Marra & Pat

Business Organizations Outline

Sole Proprietorships: A business owned by a single individual. No statutory formalities

are required to create one. An owner of a sole proprietorship has two identities: himself
and the business.

Agency

Agent: A fiduciary relationship where there is mutual assent that one will act on behalf of
the other and mutual assent that one is subject to the others control.

Actual Authority: An agent acts with actual authority when, at the time of taking action,
he/she reasonably believes that the principal wants him or her to act. Can be either
express or implied. 2 types:
a) Express  Actually designated by the principal. Can be oral or written
 Means a principal has expressly communicated to an agent, normally in
spoken words or in a writing, the power to perform some act on the principal’s
behalf.
 The ultimate test is whether a reasonable person in the agent’s position would
interpret the principal’s communication to encompass a particular act.

b) Implied  Implicit in what was said

 Ex of Apparent Authority  Mill St. Church case

Apparent Authority: Apparent authority is a power held by an agent to obligate the

principal when:
1) a 3rd party reasonably believes the principal has given the agent the pwr to act, &
2) the manifestation are traceable to the principal.
 Was there a holding out by the principal suggesting reasonably to the 3rd party
that the agent can act this way?
o Burden is on the 3rd party to prove it.

[Inherent Authority]
 Restatement 2nd §8A: Power of agent to bind principal derived solely from
existence of an agency relationship
o Is a catchall concept that was removed from the Restatement 3rd
o Cases that would have fallen under Inherent Authority in Restatement
2nd of Agency are now subsumed by broader theories of Apparent
Authority & Estoppel

Alternative Arguments
Ratification: An affirmance of an act done by another, whereby the act is given effect as
if done by an agent acting with actual authority. A ratification can be done by the
principal accepting the benefits of a contract with complete knowledge of the material

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aspects of the deal. A ratification is not effective unless it encompasses the entirety of the
contract. This can be done expressly or implied.
 § 4.02 Effect Of Ratification:
o (1) Subject to the exceptions stated in subsection (2), ratification
retroactively creates the effects of actual authority.

Estoppel: requires a 3rd party to show that

1. The third party was justifiably induced into a
2. Detrimental change in position, &
3. The principal was careless or intentional or failed to correct the false belief of the
3rd party once the principal had notice of that belief

Tort/Employment
Vicarious liability: 3 elements
1. Was he/she an agent?
2. Was he/she an employee?
3. Was he/she acting within the scope of employment?

Scope of employment: 3 factors

1. It is of a kind he/she is employed to perform.
2. It occurs substantially within the authorized time and space limits
3. Was the employee, at least in part, acting in service of the master?

Definition of employee (§7.07). For purposes of respondeat superior, an agent is an

employee only when the principal controls or has the right to control the manner and
means through which the agent performs work. The definition has the consequence of
distinguishing between employees and agents who are not employees because they retain
the right to control how they perform their work. If a person has no right to control an
actor and exercises no control over the actor, the actor is not an agent.

Respondeat Superior: an employer is liable for the tortious acts committed by its
employees while acting w/in the scope of employment. An agent is an employee only
when the principal controls OR has the right to control the means & manner by which
work is done

Dual Purpose Rule: when the employee is partially acting to please his employer and
partially acting for his own benefit. The employer will still be liable employee is acting
w/in some measure to please the employee.

Agent’s Liability to 3rd Parties: an agent is liable for his own tortious conduct to a 3rd
party who is harmed. He can be liable even though he acts as an employee or agent.

Types of Principals
Disclosed Principal: 3rd party has notice that the agent is acting for a principal, and has
notice to the identity of the principal. The agent is not a party in this contract unless the
agent & 3rd party agree so.

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Unidentifed Principal: When the 3rd party has an understanding that the agent is acting
for a principal, but the principal has not been identified. The agent is held liable in these
cases as it was his/her burden to identify the principal. In this case, the Principal can get
out of liability if the agent was acting outside the scope of his/her authority.

Undisclosed Principal: 3rd party has no notice that the agent is acting for a principal. In
this case the agent is held liable for damages.

Agent as Fiduciary: As an agent, there is a duty not to put yourself in conflict or

competition with the principal. Act on behalf of the principal and not yourself. This
includes the duty of Loyalty, Care, and Obedience. An agent should also disclose to a
principal any commissions received on a deal. This fiduciary relationship ends when the
agency ends.

When agency endsAgency ends in 3 different ways:

1) Mutual Agreement
2) Operation of Law, this is when the agent or principal dies, one acts illegally, or
the agents license expires;
3) Unilateral Action, when the agency is at will. At any time either can say I’m done.
This is an exception for an at will relationship.

General Partnerships

Partnership: A partnership is an association of two or more persons to carry on as co-

owners a business for profit. Sharing profits is prima facie evidence of a partnership.
When determining whether a partnership existed, the court uses an objective standard.

Factors considered by court when determining if there is a partnership:

1. Generally, partners make contributions
2. Generally, share in profits
3. Generally, share in risks of financial loss
4. Jointly share the management of the company.

When looking towards whether a relationship is a partnership or merely an employer-

employee relationship, the ct looks to:
1. The intent of the parties
2. The language of the agreement, if any;
3. The conduct of the parties towards third parties;
4. The treatment of the returns of the business (whether they share profits).

NOTE: These are just factors the ct considers. Even with its presence there is a chance
that the ct will find that there is no partnership.

Losses in a partnership: All partners are held jointly and severally liable for the debts of
the partnership. A partner that contributes nothing (Service Only Partner) DOES NOT
have to contribute to the losses.

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Profits: Profits are shared equally amongst partners. This is regardless of how much
money was contributed.

Partnership Obligations: Partners are agents of the partnership. Absent agreement

otherwise, partners share in equal management rights. Absent agreement otherwise, any
difference arising as to ordinary matters connected with the partnership business is
decided by a majority vote. When there is a tie vote, the burden of getting a majority is
on the partner wishing to change the status quo. All partners are jointly liable for
partnership obligations. (NYPL 26(a)). Third party must first exhaust assets of
partnership before seeking collection against partner’s personal assets.

Partnership by Estoppel: When a person, by words spoken or written or by conduct,

represents himself, or consents to another representing him to any one, as a partner in an
existing partnership or with one or more persons not actual partners, he is liable to any
such person to whom such representation has been made, who has, on the faith of such
representation, given credit to the actual or apparent partnership, and if he has made such
representation or consented to its being made in a public manner he is liable to such
person, whether the representation has or has not been communicated to such person so
giving credit by or with the knowledge of the apparent partner making the representation
or consenting to its being made.
 This is the statutory definition. Below I’ll put how I would word it.
 Partnership by estoppel is when a person, through his/her words or actions,
represents themselves as a partner in an existing partnership. By doing so, he is
held liable to any person who gives credit to the actual or apparent partnership, if
he consented to its validity in a public manner. When partnership by estoppel
exists, the nonpartner is liable as if he/she is actually a partner. All partners are
held jointly liable.

Partnership by estoppel requires:

 Actual Reliance: The party claiming partnership by estoppel needs to actually
rely on the manifestation. Not enough to just claim that he/she would have relied
on the manifestation.
 The reliance must have been reasonable.
 Some manifestation by the alleged partner: The alleged partner must fail to act in
correcting the manifestation that he/she was a partner.

Apparent Authority: To prove apparent authority, a 3rd party must prove:

1. Was the partner acting in the usual course of business? AND
a. Ct looks to partnership history OR what similar businesses usually do;
industry standard
2. 3rd party had no knowledge that the partner did not have actual authority
a. burden is on the 3rd party to prove apparent authority

UPA §9(2): An act of a partner which is not apparently for the carrying on of the business
of the partnership in the usual way does not bind the partnership unless authorized by the
other partners.

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Partnerships bound to tortious acts: Pursuant to NYPL (UPA), the partnership is bound
by the tortious acts of a partner only where:
1) the act occurred in the ordinary course of the partnership’s business, OR
2) the tortfeasor partner acts with the authority of his partner or partners. (NYPL
§24).

When defining whether the action occurred in the ordinary course of business the ct looks
to the following factors:
1) was the kind of thing a law partner would do;
2) occurred substantially within the authorized time and geographic limits of the
partnership; &
3) was motivated at least in part by a purpose to serve the partnership.

Liability of Partners Bound to Tortious Acts: Partners are jointly and severally liable
for tort claims against the partnership (§ 26). In NY, the partnership assets must be
exhausted before a creditor can collect individually from a partner.

Fiduciary Obligations of Partners: Each partner has a fiduciary obligation to the

partnership itself. Includes the duty of loyalty and the duty of care.

Duty of Loyalty: Partner has a duty to account to the partnership for profits, property, or
benefits form the conduct of partnership business or the use of partnership property. To
refrain from competing with the partnership in the subject matter of the business. To
perform all duties to the partnership and the other partner consistent with the obligation
of good faith and fair dealing.
 Partners have an obligation to not take opportunities that belong to the partnership
for their personal benefit.
 Ex. Meinhard v. Salmon: Partners can make PREPARATIONS when creating
their own business. Partners cannot steal clients or take fellow employees away
from their existing partners.
 *planning to compete is acceptable under NY law under the duty of loyalty
 *retired partners are no longer owed a duty
 Waiver of Duty of Loyalty
o UPA=silent; unclear to what extent duty may be waived by partners
o RUPA §103(b): partnership agreement may NOT eliminate the duty of
loyalty entirely BUT may identify specific types or categories of activities
that do not violate duty of loyalty SO LONG AS not “manifestly
unreasonable”
 As a partner, you can make preparations to form a new business &
that does not conflict w/the duty of loyalty.

Duty of Care: Defined in RUPA 404(C): A partner’s duty of care to the partnership and
the other partners in the conduct and winding up of the partnership business is limited to
refraining from engaging in grossly negligent or reckless conduct, intentional
misconduct, or a knowing violation of law.

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Exclusion Requirement: whether a creditor of a partnership can go after the partners

individually before exhausting partnership funds?
 ex: partnership takes a loan from a bank for $50k. Bank wants to go after the
partners individually for repayment of the loan.
o *Most juris & NY say that the bank or creditor MUST exhaust partnership
funds first before going after the partners individually
 usually, the creditor will go after the partners individually first
when the business is closing down

Joint v. Joint & Several Liability (UPA §15)

 if partnership owes $50k, lender or bank can go after either partner for full $50k
 partners share = in losses
 partner can bring an action in Contribution for ½ of losses he repaid to the bank or
creditor from the other partner
o contribution means you are suing your partner for the $

 Joint & Several Liability: tort/wrongful conduct

o Means creditor can sue partners in several diff actions
 Joint Liability: all other obligations
o No diff b/w Joint & Joint & Several in NY

Financial Rights and Accounting

Indemnity by Partnership
 Partner who pays on behalf of partnership should be indemnified by the
partnership itself
o Ex: A paid $50k to the bank on behalf of the partnership, the partnership
reimbursed A; this is indemnity

Profits & Losses: Default Rules

 Losses: partners contribute according to their share of the profits
o Where profits are changed, even if losses are not discussed, the law
assumes that the losses are in the same proportion
 Ex: partner A=60%; Partner B=40%

Capital Account Balance

 Capital Contribution: either cash or prop that a partner gives to the partnership
that makes him a partner. The partner is NOT repaid until after the partnership
ends
o A loan is diff bc the partner does not have to wait until the partnership
ends to get $ back & can collect interest
 *loans get paid back BEFORE capital contributions

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Capital Contributions
-distributions (draw)
+ profits
-losses
Capital Account Balance

 draw: advance of profits

 equity: ownership value
 ***see handout from twen that was reviewed in class on math of capital
contributions
 By default, are a partner’s services values as a capital contribution? NO!
o Service by partners by default is NOT considered a capital contribution
UNLESS the partners expressly or implicitly K otherwise
 By default, the partner is NOT entitled to compensation for services while the
partnership is still alive

***Service only partner exception

 where the partner provides service ONLY, they do NOT need to contribute to
losses
o RUPA does away w/this default rule
 NY=unclear
o We are a UPA state
o K out these things to prevent confusion!

Partnership Property
UPA § 24. Extent of Property Rights of a Partner
The property rights of a partner are (a) his rights in specific partnership property

UPA §25. Nature of a Partner’s Right in Specific Partnership Property

(1) A partner is co-owner with his partners of specific partnership property holding as a
tenant in partnership.
 Limited possessory rightprop that belongs to partnership belongs to the
partnership, NOT the partners themselves
 Not assignableex: flower shop delivery van is only supposed to be used by
partners for partnership services
 Not subject to execution of partner’s personal debtsex: X has student loans,
creditors can’t come after partnership assets to repay the partner’s debts
o Aggregate theory=where members live
Jurisdiction
 Partnership is domiciled where every single partner is domiciled
o Diversity juris=diff states & over $75k
 Corporations are domiciled where the principal place of business or place of
incorporation

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UPA § 26. Nature of Partner’s Interest in the Partnership

A partner’s interest in the partnership is his share of the profits and surplus, and the same
is personal property.
 “Interest in partnership”=”right to profits & surplus”

Rights of a Partner’s Creditors

*the right to profits is personal prop of the partners
 3rd party creditors do have the right to reach income
o this is called a charging order: creditors can reach income but CANNOT
reach partnership assets

Ending the Partnership

Ousting: By default under the UPA, No default to expel a partner. RUPA allows
unanimous expulsion amongst partners, it also allows the court to oust a partner.

Dissolution: The dissolution of a partnership is the change in the relation of the partners
caused by any partner ceasing to be associated in the carrying on, as distinguished from
the winding up, of the business. There are 2 stages to dissolution: Winding up & Settling
up.
 Winding up: Sale of business as going concern or sale of assets.
o Sale of concern factors in good will: Reputation of the business, Intangible
value, intellectual property, etc. NOT included in the sale of assets (secret
formulas, etc.)
 Alternative to Dissolution: Continuing Business
o Not the default rule
o This is when the other partners who aren’t dissolving want to continue
business. Can do so by agreement.
 Settling up: Making payments of debts in the following order:
o Creditors other than partners
o Partners for money other than capital and profits
o Partners in respect of capital
o Partners in respect of profits.

Causes of Voluntary Dissolution (no court order required): Dissolution can be caused by:
1) termination of a definite term or agreement
2) the express will of a partner when no definite term is stated,
3) the express will of all partners who have no assigned their interests or suffered
them to be charged with debts,
4) by the expulsion of any partner from the business bona fide in accordance with
such a power conferred by the agreement between the partners.
5) Any event making it unlawful to carry out business
6) The death of any partner
7) Bankruptcy of any partner
8) By decree of the court.

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 When in court, you must prove that the Partner has made it impracticable
to carry on the business.

Dissolution by Decree of Court:

1) On application by or for a partner, the court shall decree a dissolution whenever:
a. A partner has been declared a lunatic in any judicial proceeding or is
shown to be of unsound mind,
b. A partner becomes in any other way incapable of performing his part of
the partnership contract,
c. A partner has been guilty of such conduct as tends to affect prejudicially
the carrying on of the business,
d. A partner willfully or persistently commits a breach of the partnership
agreement, or otherwise so conducts himself in matters relating to the
partnership business that it is not reasonably practicable to carry on the
business in partnership with him,
e. The business of the partnership can only be carried on at a loss,
f. Other circumstances render a dissolution equitable.
2) On the application of the purchaser of a partner’s interest under sections 27 or 28:
a. After the termination of the specified term or particular undertaking,
b. At any time if the partnership was a partnership at will when the interest
was assigned or when the charging order was issued.

Buy Outs: When partners buy out another, there are 2 views on the matter:
1. Adverse Interest Exception: Some jurisdictions view those involved in a buy out
as adversaries, and therefore, the fiduciary obligations are extinguished.
2. NY View: Some juris see that until the buy-out is complete, the partnership
relationship still exists. Therefore, you still have an obligation to your partner.

-UPA §20=partners shall render on demand true & full info of all things affecting the
partnership to any partner
-RUPA=affirmative duty to disclose w/o demand
 Have to disclose material stuff
 How do you fund a partner buyout if the partner dies?=If the partnership doesn’t
have the $, then you look to the partner’s life insurance policy
o Partnership buys a policy and makes itself the beneficiary

§ 18. Rules Determining Rights and Duties of Partners: the rights and duties of the
partners in relation to the partnership shall be determined, subject to any agreement
between them, by the following rules:
 (e) All partners have equal rights in the management and conduct of the
partnership business.
 (h) Any difference arising as to ordinary matters connected with the partnership
business may be decided by a majority of the partners; but no act in contravention
of any agreement between the partners may be done rightfully without the consent
of all the partners.

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Expulsion
Hypo: A, B, & C are partners. C is “not carrying his weight.” Under UPA, can A & B
vote to terminate C from the partnership? Assume they do not have an agreement
addressing thisNO
 By default, there is no right to expel a partner
o Can be K aroundif A, B, & C had an agreement stating this then yes,
they could expel a partner
 UPA=If A & B can’t negotiate a buyout w/C, the only option is dissolution
 RUPA 601(4): A partner may be expelled for specified reasons by unanimous
vote of other partners OR by the court

Partnership Management
 “subject to any agreement b/w them….”=default rules
 Ordinary business matters req a majority vote
o For extraordinary matters, a unanimous vote is req
 Ex: amending the partnership agreement OR adding a new partner
 Deadlock: when there is a split vote
o Burden is on partner trying to change the status quo

Corporations

Corporation v. General Partnership

 Formationcorps req a filing w/Secretary of State
o General Partnership doesn’t req formal filing
 Separate Entity [double taxation]Corporations get this
 Continuity of Existence
o Bu default, corp doesn’t stop existing or change in nature when a
shareholder transfers share to another shareholder
 Ex: Starbucks stockif I sell my 10 shares in their stock,
Starbucks will continue to exist
 Limited Liability
o Key benefit of a corp=shareholders have limited liability
 Free Transferability
o Can sell & buy shares
 Centralized Management
o Corp has to have a board of directors, officers, & shareholders (owners)
 Board of Directors are the policy over-seers of the corp; they have
a big picture view
 Officers=day-to-day managersCEO, CFO, managers
 Shareholders=owners (don’t control the business)
 Board of Directors & Officers are agents of the corp; they
owe a fiduciary duty to the corp & its shareholders
 Expense account concernboard & officers aren’t
handling their own $, so they treat it differently

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Forming the Corporation: Created under state law. The Articles of Incorporation must be
filed with the Secretary of State in that state. Articles of Incorporation must include:
1) The name of the Corporation;
2) The purpose of the corporation (can be broad as “any lawful purpose”);
3) The number of shares that are authorized for each class of stock of the
corporation; &
4) The name and address of the agent for service of process.

Financing the Corporation

 Stock=shares in the corp
o Stock can appreciate in value
o Dividends=profits distributed to shareholders
o Shareholder owns a piece of the companyknown as an Equity Owner
o Gives away ownership in the company
o A fiduciary duty is owed to shareholders

 Note=”I owe you”; loan; promissory note; also called a bond

o Gets repaid + interest
o Lender/creditor; NOT an owner in the company
o Debt is on the books of the corp
o 1st in line to get repaid as a 3rd party creditor
o strictly a K relationshipno fiduciary duties to note holders

 Convertible Note
o If they don’t get repaid, they turn into stocks OR can buy stocks at a
discounted rate
o After the conversion, a fiduciary duty is owed

 Subscription Agreement=when corp comes into existence, corp agrees to buy X

amount of shares
o Is irrevocable for 6 months
o The corp can collect the amount owed as any other debt. The corp can also
rescind the agreement & may sell the shares if the debt remains unpaid for
more than 20 days after the corp sends a written demand for payment to
the subscriber

 Authorized Shares that are Outstanding=new shares cannot be created/added

unless it is worded in the articles of incorp

 Preemptive Rights=shareholders to not have a preemptive right by default

o when newly authorized shares become available, they are not given first
dibs

 Dividend: a share of the after-tax profit of the company, distributed to its

shareholders according to the number & class of shares held by them.

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 The authorized shares are the aggregate # of the shares the corp may issue (sell
to the public)
 The board decides whether the corp will declare a dividendcan’t declare
dividends if it will create a debt
 *limited by requirement that it may not be done if it will declare the corp
insolvent
o if the board issues dividends anyway, the board will be personally liable
 Option=right to buy stock
 ex: I purchase an option for $1 on 11/15. The stock is then being
sold for $15 on 11/15. I would exercise my option to buy for $1
o in a closely held business, the exercise is issued by a trigger.
 Ex: you stay w/the company for 5 yrs. The time period is the
trigger

 Par Value: minimum price which the corp can issue its stock. Is set up by the corp
itself
o Only limits the corp itself when it is first selling the stock
o Most corps used to set it for ¢1, but today most states & NY do NOT set a
Par Value at all

SHAREHOLDERS
Shareholders: A corporation is owned by its shareholders. Shareholders are entitled to the
residual value of the corporation after it has paid its creditors. Shareholders do not
participate in the management (unless they are on the board), they merely elect the
individuals who serve on the board of directors.
 All shareholders have a minimal right to inspect corporate records. However, this
must be for a “proper” purpose.

Shareholder voting (Marra, pay attention): This requires-

 Quorum: a majority of shares entitled to vote. The bylaws can change the amount
for a quorum, but cannot go below a third.
 Sufficient Vote: majority of shares in favor.

Voting Formalities:
 Shareholders may pass a vote without holding a formal meeting. Requires that
they all agree unanimously in writing
 When a member leaves, you still have a quorum (7.05B)
 Proxy Vote: Sending a proxy is like sending an agent. If the proxy does not follow
the shareholders directions, you must do a principal agency analysis. This is an at
will relationship. Must be made in writing.
 Notice: Waiver: notice is waived if you show up to the meeting
 Record Date: Date of ownership that makes a voter eligible to vote. This is set by
the bylaws. Record date must be set 70 days before the vote. If no one mentions
the record date, it is the day before notice is given.

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DIRECTORS
Board of Directors: The directors of the corporation are responsible to the Shareholders
for managing the corporate assets. Basically, the “brain” of the corporation.

Board of Directors Voting:

 Elections: Require a plurality, not a majority.
 Require a Quorum: A majority of the fixed number of directors if the corp has a
fixed board size. Can be modified, but cannot go below 1/3 for a quorum.
 Uses either straight voting (default) or cumulative voting
 Straight voting: No shareholder can cast more shares than he/she owns for a given
candidate.
 Cumulative Voting: You can give all your votes to one candidate. This is intended
to give minority shareholders a voice.
o Calculated by the (Number of shares held) x (Number of directors to be
elected).
o In Cumulative voting, one cannot be removed if a person opposed to the
removal has the amount of shares required to fill that seat.
 Under these systems, shareholders may pool their votes in order to keep someone
in a seat. Must be in writing and signed.
 Voting trust: transfers shares to a trustee. Transfers title of shares to the trustee
o This is a more formal process

Formalities of Board Action

Director Removal
 Unless the articles say otherwise, shareholders can remove directors
 Directors cannot remove another director bc that is the shareholders job
o exception= in a cumulative voting corp when it comes to removing a
director, a shareholder vote to remove the director is not effective if SH
voting against removal would be enough to elect a director
 formula for thisX=(SN/DH)+1
 S=total # of shares @ the meeting
 N=# of directors needed
 D=total # of directors to be elected

Director Vacancy
 Shareholder or the board can fill a vacancy. This is a default rule

Director Meetings
 By default, notice for a special meeting is required 2 days before the meeting
 By default, a quorum of directors=the majority of directors authorized
o Ex: if 10 directors are authorized, 10 is the quorum

Voting

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 by default, some electronic communication can count his presents as long as

everyone can hear each other
 Everyone consenting in writing instead of holding an actual meeting is sufficient

Officers
 By default, the board of directors elect officers
 Removal= board of directors can remove an officer, or an officer can remove
another officer if he appointed that officer, but it is subject to K rights
 officer= agent of the corp
 removal aligns w/whoever voted that officer in

Officers: Officers are selected by the Board of Directors and manage the day-to-day
operations of the corporation. The typical officers in a corporation are the President
(CEO), the Chief Financial Officer (CFO), the Secretary, and various VPs.

De Facto Corporation: A de facto corporation is when the corporation is not properly

formed. However, the shareholders believe that, and act as if, the corporation was
properly formed. In order to form a de facto corporation, the following requirements must
be met:
 A good faith, substantial effort must have been made to comply with the states
incorporation statute;
 The business must have had a legal right to incorporate; and
 The parties must have had a good faith belief that, and acted as though, they had,
in fact, formed a corporation.

If de facto status is found, principals will now have limited liability from the debts of the
corporation as though the corporation had been properly formed.

Promoters: Promoters act on behalf of the corporation before it is formed. Promoters are
personally liable for pre-incorporation Ks unless,
1) the K is adopted by the corporation, &
2) there is a novation. A novation is substitution of the promoter in place of the corp.
Both parties have to consent to the novation.

Corps & Charity

 NY allows for Benefit Corpshareholder wealth is NOT the primary focus
o Controversial issue=whether a corp can donate to charity
 Yes, as long as it serves a business purpose
 NY says yes, as long as it is w/in reason
 This gets controversial bc shareholders typically argue that
they should be given the $ & can decide themselves where
to donate

§ 3.04 Ultra Vires

(a) Except as provided in subsection (b), the validity of corporate action may not be

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challenged on the ground that the corporation lacks or lacked power to act.
(b) A corporation's power to act may be challenged:
(1) in a proceeding by a shareholder against the corporation to enjoin the act;
(2) in a proceeding by the corporation, directly, derivatively, or through a
receiver, trustee, or other legal representative, against an incumbent or former
director, officer, employee, or agent of the corporation; or
(3) in a proceeding by the Attorney General under section 14.30.
(c) In a shareholder's proceeding under subsection (b)(1) to enjoin an unauthorized
corporate act, the court may enjoin or set aside the act, if equitable and if all affected
persons are parties to the proceeding, and may award damages for loss (other than
anticipated profits) suffered by the corporation or another party because of enjoining the
unauthorized act.

 Outside the scope of the corp’s powers

o Ex: coffee shoppurpose is to operate & own a coffee shop. The shop
then turns into a CD store
 NY says corp can operate under any lawful business purpose
 Ultra Vires wouldn’t apply here bc everything is covered

Corporation by Estoppel: Even when de facto corporation status is not available, it is still
possible as a principal or promoter will be protected by the doctrine of corporation by
estoppel. Corporation by estoppel is when a third party treats an organization as though it
were a corporation, that third party may be estopped from denying the organization’s
corporate existence if the denial would result in unjust harm to the principals. This works
two ways, as the corporation can be estopped from denying its own existence if it
attempts to avoid an obligation. The elements for this are:
 The parties need to have consistently treated the organization as though it were a
corporation; and
 If one party were allowed to deny the existence of the corporation, that party
would obtain an unfair advantage or benefit.

Piercing the Corporate Veil: This is when a creditor of a corporation can hold the
shareholders personally for the debt that creditor is owed by the corporation. In order to
pierce the corporate veil, the court looks to several elements:
 ∆ must show a gross injustice, wrongdoing, or fraud. In cases of fraud, there need
not be intent to defraud creditors.
 The ∆ must also show that there is a separate existence of the corp & its
shareholders. Basically, the shareholders are using the corporation as a puppet, &
separate personalities are created b/w the two. There are several main factors the
ct looks to for this prong:
o Failure to follow corporate formalities: Failure to conduct meetings,
failure to maintain books, failure to elect officers.
o Failure to maintain separate accounts (comingling): Keeping your personal
account and corporation account in the same place.
o Failure to “adequately capitalize the corporation (purposeful
undercapitalization): Failure to place sufficient funds into the corporation

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to enable it to operate as a viable business, also failure to provide minimal

insurance.
 *****Most jurisdictions do not require a gross injustice in a tort action*****

 Cts look to the following elements for veil piercing (you need to have both!):
1) Unity if interest & undue dominion & control, AND
 Has 3 factors:
a. Commingling
b. Lack of formalities
c. Purposeful under capitalization
2) Equity
 ∏ has to say there is a gross injustice if veil is NOT pierced
o NY uses this 2nd prong
o Some juris doesn’t use this prong if a tort is committed to make it easier to
pierce the corp veil

Forward Veil Piercing: Corporation has a debt and the creditor seeks to go after the
shareholders personal assets to satisfy the debts.

Reverse Veil Piercing: The shareholder has a personal debt and because he is
disregarding the corporation as a separate entity, we would hold the corporation liable for
the shareholder’s debt.

Parent-subsidiary context: If the lower company is liable, it is possible to sue the parent
company. The main factors the court looks to in these cases is whether the parent
company had ultimate control over its subsidiary.

Enterprise Liability: When a creditor claims that there are several related corporations
and all or some are really part of the same corporation. Enterprise liability involves a
creditor’s effort to enforce a claim that creditor holds against one corporation against
other, related corporations. The related corporations are commonly referred to as “sister
corporations.” There is enterprise liability when the sister corporation transgresses the
corporation or corporation boundary. When looking to prove enterprise liability one must
take into account the following factors:
 Are the corporations really operating as a single enterprise?
 Are the corporations operating with separate accounts? If not, this is evidence for
enterprise liability.

Unpaid Wages: The top ten shareholders are personally liable for unpaid wages.
 Used in NY for employees NOT independent contractors
 Only applies to closely held corps

Business Judgment Rule: When a director is sued based upon a claim that he or she
violated the duty of care, that director is often entitled to the protection of the business
judgment rule. Directors have a presumption that he/she was acting in good faith,
honestly, and in the best interests of the corporation. This means that they should not

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have to justify their decision-making. When this is used as a defense, shareholders now
have the burden to prove that the Directors were acting in bad faith, self-interest, or to
defraud. If shareholders meet their presumption, the burden then shifts to the directors to
justify their decision-making.
 Basically states that directors are allowed to be wrong. They just need to act in
good faith, to consider their decision, and to have a business reason for their
action.
o If they make a rash and quick decision, must provide justification for that
action. Must take reasonable steps towards their decision.
 Business Judgment rule does NOT apply if there is self interest
 Slide what is a slid definition? definition: Detrimental standard of review of board
decision if decision (1) made in good faith and absent fraud or illegality, (2) with
a reasonable decision making process and (3) with no conflict of interest.
 This does not protect against Directors failure to act, only protects ACTIONS by
directors.

deferential to board if decisions made:

1) in good faith & absent fraud or illegality
2) w/a req decision-making process, &
3) w/no conflict of interest
 If BJR applies, directors need only demonstrate that decision “attributable” to a
rational business purpose
 Is a presumption that the directors have acted in good faith & the best interests of
the corp
 Prevents the cts from second-guessing the substance of board decisions
 Only applies to business judgments
 BJR is a defense for the directors to raise
o *difficult for SH to challenge board decisions
 Substance v. process
o SubstanceSH have very little if not no chance at all in arguing this
o ProcessThere is some room to challenge a board decision on process;
process by which the directors make a significant decision
 Directors are managing the corp for the SH. There is a fiduciary
relationship & the directors must take reasonable steps to inform
themselves of the decisions that they are making (this is the
process).
 If the process is unreasonable, the business judgment rule does
NOT apply

Exculpatory Statutes
MBCA §2.02(b)(4): the articles may set forth a provision eliminating or limiting the
liability of a director to the corp or its SH for $ damages for any action taken, or failure to
take any action as a director, except liability for A) the amount of a financial benefit
received by a director to which he is not entitled; B) an intentional infliction of harm on
the crop or the SH; C) a violation of §8.33; or D) an intentional violation of crim law

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Conflict of Interest (method in class): First, has there been a conflict? If yes, was it
disclosed? If it was disclosed, it must have board and shareholder approval. The board
approval requires a quorum, and the interested party is not allowed to vote or be in the
room. If the vote comes out to yes, it is safe. If it comes out to no, then was it fair to the
corporation in dealing and price? If it was not disclosed, is the transaction fair to the
corporation (fair in price or dealing)? If yes, it is safe, if no, it is enjoined.

Corporate Opportunity Doctrine: the corp’s bylaws may limit the director’s personal
liability to the SHs & the corp only when the directors have not acted in bad faith, for
personal gain or committed intentional misconduct or knowingly violated law

Conflict Transactions
1) SH approval
2) Director Approval
3) Interested director meets the burden of showing that the transaction was for the
benefit of the corp
Need disclosure for a conflict or conflict has to be generally known

Shareholder Limited Liability

 MBCA §6.22(b)=unless otherwise provide in the articles of incorp, a shareholder
of a corp is NOT personally liable for the acts or debts of the corp EXCEPT that
he may become personally liable by reason of his own acts or conduct
o If shareholder is the one to act or holds himself personally liable on a K,
he is then personally liable
 Ex: Shareholder=a chef & a customer of the corp gets sick from his
cookingthe shareholder & corp can be liable
 Common justifications for limited liability is that it encourages investment & that
it encourages risk taking in the business
o Mainly applies to large corps. In most closely held corps, there aren’t
really passive shareholders or large pool of $

Fiduciary Duties: there are 2 broad categories; loyalty & care

1) Duty of Loyalty: This fiduciary duty requires that officers and directors put the
interests of the corporation ahead of their own. This typically involves cases
where there is a conflict of interest. Conflicts of interest arise when, at the time of
a transaction, he or a person related to him (1) is a party to the transaction or (2)
has a beneficial financial interest in the transaction, and then exercises his
influence to the detriment of the corporation
 If the corporation is going to make a loan to one of its directors, it must be
approved by the shareholders.

a. Corporate Opportunity
i. Line of Business Test: if it is within the corporation’s line of
business, has the financial means to pursue the opportunity, and
taking the opportunity would create a conflict of interest, it needs
to be disclosed

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ii. ALI Test: stresses disclosure first

1) Any opp to engage in a business activity of which a
director or senior executive becomes aware either:
a. In connection w/the performance of functions as
a director or senior executive, or under
circumstances that should reasonably lead the
director or senior executive to believe that the
person offering the opp expects it to be offered to
the corp: or
b. Through the use of a corp info or prop, if the
resulting opp is one that the director or senior
executive should reasonably be expected to
believe would be of interest to the corp; or
2) Any opp to engage in a business activity of which a
senior executive becomes aware & knows is closely
related to a business in which the corp is engaged or
expects to engage
3) ALI test does NOT consider whether the corp has the
financial ability to pursue the opportunity
 Board here has to REJECT the opportunity
o Overall, this test asks how did the fiduciary become aware of the opp?
 Were the acting under the corp? using corp resources? Was it in
the line of the business of the corp?
 In NY to determine there is a corp opportunity=whether the corp has a tangible
expectancy in the opportunity
o Sounds like the Line of Business Test
 On an exam, discuss both tests!

2) Duty of Care: Requires that each member of the board of directors, when
discharging duties of a director, shall act (1) in good faith and (2) in a manner the
director reasonably believes to be in the best interests of the corporation.
 Notice that the second element is OBJECTIVE.
 There are 2 types of duty of care:
1) Oversight
2) Decision making
 Board is expected to monitor the big picture of the corp
 MBCA §8.30(b)
 need duty, breach, & causation in these cases
o 1) Decision Making
 substantive decision making is very hard for a SH to challenge in
ct bc of the Business Judgment Rule
 “attributable to a rational business purpose”
 Where board has made a decision
 Grossly neg conductbreach duty of care

o 2) Oversight

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 nonfeasance=failure to actit’s hard to prove that if someone

acted things would have been different
 no figure head directors or directors for show; being a director
comes w/responsibilities
 to prove a breach of duty there are 3 requirements that must be met:
o 1) duty
o 2) breach of duty
o 3) causation
a. ProcessSH might say well you didn’t take reasonable steps to inform
yourselves of the decision to pay this person an unreasonable amount of $.
Hiring an outside consultant is a reasonable step, so the SH would fail
under this argument
b. Substance board should not have approved this pay package. No fraud,
no bad faith, board reasonable informed themselves, & this is the Business
Judgment Rule.
 The Duty of care Involves:
o Diligence. Basic level of prudence in making decisions & in overseeing &
monitoring what the corp does
o Directors didn’t make reasonable steps to determine what an appropriate
salary was, so they breached the duty of care
 Corp can raise the defense of the Business Judgment Rule
o Oversight & monitoringreview financial statement, have a basic
understanding of what the business does

Executive Compensation
 Breach of Duty of care or loyalty can be argued
 Compensation committee decides compensation & is independent & consults
w/independent compensation consultants about the $ being offered
o No issue of conflict bc person being compensated is not part of this
independent committee
 Director has to show that his compensation was reasonable to the corp=that is his
burden
o Factors= what other people in similar businesses are being paid, IRS,
amount he previously received as salary, & is there a correlation b/w how
the business is doing & how he is being paid, or has his job responsibility
increased.
 In a closely held corp, profits get taken out of the business as salary rather than
dividends
o Dividends are profits of the corp & the corp has to pay taxes on that
o Salary is tax deductible
 All similarly treated SH get treated the same
 Done in a way that cuts the other SHs out of receiving profits=NOT ok
o This is called a disguise dividend

Indemnification

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 Corp may agree to indemnify a director if director is found liable to the corp
 Includes advancing of expenses, corp can require that the expenses can be repaid
after trial
 Exceptions: corp CANNOT agree to indemnify where the director is acting in bad
faith, where the director didn’t act in the best interest of the corp, or in the
criminal context, when the director should have realized what he was doing was
criminal.
 Exculpatory clauses=K out you being liable to SH. Indemnity says if you are
liable, the corp will pay
o Indemnity covers liability to 3rd parties, whereas exculpation does not do
that
 Insurancethere is always a limit on the policy & how much is covered

Freeze-out: Majority SH frustrate the reasonable expectation of the minority SH in

investing in the corp
 Often minority SH is left w/no way to get a return on his investment that would
have been reasonably expected
 The Business Judgment Rule is irrelevant here bc of self-interest
 Donahue case=all SH should be treated equally (all shares in the same class
should be treated equally)
o Wilkes case says that it is not about all the SH getting the same amount of
$, bc there might be legit business reasons to pay each SH differently,
depending on hours, job responsibilities, etc.
 Ct tried to balance the need to protect the minority.
 **Ct puts the burden on the majority SH to prove that there is a legit business
purpose for the decision they made. If majority meets its burden, then burden
shifts back to the minority SH to say that there was a less oppressive means to
achieve the goal that the directors had.
o What is a legit business purpose?
 Ex: computer skills aren’t up to speed.
 A less oppressive means would be to offer a training course
rather than kick him off the board
 A buyout agreement/provision or an employment K would give the SH a
reasonable price or would only allow the SH to be terminated for cause

Buy-Back
 Mandatory buy back provision is restricting the free transferability of shares
o Avoids a conflict about price; predictability
o Makes employees want to stay w/the company
Judicial DissolutionMinority OppressionBCL §1104-a
 NY law is the standard
 ONLY applies to closely held corps & it allows SH who hold 20% or more of the
shares in the corp to petition for dissolution based on illegal, fraudulent, or
oppressive actions toward the complaining SHs.
1. Dissolution for minority oppression under BCL §1104-a

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a. What constitutes “oppression?”: it is an objective standard. Conduct by the

majority is oppressive if it SUBSTANTIALLY frustrates the
REASONABLE expectations of SHs.
2. Buy back election under BCL §1118

***Dissolution is w/in the discretion of the ct. it is an extreme remedy

 The majority (non-petitioning SHs) may irrevocably elect a buyout pursuant to
BCL 1118
o dissolution leads to winding up & settling up
 If board cannot agree to fair value, ct will set a fair value. Ct has discretion to
provide dissolution, since it is an extreme remedy
 Minority SH might want to bring an action for breach of duty instead, depending
on the remedy that he/she wants

Minority OppressionBCL §1118

where shareholder petitions for dissolution, it triggers a right of the nonpetitioning SH
under BCL §118. The nonpetitioners can purchase the shares owned by the petitioners at
their fair value. An election pursuant to this section shall be irrevocable unless the ct in
its discretion.
 Nonpetitioners are given a 90-day period to buy these shares after the filing of the
petition
 Fair value will take into account the lack of marketability for the shares in the first
place
 Fiduciary duty of loyalty is still relevant
 Statute doesn’t provide a formula for fair value
 The ct then says this looks like oppression, defines it, says it is a ground to
dissolve the corp, & gives the nonpetitioners 90 days to elect a buy out or not.

MBCA 14.30(a)(2)Dissolution for Deadlock

(2) in a proceeding by a shareholder if it is established that:

(i) the directors are deadlocked in the management of the corporate affairs, the
shareholders are unable to break the deadlock, and irreparable injury to the corporation is
threatened or being suffered, or the business and affairs of the corporation can no longer
be conducted to the advantage of the shareholders generally, because of the deadlock;

(iii) the shareholders are deadlocked in voting power and have failed, for a period that
includes at least two consecutive annual meeting dates, to elect successors to directors
whose terms have expired;

 Director Deadlock=extreme problem for the corp where there is an irreconcilable

difference & directors cannot agree
 SH Deadlock=SH are saying they have been trying for 2 yrs to elect directors, but
they are unable to agree.

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Judicial Dissolution: SH or Director Deadlock

 [Wollman v. Littman]: when does deadlock amount to the type of irreconcilable
differences that mandate dissolution?
o The ct didn’t order a dissolution here even though there was a deadlock bc
the ct said each director did separate things in the business & could
function on their own. Also, the parties are arguing breach of duty to the
corp.
 ***Irreconcilable differences may not be enough. Corp has to be incapable of
functioning to get a judicial dissolution

Transfer Restrictions
[Allen v. Biltmore Tissue Co.]
 shares in a corp are freely transferrable
o “in case of death of any SH, the corp shall have the right to purchase the
stock from the legal representative of the deceased for the same price that
the corp received therefor originally. If the corp does not, or cannot,
purchase each stock, the board shall have the right to empower such of its
existing SHs as it sees fit to make such purchase from such legal
representative at the same price. Should the option provided for in this
section not be exercised, then, after the lapse of 90 days, the legal
representative may dispose of said stock as he sees fit.”
 This is the first option:
1) Corp can buy back the shares @ price paid
2) Estate can buy the shares
o K principals & prop principals are conflicting here; shares are considered
personal prop, but at the same time the parties entered into a K for these
shares
 **RULE=The restrictions on transferability are permissible so
long as they are reasonable

****ON EXAM: transfer restrictions are enforced when there is NOTICE of the
restriction & the restriction is REASONABLE
o Reasonableness is NOT about the price
 Corp cares about who holds shares bc SH control the corp
 Set price avoids litigation

Common Transfer Restrictions

1) First Right: where the SHs or the corp have the right to first purchase at a price
that has been set by agreement (same as in the Allen case)
2) Right of First Refusal: where the corp or other SHs have a right to first purchase
the shares, but the price is set by the market.
a. Allen, you can sell shares to 3rd party, but you have to tell the corp first
what this price is so we have the option to buy it first.
3) Mandatory Sell/Buy: if you are no longer an employee in the company, you have
to sell the shares back at X price. (Gallagher case)

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a. Is an incentive for employees to stay & employee to get cash when they
leave the corp
4) Consent Restriction: the restriction could say you may not transfer the shares in
the corp w/o first getting consent majority of SH or of the board; need consent
before selling to a 3rd party
a. It has the possibility of preventing a SH from selling shares at all
i. Consent may not be unreasonably withheld
ii. In NY=Restriction has to be written to say that such consent may
not be unreasonably withheldthis is the magic language
1. Commonly used in co-ops

Fundamental Transactions
 There are certain transactions that are so fundamental to the corp or have the
possibility of so fundamentally changing the corp that they require SH approval
o Amending the articles of incorp is a fundamental change, but there are
exceptions for things that don’t fundamentally change the SHs
investments
o By laws don’t need SH approval to be amended.
 EXCEPTION if SH adopted the bylaws, then they are the ones
who need to amend them.
o Board decides selling assets, UNLESS the board is selling a substantial
portion of the corp’s assets, then there needs to be a SH vote.
o Merger=in most cases the SHs of both corps need to approve the merger
 Same for dissolution
 What constituted SH approval=the bar for SH approval is high bc when it comes
to a fundamental transaction that require SH approval, the quorum MUST be a
majority of shares. If the corp Ks around the default rule & requires something
less for a quorum, the MBCA says you need a majority for these fundamental
changes.
o In NY, the default rule for a merger depends upon when the corp was
formed. If it was formed before Feb 11, 1998, then the default rule is that
you need 2/3 of all shares entitled to vote for a merger. After that date, you
need a majority of all shares entitled to vote.
 This applies to mergers & dissolutions
 Ex: 40, 30, 30. When 70 show up, there is a quorum. For a merger,
if 40 vote in favor & 30 against, there is not enough to vote for the
merger.

Direct v. Derivative Claims

Derivative Suit: Lawsuit that belongs to the corp
 The directors ought to the be the ones to decide if they will bring a lawsuit on
behalf of the corp
 If a SH wants to bring a lawsuit on behalf of the corp, there are procedural
requirements.

These Questions help us decide if the suit is direct or derivative

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1) Who suffered the alleged harm—the corp or the individual stockholder?

2) Who would receive the benefit of any recovery or other remedy—the corp or the
stockholders individually
 Example1: when the board is stealing profits for themselves, who is harmed? The
corp is harmed. The corp would receive the remedy here. Derivative claim.
 Example2: corp won’t let a SH in to review financial statements. This is a direct
claim bc it is a claim to that SH personally.
BCL §626 in NY=Procedural Requirements
b): ∏ SH must be a SH at the time of the wrong AND at the time of the lawsuit
d): Settlement requires Ct approval
c): Demand requirement (this is a pre-requisite to bringing a suit)
 For a SH to bring a derivative req, the SH must go to the board & make a demand
that the board brings a lawsuit.
o In any such action, the complaint shall set forth w/particularity the effect
of the ∏ to secure the initiation of such action by the board OR reasons for
not making such effort
 Exception=where the demand would be futile. Futility exists where
a majority of directors are involved in the alleged wrongdoing
 Ex: when a SH is suing the board, the board obv is not
going to vote to get themselves sued

Analysis on an Exam
 ***Whenever there is a SH that wants to sue, ask is it derivative or direct?
o If derivative, SH either needs to make a demand or plead w/particularity
why that demand is excused because of futility.
 Is SH now & at time of wrongdoing?
 Did SH make a demand?
 Is the demand excused bc of futility?

[Barth v. Barth]
 Robert alleged that Michael (controlling SH):
o 1) paid excessive salary to himself
 effects corp; is derivative
o 2) used corp employees for personal services
 derivative
o 3) lowered dividend payments
o 4) appropriated corp funds for personal investments
o 5) wrongfully terminated Robert’s employment
 direct claim bc it harms the SH himself
o 6) refused Robert access to the corp records & barred Robert from
entering corp premises
 direct claim
 when you have a closely held corp, the ct said the SH shouldn’t have to make a
demand on the board

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o NY doesn’t use this. NY says you have to make a demand or plead

w/particularity

Universal Demand Requirement under the MBCA

 Every SH must make a demand; there is NO futility excuse here
 If the board doesn’t respond w/in 90 days, the SH can go to the court & has
satisfied the demand requirement
 Business Judgment Rule applies here unless there is self-interest, fraud, or
illegality.
S-Corp
 All of the rules of corp law apply
 Tax election to be treated for tax purposes as a partnership; no double taxation bc
partnership doesn’t get taxed
o Limits: no more than 100 SHs, must be individual SHs (not other entities),
SHs may not be non-resident aliens & no more than 1 class of stocks.

LIMITED PARTNERSHIP (LP)

 NYPL §90: a partnership formed by 2 or more persons having as members one or
more general partners & one or more limited partners
o Limited Partners are NOT personally bound by obligations of the
partnership
 General partner has unlimited personal liability
 Limited partners have limited liability; all they risk is the
investment they put in

General Partnership v. Limited Partnership

 General partnership uses UPA (1914)
o No formalities; simply formed by agreement among partners
o Unlimited liability
o Control: by default, owned & controlled by all partners
o Profits & loses: by default, shared equally
o Taxation=pass through taxation
o Transferability: needs unanimous vote by partners
o Duration: dissolution upon death, bankruptcy, etc. of a partner (absent
agreement to continue)
 Limited Partnership uses ULPA (1916) applicable to limited partnerships
formed before July 1, 1991. RULPA is used after July 1,1991
o Must file w/Secretary of State
o Limited liability
o Control: by default, owned by limited partners & general partners.
 Controlled by general partners
 Separation of ownership & control
o Profits & loses: by default, shared in proportion to capital contributions
o Taxation=pass through taxation

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o Transferability: limited partner’s interest is freely transferable. For general

partners, need unanimous vote of partners, including limited partners
o Same, except that no dissolution occurs when limited partners withdraws,
dies, goes bankrupt, etc.
 Corporations are usually general partners
 Limited partners can lose limited liability if they participate in the control &
management of the corp

[Holzman v. De Escamilla]
 Limited partners lose limited liability when they participate in management &
control, as the partners did here. (NYPL §96)
o Partners made decisions on what crops to plant, had the power to write
checks
 RULPA (NYPL §121-303): used for partnerships formed AFTER 1991if the
limited partner does participate in the control of the business, he is only liable to
the persons who transact business w/the limited partnership reasonably believing,
based upon the limited partner’s conduct, that the limited partner is a general
partner.
o Only liable to creditors who believe that they are general partners
 Basically apparent authority
 RUPLA Safe Harbor: a limited partner does not participate in the control of the
business w/in the meaning of this section by virtue of doing more than 1 of the
following:
o Consulting w/& advising or rendering professional services to a general
partner w/respect to any matter, including the business of the limited
partnership

LIMITED LIABILITY PARTNERSHIP (LLP)

 In NY, only available to professional partnerships
 LLP needs to be registers w/the State
o No partners in LLP is liable for debts or wrongful conduct of the LLP
solely bc they are a partner in the LLP
o Will be fully & personally liable when negligence/wrongful conduct is
committed by a partner or someone under his direct supervision & control
while rendering services on behalf of the LLP
 Ex: Megadyne v. Rosner, Owens & Nunziato

LLP v. LP
 LLP partners will not lose limited liability even if they control the business
 Nobody is generally liable in an LLP
 LP has 2 types of partners: general & limited. Limited partners risk losing shield
of limited liability if they exercise control

LIMITED LIABILITY CORPORATION (LLC)

 Most popular new filing

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 Has best attributes of the corp & the partnership

 Owners or members are what we call ppl in an LLC
o All have limited liability & pass through taxation
o Maximizes freedom of contract
 LLC has to adopt a written operating agreement

Formation of LLC Worksheet

1) Publication: NY requires that after the LLC is formed, the formation has to be
announced in the county newspaper designated by the clerk w/in 100 days. Need
to file an affidavit of publication. Need to adopt an operating agreement as well.
2)
a. Default rule for profits & loses=proportion to capital contributions
b. Default is member-managed LLC
1) Member Managed: looks like a partnership. This is the default.
 Quorum: a majority of interest for a quorum
 Sufficient vote: need a majority of interest present
 Members are agents to bind the LLC
 Members are acting as managers & would owe a fiduciary duty of
care to the LLC
2) Manager Managed: looks like a corporation
 Quorum: Need a majority of managers present
 Sufficient Vote: majority in favor
 A manager owes a fiduciary duty of care to the LLC

c. By Default, members vote in proportion to their capital contribution

d. Managers vote is 1 vote, it is not the proportion of capital contribution as
would be under member management.

[Kaycee v. Flahive]
 Piercing the LLC Veil is allowed
o NY statute says LLC members have limited liability
o The standard to pierce the LLC veil
 Piercing the Veil factors are the same as a corp: Commingling of
funds, lack of formalities, purposeful undercapitalization
 For extreme situations
 Usually members are limited liability

Fundamental Change
 Need a majority of interest for there to be a sufficient change
Membe % If A & C show up, there is a quorum. If they are voting to admit a
r new member and A votes in favor, C votes against, 40 votes is not a
A 40 majority (out of 100) of interest.
B 30
C 20
D 10
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Marra & Pat

[Pappas v. Tzolis]
 Breach of duty of loyalty
 Tried to K around the duty of loyalty in the operating agreement & in the buy out
 NY Centro: a sophisticated principal is able to release its fiduciary from claims, at
lease where the fiduciary relationship is no longer one of unquestioning trust-so
long as the principal understands that the fiduciary is acting in its own interest &
the release is knowingly entered into.
 Cannot contract around the duty to 3rd parties

LLC Derivative Suits

 NY Ct of Appeals held that the members of an LLC may bring a derivative suit on
the LLC’s behalf, even though there are no provisions governing such suits in the
NY LLC Law.

Dissolution:
 Winding up
 Settling up

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