BUSINESS ENTITY FUNDAMENTALS |
AGENCY
I.
II.
Agency: is the fiduciary relationship that arises when one-person (a principal) manifests assent
to another person (an agent) that the agent shall act on the principal’s behalf and subject to the
principal’s control and the agent manifests asset or otherwise consents so to act
a. Fiduciary: one person trusting the other to act in their best interest and other person
knows they have a heighted level of trust and obligation than in ordinary contractual
relationships
b. Mutual Consent: does not need to be contractual; can be gratuitous
c. Control: principal must have ability to control agent
d. Duty of Agent to Principal
i. Duty of Loyalty: must serve the best interest of the principal; no conflict of
interest; no competing; accounting to principal for all profits; degree of care; obey
principals’ instructions
Agent Authority
a. Actual: through words or conduct principal communicated to agent that agent could do
something (i.e. enter into a contract on behalf of principal)
i. Often a board resolution or provision in partnership agreement authorizing
specific individuals to enter into contracts w/third parties
b. Apparent: arises from communications between principal and third party; through words
or conduct, principal communicated to third party that agent could enter into such
contract
i. When principal through words or behavior makes it appear that the agent has
authority and the 3rd party reasonably believes that the agent is authorized and
has no notice that agent is not authorized, principal bears this loss b/c principal
has the responsibility of making agent appear to have the authority
c. Inherent Authority: position confers certain power
d. A principal will be liable on a K between the agent and 3rd party when the agent acts
w/actual, apparent, or inherent authority
PARTNERSHIPS
I.
II.
Partnership: two or more persons operating a business as co-owners; association of two or more
persons carrying on a business as co-owners for profit
General Characteristics
a. Discontinuity of life
b. Consent required to transfer partner’s interest
c. Decentralized management b/c all partners manage (1 partner/1 vote)
d. Equal share of revenues and expenses
e. Joint and several liability – each partner becomes liable for the debts of the business
f. Uniformity between states
i. Default rules may be varied by partnership agreement
g. Mutual fiduciary obligations (limited ability to contract away obligations)
h. Disassociation/Dissolution – method of receiving share of interest
i. Taxed on an individual basis
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III.
IV.
V.
Formation: partnership is a legal characterization of an arrangement based on objective indicia
that may comport w/parties’ subjective intention (if manifest objectively intention to carry out a
business, then become partners)
a. Presumed partners if sharing in the profits of the business (however, can be rebutted –
creditor may be sharing in profits of business but not partner)
b. Does not require a public filing
c. Partnership Agreement: agreement among partners and between partners and the
partnership on the governance of the partnership (does not need to be written)
i. Can alter default statutory rules
Authority in Management
a. Actual Authority: look to partnership agreement; management rights among partners
i. Default: every partner has the right to participate in the management of the
partnership
1. 1 partner / 1 vote
2. Simple majority for ordinary business matters
3. Unanimity for extraordinary matters or in contravention of the partnership
agreement
4. Admission of new partner requires consent of all partners
5. Amendment of agreement consent of all partners
ii. Variation by Agreement
1. Management and voting rights – could be delegated to smaller
committee; allocate certain powers to certain partners
2. Veto power – court held that unanimity provision in partnership
agreement does not give absolute right of partner to impede a
transaction for personal gain
b. Authority to Bind Partnership to Third Parties
i. Every partner is an agent of the partnership and any act of a partner for
apparently carrying on in the ordinary course of the partnership or in business of
the kind binds the partnership, UNLESS the partner had no authority to act for
the partnership in the particular matter and the third party knew or had reason to
know that partner lacked the authority
1. Under RUPA §301, can issue a statement to limit or confer authority of a
partner that the 3rd party can rely on but recordation w/secretary of state
does not constructively notify 3rd party of authority unless dealing w/real
property
Capital Structure: question of who is entitled to what and how we define that is relation to equity
investors in the business
a. Default Rules: equal share of profits and losses (UPA §18(a)) and receive back what
partner put in; RUPA §401(b) each partner has an account for profits offset by losses
(amount of claim against assets of the partnership)
i. Capital Account: adjusted periodically for contributions of capital, distributions,
profits, and losses (equals money and property contributed by the partner, less
amount of any distribution to the partner)
b. Equal Shares on Dissolution: in winding up of the business, partnership assets first
discharged to creditors then after payment of all partnership liabilities, any surplus must
be applied to pay in cash the net amount due to the partner
i. UPA Ordering Rule: pay creditors, partners who loaned to the partnership, then
pay pari passu (at the same rate) to partners
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VI.
1. If not enough to pay the creditors, then partners need to contribute
amount necessary to satisfy the liabilities relative to the proportion to
which they share in the profit
c. When Do Partners Receive Cash Before the End of the Partnership?
i. Allocation to capital accounts (crediting/debiting)
ii. Distributions: actual cash payout
iii. Agreement typically governs distributions to partners (Starr v. Fordham: K
allowed founding partners to determine compensation)
d. Distinguishing Partnership Property
i. Property becomes partnership property if acquired:
1. In the name of the partnership (only if name of partnership is indicated in
instrument)
2. In the name of 1+ partners w/indication in transferring instrument their
capacity as partner or existence of partnership
ii. Property transferred to partnership is partnership property (even if not
partnership named) if instrument transferring title indicates:
1. Partner’s capacity as partner or
2. Existence of the partnership
iii. Property purchased w/partnership funds is presumed partnership property
iv. Property purchased in name of partner w/o indication of their capacity as partner
and w/o partnership funds is presumed partners’ separate property even if used
for partnership purposes
v. Creditors
1. If property = partnership  partnership creditors get first crack
2. If property = individual partner  individual partner’s creditors get first
crack (notwithstanding unlimited liability)
Partners’ Liability for Business Obligations: if partnership is liable for the debt, then the creditor
may recover from both the partnership and the individual partners (generally, creditors must sue
and serve the individual partners to collect from them)
a. UPA §15: all partners are liable JOINTLY & SEVERALLY [just one party may be sued;
independently liable] for everything chargeable to the partnership under §13 & §14 AND
JOINTLY [all parties must be sued] for all other debts and obligations to the partnership
(i.e contractual obligations)
i. §13 [Partnership bound by partners wrongful act]: if any wrongful act in ordinary
course of business or w/authority of his co-partners, partnership is liable to the
same extent as the partner so committing or omitting to act
ii. §14 [Partnership bound by partner’s breach of trust]: partnership is liable if value
is placed into custody of the partnership and it is misapplied
iii. Common Name Statutes: authorizing partnership to sue or be sued in the
partnership’s name rather than joining every partner (since not an entity)
b. RUPA §306: all partners are jointly and severally liable for all obligations of the
partnership; however, a person admitted into an existing partnership is not personally
liable for any partnership obligations incurred before person’s admission as a partner
i. Exhaustion (RUPA §307(d): requires the judgment creditor to exhaust the
partnership’s assets before enforcing a judgment against the separate assets of
a partner, UNLESS the partner is personally liable for the claim AND
1. Judgment based on the same claim has been obtained against the
partnership and a writ of execution on the judgment has been returned
unsatisfied in whole or in part;
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2.
3.
4.
5.
VII.
VIII.
Partnership is a debtor in bankruptcy;
Partner has agreed that creditor need not exhaust partnership assets;
Court grants permission to not exhaust;
Liability is imposed on the partner by law or K independent of the
existence of the partnership
6. Example: a judgment creditor may proceed directly against the asset of
a partner who is liable independently as the primary tortfeasor, but must
exhaust the partnership’s assets before proceeding against the separate
assets of the other partners who are liable only as partners
a. Gildon v. Simon Property Group, Inc. (Simon possessor of mall
and directly involved in tortious conduct)
ii. Judgment against partnership is not a judgment against partner
c. Liability of Incoming Partners: not personally liable for partnership obligation incurred
before admitted as a partner into existing partnership
d. Indemnification: UPA & RUPA provide that a partnership must indemnify a partner for
payments made and liabilities incurred by the partner in the ordinary course of the
partnership business (while an individual partner may have to pay the entirety of a
partnership obligation to a 3rd party, indemnification provides for sharing of payment)
i. Each partner only responsible for his share of the partnership obligation to other
partners in indemnification
Charging Orders – Equity Holders’ Creditors: to accommodate the interests of the partners
(consent of partners for management rights) and creditors, developed charging order to impose
against debtor-partner upon request of partner’s creditor
a. Charging Order: lien on partner’s transferable interests (financial rights) in the
partnership; entitled to any distribution made by partnership that otherwise would go to
debtor-partner and continues until creditor received enough to pay off judgment
b. What if partnership does not make distributions? Court orders foreclosure and sale of
partner’s interest in partnership (entitled to distribution but not a partner)
Fiduciary Duties: partners owe fiduciary duties to the partnership and to each other – the “duty of
the finest loyalty” – Meinhard v. Salmon
a. Duty of Loyalty: (RUPA §404(a)) limited to the following obligations: to account to the
partnership for the benefit derived by the partner in conducting the partnership business,
using partnership’s property, or appropriating a partnership opportunity; to refrain from
self-interested transactions; to refrain from competing w/partnership
i. Self-Dealing Transactions
1. Starr v. Fordham – self-dealing transaction b/c K provided founding
partners to determine compensation and decided disassociating partner
would receive 6.3% only for the share of work that had been paid for and
by paying him a low share inherently increase theirs; breach of fiduciary
duty would need to prove that distribution was fair and reasonable
ii. Appropriating Partnership Opportunities
1. Meinhard v. Salmon – Salmon violated his fiduciary duty to Meinhard by
failing to disclose the existence of the opportunity presented by Gerry;
every partner has the duty to make full disclosure of all information
concerning partnership’s business and affairs that reasonably required
for the proper exercise of a partner’s rights
iii. Partnership Information
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IX.
X.
1. Court held that a partner breached duty by using information that
partnership would not close deal to close deal for himself
iv. No Competition
1. Meehan v. Shanughsey – cannot compete w/partnership while still a
partner; a partner can make plans to leave but cannot solicit clients while
still a partner
2. If not a partner, associate not a fiduciary so bound by the terms of
agreement
b. Duty of Care: (RUPA §404(c)) limited to refraining from engaging in grossly negligent or
reckless conduct or knowing violation of the law
c. Covenant of Good Faith and Fair Dealing: contractual concept imposed b/c partnership
agreement; “when the express terms of the K indicate that the parties would have agreed
to the obligation had they negotiated the issue” – fruits of K
Transfer of Ownership Interests
a. Specific Partnership Property: a partner cannot sell their share of the property that the
partnership owns
i. UPA §24 indicates that the partnership is not a separate entity; rather an
aggregation so the partners hold the property as tenants in partnership
ii. RUPA §§201, 501 indicates that a partnership is a distinct entity and a partner is
not a co-owner of the partnership property and has no interest in the partnership
property that can be transferred
b. Ownership in Partnership (Equity): can only transfer economic interest
i. Under UPA §26 & RUPA §502 the only transferable interest of a partner in a
partnership is the partners’ share of the profits and losses and right to receive
distributions (personal property interest)
c. Interest in Management: cannot transfer management interest; must be admitted as a
partner into the partnership (default by the consent of all partners) to have management
rights
Dissociation and Dissolution in Partnerships
a. UPA: a partner can leave, but it ends the partnership; if one partner resigns and it is in a
way that does not violate the partnership agreement (i.e. violation = agreement says
partnership will end in 2025 but resign in 2020) and not from death, if all partners agree
to continue the partnership, then the partnership will continue
i. Partner who is leaving paid the value of their share
ii. What if departure violates partnership agreement? Upon wrongful departure, the
partnership can continue w/consent of everyone except the person who violated
the agreement
1. Partner who is leaving receives value of their share less the harm
caused by leaving the business early
b. RUPA: partner dissociates from the entity
i. Dissolution? Turns on whether dissociation was wrongful
1. If not wrongful, partnership continues automatically (entity continues) and
owe the dissociating partner fair share of their interest
2. If wrongful, partnership continues if half of the partners agree to continue
the partnership and owe dissociating partner fair share less harm done to
the partnership by w/drawing in violation of agreement
CORPORATIONS
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I.
II.
III.
General Characteristics
a. Free transferability of interests
b. Continuity of life
c. Centralized management – BoD
d. Limited liability – may lose investment but not liable for business debts
e. Taxed as a separate person and on distribution of dividends
f. Listed vs. closely held corporations
Formation
a. Select state of incorporation = choice of law to govern the internal affairs of the
corporation (governs relationships between shareholders, directors, and corporation)
b. File appropriate documents (usually article of incorporation) to state agency and perform
other necessary organizational steps
i. Delaware requires filing a certificate of incorporation w/Secretary of State
including name of corporation, registered agent, nature of business, classes of
stock and number to distribute, incorporator, additionally provisions not contrary
to corporate law
c. Qualify as a foreign corporation in state intending to transact business in conformity
w/domestication statutes (if fail to do so many lose limited liability shield)
Authority
a. Board of Directors: vested w/all corporate authority; BoD not agent of shareholders b/c
not subject to control of shareholders but fiduciaries
i. General Authority: select officers, review/approve officers’ plan, monitor
performance and finances, fire officers and hire new ones
ii. Action as Board
1. Directors Meetings: must meet can be in/out of state but everyone must
be able to be heard simultaneously
2. Action w/o Meetings: can take action w/o meeting if all sign consent
describing action to be taken and receive 100% consent (if one wants to
have a meeting, then have to have a meeting)
3. Supervisory Committees: role of outside directors (not officers of the
corporation) and independent (no financial connection to corporation) to
look out for the interest of the corporation and shareholders
4. Committees
a. Audit: hire and supervise CPA firm
b. Nominating: nominate O/D (usually independent)
c. Compensation
b. Corporate Officers: must have a CEO and a corporate secretary to keep records and
certify board action taken; AGENTS of corporation subject to board control
c. Shareholders: authority to elect the board, approval amendment of bylaws, veto
decisions such as corporate mergers or liquidation
i. Voting in Closely-Held Corporations
1. Cumulative Voting: voting system that strengthens the ability of minority
shareholders to elect a director; shareholders cast all of their votes in a
single at large election and votes determined by multiplying number of
shares owned by number of directors to be elected
2. Voting Agreements: K between shareholders to vote their shares as a
block on certain matters
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IV.
V.
VI.
VII.
3. Voting Trusts: transferring legal title to a voting trustee who empowers
trustee to vote the stock and trust agreement instructs trustee how to
vote
ii. Agreements Binding Board Action: directors cannot enter into voting agreements
that will bind how they will vote on the board (directorial independence &
directors must vote in the best interest of the corporation)
1. Exception: narrowly enforced where the agreement is between the only
two shareholders in the corporation b/c it does not harm another
shareholder
Capital Structures
a. Common Stock: default; w/o right to be paid first; voting usually 1 share/1 vote
i. Fungible; low seniority; potential return is distribution and capital gain upon sale
ii. NO K right to distribution
b. Preferred Stock: subordinate to debt but senior to common stock; potential returns =
dividends fixed at a percentage of par value; nonvoting
c. Debt Securities: issue security to borrow money (loan arrangement); high seniority; no
voting; typically fixed maturity rate
i. Bond: long term debt security issued by legal entity and have security interest
(lien placed on asset of corporation for benefit of debt holder)
ii. Debentures: long term w/o security interest
iii. Notes: short term obligation
Shareholder Liability for Business Obligations -- Defective Incorporation
a. One purporting to act on behalf of a nonexistent corporation shall be personally liable for
the obligations incurred thereby
Piercing the Limited Liability Veil: whether individuals in a close corporation or subsidiary
abused the LL shield
a. To pierce the corporate veil, a plaintiff must establish that the shareholder exercises
undue domination and control over the corporation (abusing corporate form; treating it as
an alter ego) and that the corporation is a device or sham used to disguise wrongs,
obscure fraud, or conceal crime
i. Kinney Shoe Corp. v. Polan – grossly inadequate capitalization combined
w/disregard of corporate formalities causing basic unfairness sufficient to pierce
veil
b. Mere fact that creditors not now being paid likely not enough to justify piercing
c. Does not apply to public shareholders b/c cannot exercise undue domination
Corporate Fiduciary Duties: O/D owe duty to the corporation
a. Business Judgment Rule: presumption that directors are acting in what they presume to
be in the corporation’s best interest
i. D/O who makes a business judgment in good faith fulfills the duty if the director
or officer is not interested in the subject of the business transaction, is informed
w/respect to the subject of the business judgment to the extent reasonably
believes to be appropriate under the standard and rationally believes the
business judgment is in the best interest of the corporation
b. Duty of Care: discharge their duties w/care that a person in a like position would
reasonably believe appropriate under the circumstances (breach = gross negligence)
i. Duty applies to directors when
1. Becoming informed in connection w/decision making
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c.
a. Application of business judgment rule (when satisfied courts
presume acted w/requisite care)
b. Shareholder must overcome presumption proving that director
did not act w/diligence, care, and skill that a person in a like
position would have employed
i. Smith v. Van Gorkom – court held that directors
breached their duty of care by failing to inform
themselves of all information reasonably available to
them and relevant to decision regarding a cash buy out
merger; BoD’s decision not produce of informed decision
b/c relied solely on 1 directors representations
ii. Shiensky v. Wrigley -- upheld directors decision to
refuse to install lights as a rational business decision
iii. In Re Walt Disney Co.
2. Devoting attention to oversight function
a. Establish monitoring mechanisms aimed at assessing
compliance throughout corporation
b. Liable only if fail completely to implement some mechanism or
fail to monitor one set up
Duty of Loyalty: act in a manner the director reasonably believes to be in the best
interest of the corporation; in litigation once P shows conflict of interest, business
judgment rule does not apply and D needs to show decision was entirely fair
i. Self-Dealing Transactions
1. No transaction is void or voidable of self-dealing if:
a. Disclosed and approved by majority of disinterested directors, or
b. Disclosed and approved by disinterested shareholders, or
c. Objectively fair and reasonable to the corporation
2. If no self-dealing, business judgment rule applies
3. If disinterested approval, transaction on same footing as cases of no selfdealing, and therefore business judgment rule applies
4. If self-dealing and D establishes one of the three above, the shareholder
can prove corporate waste
a. Corporate Waste: entails an exchange of corporate assets for
consideration so disproportionately small as to lie beyond the
range at which any reasonable person might be willing to trade
ii. Executive Compensation – Seidman v. Clifton Savings Bank
1. Where directors have represented both themselves and the corporation,
and where there was no ratification by stockholders, court must
determine whether the directors breached duty of care; w/stockholder
ratification, court look to see if satisfies business judgment rule or
amounts to corporate waste
iii. Corporate Opportunities
1. Guth Rule: D/O may not take a corporate business opportunity if:
a. Corporation is financially able to undertake it;
b. Is in corporation’s line of business and is of practical advantage
to it;
c. Corporation has an interest or reasonable expectancy in
opportunity AND
d. Brings self-interest of D/O into conflict w/corporation
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VIII.
IX.
2. Guth Corollary: D/O may take opportunity if:
a. Comes to him in his individual capacity rather than his official
capacity;
b. Not essential to corporation AND
c. Corporation no expectancy in the opportunity
d. Duty of Good Faith -- In Re Walt Disney Co.
i. Breach of Duty of Good Faith: intentional dereliction of duty or a conscious
disregard for one’s responsibilities
1. Acting w/purpose other than that of advocating for best interests of corp
2. Acting w/intent to violate applicable law
3. Intentionally failing to act in the face of a known duty to act
Corporate Acquisition Methods
a. Merger: Stock for Stock
b. Merger: Stock for Cash
c. Consolidation
d. Triangular Merger
e. Reverse Triangular Merger
f. Acquisition of Assets
g. Cash for Assets
h. Acquisition of Shares for Case
i. Acquisition of Shares for Shares
j. Two-Step Acquisition
Corporate Ownership Changes – Methods of Control
a. Closely-Held Corporations
i. Problem: stock transfer in close corporations risks disrupting the relationship
among the original shareholders
ii. Stock Transfer Restrictions: obligates each shareholder to offer her stock to the
corporation when a particular event occurs (retirement, death)
1. Forms include:
a. Option exercisable by the corporation to buy the stock at a set
price upon event
b. Right of first refusal, allowing corporation to meet best legitimate
price offered by an outsider for the stick
c. Mandatory buy-sell agreement requires corporation to buy stock
at a set price upon triggering event
2. Enforceable if reasonable (i.e. maintaining status of corporation when
dependent on shareholders)
iii. Del. §202: can adopt restrictions on the transfer of securities
b. Public Corporations – Management Responses to Hostile Takeovers
i. Defensive Tactics
1. Poison Pill/Shareholder Rights Plan: upon a triggering event (i.e. bidder
acquiring a given percentage of the target’s stock), target corporation will
issue debt or equity securities to remaining shareholders at a bargain
price to dilute the bidder’s ownership interest
ii. Unocal/Unitrin Test: directors must show justification for their conduct
1. Board must have reasonable grounds for believing that a threat exists
a. Typically satisfied by a fair and reasonable investigation
b. Inadequate price of the corporation (financial analysts value it at
higher price)
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2. Defense adopted is reasonable in relation to that threat
a. First determine whether board’s response was Draconian –
coercive or preclusive (rendering later acquisition impossible)
b. If no, court may enjoin act only if it falls outside the range of
reasonableness
iii. Delaware Antitakeover Statute §203: no business combination for three years
w/a 15% or more shareholders, unless prior board approval, becomes 85%
shareholder at the same time as becoming a 15% shareholder, OR approved by
BoD and 2/3 of voting shares
X.
Friendly Takeovers – Auction Duties
a. Revlon Standard: when the sale or breakup of the corporation becomes inevitable, the
duty of the Board is to maximize the corporation’s value at a sale for the stockholder’s
benefit – duty of an auctioneer charged w/getting the best price
i. Duty applies either when a company embarks on a transaction whether on its
own initiative or in response to an unsolicited offer where a change of control is
inevitable
ii. Competing bidders treated equally  can satisfy price maximization duty by
auctioning to best price
iii. Competing bidders treated disparately  if treatment enhances shareholder
interest then reasonable
iv. Paramount Communications v. QVC – Revlon Duty applies where target board
favored one of the competing bidders and imposed defensive mechanisms
against the other b/c the target pursued a deal that would result in change of
control
XI.
Freeze-Out Mergers/Cash-Outs: occur where a controlling shareholder wishes to eliminate
minority shareholders from any further participation in the corporate enterprise
a. In Massachusetts, the SJC held that freeze-out mergers are permissible if and only if
freeze out is pursued for a business purpose
i. Coogins v. New England Patriots – requires a showing that eliminating a minority
shareholder will increase corporate income or assets (not just redistributing the
pie)
b. In Delaware, any self-interested combination must meet the entire fairness standard
w/burden of proof on the controlling/dominant shareholder
i. However, an informed approval of the transaction by an independent committee
or disinterested directors or by majority of the minority, the burden shifts to the
minority shareholder being forced out to prove unfair process or unfair price
LIMITED LIABILITY COMPANIES (LLC)
I.
II.
III.
LLC: noncorporate business structure that provides its owners, referred to as members,
w/several benefits including:
a. Limited liability for the obligations of the venture
b. Pass-through tax treatment
c. K freedom to arrange internal operations
General Characteristics
a. Less uniformity among laws (ULLCA, RULLCA, Delaware)
b. Member: equity investor in LCC
Formation
a. Publicly file necessary documents
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i. Certificate of Organization/Formation: includes name of LLC; registered agent;
ULLCA must indicate whether member/manager managed or default to member
ii. Operating Agreement: nonpublic document similar to partnership agreement that
contains specifics on rights, duties, and obligations of the LLC members and
managers regarding operation of LLC
1. Delaware provides maximum effect to freedom of K and enforceability of
LLC agreements (allowing tailoring of fiduciary obligations by K)
IV.
V.
VI.
VII.
VIII.
Authority
a. Management
i. Member-Managed: like a partnership where all members participate in
management
ii. Manager-Managed: like a corporation where centralized management
b. Voting
i. ULLCA/RULLCA default to 1 member/1 vote and for ordinary course of business
requires a simple majority threshold; otherwise consent of all the members
ii. Delaware vote by percentage of interest
c. Agency Power of Members/Managers
i. ULLCA §301: each member/manager is an agent of the LLC for carrying on
ordinary course of business or business of the kind unless the member had no
authority to act in the particular matter and the 3rd party knew or had notice that
member lacked the authority
1. Action outside ordinary course of business binds company only if act is
authorized by the other members (if manager-managed, requires
consent of members)
Owners’ Limited Liability
a. Default: member/manager is not liable for the obligations of the LLC arising solely out of
status as member/manager
b. Members/Managers’ Wrongful Acts
i. LL does not protect members from all fraudulent activity done before the LLC
was formed
ii. Members/Managers liable for individual wrongful acts
iii. Nothing in LLC statute changes rule that agent always still liable for its own torts
Piercing Limited Liability Veil: permitted if the court deems the facts to be sufficiently egregious,
even while acknowledging greater business informality observed
Charging Orders – Equity Holders’ Creditors: issue arises w/single-member LLCs particularly
when court forecloses on a charging order, debtor is given control of the LLC’s assets but not
participating in the management (unsettled area of law)
Fiduciary Duties
a. Duty of Care: did you make an informed decision that rationally believe in best interest of
the LLC?
i. ULLCA §409: refrain from gross negligence or recklessness (managermanaged, member does not have fiduciary duties)
ii. RULLCA §409: act w/same care that a person in like position would reasonably
exercise under similar circumstances and in a manner the member reasonably
believes to be in best interest of corporation
b. Duty of Loyalty: no competing interests; if carry burden transaction fair, it stands
c. Covenant of Good Faith and Fair Dealing
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IX.
Transfer of Ownership Interests: presumption same in partnership; members have the right to
sell their economic interest but a person becomes member w/consent of all the remaining
members unless contrary provision in operating agreement
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