally among the partners, unless the partnership agreement
states otherwise.
Buyout Agreements
A. A buyout agreement is an agreement that allows a partner to end his/her relationship with the other partner and
receive a cash payment or series of payments, or some assets of the firm in return for their interest in the firm.
1. Rule A partnership buyout agreement is valid and binding even if the purchase price is less than the
value of the partner interest, since partners may agree among themselves by contract as to their rights
and liabilities.  G & S Investments v. Belman
Limited Partners
A. The difference between Limited Partners and General Partners is control
1. A limited partner can give advice and have some say but cannot control.
2. A general partner is on the hook for liability
3. As soon as you start to control the enterprise, then you may wind up being treated as a general partner.
Page 10 of 25
Biz Org Outline - Partnerships
Rule  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.  Holzman v.
De Escamilla
Limited Liability Partnership
A. Rule  Limited Partners do not incur general liability for the limited partner’s obligations simply because they are
officers, directors, or shareholders of the corporate general partner  Frigidaire Sales Corporation v. Union
Properties, Inc.
B. Rule  A limited partner will be held liable if, for personal gain, they take control of a business over and above
their normal rights as limited partners.
C. Profits:
1. Form of general partnership, therefore, general rule that equal sharing of profits applies.
Partner’s Rights & Duties
A. Particular Matters Requiring Unanimous Approval
1. Under UPA § 9(3), unless a partnership agreement provides otherwise, the following actions require
unanimous approval:
a. Assigning the partnership’s property in trust to creditors or in return for the assignee’s promise
to pay the partnership’s debts;
2. Unanimous Consent Required: Actions outside the ordinary course of business & an amendment to
partnership agreement. 67.140(11)
3. Majority Consent Require: Actions within the ordinary course of business require only a majority of
consent by partners.
4. Changes to the Partnership Agreement require unanimous consent.
B. For matter not covered by UPA §§9(3) or 18(g), the general rule of § 18(h) appears simple enough:
1. Any difference arising as to ordinary course of business connected with the partnership business may be
decided by a majority of the partners; but no act contravention of any agreement between the partners
may be done rightfully without the consent of all the partners.
2. Substantial changes to the nature of the partnership’s business are likely to require unanimous consent.
So too are decisions to increase substantially the size of the business, where that increase requires a
significant increase in the liability exposure or investment risk of each partner.
a. Changes in the standards for admitting new partners or expelling old ones probably also requires
unanimity. ORS 67.140(10)
C. Management Deadlock
1. If the partners are equally divided, those who forbid a change must have their way. Summers v. Dooley,
481 P.2d 318, 321 (Idaho 1971).
a. If the deadlock concerns a substantial matter, the partners might resolve the problem by
dissolving the partnership.
4.
XVII.
XVIII.
Page 11 of 25
Biz Org Outline - Corporations
Corporations
I.
II.
III.
IV.
Key features of a corporation
A. Incorporation and organization
1. Existence requires filing articles on incorporation with the government –
2. At or shortly after formation the corporation must identify number of shares, incorporators, a board of
directors and adopt by laws.
B. Legal Personality
1. Unless its articles of incorporation provide otherwise, every corporation has the same powers as an
individual to do all things necessary or convenient to carry out its business.
C. Indefinite Duration
1. No set end to its existence (voluntary dissolution, merger, liquidation in bankruptcy)
D. Free transferability of ownership interest
1. Through sale of shares.
Promoters and the Corporate Entity
A. Rule  One who contracts with what he acknowledges to be and treats as a corporation, incurring obligations in
its favor, is estopped from denying its corporate existence, particularly when the obligations are sought to be
enforced.  Southern-Gulf Marine Co. 9 Inc. v. Camcraft Inc.
Stock
A. Stock represents ownership interest in corporation and owners may possess one or more shares
1. Ability to control business generally proportional to number of shares owned, unless specified differently.
B. Directors need not be shareholders and often not all shareholders of a corp. will be directors.
1. Majority at board meeting makes decisions.
a. Directors elected shareholder meeting by plurality of shares
b. Quorum for meeting is majority of shares
c. Other shareholder decisions decided by majority of shares.
C. Types of Stock:
1. Preferred Stock
a. stock that entitles the holder to a fixed dividend, whose payment takes priority over that of
common-stock dividends.
i.
Conventional preferred stock has not more absolute right to dividends than does
common
ii.
But no common dividends unless preferred dividends have been paid
iii.
Also, non-legal reason to pay preferred dividends – implied, not legally binding
commitment to pay preferred dividends on schedule
iv.
Companies may find it difficult to raise money if preferred dividends not timely paid
v.
But, generally can’t sue to force preferred dividend payments.
2. Common Stock
a. shares entitling their holder to dividends that vary in amount and may even be missed,
depending on the fortunes of the company.
D. Charging Order
1. Court giving judgment creditor of partner right to partnership distributions
a. Creditor gains no management rights nor rights to demand distributions outside ordinary course
of business.
Public Trading
A. People and business typically belong to business organization for financial gain.
1. Gain can be achieved in two main ways –
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V.
a. Distribution of profits during life of business;
b. Selling interest in business to someone else.
B. A business can be sold in bulk to another business, but often current owners of business have, or develop,
different financial needs. However, not all owners may wish to sell whole business at same time.
C. Corporation generally provides most convenient form permitting some owners/investors to cash out without
disrupting existing business.
1. this convenience benefits both departing and remaining owns, since business may be much more valuable
as ongoing concern.
2. Normally, when owners of partnerships and LLCs cash out, buyers do not gain control rights, just financial
rights.
3. Partnership or LLC agreement can provide otherwise, but for corporations, default rule is buyers of stock
get full ownership and financial rights.
4. If shares are publicly trades then for federal income tax purposes, the business is taxed as a corporation,
removing one of the main advantages to operating LLC.
D. Public trading not essential to cashing out of ongoing business without disrupting it, but it provides access to wide
range of potential buyers, reliable, easily acquired information.
E. If necessary, ownership stake can be quickly unloaded without possible need for sharp discount  Liquidity.
1. Investment in real estate is not very liquid, whereas, investment in stock is highly liquid.
F. Per IRC § 7704, if ownership interest in a business organization are traded on established securities market or
readily tradeable on a secondary market then business will be taxed as corporation (double taxation of profits)
(with some minor exceptions)
1. Basically, if you set up LLC or partnership so that owners can trade their investment like shares of stock on
stock exchange, business taxes as corporation.
2. Few advantages to avoiding incorporation if taxes as incorporated anyway.
G. ****If a partnership decides to publicly trade, they lose tax benefits and are taxed as a corporation.
Board of Directors
A. Directors are NOT agents of corporation.
1. Directors acting alone, have no authority… i.e. not acting behalf of any principal.
2. Also, shareholders are not agents either.
B. Shareholders own the business and theoretically have most to gain if company very successful
1. Shareholders have no legal authority to determine how corporation operates – what businesses to
pursue, whether to expand or scale back, hiring and firing.
2. Shareholders can belong to the BOD. Then they have separate and distinct responsibilities.
C. Board of Directors, chosen by shareholders, make certain big picture decisions collectively
1. Typically, directors have other full-time jobs and usually average only a few hours on a given corporation’s
affairs.
2. The B.O.D. has the right to hire and fire corporate officers.
3. Typically, board does not manage operations of a corporation.
4. Unless the articles of incorporation or bylaws of the corporation provide otherwise, the BOD may fix their
own compensation. ORS § 14460.334
D. Corporate Officers = top executives who run business.
1. Chosen by the board, they manage business.
2. Full-time employees.
a. CEO
b. President, etc.
E. Dividends
1. Are paid at the discretion of the directors.
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VI.
The corporate Entity and Liability
A. Limited Liability
1. You cannot go after shareholders personally. You can only go after the assets and profits of the
corporation.
a. The investors only lose out of the value of the share, only corporate assets are at risk.
2. A corporation needs to put everyone they do business with on notice.
a. This is done by using the words Inc. Corp. LLC.
b. People should know that the entity they are dealing with are a limited liability.
3. Limited Liability for Investors: once prime motivation to organize or convert business to corporation, no
longer critical motivation.
a. Ability to trade ownership interests on public markets (largely reserved for corporations)
i.
Public Trading of Interests
B. Piercing the corporate veil
1. You as a shareholder need to appear different then the corporation that you own.
a. Must hold meeting, elect officer, and keep corporate funds separate.
b. Rule  An individual can be held liable for the acts of a corporation if it can be shown that the
individual used his control of the corporation for personal gain.  Walkovszky v. Carlton
c. The corporate veil will be pierced for 2 reasons  Van Dorm Test
i.
There must be such unity of interest and ownership that the separate personalities of
the corporation and the individual no longer exist.
1) 4 factors for determining if corporation should not be separate from each other
a) The failure to maintain corporate records to comply with corporate
formalities
b) Commingling of funds or assets
c) Undercapitalization
i.
Company does not have sufficient capital to conduct normal
business operations and pay creditors.
d) One corp. treating assets of the other corp. as its own.
2) Look at these factors individually and collectively.
a) Only having 1 of the factors alone will probably not pierce the veil.
ii.
Circumstances must be such that adherence to the fiction of separate corporate
existence would sanction a fraud OR promote injustice.
1) No intent required.
2) Promote injustice
a) Something more has been done then just inability to collect.
b) There must be something really wrong
2. Awareness of formalities do not matter
a. You can find out about the issues through discovery and then sue to pierce the veil.
b. Going in to the litigation, a plaintiff does not need to be aware of the facts that will end up
piercing the corporate veil.
3. Fraud can be an independent basis for reliably
a. Court may pierce the veil for any type of fraud as it shows bad actors.
b. You might need to prove reliance on the fraud.
4. When piercing the veil, you can go up (reverse piercing) and go after the owner and all of his assets.
a. You also can also go laterally and go after each affiliated corporation.
b. Alter Ego Theory it must be made to appear that the corp. is not only influenced and
governed by that person (or entity), but that there is such a unity of interest and ownership that
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VII.
VIII.
the individuality, or separateness of such person and corporation has ceased, and the facts are
such that an adherence to the fiction of separate existence of the corporation would, under the
particular circumstances, sanction a fraud of promote injustice.
c. However,  Where a parent Corporation Controls several subsidiaries, the corporate veil of one
subsidiary may not be pierced to satisfy the liability of another subsidiary.  Roman Catholic
Archbishop of SF v. Sheffield
C. Claim Ceilings (Oregon): Ceiling for single claim against all shareholders of Oregon professional firm for
professional negligence is $3,550,000.
Incorporation
A. LLP or LLC requires paperwork with (state) government.
B. Domestic Corporation
1. A corporation for profit that is incorporated under, or subject to, the provisions of this chapter and that is
not a foreign corporation. ORS 60.001(5)
C. Foreign Corporation
1. A corporation for profit that is incorporated under laws other than the laws of this state. ORS 60.001(18).
2. May not transact business in Oregon until it has been authorized to do so by the Secretary of State.
3. A company operating exclusively in Oregon, for example, but incorporated in Delaware, cannot initiate
lawsuit in Oregon unless it applies for authority to do business in Oregon.
D. Multi-State Businesses
1. Although regional and national business incorporates in various states, Delaware is dominant, particularly
among large businesses.
E. ORS 60.714
1. A foreign corporation authorized to transact business in Oregon has same but no grater rights and has
same but no greater privileges as, and except as otherwise provided by this chapter is subject to the same
duties, restrictions, penalties, and liabilities now or later imposed on, a domestic corporation of like
character.
The Role and Purpose of Corporations.
A. Business donations
1. Rule  Corporate gift-giving is an allowable method of increasing goodwill, but the gift should be less
than 1% of capital and surplus and directed to an institution owning no more than 10% of the company
stock.  A.P. Smith Mfg. v. Barlow
B. Business Explanation Rule
1. Rule  The purpose of a corporation is to make a profit for the shareholders, but a court will not
interfere with decisions that come under the business judgment of directors.  Dodge v. Ford
2. UNLESS it is clearly made to appear that they are guilty of
a. Fraud
b. Misappropriation of the corporate funds or
c. Refuse to declare a dividend
i.
When the corporation has a surplus of net profits and refusal would amount to such an
abuse of discretion as would constitute a fraud or breach of that good faith.
ii.
Theoretically, shareholders could acquire all corporate property – subject to the rights
of creditors, IRS, etc. – by having board distribute all corporate property as dividends.
iii.
But not obligated to follow shareholder desires, but shareholders can generally remove
directors and replace them if shareholders are all in agreement.
iv.
Dividends have potential to transform corporate property into shareholder property,
ultimately.
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3.
IX.
X.
Rule There must be fraud or a breach of the good faith which the directors are bound to exercise
toward the stockholders in order to justify the courts entering in to the internal affairs of the corporation.
4. Rule  A court will not interfere with an honest business judgment absent a showing of fraud, illegality or
conflict of interest  Shlenesky v. Wrigley
a. Need to look to see if the company made the business decision under a sound manner.
b. As a shareholder, if you are going to bring this type of suit, you need to show damage to the
corporation and not just yourself.
Limited Liability Company
A. Formation
1. This is a recent contribution and a recent statute.
a. You only get taxed on your personal returns (Single Tax)
b. This is different from corporations.
c. This eliminates all the issues with who is a general partner and who is a limited partner.
d. The owners of LLC a are called members
i.
They can manage or hire a manager.
e. Requires a formal filing with the state and an agreement.
2. Because these LLC’s are so new, the laws are still being determined.
B. LLC Liability (Third Party Agency Notification)
1. Rule Failure to disclose the existence of LLC will make agent liable.
2. Rule The statutory notice provision applies only where a third party seeks to impose liability on an LLC’s
members or managers simply due to their status as members or managers of the LLC.  Water, Waste &
Land, Inc. d/b/a Westec v. Lenham
C. The Operating Agreement
1. Rule  The Delaware LLC statutes give great deference to the freedom of LLC members to contract,
providing the terms do not overstep any of the mandatory statutory provisions.  Elf Atochem North
America Inc. v. Jaffari
a. LLC formation Rule The LLC agreement is any agreement, written or oral, of the member or
members as to the affairs of the LLC and the conduct of its business.
2. Rule  Because LLCs are not a creature of the state but of contract, the duties and obligations of the LLC
members are as set forth in the LLC agreement.  Fisk Ventures, LLC v. Segal
a. Rule Every contract contains an implied covenant of good faith and fair dealing
i.
The convent cannot invoke where parties have contracted around it.
D. Piercing the LLC Veil
1. LLC Piercing Neither the members, nor the managers of a LLC, are personally liable under a judgment,
decree or order of a court, or in any other manner for a debt, obligation or liability of the LLC.
a. Rule  For the purposes of piercing the corporate veil, there is no law or policy that would
require treating limited liability companies (LLC’s) different from corporations.  Kaycee Land
and Livestock v. Flahive
i.
The court treats the piercing of an LLC the same as a corporation.
E. Fiduciary Obligation
1. Rule  Members of an LLC can agree to limit the scope of the fiduciary duty they owe to the LLC. 
McConnell v. Hunt Sports Enterprise
F. Profits
1. Default rule is that profits are shared equally. Goes against notion that they would be shared per
proportion of contribution.
a. Easily override it by including details in operating agreement.
Duties of Officers, Directors, and Other Insiders
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A. Obligation of Control: Duty of Care
1. Rule  A court will not interfere with the decision of a company’s directors unless there is evidence of
fraud or dishonest practice.  Kamin v. Amex.
2. Rule  Under the business judgment rule, a business judgment is presumed to be an informed judgment,
but the judgment will not be shielded under the rule if the decision was unadvised.  Smith v. Van
Gorkom (CEO of Trans Union)
a. Report Rule for a report to be acceptable, it must be pertinent to the subject matter upon
which a board is called to act, and otherwise be entitled to good faith, not blind, reliance.
3. Rule it is incumbent upon directors to discharge their duties in good faith and with that degree of
diligence, care, and skill which ordinarily prudent men would exercise under similar circumstances in like
positions.  Francis v. United Jersey Bank
a. A director should
i.
have a rudimentary understanding of the business
ii.
exercise ordinary care
iii.
Look at all the rules in 328
b. Directors are liable if they do not act in good faith.
B. Duty of Good Faith
1. Good faith requirements
a. The good faith required of a corporate fiduciary includes not simply the duties of care and
loyalty, but all actions required by a true faithfulness and devotion to the interests of the
corporation and its shareholders.
b. The statutory denial of discharge for acts not in good faith must encompass the intermediate
category of misconduct captured by the chancellor’s definition of bad faith.
c. The obligation to act in good faith does not establish an independent fiduciary duty that stands
on the same footing as the duties of care and loyalty
2. Rule  Due Care and Bad Faith may be treated as separate grounds for denying business judgment rule
review
3. Rule  Members of a corporation, Board members, Subcommittee members and Directors, do not
breach their duty of due care where, although they do not follow the best practices, they are sufficiently
informed about all material facts regarding a decision they make.  In re The Walt Disney Co. Derivative
Litigation
a. This works for any decision.
4. Rule  Where directors rely on advice that is accurate, and their reliance is made in good faith, they do
not breach any fiduciary duties.
5. Rule  To recover on a corporate waste claim the plaintiffs must shoulder the burden of proving that the
exchange was so one sided that no business person of ordinary, sound judgment could conclude that the
corporation has received adequate consideration.
a. A claim of waste will only arise in in the rate “unconscionable case where directors irrationally
squander or give away corporate assets”.
C. Oversight
1. Rule  a court must determine whether or not the particularized factual allegations of a derivative
stockholders complaint create a reasonable doubt that the board of directors could have properly
exercised its independent and disinterested business judgment in responding to a demand.  Stone v.
Ritter
a. Graham Rule  Absent cause for suspicion, there is no duty upon directors to install and
operate a corporate system of espionage to ferret out wrongdoing which they have no reason to
suspect exists.
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Caremark Rule  Absent grounds to suspect deception, neither corporate boards nor senior
officers can be charged with wrongdoing simply for assuming the integrity of employees and the
honesty of their dealings on the company’s behalf.
i.
Caremark = If you see a crime, a fine or penalty you should think Caremark right away.
1) Plaintiffs must prove a “sustained and systemic failure” to exercise oversight in
order to show a lack of good faith and hold directors liable for wrongdoing that
occurs on their watch.
2. Rule  only a sustained or systematic failure of the board to exercise oversight will establish the lack of
good faith that is a necessary condition to liability.
D. Shareholder Derivative Action
1. Derivative Lawsuit  A shareholder derivative suit is a lawsuit brought by a shareholder on behalf of a
corporation. Generally, a shareholder can only sue on behalf of a corporation when the corporation has a
valid cause of action, but has refused to use it.
a. A suit in equity against a corporation to compel the corporation to sue a third party.
i.
A suit by a shareholder to sue an officer or director for fraud or breach of fiduciary duty.
ii.
Only the corporation can sue for a derivative suit
1) Only the corporation has been harmed so a stockholder has no standing b/c
they have not been harmed.
2) The shareholder loss is derivative of the companies injury
b. Only the directors can sue.
i.
Should a corporation sue and win
1) They recover the lost $$$ and the stock will rebound
2) The shareholder will become whole again.
ii.
Sometimes the company will say great lets sue
iii.
But sometimes they will say to damn bad and not sue
1) This is where the issues are.
2. Direct – v – Derivative
a. Who is harmed and who has standing?
i.
Corporation  Derivative suit
1) Usually involve money or injunctions to stop actions.
2) Derivative suits:
a) Instigate the corporation to sue to make itself whole
i.
Significant procedural hurdles
ii.
Corporation owns potential lawsuit against agent of harm
iii.
DEMAND IS REQUIRED
ii.
Stockholder  Direct suit.
1) The complaint is not about care, loyalty  you hosed me out of control of the
company.
2) Direct suits:
a) Pursue the parties responsible for injuring rights as shareholder
i.
Minimal procedural hurdles
ii.
S/H owns lawsuit
b. Rule  A shareholder’s derivative suit will follow state non-procedural laws regarding the
derivative suits when possible.  Choen v. Beneficial Industrial Loan Corp.
c. Rule  When the injury suffered was personal, rather than an injury of the corporation, the suit
should not be considered derivative for the purposes of requiring a posting of security for
opposing legal expenses.  Eisenberg v. Flying Tiger Line, Inc.
b.
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3.
4.
Demand Requirement
a. Most states (including Delaware) required plaintiffs in derivative suits to approach the board first
and demand the board take action.
i.
If required, the failure to make demand is a procedural barrier and the lawsuit will be
dismissed
ii.
Rule of Law  A plaintiff, by making a demand, waives his right to contest the
independence of the Board of Directors, and the effect of the demand will apply for all
of a plaintiff’s stated claims.  Grimes v. Donald
b. Justification for not making demand letter
i.
However, some time demand will be excused.
1) 3 justifications for not making pre-suit demands
a) 1) A majority of the board has a material financial or familial interest
b) (2) A majority of the board is incapable of acting independently for
some other reason such as domination or control
i.
(2) A majority of the board is dominated or controlled by the
alleged wrongdoer; OR
c) 3) The underlying transaction is not the product of a valid exercise of
business judgment.
i.
(3) The challenged transaction was not the product of a valid
business judgment.
2) A stockholder who issues a demand is entitled to know promptly what action
the board has taken in response
ii.
Rule  A director will always be an interested party, for the purpose of the excusal of a
demand, when the director is voting on director compensation, but a plaintiff has to
demonstrate with particularity that the compensation is excessive.  Marx v. Akers
Special Litigation Committees
a. How are these boards created?
i.
CEO appoints  board approves.
ii.
Group of individuals that are selected determine if the request will be granted or
denied.
b. Judicial Challenges to Rulings (MUST KNOW BOTH)
i.
NY / Majority
1) Rule  A party may challenge the independence of a special committee, but
once a committee is deemed to be independent then their decisions are
protected under the business judgment rule.  Auerbach v. Bennett  New
York  Majority Rule
2) The business judgment rule does not protect the SCL if they are found to not be
independent or not to conduct a proper investigation.
a) The court will only look at the procedures of the committee and not
look in to the decision made by the committee.
ii.
Del. / Minority
1) Rule  When assessing a special litigation committee’s motion to dismiss, a
court must
a) determine whether the committee
i.
Acted independently
ii.
Acted in good faith
iii.
Made a reasonable investigation.
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E.
F.
b) Apply the court own independent business judgment.  Zapata Corp
v. Maldonado  Delaware
i.
This is not the majority rule it’s the Delaware rule.
ii.
This goes 1 step further than the normal majority rule.
c. Independence in SLC’s
i.
Rule  The question of independence turns on whether a director is, for any substantial
reason, incapable of making a decision with only the best interest of the corporation in
mind.  In Re Oracle Corp. Derivative Litigation
Indemnification and Insurance
1. Indemnification
a. Rule of Law  A corporation cannot agree to indemnify an officer in a manner that is
inconsistent with the state statute, but the officer is entitled to indemnification if the charges
against him have been dismissed.  Waltuch v. Conticommodity Services Inc. (Conti)
b. Rule of Law  An agreement between a corporation and its officer to advance officer money to
cover legal expenses that arise from his position with the company is independent of whether
the company is required to indemnify the officer and is consistent with other statutory
provisions.  Citadel Holding Corp v. Roven
Duty of Loyalty
1. This is the second part of the BJR If the duty of care is met, and the duty of loyalty is met, we leave the
judgment along.
a. If there is a violation of this duty, the presumption then shifts,
b. If you can get past duty of loyalty or care, you get past the business judgment rule and can look
at the decision and make determinations based on those decisions.
2. Directors and Managers
a. Rule  The business judgment rule yields to the rule of undivided loyalty. Bayer v. Beran
i.
Rule  A director has a fiduciary duty to support the corporation’s interest over his or
her own conflicting interests, and any competing interests renders the business
judgment rule inapplicable.
ii.
Rule As long as the company received full benefit the transaction is proper.
b. Rule directors acting separately and not collectively as a board cannot bind the corporation.
i.
1 – The collective procedure is necessary in offer that action may be deliberately taken
after an opportunity for discussion and an interchange of views,
ii.
2 – That directors are the agents of the stockholders and are given by law no power to
act except as a board.
c. Rule The law provides a safer harbor for transactions by directors on multiple boards. 
Benihana of Tokyo, Inc. v. Benihana, Inc.,
i.
If the material facts as to the directors relationship or interest and as to the contact or
transaction are disclosed or are known to the board of directors
ii.
The director neither sets the terms of the transaction, nor deceives, nor controls or
dominates the disinterested directors approval of the transaction.
iii.
And the board in good faith authorizes the contract or transaction by the affirmative
votes of the majority of the disinterested directors
3. Corporate Opportunity
a. Rule  if there is presented to a corporate officer or director a business opportunity which the
corporation is
i.
Financially able to undertake the opportunity
ii.
In the line of the corporation’s business of the corporation
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iii.
One in which the corporation has an interest or a reasonable expectancy, and
reasonably be able to accept it.
1) If not presented to them, then probably no expectancy.
iv.
By embracing the opportunity, the self-interest of the officer or director will be brought
into conflict with that of the corporation.
1) The law will not permit him to seize the opportunity for himself.  Broz V.
Cellular Information Systems, Inc.
v.
Rule the doctrine is implicated only in cases where the fiduciary’s seizure of an
opportunity results in a conflict between the fiduciary’s duties to the corporation and
the self-interest of the director as actualized by the exploitation of the opportunity.
b. Rule An agent is under a duty to account for profits obtained personally in connection with
transactions related to her or her company.  In re eBay, Inc. Shareholders Litigation
i.
Even if a claim does not run afoul of the corporate opportunity doctrine, it may still
constitute a breach of the fiduciary duty of loyalty.
4. Ratification
a. Rule Shareholder ratification of an interested transaction, although less than unanimous, shifts
the burden of proof to an objecting shareholder to demonstrate that the terms are so unequal as
to amount to a gift or waste of corporate assets.  Fliegler v. Lawrence
i.
This will not be legitimate if the majority of the shareholders are the interested parties.
1) Just the minority should have had a separate vote, and if a majority of the
minority would have done this it would have prevented the law suit.
G. Shareholder Transactions
1. What fiduciary duty do shareholders owe each other?
a. Not Much  This is different from Directors
2. Conflict of Interest
a. If a director has a conflict of interest regarding a vote or transaction, you would expect them to
step aside.
i.
If you look like the director (shareholder of 51% of the stock) we will put the same duty
on you as we do the director.
1) You have the right to control, but you cannot oppress the rights of stockholders
who are not in control.
b. We subject these majority stock holders to an objective intrinsic fairness test.  Fairness = no
one got ripped off.
3. Dominate Shareholders
a. Rule when the situation involves a parent and a subsidiary, with the parent controlling the
transactions and fixing the terms, the test of intrinsic fairness, with its results of shifting the
burden of proof, applies.
i.
This standard will only be applied when the fiduciary duty is accompanied by selfdealing
1) the situation when a parent is on both sides of the transaction with the
subsidiary
ii.
Self-Dealing occurs when the parent by virtue of its domination of the subsidiary, causes
the subsidiary to act in such a way that the parent receives something for the subsidiary
to the exclusion of, and determinant to, the minority stockholders of the subsidiary. 
Sinclair Oil Corp. v. Levien
b. Rule  Majority shareholders owe a duty to minority shareholders that is similar to the duty
owed by a director, and when a controlling stockholder is voting as a director, he violates his
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XI.
duty if he voted for his own personal benefit at the expense of the minority stockholder.  Zahn
v. Transamerica Corp
4. Shareholder Voting Control
a. Rule  All the law requires is for stock to have management control, not financial interest. 
Stroh v. Blackhawk holding corp.
5. Shareholder Inspection Rights
a. Under Federal proxy rules, there is nothing requiring a corporation to give a shareholder a list of
other shareholders.
i.
Only State law could make this requirement.
b. Rule  A qualified shareholder is allowed, when in good faith, to inspect a corporation’s stock
register in order to notify shareholders of exchange and solicitation offers for stock.  Crane Co.
v. Anaconda Co. (NY)
i.
Unless  it is sought for a purpose unfavorable to the corporation or its stockholders
c. Del. Rule  A shareholder can only demand corporate investor identification information when
the purpose is related to investment concerns traditionally associated with shareholder
concerns.  State ex Rel. Pillsbury v. Honeywell
i.
A shareholder must prove proper purpose to inspect corporate records, other than a
shareholder list.
1) A proper purpose contemplates concern with investment returns.
2) Only those with a bona fide interest in the corporation have the power to
inspect the books.
d. NY Rule  NY Statute §1315 allows NY residents owning shares of a foreign corporation to
obtain a list of the corporations shareholders.  Sadler v. NCR Corporation
i.
Must be owner for 6 months
ii.
Must hold 5% of stock
iii.
Must give 5 days’ written notice
iv.
May examine in person or by agent the records as specified location.
e. §1315 should be liberally construed in favor of the stockholders.
6. When it comes to an LLC  closely held corporation
a. Disclosure would depend on the operating agreement, regardless of the number of people.
Control, Duration, and Statutory Dissolution
A. Control of Closely Held Corporation
1. Vote Pooling
a. Rule  Shareholder pooling agreements are valid for the purpose of electing directors and are
common  Ringling Bros. – Barnum & Bailey Combined Shows v. Ringling
i.
If there is a disagreement on voting the courts will allow a third party to intercede.
2. Statutory Voting
a. Vote for each seat independently
3. Cumulative Voting
a. Add up the total number of shares multiply the number of seats, and then you have the total # of
votes per person. you can vote as many shares per seat as you wish.
4. Agreement Rules and Restrictions
a. Rule  Shareholders cannot form an agreement to control the decisions traditionally vested in
the judgment of the directors of a company.  McQuade v. Stoneham
i.
Directors may not by agreements entered into as stockholders abrogate their
independent judgment.
ii.
Cannot make agreements that will put them at odds with their duties to stockholders.
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b.
c.
d.
Rule  An agreement between shareholders, wherein the shareholders entering the agreement
are the only shareholders of the company, is valid even if the agreement contemplates
controlling management decisions.  Clark v. Dodge
Rule  A shareholder agreement, particularly in closed corporations, that controls the voting for
board members and the members’ management decisions, should be enforced as long as the
agreement is not fraudulent, harmful to the public, or objected to by a minority owner.  Galler
v. Galler
Rules  Voting agreements binding individual shareholders to vote in concurrence with the
majority constitute valid contracts.  Ramos v. Estrada
B. Abuse of Control
1. Duty owed
a. Rule  Stockholders in the close corporation owe one another substantially the same fiduciary
duty in the operation of the enterprise that partners owe to one another.  Wilkes v. Springside
Nursing Home, Inc.
i.
The standard of duty owed by partners to one another is one of the utmost good faith
and loyalty.
b. Rule  Courts balance ownership rights v. Fiduciary obligations to the minority
i.
Courts look to see if there is a legitimate business purpose.
ii.
The minority may prevail by showing that the objective could have been achieved
through a less harmful means.
2. Employee / Shareholder
a. Rule  A minority shareholder in a closely held corporation, who is also employed by the
corporation, is not afforded a fiduciary duty on the part of the majority against the termination
of his employment  Ingle v. Glamor Motor Sales, Inc.
3. Freeze out
a. Rule  The remedy for a freeze-out is to restore to the minority shareholder the benefits which
she reasonably expected, but has not received because of the fiduciary breach.  Brodie v.
Jordan
i.
Forced buyout provisions are not appropriate.
4. Minority Duty
a. Rule Minority shareholders owe majority shareholders a fiduciary duty in the same manner
that majority owners owe minority shareholders, and therefore the majority can seek judicial
intervention for decisions that are unjustifiable for the corporation’s interests.
i.
All stockholders in the close corporation owe one another substantially the same
fiduciary duty in the operation of the enterprise that partners owe to one another
ii.
The standard of duty  utmost good faith and loyalty
5. Purchasing Own Stock
a. Rule  A closely held corporation has a duty to disclose a potential merger or buyout when
attempting to buy shares from an unwary shareholder.  Jordan v. Duff and Phelps, Inc.
i.
Corporations that buy their own stock must disclose to the sellers all information that
meets the standard of “materiality” set out.
C. Statutory Dissolution 14.302 (1-2)  Get Statute Language
1. The best bet is to negotiate a clean and fair buy sell agreement with majority shareholders of the
corporation.
a. If this is in the contract, the courts will award it.
2. However, not all corporations have these agreements.
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a.
States have anticipated these types of problems and created statutes to outline the process for
corporate dissolution.
b. THIS IS A DEFAULT RULE AND ALTERNATIVE
3. Rule  Absent a statutory right of appraisal, a shareholder is not entitled to an equitable remedy that
requires the other shareholder to purchase their shares.  Alaska Plastics, Inc. v. Coppock
a. Four ways to force by out of
i.
1) provision in a by-law (not present here);
ii.
2) petition for involuntary dissolution of corporation (the directors’ conduct was not so
extreme as to warrant this remedy);
iii.
3) change in corporate structure such as a merger; and
iv.
4) Statutory right of appraisal (not recognized by state law).
b. To sue for dissolutions  plaintiff must show fraud or waste
D. Dissolution
1. Judicial Dissolution
a. Dissolution Rule a court may order dissolution of a LLC whenever it is not reasonably
practicable to carry on the business in conformity with a Limited Liability Company agreement.
 Haley v. Talcott
i.
Rule For a Judicial Order of dissolution of a joint owned venture corporation §273
1) The corporation must have 2 50% stockholders
2) Those stockholders must be engaged in a joint venture
3) They must be unable to agree upon whether to discontinue the business or
how to dispose of its assets.
ii.
Even under this § the courts authority is discretionary.
2. Majority Buy Back
a. Rule Majority shareholders who buy back shares from another shareholder are obligated to
pay fair market value if they have breached a fiduciary duty owed to the shareholder.  Pedro v.
Pedro
i.
Shareholders in closely held corporations have a fiduciary duty to deal openly, honestly
and fairly with one another.
3. Involuntary Dissolution
a. Rule  An involuntary dissolution is an extreme remedy that will be granted only when there is
strong evidence of an abuse of discretion by the majority.  Stuparich v. Harbor Furniture
Manufacturing, Inc.
4. Improper Dissolution & Liability (LLC)
a. Rule  Members of an LLC can be held personally liable for the debts of their LLC if they fail to
properly dissolve the LLC under the relevant statutes.  New Horizons Supply Co-op v. Haack
E. Transfer of Control
1. It is okay to sell controlling block of shares at a premium
a. Leave minority shareholder in the dust
b. Generally not okay to buy control in order to affect a “Naked Purchase” of office or director.
i.
But this is okay if it is reasonable.
2. Right of First Refusal
a. What does an RFR afford
i.
You will never be shut out.
ii.
If there is an offer, you need to take the minority shareholder along with you.
1) If you get a deal you may need to let the minority buy the stock first
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Rule  In a transfer of control of a company, the rights of first refusal to buy shares at the offer
prices are to be interpreted narrowly.  Frandsen v. Jensen-Sundquist Agency, Inc.
i.
Does not convey the right to control the sale of assets or the liquidation of the
company.
ii.
There are all these incentives to not be left behind as a minority shareholder.
Premium on Controlling Interest
a. Rule  Absent looting of corporate assets, conversion of a corporate opportunity, fraud or other
acts of bad faith, a controlling stockholder is free to sell, and a purchaser is free to buy, that
controlling interest at a premium price without the minority shareholders being entitled to share
in that premium.  Zetlin v. Hanson Holding Inc.
Fiduciary Duty on Transfer
a. Rule  Directors and dominant stockholders stand in a fiduciary relationship to the corporation
and to the minority stockholders as beneficiaries thereof.  Perlman v. Feldman
b. Rule  Sale of the control block of stock at a premium is okay, but the sale of a board of
directors is not.  Essex Universal Corporation v. Yates
i.
You cannot nakedly sell the Board of directors.
ii.
Rule  An agreement to sell the control of management along with the sale of a
substantial percentage of shares is not against public policy.
b.
3.
4.
XII.
Taxes
A. Shareholders is not taxed just because corporation has profits.
B. Shareholder is taxed on dividend, but partners to a partnership are not taxed on draws.
1. Instead, partners are taxed on the profits up front. (no double taxation like corporation)
C. Corporation is taxed on profits and then shareholders are taxed on dividends. (double taxation)
1. Corporation owes income tax on any profit it earns because corporation is considered separate legal
entity.
D. Federal Tax on Corporate Profits: 21%
E. Federal Tax on Dividends: 15%
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