Business Associations

Question 1

Agency

Answer 1

X

Question 2

Sources of Agency Law

Answer 2

X

Question 3

Creation of the Agency Relationship

Answer 3

X

Question 4

Liability In An Agency Relationship: Tort Liability

Answer 4

X

Question 5

Liability in an Agency Relationship: Contract Liability

Answer 5

X

Question 6

Duties of Agents/Principals

Answer 6

X

Question 7

Terminating the Agency Relationship

Answer 7

X

Question 8

Forming a Partnership

Answer 8

X

Question 9

UPA §7(4)

Answer 9

X

Question 10

RUPA §202(c)(3)

Answer 10

X

Question 11

RUPA §103(a) and 2013 RUPA §105 (c)

Answer 11

X

Question 12

UPA §16

Question 13

RUPA §308

Answer 13

X

Question 14

UPA §18

Question 15

RUPA §401

Answer 15

X

Question 16

UPA § 9

Answer 16

X

Question 17

RUPA §301

Answer 17

X

Question 18

RUPA §601

Answer 18

X

Question 19

UPA §40

Answer 19

X

Question 20

RUPA §807

Answer 20

X

Question 21

Valuation: Asset-Based Approach

Answer 21

X

Question 22

Valuation: Earnings-Based Approach

Answer 22

X

Question 23

LLP Statement of Qualification

Answer 23

1. RUPA § 101 – An LLP is a partnership that has filed a statement of qualification.
2. RUPA § 1001 – Statement of Qualifications (b) The terms & conditions on which the partnership becomes an LLP must be approved by the vote necessary to amend the P.A.
   (c) A partnership may become an LLP by filing a statement of qualification, which must contain: (1) partnership name
   (2) address of partnership’s CEO, and if different, address of an office in the state (if any); (3) if no office in the state, the name & address of an agent for service of process…
   (4) a statement that the partnership elects to be an LLP; and (5) a deferred effective date, if any. (e) The status of an LLP is effective on the later of the filing date of the statement or a date specified in the statement … (f) The status of an LLP or the liability of its partners is not affected by errors or changes in the info contained in the statement of qualification.
3. RUPA § 1002 – Name (a) The name of an LLP must end with “Registered Limited Liability Partnership”, “Limited Liability Partnership”, RLLP, or LLP.
4. RUPA § 1003 – Annual Report (f) An obligation is incurred by a partnership during a period when its statement of qualification is administratively revoked will be considered as incurred by an LLP provided the partnership’s status is reinstated within 2 yrs.
5. RUPA § 306(c) – (LLP liability conflicts w/ the partnership agreement) (c) An individual partner’s liability is limited to an LLP … this applies despite anything inconsistent in the P.A. that existed immediately prior to the or consent required to become an LLP.
6. Reqs vary between states. Also, many jurisdictions require an LLP provide a specified amount of liability insurance or pool of funds segregated for the satisfaction of judgments against the partnership.

Question 24

Corporations

Answer 24

1. An organization—usually a group of people or companies—authorized by the state to act as a single entity (a legal entity recognized by private and public law “born out of statute”; a legal person in legal context) and recognized as such in law for purposes reducing liability and encouraging risk taking
2. Basic Terminology
   a. Closely held corporation = a corp. whose stock is not freely traded & is held by only a few shareholders (usually family).
   b. Ultra vires = unauthorized; beyond the scope of power granted by corporate charter or law.
   c. Stock = a proportional part of a corp.’s capital, represented by the # of equal units (shares) owned, and can grant the holder the right to participate in management and share in net profits/earnings.
   d. Bylaw = a rule adopted by an org. for internal governance & external dealings.
   e. Shareholders’ agreement (‘pooling agreement’) = a contract by which shareholders agree their shares will be voted as a unit.
   f. Promoter = founder or organizer of a business venture; one who takes the entrepreneurial initiative in founding or organizing the business.
3. Key differences between partnerships & closely held corporations:
   a. Liability (partners face general liability; shareholder losses generally limited to value of initial investment).
   b. Management (centralized vs. diffused)
   c. Transferability of ownership interests (adding new partners to a partnership is difficult; shares, in contrast, are freely transferable).
   d. Tax status (pass thru vs. double tax)

Question 25

Corporate Formation

Answer 25

1. Under the MCBA:
   a. articles of incorporation must be filed with Sec. of State (§ 1.20(b)&(i));
   b. articles of incorporation must be executed & signed by [an appropriate representative] (§1.20(f) & (g));
   c. articles of incorporation must be accompanied w/ payment (§1.20(j));
   d. articles of incorporation must set forth a name for the corporation (§ 2.02(a));
   e. articles of incorporation must set forth the number of shares the corporation is authorized to issue (§ 2.02(a));
   f. articles of incorporation must set forth the street address of the corporation’s initial registered office and the name of its initial registered agent at that office (§ 2.02(a)); and
   g. articles of incorporation must set forth the name/address of each incorporator.
2. MCBA § 4.01 – Corporate Name (a) A corporate name must include the word “corporation”, “incorporated”, “company”, or “limited”, or the abbreviation “corp.”, “inc.”, “co”, or “ltd”, or words or abbreviations of like import in another language; … (b) … A corporate name must be distinguishable upon the records of the Sec. of State from (1) the corporate name of a corporation incorporated or authorized to transact business in this state; (2) a corporate name reserved or registered under § 4.02 or 4.03.
3. MCBA § 3.01 – Purposes (a) Every corporation … has the purpose of engaging in any lawful business unless a more limited purpose is set forth in its articles of incorporation.
4. MCBA § 3.02 – General powers (a) Every corporation has perpetual duration …
5. MCBA § 8.01 – Requirement for … Board of Directors (a) … Each corp. must have a board of directors.
6. MCBA § 8.03 – Number & Election of Directors
   (a) A board of directors must consist of 1 or more individuals…

Question 26

Premature Commencement of a Business/Corporation

Answer 26

1. Promotors
   a. Promoters = entrepreneurs who put new business together. They owe fiduciary duties to the other participants in the venture and can be held personally liable.
   b. Promoter liability depends largely on what is in the contract. 3 possibilities: (1) Ratification = entity ratifies K & becomes liable IN PLACE OF the promoter (a) Liability is retroactive (b) No special approval needed from counter-party (c) Caveat: principal must exist at time K was signed (d) Gold standard. (2)Adoption = entity adopts the K and becomes liable IN ADDITION TO the promoter (a) Doesn’t really help the promoter whatsoever. (3) Novation = entity adopts the K and becomes liable IN PLACE OF the promotor. (a) But, liability is NOT retroactive! (b) Only protects promotor from new contractual liabilities. (c) Need approval from principal (hard to do ex post). (d) Can put in K ex ante, but lesser form of protection than ratification.
   c. Tips for promoters signing documents for a newly-formed company: (1) Form entity first, if possible. (2) Pay attention to signature block – include “by” and person’s official title (e.g. “By: Sam Smith, Owner”). Do not allow for variations.
   d. If the K does not address the issue of promoter liability, the general rule is that promoters are held personally liable. (1) The majority view holds that non-existent corporations for which a promoter conceivably acted does not automatically assume liability once it forms. The corporation must then adopt the contract at issue. (2) A corporation can adopt a K expressly or implicitly. Generally, receiving benefits of a K & knowledge of the K without repudiation will constitute an ‘adoption’. (3) If a corp. begins making payments under a pre-incorporation contract & accepts services/benefits, most cts would find the corp. to be bound (but, not necessarily replacing the promotor as the liable party).
2. Defective Incorporation Issues
   a. Old common law doctrines allowed for de facto corps., de jure corps., and corporation by estoppel.
   b. This issue is now addressed by MCBA § 2.04: ‘All persons purporting to act as or on behalf of a corp., knowing there was no incorporation under this Act, are jointly & severally liable for all liabilities created while so acting.
   c. Goal is to protect passive investors who are not actively involved and didn’t or couldn’t have known about the defect in incorporation.

Question 27

Disregard of the Corporate Entity

Answer 27

1. Piercing the Veil
   a. Piercing the Veil = the judicial act of imposing personal liability on otherwise immune corporate officers, directors, & shareholders for the corp.’s wrongful acts.
   b. Basic concepts: (1) Capital (a) Includes money or assets invested/available for investment, the total assets of a business, and the total amount or value of a corporation’s stock (i.e. corporate equity). (2) Working capital (a) Includes current assets (cash, inventory, accts receivable) minus current liabilities. (b) Working capital measures liquidity & the ability to discharge short-term obligations. (3) Capitalization (a) The total amt of long-term financing used by a business, including stocks, bonds, retained earnings, etc. (4) Undercapitalization (a) The financial condition of a corp. that doesn’t have enough capital to carry on its business.
   c. ALTER EGO THEORY: In assessing whether to pierce the corporate veil, a Ct. will look to see whether there was … Fraud; or a failure to adhere to basic corporate formalities and some significant resulting inequity or injustice. Factors to assess (per DeWitt Truck Brokers): (1) Under-capitalization (2) Failure to observe corporate formalities (3) Non-payment of dividends (4) Insolvency of the corporation at the time (5) Siphoning of corporate funds by the dominant shareholder (6) Non-functioning of other officers and directors besides the defendant (7) Absence of corporate records (8) Corporation as a façade - Non-participation in corporate affairs by shareholders other than defendant
   (9) Fraud not necessary if combo of these factors leads to resulting inequity/injustice.
   d. Other considerations: (1) Operational vs. non-operational independence? (2) Affirmative control vs. passive control?
   e. Irrelevant considerations: (1) Consolidated income tax return (2) Legal services (3) Borrowing (4) Common pension, profit-sharing, shared retirement plan (5) Cash concentration system
2. Piercing the corporate veil: contract v. tort liability
   a. Contract cases - (1) Bartle v. Homeowners Coop – homeowners’ co-op creates a subsidiary to build homes, mainly for themselves. Creditors use this fact to try & hold shareholders personally liable. Ct held for Ds after finding that the creditors had burden of investigating their lendee – they could have ascertained on their own that the subsidiary was not realizing profits. (2) Dewitt Truck Brokers – man acted like he had a corporation but it was really just a 1-man show. After his company went bankrupt creditors went after him personally. Ct held for Ps, stating that there is no assumption of risk defense in cases of fraud or illegality.
   (3) Radaszewski v. Telecom – P sues parent company of business whose employee caused an MVA, arguing that they undercapitalized their subsidiary (they provided loans & ins, but no actual capital) and were thus negligent in allowing it to operate. Ct held that providing ins is comparable to providing capital. Moreover, the purpose of limited liability is to protect a parent corp. when a subsidiary becomes insolvent. This doctrine would be destroyed if a parent corp. could be held liable for errs in business judgment. Need something more.
   b. Tort cases (1) Baatz v. Arrow Bar – the whole point of limited liability is to protect assets of owners. Tort-related veil-piercing is VERY rare.
3. Choice-of-law in veil piercing cases:
   a. Contract claims (1) Law of the state of incorporation applies to contract dispute, per the internal affairs doctrine.
   b. Tort claims (1) 2nd R. on Conflict of Laws § 145: Choice of law depends on which state has the most significant relationship to the occurrence/parties. (2) Considerations:
   (a) where injury occurred; (b) where conduct causing the injury occurred; (c) domicile, residence, nationality, place of incorporation, & place of business of the parties;
   - place where the relationship (if any) between the parties is centered.
4. Types of liability in veil-piercing cases
   a. Direct liability = parent company owns subsidiary.
   b. Direct ‘operational’ liability = parent co. plays direct role in facility’s operations.
   c. Indirect liability = subsidiary acts as alter ego for the parent co. (e.g. to commit fraud).
5. Reverse piercing & self-piercing
   a. Same process as regular piercing; the only difference is the party requesting relief. Instead of a creditor wishing to pierce the veil, with reverse piercing, it is the party being protected that is requesting the pierce. (1) Cargill v. Hedge – ct pierces veil at request of debtor, whose company owned his family’s land which he lived on. They were able to reserve 80 acres for family’s personal home by piercing the veil under a homestead exemption. (2) ^^ Ct held reverse piercing is appropriate when there are strong public policy reasons for disregarding the corp. entity.
   b. Self-piercing is also a thing (sometimes initiated in bankruptcy ct by a trustee who wishes to pierce the veil in order to access parent company funds).

Question 28

Successor Liability of a Corporation

Answer 28

1. Overview of successor liability
   a. Merger = the absorption of 1 org. that ceases to exist into another that retains its own name & identity and acquires the assets & liabilities of the former.
   b. Asset acquisition = acquisition of a corp. by purchasing all its assets directly from the corp. itself, rather than by purchasing shares from shareholders.
2. Successor nonliability rule = successor corporations are generally not liable for the debts or obligations of their predecessor, unless… (1) there is an express or implied agreement to assume the liabilities; (a) price paid can reflect an acceptance/rejection of future unknown liabilities
   (2) the transaction is a merger or consolidation; (3) the successor is a mere continuation or reincarnation of the predecessor entity; or look for similarities in ownership/management (4) the transaction was fraudulent, made in bad faith, or w/o sufficient consideration.
3. Assessing the liability of dissolved corporations
   a. MCBA § 14.06 – Known Claims (a) A dissolved corp. may dispose of known claims by notifying claimants in writing of the dissolution at any time after its effective date.
   (b) The written notice must: (1) describe info that must be included in the claim; (2) provide a mailing address where claims can be sent; (3) state the deadline (which may not be <120 days from the effective date of the notice); and
   (4) state that the claim will be barred if not received by the deadline. (c) A claim is barred if … (i) a claimant who was given written notice does not deliver the claim to the dissolved corporation by the deadline; or (ii) a claimant whose claim was rejected by the dissolved corporation does not commence [an appeal] within 90 days from the rejection notice; (d) … ‘Claim’ does not include a contingent liability or a claim based on an event occurring after the dissolution.
   b. MCBA § 14.07 – Unknown Claims (a) A dissolved corp. may publish notice of its dissolution and request that potential claimants present them in accordance w/ the notice. (b) The notice must: (1) be published 1 time in a newspaper of general circulation; (2) describe the info needed in a claim & provide an address where the claim may be sent; (3) state that any claim will be barred unless a proceeding is commenced within 3 yrs … (d) A claim that is not barred by (b) or (c) may be enforced: (1) against the dissolved corp. to the extent of its undistributed assets; or (2) if the assets have been distributed in liquidation, against a shareholder to the extent of the shareholder’s pro rata share of the claim or the corporate assets distributed to the shareholder in liquidation, whichever is less, but a shareholder’s total liability for all claims under this section may not exceed the total amt of assets distributed to the shareholder.
   c. MCBA § 14.09 – Director’s Duties
   (a) Directors shall cause the dissolved corp. to discharge or make reasonable provision for the payment of claims & make distributions of assets to shareholders after payment r provision for claims. * in other words, $$$ must be set aside to pay known claims BEFORE distributing assets/capital to shareholders! Otherwise, shareholders could be held personally liable.
   d. MCBA § 14.08 – [Going to Court re: Setting Aside Funds]
   In short, you can go to court & have a judge determine how much you need to set aside. You are then off the hook for anything in excess of that amount. But, ct may appoint a GAL to rep the unknown creditors. Risky b/c it could be anyone (& they could charge high fees).

Question 29

Financing the Corporation

Answer 29

1. Shares and Shareholders
   a. Shareholder Rights:vUnder MCBA § 6.01, common-stock shareholders are entitled to: (1) vote to elect directors and on other matters; (2) the net assets of the corp. (after allowances have been made for debts) in the form of dividends or distributions. Other non-financial rights include: (3) a right to inspect books & records (§ 16.02)
   (4) a right to sue o.b.o. the corporation to right a wrong committed against it (§ 7.40 – 7.47). (5) a right to financial information (§ 16.20)
   b. Types of Stock: Common stock = entitles holder to vote on corporate matters, receive dividends after other claims & dividends to preferred shareholders have been paid, and to share in assets upon liquidation. Preferred stock = entitles holder to a preferential claim to dividends and corporate assets upon liquidation, BUT usually no voting rights. Preferred Stock May also include:
   * redemption rights (corporation reserves right to redeem the shares at any time at a fixed price set forth by the articles of incorporation – shareholder has no choice but to accept). * conversion rights (preferred shares may be converted to common shares at the option of the holder, at a ratio fixed by the articles of incorporation). * protective provisions
   c. Ensuring Adequate Consideration for Shares (1) MCBA § 19 (1969) [LIMITS WHAT CAN BE CONSIDERED ‘CONSIDERATION’] . The consideration for the issuance of shares may be paid, in whole or in part, in cash, in other property, tangible or intangible, or in labor or services actually performed for the corporation … Neither promissory notes nor future services shall constitute payment for the issuance of shares of a corporation … In the absence of fraud in the transaction, the judgment of the board of directors or the shareholders … as to the value of the consideration received for shares shall be conclusive.
   COMPARE WITH (2) MCBA § 6.21 [BOARD HAS DEFERENCE TO DECIDE WHAT ‘CONSIDERATION’ IS] (b) The board of directors may authorize shares to be issued for consideration consisting of any tangible or intangible property or benefit to the corp. … (c) Before the corp. issues shares, the directors must determine that the consideration received is adequate…
   (e) The corporation may place in escrow shares issued for a contract for future services or benefits or a promissory note, or make other arrangement to restrict the transfer of shares, and may credit distributions in respect of the shares against their purchase price, until the services are performed, the note is paid, or the benefits received.
   d. Par value = an arbitrary dollar value assigned to shares which represents the minimum amount for which each share may be initially sold. (1) Initially created so investors could rest assured that no one else would receive a more favorable issue price than them (this was before stock sales were made publicly available and is largely irrelevant nowadays). (2) If par value set too high, could lead to ‘watered stock.’ Best to set as low as possible. Watered stock can lead to individual liability o.b.o. shareholders that did not pay full market value. Shareholder may be liable to corporate creditors to the extent his stock has not been paid for. (3). Today, shareholders who buy stock receive more protection. MCBA § 6.22(a) (2008) provides that “a purchaser from a corp. of its own shares is not liable to the corp. or its creditors w/ respect to the shares except to pay the consideration for which the shares were authorized to be issued (§ 6.21) or specified in the subscription agreement (§ 6.20). (4) Note: par value only applies to the initial issuance of stock (not subsequent transfers or issuances).
2. Debt Financing
   a. Debt Financing vs. Equity Financing: (1) Debt financing = raising $ thru loans. (2) Risky b/c if you don’t make lots of money early on, you risk defaulting on loans. (3) But, can be better long-term b/c you pay less dividends on stocks (assuming you didn’t sell a bunch). (4) Most common model of financing today.
   b. Equity financing = raising $ thru sale of stock. (1) Less debt equals lower interest payments and less risk of default early on But, long-term gains will be lower as you make more $, b/c you have to pay out dividends on all those shares you sold early on.
   c. What exactly is leverage? (1) Leverage results from using borrowed $ as a funding source when investing to expand the firm’s assets & generate returns. Leverage is an investment strategy of using borrowed money to increase the potential return of an investment. Leverage can also refer to the amount of debt a firm uses to finance assets.
   (2) . When one refers to a company as ‘highly leveraged’, it means that company has more debt than equity. (3) To the extent a business is able to earn more on each dollar invested than the cost of borrowing that dollar, all surplus can be allocated to the equity interests in the corp. The result is that earnings per share increase much more rapidly in a leveraged situation than in an unleveraged one as earnings increase.
   d. Leveraged buyouts (1) A leveraged buyout is the acquisition of a company using mostly borrowed money to meet the cost of the acquisition. The assets of the company being acquired (and the company buying) are often used as collateral for the loans. (2) Advantages of a leveraged buyout: (a) Small investment: 10% down = ownership (traditionally) (b) Management fees ensure that the private equity firm will make money even if the target company files for bankruptcy. (c) A lot of $ is going to paying down the debt, but interest payments are tax deductible. As debt is paid down, equity grows. (d) Improved revenue & cash flow. (e) Public companies are taken private so they do not need to comply w/ federal & state securities laws.
   (3) . Disadvantages of a leveraged buyout: New management team will slash overhead (e.g. reduce R&D budget, layoffs, etc.). May compromise long-term prospects.
   - Debt ratio has increased astronomically – precarious situation. -All company assets are fully lined up. If there is any downturn in revenue, the company is almost assured of a loan default/triggering a debt covenant. If that happens, restructuring the company becomes extremely difficult.
   d. Initiators of an LBO should be weary of conflicts of interest. (1) MRPC 1.7 – Conflicts of Interest (current clients)
   (a) … A lawyer shall not rep a client if the rep involves a concurrent conflict of interest. A concurrent conflict of interest exists if: (1) the rep of 1 client will be directly adverse to another client; or (2) there is a significant risk that the rep of 1 or more clients will be materially limited by the lawyer’s responsibilities to another client, a former client, or a 3rd person, or by a personal interest of the lawyer. (b) Notwithstanding a concurrent conflict of interest, a lawyer may rep a client if: (1) the lawyer reasonably believes that the lawyer will be able to provide competent & diligent rep to each client; (2) the rep is not prohibited by law; (3) the rep does not involve the assertion of a claim by 1 client against another client repped by the lawyer in the same litigation or other proceeding before a tribunal; and
   (4) each affect client gives informed consent, confirmed in writing.

Question 30

Public Offerings

Answer 30

1. Initial public offering (IPO)
   a. Why go public? (1) More $$$ for expansion. (2) Liquidity of shares for shareholders (3) Publicly traded shares help lure employees w/ stock options (4) Publicly traded companies tend to be better known
   b. Why stay private? (1) Must make internal affairs public & face increased scrutiny (2) Increased legal risks under SEC & Blue Sky laws (3) SEC filing requirements (e.g. quarterlies)
   (4) Very expensive to go public; complicated process can drain scarce resources.
   c. How is an IPO different from a ‘direct listing’? (1) In an IPO, new shares are created & sold to the public. In a direct listing, no new shares are created - only existing, outstanding shares are sold.
2. 1934 Securities Act ( ‘Securities Exchange Act’)
   a. Established the SEC to enforce securities laws.
3. 1933 Securities Act (‘Truth in Securities Act’) (federal registration requirement)
   a. § 5: Requires the filing of a registration statement in order to offer/sell/buy any security.
   b. § 4: Exempts transactions involving underwriters, issuers, & private offerings.
   c. § 3(a)(11): Exempts securities offered or sold only to persons within a single state; and where the issuer is a person resident or doing business within, or if a corporation, incorporated in & doing business within, such a state. ^ ‘local business exception’
4. Rule 147 (local business exemption)
   a. Rule 147 details who qualifies for the local business exception (§ 3(a)(11)): (1) issuer must be a ‘resident’ of the state where the offer is made; * resident = person resides there, or company is incorporated AND has its PPB within the state. (2) issuer must be ‘doing business’ within the state, & * doing business = at least 80% of gross revenues come from the state. (3) purchaser must be residents of that same state.
   b. Also a 9-month limit on out-of-state resales.
   c. Note: Congress recently passed Rule 147a which made a few key changes: (1) It allows issuers to make offers to out-of-state residents so long as the actual sales remain limited to in-state residents. (This allows issuers to advertise online & reach large audiences quickly). (2) It requires only that the company’s PPB be in the state (no longer requires company to have incorporated within the state). (3) Also changes the out-of-state resale restriction to 6 months.
5. Reg. D (small business exemption)
   a. Reg. D is meant to boost small businesses by providing exemptions to federal registration requirements for small offerings (up to $5 million).
   b. Rule 501 defines “accredited investor” & provides guidance on how to calculate the # of investors for any given security.
   c. Rule 502 covers several issues: (1) Some issuers want to issue a large batch of securities but know that such an issuance would subject them to fed. regs. So, they attempt to issue smaller batches at varied intervals. 502(a) restricts this practice. (2) Rule 502(c) provides limits on the marketing of exempt securities.(3) Rule 502(d) restricts the resale of exempt securities.
   d. Rule 504: A small offer exemption of up to $5 million can be sold pursuant to state blue sky regs. This rule gives a larger scope to state regulators and requires that all state reqs. be satisfied. * No limit on the # of investors. * $5 mil stacks within a 12-month period.
   e. Rule 506: Any amount may be sold to “accredited investors.” The issuer can also sell to those who are not accredited investors so long as the issuer reasonably believes that said person meets the reqs of 506(b)(2)(ii).
   * There cannot be more than 35 investors, but accredited investors don’t count against this number.
6. Rule 10b-5 of the 1934 Act (truthfulness clause - applies to all security sales, registered or unregistered) (5) It shall be unlawful for any person: (a) To employ any device, scheme, or artifice to defraud, (b) To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or (c) To engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person, … in connection with the purchase or sale of any security.
7. Modern-day exception: Crowdfunding
   a. Crowdfunding is just another means by which a company can locate investors via a combo of crowdsourcing & angel investing.
   b. Different crowdfunding models: (1) the peer-to-peer lending model; (2) the donation mode (e.g. Go Fund Me);
   (3) the reward model; (4) the pre-purchase model; &
   (5) the equity model created by the JOBS Act of 2012.
   c. JOBS Act aimed to allow non-accredited investors to purchase equity positions in small businesses.
   d. Title III of the Jobs Act creates 2 tiers of investing under which non-accredited investors can invest up to 10% of their income/net worth annually. - Tier 1: companies can raise up to $20 million. Subject to state law & regulators, but no formal audits/reporting. - Tier 2: companies can raise up to $50 million. Not subject to state law or regulators, but will be audited and must provide annual reports, subject to SEC review.
8. Case law
   a. Ralston v. Purina – ct held that the sale of a security will not be exempt from securities regulation if it is determined that the class of persons involved in the sale requires the protections afforded by the federal securities act.
   b. Smith v. Gross – ct held that investment contracts are considered ‘securities’ which are protected by federal security law.

Question 31

Preemptive Rights & Distributions

Answer 31

1. Preemptive Rights
   a. Preemptive rights give a shareholder the right to buy additional shares (in an amount proportional to his/her existing interest in the company) in any future issue of the company’s common stock before the shares become available to the general public.
   b. MCBA § 6.30 – Shareholders’ Preemptive Rights
   (a) Shareholders do not have a preemptive right to acquire unissued shares except to the extent the articles of incorporation provide.
   c. Katzowitz v. Sidler: preemptive rights are designed to protect shareholders against dilution of their equity and their proportionate voting control. While the price of new shares is not set by statute, directors must set the price in a way that benefits the corporation & shareholders. Issuing stock for less than market value can injure shareholders by diluting their interest.
2. Distributions by a Closely-Held Corporation
   a. In evaluating whether a corp. should be compelled to pay dividends (or increase the amount of dividends paid), the central Q is whether the corporation’s policy is dictated by personal interests rather than the corporate welfare.
   b. Courts more likely to intervene in closely-held corporations (for obvious reasons.)
   c. In order for a ct to intervene, there must be: (1) an adequate corporate surplus; and (2) bad faith by the directors.
   d. Bad faith: requires a significant evidentiary burden. Key factors: (1) The surplus the corporation is holding on a year-in, year-out basis; (2) Intense hostility of the controlling faction against the minority; (3) Exclusion of the minority from the employment by the corporation; (4) High salaries, or bonuses or corporate loans made to the officers in control; (5) The fact that the majority group may be subject to high personal income taxes if substantial dividends are paid; and (6) The existence of a desire by the controlling directors to acquire the minority stock interests as cheaply as possible.
   e. Dodge v. Ford: a corporation cannot take actions that harm its shareholders and are motivated by humanitarian concerns and not by business concerns.
3. Legal Restrictions on Distributions
   a. MCBA § 6.40 – Distributions (a) A board of directors may authorize distributions … subject to restrictions in the articles of incorporation and the limit in (c). (c) No distribution may be made if… (1) [INSOLVENCY TEST] the corp. would not be able to pay its debts as they become due in the usual course of business; or (2) [BALANCE SHEET TEST] the corp.’s total assets would be less than the sum of its total liabilities + the amount that would be needed to satisfy the preferential rights of shareholders upon dissolution. *** Note – both tests must be met. (d) The board of directors may determine that a distribution is not prohibited under (c) either on: [i] financial statements prepared on the basis of accounting practices/principles that are reasonable in the circumstances; [ii] a fair valuation that is reasonable in the circumstances; or [iii] other method that is reasonable in the circumstances.
   b. MCBA § 8.30(b) – Standard of Care for Directors
   (b) The board of directors shall discharge their duties w/ the care that a person in a like position would reasonably believe appropriate under similar circumstances. ** Under 8.30(b), (d), (e), and (f), the board of directors may rely on info, reports, opinions, & statements prepared – internally or externally. (f) A director is entitled to rely on … (1) officers or employees whom the director reasonably believes reliable & competent; (2) legal counsel, public accountants, or other persons retained by the corporation as to matters involving skills or expertise the director reasonably believes are matters (i) within the person’s professional or expert competence or (ii) as to which the particular person merits confidence; or (3) a committee of the board of directors of which the director is not a member if the director reasonably believes the committee merits confidence;

Question 32

Cumulative Voting

Answer 32

1. Gamesmanship in Voting
   a. Straight Voting = 1 vote per share. (1). Simple, straightforward. (2). Easy for majority shareholder to elect entire board of directors. (3). Companies employ a variety of devices to modify this method: e.g. some classes of stock have no voting rights e.g. 2 different classes may each be able to elect ½ the board e.g. a class of stock may be entitled to multiple votes.
   b. Cumulative Voting = shareholders cast vote that is equal to his/her # of shares multiplied by the # of open positions.
   (1) Only applies to the election of directors. (2). Minority shareholders can allocate their aggregate # of votes in any proportion he/she chooses, thus improving his/her chance of electing at least 1 director. (3). As of today, only 4 states require cumulative voting. The rest generally allow a corp. to ‘opt in’ and select cumulative voting in their articles of incorporation. (4). Even when cumulative voting is mandatory, there are methods to reduce its impact.
   e. g. creating small classes of directors (with only 1-2 directors in each class) and then staggering the vote on each class is 1 possibility (see Humphrey’s v. Winous Co.)
2. MCBA § 7.28(b) – Shareholders do not have a right to cumulate their votes for directors unless the articles of incorporation so provide.
3. MCBA § 8.08 – Removal of Directors by Shareholders
   (a) Shareholders may remove directors with or without cause unless the articles of incorporation provide [otherwise]… (c) If cumulative voting is authorized, a director may not be removed if the # of votes sufficient to elect him under cumulative voting is voted against his removal. If cumulative voting is not authorized, a director may be removed only if the # of votes cast to remove him exceeds the number of votes cast not to remove him. * So, if 200 cumulative votes were cast to elect X, and there is a subsequent vote to remove X, X cannot be removed if 200 or more votes are cast AGAINST X’s removal.
4. MCBA § 10.01 – Authority to Amend (a) A corp. may amend its articles of incorporation at any time to add or change a provision that is required or permitted in the articles of incorporation as of the effective date of the amendment.

Question 33

Shareholder Voting & Agreements

Answer 33

1. Restrictions on the Transfer of Shares
   a. Background on Share-Transfer Restrictions (1) Usually, only a handful of individuals are involved at the formation stage of a closely-held corp. They may want restrict share transferability for a # of reasons … to prevent ppl from acquiring company or selling shares to certain parties… to comply with govt contracts that restrict who can own shares. (2). So, cts allowed various types of restrictions. Under common law, the validity of a share-transfer restriction depends on whether it ‘unreasonably restrains transferability.’ However, most states have adopted some version of MCBA § 6.27.
   b. Under MBCA § 6.27, a valid share-transfer requires:
   1) notice;
   2) valid purpose; and
   3) valid means.
   c. MCBA § 6.27 – Power to Restrict (a) The articles of incorporation … may impose restrictions on the transfer of shares. (b) [NOTICE] A restriction is valid & enforceable if the restriction is authorized by this section & its existence is noted conspicuously on the front or back of the cert … A restriction is not enforceable against a person w/o knowledge of the restriction. (c) [VALID PURPOSE] A restriction is authorized … (1) to maintain the corp.’s status when it is dependent on the # or identity of its shareholders; (2) to preserve exemptions; or (3) for any other reasonable purpose. (d) [VALID MEANS] A restriction may … (1) obligate the shareholder first to offer the corp.… an opportunity to acquire the restricted shares; (2) obligate the corp. … to acquire the restricted shares; (3) require the corp. or another person to approve the transfer of the restricted shares, if the requirement is not manifestly unreasonable; (4) prohibit the transfer of restricted shares to designated persons or classes of persons, if the prohibition is not manifestly unreasonable. …
   c. Common types of share-transfer restrictions: (1) Buy-sell agreements: shareholder is obligated to sell & the corp. is obligated to buy at (a) a designated price or (b) computable price, upon the occurrence of a triggering event. (2). Option agreements (‘right of first refusal’: if a shareholder wishes to sell his shares, the shares must first be offered to the existing shareholders or to the corp. at the price an outsider is willing to pay.
   d. Share valuation options (1) Agreement may provide for a buyback at same price the shares were issued; (2) Agreement may call on parties to use a valuation expert;
   (3) Agreement may rely upon one of many valuation approaches; or (4) The board can periodically value shares in the company. (5) Many closely-held corps. do not have any share-transfer restrictions. Why not? (a) Owners may be unsophisticated, owners may be family/friends, may be afraid to introduce the topic of protective agreements, and it’s difficult to foresee future circumstances. Ppl also tend to be overly optimistic in entering a venture together.
2. Deadlocks (closely-held corps. only)
   a. Instances when a company might face a deadlock: (1) There is a 50/50 split on share ownership w/ straight voting
   (2) High quorum & voting requirements for shareholder meetings so that a minority has effective veto power over all significant decisions (3) High quorum & voting requirements at the board of directors level so you have a small # of directors w/ veto power over all decisions (4) There is an even # of directors & each faction gets to vote for ½ of the directors.
   b. When a deadlock cannot be resolved internally, the corp. may seek 3rd-party intervention, including:
   i. Mediation/arbitration of key issues;
   ii. Appt of a custodian (see § 14.32);
   iii. Appt of a provisional director;
   iv. Appt of a receiver (see § 14.32)
   c. To the extent none of these options work, a shareholder can petition for dissolution. Cts are reluctant to dissolve profitable companies (esp if there is a likelihood shareholders or public will be injured as a result), but may do so if the circumstances merit it.
   d. MCBA § 14.30(a)(2) – A shareholder can petition for dissolution if … (i)[a] directors are deadlocked in the management of corporate affairs; (i)[b] shareholders are unable to break the deadlock; and (i)[c] (1) irreparable injury to the corp. is threatened/suffered, or (2) the business & affairs of the corp. can no longer be conducted to the advantage of shareholders b/c of the deadlock. (ii) the directors … have acted, are acting, or will act in a manner that is illegal, oppressive, or fraudulent; (iii) the shareholders are (a) deadlocked in voting power and (b) have failed, for a period including at least 2 consecutive annual meetings, to elect successors to director positions; or (iv) the corporate assets are being misapplied or wasted.
   e. MCBA § 14.34 – Election to Purchase in lieu of dissolution
   (b) An election to purchase may be filed … within 60 days after the filing of the petition under 14.30(a)(2) … After an election has been filed, the petitioner may not sell or otherwise dispose of his or her share. (c) If, within 60 days of the filing …the parties reach agreement as to the terms of purchase…the ct shall enter an order directing the purchase of petitioner’s shares. (d) If the parties are unable to reach an agreement, the ct shall stay the proceedings & determine the fair value of petitioner’s shares … as the ct deems appropriate under the circumstances.*** Note: § 14.34 is beneficial for the corporation b/c it essentially locks both parties into this formal judicial process where the disgruntled party is ‘locked in’ and cannot back out. A sale is then compelled & the disgruntled shareholder is gone.

Question 34

Corporate Fiduciary Duties (Duty of Care)

Answer 34

Fiduciary Duties

1. Overview
   a. Directors owe fiduciary duties to the corp. & to its shareholders.
   b. High-level managing officers generally owe the same duties a director does.
   c. Controlling shareholders may also owe duties to minority shareholders.
   d. When a company becomes insolvent, these duties extend to creditors as well.
2. Duty of Care (MCBA § 8.30)
   a. Depending on jurisdiction, the duty of care is defined by statute or by case law. In Delaware, the duty of care is defined solely by case law.
   b. The traditional formulation: “A director or officer must act in (1) good faith; (2) with the care that an ordinarily prudent person in a like position would exercise under similar circumstances; and (3) in a manner he/she reasonably believes to be in the best interests of the corporation.
   ** Note that such a standard could (i) impose liability for mere negligence and (ii) involve some assessment of the actual decision made.
   c. Duty of Care under § 8.30: “Directors … shall act in (1) good faith, (2) in a manner he/she reasonably believes to be in the best interests of the corp. … The director, when becoming informed in connection with their decision-making function … shall discharge their duties with the care that a person in a like position would reasonably believe appropriate under similar circumstances.”
   ** Note, this section emphasizes that the standard is to be applied to the PROCESS employed in reaching a decision – not the decision itself (or the subsequent results).
   d. § 8.30(c) requires a director to disclose to other board members all info material to the decision-making process. Note, this does not require the disclosure of conflicts of interest (for that, see § 8.62).
   e. § 8.30(d), (e), and (f) work together to allow directors to delegate some investigatory work to officers, committees, or outside professionals, and then rely on the info presented by those people. (1) But, this is not a license for directors to buy their heads in the sand. Directors cannot have knowledge that makes the reliance unwarranted or would cause a person in a like position under similar circumstances to undertake a reasonable inquiry.
   f. Director Liability under § 8.31: A director shall not be liable … for any decision to take or not to take action as a director unless the plf establishes that: (1) there is no defense based on … [A] [a provision in the articles of incorporation which limits or eliminates director liability]
   [B] [a safe harbor provision], or [C] [the corporate opportunity doctrine] (2) the challenged conduct was the result of… [i] [bad faith] [ii] [a decision which the director did not reasonably believe to be in the best interests of the corp., or as to which the director was not informed to an extent appropriate in the circumstances] [iii] [a lack of objectivity due to familial, financial, or business relationships with … another person with a material interest in the challenged conduct … which could be reasonably expected to have affected his judgment AND which could not have been reasonably believed by the director to be in the best interests of the corporation;] [iv] [a sustained failure of the director to devote attention to ongoing oversight of the business & affairs of the corp. …]; or [v] [receipt of a financial benefit to which the director was not entitled …]. (b) for more on damages under this Section.
   The party seeking to hold a director liable
   (1) for money damages
   g. Tempering the Effect of the Duty of Care: i. The Business Judgment Rule: Honest business decisions made (1) in good faith in the best interests of the corporation, (2) on the basis of reasonable investigation and (3) by an individual not interested in the subject at issue, are not actionable, even when the decision leads to disastrous results.
   * Many jurisdictions hold that a director whose decision complies with the BJR has fulfilled his/her duty of care.
   * The BJR is a very effective defense b/c its standard is very subjective – who exactly is a person in a ‘like’ position? In contrast, the BJR is easy to prove. You just need to show good faith, no conflict of interest, & ‘reasonable’ investigation.’ * Note, the BJR cannot be used a defense to breach of the duty of loyalty claims. Only duty of care.
   * The most successful attack on the BJR defense is an allegation that there was an undisclosed conflict of interest.
   ii. The Entire Fairness Defense: ▲ must show (1) a fair price was received or tendered; and (2) there were fair dealings.
   * A catch-all defense for when duty of care has been breached. iii. The Reliance Defense (§ 8.30): applies when a director relies on bad info or advice from a colleague or expert, which they were reasonably led to believe was sound advice. Requires good faith & independent assessment of the info. iv. Insurance: D&O ins will cover legal expenses that a director or officer may incur in defending claims of fiduciary duty breaches.
   v. Charter provisions: many states (including Delaware) prove that a corp.’s charter may contain provisions that serve to protect directors from personal liability based on their business decisions. vi. Causation: negligence/breach may not have been proximate cause of the loss at issue. Establishing a link between negligence & damage is difficult with so many elements at play. h. Steps for complying w/ duty of care: i. Make sure that D&Os have all material info re: each business decision. ii. Consider how each business decision would impact stakeholders;
   iii. Seek the advice of qualified experts, internally & externally. iv. Maintain detailed meeting minutes.
   v. Maintain written reports & memos that reflect in detail the materials reviewed & discussed in connection w/ a business decision; vi. Avoid transactions w/ insiders and other conflicts of interest; vii. Avoid preferential treatment of insiders; don’t accept personal benefits in return for supporting or opposing a transaction; viii. Take advantage of any safe-harbor provisions (§ 8.30(d) and (e).

Question 35

Corporate Fiduciary Duties (Duty of Loyalty)

Answer 35

1. Duty of Loyalty
   a. The duty of loyalty focuses on the responsibility of D&Os in avoiding (or at least, disclosing & scrutinizing) conflicts of interest.
   b. 19th century law held that any transaction between the corp. & a director was voidable at the option of the corp. Cts have moved away from this approach in recent years, for a few reasons: i. Young corps. are often forced to rely on its directors for financing, etc. ii. Many self-dealing transactions actually benefit the corp. iii. Many creditors may want to have a rep. on the board. iv. Corps. have increased their use of independent boards of directors, which have theoretically reduced the need for judicial oversight.
   c. Common law rule of Per Se Voidability: transactions between corps. with common D&Os are ‘constructively fraudulent’ absent shareholder ratification. i. The vote of an interested director will not be counted in determining whether a challenged self-dealing transaction received board approval. ii. § 144 of Delaware Corp. Code has largely replaced this common law rule, but…the ct in Marciano v. Nakash held that § 144 is not the only way for a corp. to ‘immunize’ a self-interested transaction…
   d. Per the ct in Marciano v. Nakash, if a self-interested transaction is ‘intrinsically fair’, then it should be allowable. i. Transactions to the right are valid; transactions to the left are voidable. Transactions in the middle should only be upheld if (1) reviewed & approved by disinterested directors or shareholders; and (2) approved in good faith as being in the best interest of the corp.
   e. MCBA on Conflict-of Interest transactions: i. § 8.60 – Defines ‘conflict of interest transaction’ ii. § 8.61 – Methods of sanitizing conflict-of-interest transactions (b)(1) [directors’ authorizing vote] (b)(2) [shareholders’ authorizing vote]
   (b) (3) [transaction is fair to the corp.] iii. § 8.62 – Means of sanitizing conflict-of-interest transactions by directors’ action (a) Requires affirmative vote of a majority of qualified directors + disclose. (b) Conflicted director is not obligated to disclose anything if doing so would violate a duty imposed under law (or contract). (d) Defines ‘qualified director’ (ie a disinterested director) iv. § 8.63 – Means of sanitizing conflict-of-interest transactions by shareholder action - Requires (1) majority of votes by qualified shareholders; (2) notice of the transaction to shareholders, (3) disclosure under 8.63(b), & disclosure to shareholders as defined in 8.60. - Sec. (e) says that even if full disclosure was not made, the ct can defer to the ultimate shareholder vote if such failure was not intended to influence and did not in fact determine the outcome of the vote.
   f. The Corporate Opportunity Doctrine i. The corporate opportunity doctrine attempts to resolve disputes re: when an opportunity belongs to the corp. & when it may be seized by an officer or director. There are 4 classic tests:
   i. Interest/expectancy test – P must show the corp. had a preexisting contractual expectation with which a director or officer interfered. ii. Line of Business test – forbids a director or officer from seizing an opportunity if … (a) the corp. is financially able to undertake it; (b) the opp. is in the corp.’s line of business; (c) the opp. is of practical advantage to the corp. and one that the corp. has an interest or a reasonable expectancy; and (d) by embracing the opp., the self-interest of the director or officer will be brought into conflict w/ that of the corp. iii. Fairness test – ct to apply ‘fair & equitable’ standards based on particular facts of case.
   iv. Combined or ‘dual’ test: ct performs 2-step analysis:
   (1) Is the opp. within the corp.’s line of business? (2) What equitable considerations existed to, at the time of, and following the officer/director’s acquisition? ii. Modern approach: the ALI test (§ 5.05(b)): i. Defines ‘corporate opportunity’ broadly. Includes: (1) any opp. to engage in a business activity of which a director/sr. exec. becomes aware either… (a) in connection w/ the performance or functions as a director or officer; (b) where a director/officer should reasonably believe that the person offering the opportunity expects it to be offered to the corp.; or
   (2) any opp. to engage in a business activity of which a sr. exec becomes aware & knows is closely-related to a business in which the corp. is engaged or expects to engage. ii. If an opportunity exists, the director may not take it unless… (1) he offers the opportunity to the corp. and properly discloses the conflict & the opportunity; (2) the opportunity is rejected by the corp.; and (3) either: (a) the rejection is fair to the corp.; (b) rejection occurs in advance, approved by a majority of disinterested directors or, for officers, rejection is approved by a disinterested superior in a way that satisfies the BJR; or (c) rejection occurs in advance, approved by disinterested shareholders, and rejection is not a waste.
   g. Oppression of Minority Shareholders i. Majority & other controlling shareholders owe fiduciary duties to minority shareholders. Failure to abide by these duties can constitute oppressive conduct & result in a ct-ordered dissolution (or other relief). ii. Oppressive conduct is not necessarily illegal; most cts tend to focus on whether there is a lack of fair dealing or fair play. iii. Once again, we are dealing w/ a judicially created equitable doctrine that has been codified in many jurisdictions.

Question 36

Benefit Corporations

Answer 36

1. Overview
   a. B-Corps. believe in a “triple bottom line” and add social & environmental values to their foundational documents, unlike a C-Corp.
   b. To qualify as a B-Corp., an entity must file a statement in its cert. of incorporation that states the goal of some general public benefit.
   c. Many states allow existing C-Corps. to simply amend their current certificate of incorporation to become a B-Corp. w/ a super-majority vote by shareholders.
2. Oversight
   a. B-Lab i. B-Lab develops templates that state legislators can use to draft B- Corp. law. They also lobby for legal developments. ii. They also certify companies that meet high standards of corporate purpose, accountability, & transparency (as opposed to merely using its status as a marketing tool).
3. Criticisms: (1) Unnecessary b/c existing laws do not prevent directors from considering stakeholder interests alongside shareholder interests. (2) Law does little to ensure B-Corps. are living up to corp. social responsibilities.
   (3) Pension plans & other investors are generally tasked with investing in companies that seek to maximize financial return of their investments. They may not be allowed to invest in B-Corps. (4) Special interest groups oppose B-Corps. b/c “its goal is to move the corporate system toward socialism by suggesting that there’s a higher, better purpose than maximizing profit.” (This is not a joke).

Question 37

Limited Partnerships

Answer 37

1. Overview
   a. An LP is comprised of at least 1 general partner and 1 limited partner.
   b. The General Partner has unlimited liability (can be limited by the P.A.).
   c. The limited partner has no liability for the debts of the venture beyond the loss of his/her investment. But, cannot participate in management if they want to maintain their limited liability.
   d. Various statutory provisions govern limited partnerships:
   i. Most states have adopted some form of RULPA (1985). ii. 16 states have adopted ULPA (2001). iii. A few states have adopted ULPA (2013).
   e. General partnership law applies to the extent an issue is not addressed by RULPA. However, RUPA and ULPA are not linked in a similar way.
2. Defective Incorporation of the LP:
   a. RULPA § 304: (a) A person who makes a contribution to a business enterprise & erroneously but in good faith believes that he has become a LP… is not a GP if, on ascertaining the mistake, he: (1) files an appropriate cert. or amendment; or (2) files a cert. of withdrawal. (b) A person is liable as a GP to any 3rd-party who transacts w/ the business … if the 3rd-party believed in good faith that the person was a GP at the time of the transaction.
   b. ULPA § 306 is substantially the same.
3. Liability Protection for Limited Partners:
   a. RULPA § 303: (a) A limited partner is not liable … unless he participates in the control of the business.… However, even if the LP participates in the control of the business, he is liable only to persons who transact business with the LP reasonably believing, based upon the limited partner’s conduct, that he is a general partner. (b) (provides a safe harbor for various activities)
   b. ULPA § 303:
   - A limited partner is not personally liable … solely by reason of being a limited partner, even if he/she participates in the management & control of the LP. Nevertheless, LPs will still be liable for their own misconduct
4. Profit-Sharing in LPs:
   a. RULPA § 607: - A partner may not receive a distribution from an LP to the extent that, after giving effect to the distribution, all liabilities of the LP, other than liabilities to partners on account of their partnership interests, exceed the fair value of the LP’s assets. (in short, cannot exceed liabilities).
   b. RULPA §503 -Distributions of profits are to made on the basis of contribution of LPs to the LPship if not otherwise defined in the PA. - A distribution from an LP must be shared among the partners on the basis of the value … of the contributions the LP has received from each partner (in short, distributions must be made pro rata).
5. Voting Rights
   a. RULPA
   - RULPA does not have an express provision stating LPs have voting rights. However, this can be modified by the PA
   b. ULPA §302
   - LPs may have voting rights for specific proposals such as admitting LPs or GPs, amending the PA, etc…

Question 38

Limited Liability Company (LLC)

Answer 38

1. The LLC is a business structure that provides its owners (‘members’) w/ several benefits: i. Limited personal liability;
   ii. Pass-thru taxation; iii. Tremendous freedom to contractually arrange internal operations.
2. Relevant statutory framework: i. The DLLCA governs many disputes. ii. The ULLCA is in effect in approx. 7 states.
   iii. The RULLCA (2013) has been adopted by 12 states (originally promulgated in 2006). iv. Case law is not very rich & varies a lot. So cts tend to rely on partnership law principles to address the partnership aspects of the LLC, while they rely on corporate law principles to address the corporate aspects.
3. Formation
   a. ULLCA § 202: Organization i. Requires delivery of articles of organization to the Sec. of State for filing; ii. Effective on the date of filing; iii. Filing of the articles of org. serve as conclusive proof of LLC’s existence.
   b. ULLCA § 203: Articles of Organization
   i. The primary purpose of the Articles of Organization is to notify the public of the LLC’s existence. ii. Articles of Organization don’t set forth the governance of the LLC. The Operating Agreement does iii. Articles must set forth:
   1. name
   2. address
   3. name/address of the agent;
   4. name/address of each organizer;
   5. Whether the company is to be a term company (and if so, the term specified);
   6. Whether the company is to be member-managed or manager-managed;
   7. Whether one or more members are to be liable for its debts under 303(c).

Question 39

LLC Governance

Answer 39

1. Governance
   a. Default rule is that management is handled by members (much like a GP).
   b. Can also elect for managers to handle management (more akin to a corporation) (1) May give inexperienced members comfort if they are unfamiliar w/ management & business. Can also make decision-making process more efficient when there are lots of members (100+).
   c. Generally, the operating agreement governs the business affairs an LLC. (1) To the extent there is a conflict between the operating agreement and the articles of organization, then the operating agreement controls as to managers, members, & transferees, and the articles of org. control as to persons other than manager, members, & transferees who reasonably rely on the articles to their detriment. (ULCCA § 203(c)).
2. Voting Rights
   a. DLCCA § 18-402: Management is vested in its members in proportion to their current interest in the company. - Operating agreement amendment requires unanimous approval (§ 18-302(f). - The election & removal of managers (when the operating agreement is silent) is an open issue under § 402. A rare scenario, but if it happens the ct can rely on law of the jurisdiction.
   c. ULLCA § 404: Each member has equal rights in management and most decisions can be made by a simple member of majority. - Operating agreement amendment requires unanimous approval (§ 404(c)). - Manager may be removed by a majority of the members (§ 404(b)(3).
3. Profits & Distributions
   a. DLCCA § 504 – default rule is pro rata based on interest/contributions.
   b. ULLCA § 405 – default rule is ‘equal shares.’

Question 40

LLC Fiduciary Duties for Members & Managers

Answer 40

1. ULLCA § 409: (b) A member’s duty of loyalty to a member-managed company & its other members is limited to: (1) to account to the company & to hold as trustee for it any property, profit, or benefit derived by the member in the conduct or winding up of the business or derived from use of the company’s property, including the appropriation of a company’s opportunity; (2) to refrain from dealing w/ the company or on behalf of a party w/ an interest adverse to the company; and (3) to refrain from competing w/ the company. (c) A member’s duty of care to a member-managed company … is limited to refraining from engaging in grossly negligent or reckless conduct, intentional misconduct, or a knowing violation of law. (d) A member shall discharge the duties to a member-managed company … & exercise any rights consistent w/ the obligation of good faith & fair dealing. (h) In a manager-managed company …
   (1) A member who is not also a manager owes no duties to the company or to the members solely by reason of being a member (2) a manager is held to the same standards of conduct prescribed for members in (b) thru (f), and (4) a manager is relieved of liability … for violation of (b) thru (f) to the extent of the managerial authority delegated to the members by the operating agreement.
2. ULLCA § 103 lists non-waivable provisions that restrict how much the operating agreement can reduce/eliminate these fiduciary duties. - See also, Anderson v. Wilder, where the ct held that although LLCs have relative freedom in drafting their operating agreements, there is a limit when such agreements allow for inequitable conduct or in a bad-faith manner. * Ct held that majority members owe fiduciary duties to minority members. So although the defendants’ action was not in breach of the operating agreement, it did breach their fiduciary duties.
3. DLLCA §303
   a. Except as otherwise provided, the…
   (a) Good Faith in DE is based on the parties ex-ante expectations of the bargain

Question 41

LLC Ownership Interests, Transferability, Dissociation & Dissolution

Answer 41

1. Overview
   a. Financial rights (‘distributional interest’) = right to share in profits/losses of the company. Default rule is that these rights are transferable.
   b. Management rights = right to participate in management/control of the company. Default rule is that these rights are NOT transferable.
2. Statutory sources
   a. ULLCA § 501 – Member’s Distributional Interest (a) A member … has no transferable interest in the property of an LLC. (b) A distributional interest in an LLC is personal property and subject to § 502 and § 503, may be transferred.
   b. ULLCA § 502 – Transfer of Distributional Interest - A transfer of a distributional interest does not entitle the transferee to become or to exercise any rights of a member. A transfer entitles the transferee to receive, to the extent transferred, only the distributions to which the transferor would be entitled.
   c. ULLCA § 503 – Rights of Transferee
   (a) A transferee of a distributional interest may become a member of an LLC to the extent that the transferor gives the transferee the right in accordance w/ authority described in the operating agreement or all other members consent … (d) A transferee who does not become a member is not entitled to participate in the management or conduct of the business, require access to info concerning the company’s transactions, or inspect/copy records.
   (e) A transferee who does NOT become a member is entitled to: (1) receive … distributions to which the transferor would otherwise be entitled; (2) receive, upon dissolution & winding up … (i) in accordance w/ the transfer, the net amount otherwise distributable to the transferor; (ii) a statement of account only from the date of the latest statement of account agreed to by all members; (3) seek under § 801(5) a judicial determination that it is equitable to dissolve & wind up the business.
   d. RULLCA §602 – A person may be dissociated as a member from an LLC when…(5) On application by the company, the person is expelled as a member by judicial order b/c the person (A) has engaged, or is engaging, in wrongful conduct, that has adversely and materially affected, or will adversely and materially affect, the company’s activities; OR (C) has engaged in, or is engaging in, conduct relating to the company’s activities which makes it not reasonably practical to carry on the activities of the business w/the person as a member

            ULLCA §7,8