Final

Question 1

Sole Proprietorship

Answer 1

The proprietor is entitled to make all decisions, is entitled to all of the residual profits, and is personally liable for all debts of the business.
Governed by the common law of agency.

Question 2

General Partnership

Answer 2

Multiple partners must agree in advance how to make decisions and how to share the profits. Two or more residual claimants who share the monitoring role. Partners are personally liable for the debts of the business.
Governed by the UPA or RUPA.

Question 3

Limited Partnership

Answer 3

Some owners are general partners with management role and personal liability. Some owners are limited partners with non-management monitoring status and limited liability.
Governed by the Uniform Limited Partnership Act.

Question 4

Limited Liability Company

Answer 4

Relatively new. “Members” have limited liability

Question 5

Limited Liability Partnership

Answer 5

Newest type of business association. Similar to general partnership except that owners obtain full or partial limited liability.

Question 6

Corporation

Answer 6

Shareholders are entitled to residual profits. Shareholders are passive and delegate to the corporation’s managers the responsibility for day-to-day operations.
Shares can be freely transferred and shareholders are not personally liable.
Even closely-held corporations can be protected from non-consensual creditors such as tort victims.
Closely-held businesses may have different rules.
Disproportionately large number of corporations are governed by the Delaware law.

Question 7

Contractarian view

Answer 7

A business association is a nexus of contracts, and the law provides “gap-fillers” by providing standard terms.
When does a “gap” exist?
How should a court go about filling the gap?
Hypothetical Bargain: what informed parties would have entered into if they had contracted as to every detail.
The court often establish a rule that later parties may accept as part of their contract.

Question 8

Regulatory view

Answer 8

Corporation’s origin comes from a state-conferred privilege.
Government regulation is necessary to protect public corporation shareholders.
Interests of non-shareholders who are affected by the firm need to be protected.
Regulation of contract is needed because of the inherent incompleteness of all corporate contracts.
State laws protect the businesses not the stakeholders.

Question 9

Nichols v. Arthur Murray, Inc.

Answer 9

An agency relationship exists in the law when one party (the agent) works for and under the direction of another (the principal).
An undisclosed principal is liable for the contractual obligations incurred by his agent in the course of the agency, even though the oblige did not know there was a principal at the time the obligations were incurred.
Even if there is no actual agency relationship, a party may be held liable under an “apparent agency” theory for negligently or intentionally causing or allowing a third party to believe the party was a principal.

Question 10

Risk Borne by a Principal

Answer 10

Contracts: an agent’s acts bind his principal when the agent acts with actual or apparent authority.
Torts: Under the doctrine of respondeat superior, an employer or principal legally responsible for the wrongful acts of an employee or agent, if such acts occur within the scope of the employment or agency.

Question 11

Considerations when the agent’s act bind the principal.

Answer 11

Actual authority:
Apparent authority
Estoppel
Restitution
Ratification

Question 12

Actual authority:

Answer 12

An agent acts with actual authority when, at the time of taking action, the agent reasonably believes, in accordance with the principal’s manifestations to the agent, that the principal wishes the agent so to act.
The principal’s manifestations may take the form of communication or conduct.

Question 13

Apparent authority:

Answer 13

This is created by a principal’s manifestations to third persons with whom the agent might deal.

Question 14

Restitution

Answer 14

A third party may be entitled to recover from the principal if it offered a benefit on the principal for which the principal should be required to pay, whether or not the principal was responsible for the third party’s being misled.

Question 15

Lind v. Schenley Industries, Inc. p. 24

Answer 15

In this case, any reasonably prudent person in the same situation would believe that the agent has an authority to take actions.
Alternatively, the principal should be estopped to deny the authority because he carelessly let the plaintiff rely on the agent.
Principal’s failure to take actions suggest that he affirmed of an earlier unauthorized act.

Question 16

Employee vs. Independent Contractor

Answer 16

whether the person is free from the control and direction of the hiring entity;
whether the person performs work that is outside the usual course of the hiring entity’s business; and
whether the person is customarily engaged in an independently established business or trade.

Question 17

Scope of employment

Answer 17

Joel v. Morrision p. 32

Question 18

Lindland v. United Business Investments p. 33

Answer 18

Burden is on plaintiff to establish that the agent breached his/her duty.

Question 19

General Automotive Manufacturing Co. v. Singer p. 36

Answer 19

An agent’s side business can be a violation of his fiduciary duty to his employer
with approval -> no breach
with specific instruction against -> breach
without approval or instruction -> depends
conflict of interests
use of company’s assets

Question 20

Partnership Relationship Considerations

Answer 20

whether the parties “intended” to be partners and whether the parties “acted” like partners.

Question 21

Martin v. Peyton p. 44

Answer 21

The agreement did not reach that level of relationship such that parties were partners. The interest of the creditors was not in the profits of the firm but to protect their loan such that they would be repaid their investment.

Question 22

Minute Maid Corp v. United Foods, Inc. p. 48

Answer 22

The agreement did reach that level of relationship such that parties were partners. The interest of the creditors was not in the interests and repayment of their initial investment but to profits of the firm. The parties had joint control over this enterprise

Question 23

Default Deal Points

Answer 23

The law supplies the deal that the parties would have made, had it not been so expensive to strike such a deal.

Question 24

Financing the General Partnership

Answer 24

Partnership can raise money by admitting new partner(s) or by obtaining additional contribution from existing partners.

Question 25

Partnership Governance

Answer 25

Most issues related to the allocation of power between the residual claimants and the managers.
Standard form
Limitations on the ability of partners to transfer their ownership interests; and
Partners’ rights to exit the firm through liquidation of the firm or buyout.

Question 26

Voting rules

Answer 26

Default:
What issues do owners vote on?
Default: each partner can participate actively in management decisions
How many votes control the outcome?
Default: ordinary business matters can be decided by a majority
How are votes allocated among voters?
Default: each partner has one vote regardless of his financial contribution
Altering the standard form
To what extent may the management and control provisions of the UPA be altered?
What considerations explain the governance provisions adopted in particular situations?

Question 27

McCallum v. Asbury p. 62

Answer 27

Certain fundamental changes in a partnership agreement may not be made without the consent of all the parties, notwithstanding that the agreement may provide that it can be amended by majority vote.

Question 28

Partners as Mutual Agents

Answer 28

A partner’s act that is for apparently carrying on in the usual way the business of the partnership presumptively binds the partnership unless it can show that the third party was aware of specific limitations on the partner’s authority.
When the act was not apparently usual, such act is only binding if the act was actually authorized.

Question 29

Burns v. Gonzalez p. 66

Answer 29

Since the express limitation on the authority of a partner was unknown to a third party, the partner’s act in executing the note would bind the partnership only if such act can be classified as an act for apparently carrying on in the usual way the business of the partnership.
The question is whether a reasonable person would see partner A’s action as an ordinary course of business. The burden of proof is on the person seeking to hold the non-participating partner accountable.

Question 30

The nature of fiduciary duties

Answer 30

A fiduciary must act selflessly, with the “finest loyalty” to the beneficiary’s interests.
Not every relationship in the business association setting triggers fiduciary duties. (i.e., lender-borrower relationship).

Question 31

Partnership

Answer 31

self-dealing, use of partnership assets for personal benefit, usurping partnership opportunities, and competition with the partnership.

Question 32

Meinhard v. Salmon p. 72

Answer 32

The opportunity came to him by virtue of his agency, and therefore he was under a duty to concede and to disclose.

Question 33

Walter v. Holiday Inns, Inc. p. 80

Answer 33

It would be unrealistic to require a partner to disclose every internal projection in its possession, particularly when its co-partner had equal access to the partnership records, had received the foundational facts upon which the projection was based, and was sufficiently knowledgeable to develop its own projection from those facts.

Question 34

Transfer of Partnership Interests

Answer 34

Default Rule:
Limited transfer of management rights, while permitting free transferability of financial rights.

Question 35

Rapoport v. 55 Perry Co. p. 87

Answer 35

The partnership law provides that subject to any contrary agreement between the partners, no person can become a member of a partnership without the consent of all the partners.d

Question 36

Dissolution of the Partnership

Answer 36

General:
UPA addresses illiquidity by giving each partner the power at any time to dissolve the partnership and therefore compel liquidation of the firm or at least the purchase of the partner’s interest.
Departing partner is no longer liable for post-dissolution debts but remains personally liable for pre-dissolution debts unless relieved.
Departing partner gets a full accounting for assets and liabilities or is entitled to receive the value of his interests plus profits or interest from the time of dissolution.

Question 37

Judicial limitations on the power to dissolve

Answer 37

Page v. Page p. 93
A partner at will is not bound to remain in a partnership, regardless of whether the business is profitable or unprofitable. A partner may not, however, by use of adverse pressure “freeze out” a copartner and appropriate the business to his own use. A partner may not dissolve a partnership to gain the benefits of the business for himself, unless he fully compensates his copartner for his share of the prospective business opportunity.

Question 38

Valuation of Buyout

Answer 38

In re Brown p. 100
When paying a leaving partner, the buyout value should include off-balance sheet items such as goodwill and going-concern value.

Question 39

Altering the consequences

Answer 39

RUPA §801
Partnership at will
Partnership for a definite term or particular undertaking
Pav-Saver Corporation v. Vasso Corporation p. 107
When drafting for dissolution, parties should unambiguously express the terms (i.e., who should get the patent after dissolution).

Question 40

Pav-Saver Corporation v. Vasso Corporation p. 107

Answer 40

When drafting for dissolution, parties should unambiguously express the terms (i.e., who should get the patent after dissolution).

Question 41

Doctrine of defective incorporation

Answer 41

Where an entity had failed to incorporate, its shareholders could still obtain limited liability if the courts elected to apply one of two equitable concepts – “de facto corporation” or “corporation by estoppel.”

Question 42

A limited partnership must include:

Answer 42

one or more general partners who are co-managers with personal liability; and
one or more limited partners who have limited liability and do not actively participate in management, except that they may be able to vote on certain matters.

Question 43

Management and Control
ULPA of 2001 §303 provides that

Answer 43

a] limited partner is not personally liable . . . even if the limited partner participates in management and control of the limited partnership.”

Question 44

Transfer of interests and dissolution

Answer 44

Financial rights are freely transferable but members must approve transfer of management rights or admission of partners.
Limited partners’ withdrawal does not trigger winding up and termination. The leaving limited partner may demand payment for his or her share in the limited partnership.

Question 45

Fiduciary duties of GPs in limited partnerships

Answer 45

General partners have rights, powers, duties, and liabilities of general partners in general partnerships.
Why? Limited partners are locked out of management by the “control rule” and have no efficient market.

Question 46

Appletree Square I Limited Partnership v. Investmark, Inc. p. 127

Answer 46

While partners are free to vary many aspects of their relationship . . . they are not free to destroy its fiduciary character. Partners can’t replace their broad fiduciary duties with a narrow duty.
A fiduciary duty is defined with reference to the experience and intelligence of the person to whom the duty is owed.

Question 47

Limited Liability Companies
Formation

Answer 47

: The firm must publicly file articles or a certificate, just as limited partnerships and corporations must do.

Question 48

Management and Control

Answer 48

A member of a member-manage LLC, and a manager of a manager-managed LLC, have authority to bind the firm