Business Associations Spring 2018 1

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CASE I. Introductory Topics

a. Main Roles of the Attorney:
STATUTE
i. Counselor: Advise the client, must know the law in order to
RULE/ELEMENTS advise
ii. Conciliator: Resolve a conflict between a client and another
IMPORTANT 1. Different from litigation—deal making, not winner/loser
iii. Facilitator: Facilitate a deal/transaction
QUESTION 1. Negotiate substantive elements of transaction
2. Draft the writing that captures terms and its legal effects
3. Knowledge of applicable statutes to ensure compliance
iv. Guardian: Protect corporation from outside (confidentiality) and
from within (negative actions by employees of corporation)
b. Corporate Attorneys
i. Private practice, firms, multiple clients in a variety of industries
ii. Corporate (In House):
1. One client who is your employer to which you are
integrated with (raises ethical concerns)
iii. Other:
1. Academia, nonprofits, government
c. Economics:
i. Terms:
1. Risk:
a. Uncertainty about the future
b. Something different than was expected will happen;
either worse or better
c. Mitigating Risk:
i. Security interest: mortgage/lien on
something over the life of an investment
ii. Built-In return: put in contract a minimum
return
iii. Allocating Consequences:
1. One party better suited to take hit?
2. Party thinks risk is remote so willing to
undertake it?
3. Party induces the other with larger
reward to take the risk?
2. Liquidity:
a. How easily something can be turned into cash
b. Often impacts the value that an investor places on
an asset
i. Things that are more difficult to liquidate are
“discounted”
3. Valuation:
a. Price v. Value
i. Price = what you ACTUALLY pay
ii. Value = economic worth of an investment to
the owner
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1. Takes into account range of

assumptions about the future impacts
of value
4. Market Capitalization:
a. # of shares outstanding multiplied by market price
ii. Making Economic Decisions
1. Fundamental assumptions:
a. Decision maker is perfectly normal
i. Assuming unlimited time and resources
ii. Gathered and correctly assessed
1. Firms do not have perfect information
or unlimited resources to make a
decision
b. Decision maker makes decisions that are entirely
self-interested
2. Classical Economic Theory suggests:
a. Actors are rational
b. Actors act in their own self interest
c. Actors have access to perfect information
3. Behavioral Economic Theory:
a. Disproved classical theory
b. Clients are NOT always rational and sometimes do
act NOT in their own self-interest

II. Agency Law

A fiduciary relationship that arises when one person (principal) manifests assent to
another person (agent) that agent shall act on principal’s behalf and is subject to
principal’s control, and that agent manifests assent or otherwise consents so to act.
a. ELEMENTS of Agency Relationship:
i. (1) Manifestation by the principal that the agent shall act for
him;
ii. (2) Agent’s acceptance of the undertaking; AND
iii. (3) Understanding that the principal is to be in control of the
undertaking
iv. Burden of proof of establishing agency relationship is on party
ASSERTING that it exists
v. Intent is NOT required—if the elements exist an agency
relationship has been formed
b. Basile v. H&R Block:
i. FACTS:
1. H&R had rapid refund program funded by Mellon Bank.
Customers that were eligble were informed of program
and if interested H&R would simultaneously send their tax
returns to IRS and Mellon would send checks to the
customers (if approved) H&R did NOT disclose that
received payment from Mellon for each long/shared profits
with Bank
ii. HOLDING:
1. No agency relationship btwn H&R and customers here
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a. No showing that customers intended H&R to act on

their behalf in securing loans
b. Facilitating the customers’ ability to get their
money faster was NOT sufficient because
customers did not manifest that H&R shall act on
principal/customers’ behalf
c. Agency relationship imposes a FIDUCIARY DUTY
i. Duties AGENT owes to PRINCIPAL
1. Duty to Obey: Agent has a fiduciary duty to its principal,
which includes a duty to protect the principal’s interests
and act as directed
2. Duty of Loyalty: Agent may not compete with, or act
adversely to the principal. This includes a duty to disclose
to the principal all relevant information
3. Duty of Care: An agent must act reasonably not to cause
harm to the principal’s interests
ii. Duties PRINCIPAL owes to AGENT
1. The principal owes the agent a duty to deal fairly and in
good faith with the agent, and must honor any contractual
duties between them
a. Renounce: When the agent ends the relationship
b. Revoke: When the principal ends the relationship
d. Agency Authority
i. Actual Authority (express or implied): a principal is bound to
3d parties by an agent acting within the scope of his ACTUAL
authority
1. Express: Oral or written instruction delegating authority
2. Implied: Whatever is reasonable for the agent to think is
necessary delegated by the principal
ii. Apparent Authority:
1. Stems from 3d party belief that is traceable to the
principle’s manifestation that the agent IS authorized to
act for the principal
2. RULE: An agent has APPARENT authority, when 3d party
reasonably believes that the agent has authority to act on
behalf of the principal and that belief is traceable to the
principle’s manifestation
a. ANALYTICAL STEPS:
i. What were the principal’s manifestations
relating to the agent’s authority?
ii. Based on these manifestations, was it
reasonable for the 3d party to believe that
the agent was acting within his authority?
3. Udall v. T.D. Escrow Services, Inc.
a. FACTS:
i. T.D. employs ABC to host auction on
defaulted homes
ii. T.D. authorizes sale at $159k, ABC opens bid
at $59k
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iii. Udall purchased the home for $60k, but was

denied deed of trust
b. HOLDING: Agent has apparent authority when 3d
party has reasonable belief that agent had
authority and that belief is traceable to the
principal’s manifestation
i. Actual Authority? No.
ii. Apparent Authority? Yes.
iii. By issuing notice of sale, T.D made
manifestation that ABC had authority. Udall
could reasonably believe that ABC was
authorized to make sale
c. Dissent suggests that Udall was experienced buyer
and should have realized the price was too low
4. CSX v. Recovery Express:
a. FACTS:
i. Partner at IDEC sends email to rep at CSX
regarding buying railcar. Email says Partner
works for both Recovery Express & IDEC.
CSX sends sales order forms to same office
that RE shares w/ IDEC. Sale goes through.
Partner took delivery of cars at CSX location.
CSX discovers partner does NOT work for RE
even though email signature suggested he
did.
b. HOLDING:
i. No apparent authority
1. Reasonably belief can’t be based
simply on business cards/email
signatures
2. Relying on email domain name is
unreasonable and cannot be sufficient
to sustain claim of apparent authority
a. If this WERE enough, every
subordinate employee would
have the ability to bind a
company just like CEO
5. Kansallis Finance Ltd. v. Fern
a. FACTS:
i. Partner issued an opinion letter on
partnership letterhead to the corporation in
order to induce it to make a loan. Letter
contained several intentional
misrepresentations. Partner was held
criminally liable, but was insolvent. P
seeking compensation from partnership.
b. HOLDING:
i. Partnership WAS liable
1. If partner acting with apparent
authority OR partnership receiving
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some benefit & within scope

iii. Estoppel:
1. Principal is liable to 3d party even without authority
because 3d party changed position in reliance upon belief
that action authorized if principal caused the belief, OR, if
Principal, knowing of belief, did nothing to notify 3d party
2. Comes into play ONLY where agent’s actions were not
actually authorized
e. Tort Actions
i. Methods of liability
1. Direct Liability
2. Vicarious Liability
ii. Employer/Employee Relationships
1. All employERs are principals, and all employEEs are
agents.
a. Principal/EmployER is liable for all of an employEE’s
tortious conduct that occurs within the scope of
his/her employment
2. If independent contractor is acting as an employee, then
they are considered agent and principal may be held
vicariously liable for any of their actions that occur within
scope of employment
iii. RULE: Principal is liable in contract IF agent acted with apparent
or actual authority
iv. Unidentified Principal (Rest. § 6.01(2)):
1. An agent is liable to a 3d party when acting for an
unidentified principal
a. A principal is unidentified when the 3d party has
notice that the agent is acting for a principal, but
does not have notice of identity
b. If the 3d party knows that the agent is acting on
behalf of an organization, but is not informed that I
t is an LLC then agent IS liable
2. Principal is liable to 3d pary
v. Undisclosed Principal (Rest. § 6.03(2)):
1. A principal and an agent who contracts on behalf of an
undisclosed principal ordinarily is liable to the third person
with whom the contract was made
vi. Disclosed Principal (Rest. § 6.01(2)):
1. An agent who contracts on behalf of a disclosed principal
is NOT thereby liable to the 3d party with whom the
contract is made
vii. RULE: Principal is liable for an agent’s torts where the principal
authorized the agent to engage in TORTIOUS conduct, even if
the principal did not intend the conduct to be tortious—ALSO
liable for torts committed by agent acting w/ apparent authority
1. EXAMPLE:
a. Misrepresentation, defamation
viii. Determining whether an AGENT is an EMPLOYEE:
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ix. Fisher v. Townsends, Inc.

1. FACTS:
a. Townsend is a chicken processing business; they
have 7 weight masters. Reid is a weight master.
Reid had worked exclusively for 5 years under oral
contract. They later made a written contract. On
the way to plant at end of day gets into accident.
i. Q: Was Reid independent contractor or
employee?
2. HOLDING:
a. Triable issue of fact whether Reid was employee
i. Employees: Principal assumes right to
control, time, manner, method of executing
work
ii. Independent Contractor: not subject to
control, retains freedom
f. Termination of Agency Relationship
i. Actual Authority
1. Parties agree to end relationship
2. Renouncement (by agent) or revocation (by principal)
a. Effective ONLY when other party has notice
b. Irrevocable—revocation not effective if power given
to Agent has been made IRREVOCABLE
i. Agency power coupled with interest
1. Limited proxy—vote as directed by
principal
2. General proxy—vote as Agent thinks is
Principal’s best interest
ii. Apparent Authority:
1. When no longer reasonable for 3d party to believe that
Agent has authority
a. Simply because agent’s actual authority has ended
doesn’t mean apparent has ended
iii. Death/Incapacity
1. Agent death, ends actual authority (can longer act for
apparent authority)
2. Principal’s death terminates agent’s actual authority when
agent receives notice of it
3. Principal loses capacity, agent prohibited from performing
the act
III. Partnership
a. General
i. Partnership was originally viewed as an aggregate of individuals
1. When a partner left the partnership ended
ii. Under RUPA—partnership is viewed as an entity
iii. Default is to treat as partnership—partnership can be
inadvertently formed (CORPORATION CANNOT)
iv. RUPA § 103
1. partnership agreement controls, BUT if doesn’t address
something then default rules of RUPA apply
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a. Partnership agreement CANNOT:

i. Eliminate fiduciary duty (loyalty, care, good
faith), but CAN limit it
ii. Vary the power to disassociate
iii. Restrict rights of third parties
v. Partnership Presumptions
1. Losses are divided in the same proportion as profits
2. Each partner has equal right to manage the business;
disputes are decided by a majority of partners regardless
of ownership interests
3. A partners’ power cannot be transferred and no one can
become a partnership without unanimous consent of all
other partners

b. How to Form a Partnership (RUPA §202)

i. ELEMENTS:
1. Association of two or more people
2. To carry on as co-owners
a. Subjective (UNNECESSARY):
i. Persons view themselves as members of the
business rather than an outside contracting
b. Objective:
i. Profit sharing
ii. Control sharing
iii. Loss sharing
iv. Contribution
v. Co-ownership of property
c. Zeigler v. Dahl
i. FACTS:
1. D marketing an ice fishing guide
service. D asked P to help guide
fishermen. P gave D a check and
claimed it was a capital investment,
but D said marketing. P claiming
partnership
ii. HOLDING:
1. NO Partnership
a. Intent:
i. There was no evidence
that D intended to form
partnership with P
b. Co-ownership:
i. P failed to demonstrate
that they had any role in
management, and there
was no profit sharing
ii. Fee structure was more
similar to independent
contractor as opposed to
partnership
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3. A business for profit

a. A person who receives any portion of a business’s
profit is presumed to be a partner UNLESS
profits are received as some type of payment
4. Whether or not the parties intended to form a partnership
a. Intent can be INFERRED from CONDUCT
regardless of party’s subjective intent
b. Intent will outweigh even if the relationship doesn’t
necessarily appear to be partnership
c. Types of Partnerships
i. Term Partnership:
1. Partnership limited to a certain amount of time
ii. At will partnership:
1. Partnership of indefinite term
d. Financing Partnership
i. Partner contributions:
1. The statute does NOT require that partners make equal
contributions or equal types of contributions
a. Contributions can be in the form of money,
services, property
e. Partnership Liability
i. RUPA § 301:
1. Each partner is an agent of the partnership for the
purpose of its business.
ii. Default Rule: Partner is individually liable for all debts of the
partnership
1. MacArthur v. Stein:
a. FACTS:
i. Company wants to expand D’s roofing
business. Company invests capital in the
business, D lends the name and his
goodwill/reputation. Company skips out and
P attempts to collect against D as a partner.
b. HOLDING:
i. D was liable to the bank even though he did
not take out the loans himself.
1. Partnership existed
a. D contributed his name
b. D shared profits
c. Intent can be inferred
iii. RUPA § 307 (Exhaustion Rule)
1. A partnership creditor cannot levy on the assets of the
partners until all of the assets of the PARTNERSHIP are
exhausted AND the creditor obtains a judgment against
the partner
2. A judgment against a partnership is NOT by itself a
judgment against a PARTNER. A judgment against a
partnership may not be satisfied from a partner’s assets
unless there is also a judgment against the partner
iv. RUPA § 306
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1. Partners are jointly and severally liable for all

debts, obligations, and other liabilities of the partnership
unless otherwise agreed by the claimant or provided by
law
a. A new partner is NOT personally liable for
preexisting debts, UNLESS expressly agreed to
b. A dissociated partner is NOT liable for obligations
incurred after dissociation (§ 703)
c. A dissociated partner is liable on a transaction
entered into AFTER dissociation ONLY IF:
i. A partner would be liable on the transaction;
AND
ii. It is less than TWO YEARS since the
dissociation AND the other party reasonably
believes person is still partner
v. RUPA § 305:
1. Partnership is liable for loss/injury caused to person,
as a result of wrongful act/omission of partner acting
in the ordinary course of business of the partnership OR
with actual/apparent authority of partnership
a. EXAMPLE:
i. PAC surfboards is a partnership w/ P, A, & C
as sole partners. In the course of her work, A
injures V by acting negligently. Can V sue
and recover from PAC Surfboards for
damages?
1. YES. It was a wrongful act that
occurred in the ordinary course of
business.
ii. Can V sue A?
1. YES. Under negligence cause of action
—partnership is sued under § 305 and
A sued under tort claim.
f. Ownership of Partnership Assets
i. RUPA § 203:
1. Property acquired by a partnership is property of the
partnerships and not the individual partners
a. Individual partners have no right to use property for
personal use
b. Partners have NO transferrable interest in the
partnership property
ii. RUPA § 204:
1. Property is partnership property IF acquired in the
name of:
a. The partnership; Or
b. One or more partners with an indication in the
instrument transferring title to the property of the
person’s capacity as a partner or of the existence
or a partnership BUT without an indication of the
name of the partnership
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i. Property acquired before the formation of a

partnership does not automatically become
partnership property—need to transfer title
2. Property is acquired in the name of the partnership BY
transfer to:
a. The partnership in its name; OR
b. One or more partners in their capacity as partners
in the partnership, if the name of the partnership is
indicated in the instrument transferring title to the
property
3. Property is presumed to be partnership property IF
purchased with partnership assets; EVEN IF
a. Not acquired in the name of the partnership OR
b. The name of one of the partners
4. Property acquired in the name of one or more partners,
WITHOUT indication to the property of the person’s
capacity as a partner OR of the existence, without using
partnership assets is PRESUMED to be SEPARATE even
if used for partnership purposes
iii. Transferable Property Interests (RUPA § 503):
1. The ONLY transferable interests of a partner in a
partnership is the:
a. Partner’s SHARE OF PRFOTS AND LOSSES
b. Partner’s RIGHT TO RECEIVE DISTRIBUTION
2. These interests are personal property and considered an
asset
a. Just PURCHASING a transferrable property interest
does NOT GIVE managerial right, you have to
purchase ALL of a partner’s interest to have
managerial rights
g. Partnership Rights/Duties
i. RUPA § 105:
a. Except as otherwise provided, the partnership
agreement governs:
i. Relations among partners and between
partners and partnership
ii. Business of the partnership and conduct of
that business; AND
iii. The means and conditions for amending the
partnership agreement
ii. Each partner has EQUAL rights in the management and conduct
of the partnership business.
iii. A person may become a partner ONLY with the consent of ALL
partners
iv. Managerial Role
1. All partners have an equal interest in managing the
partnership
2. It is possible for a contract to give all managerial authority
to one party and the partnership can be bound by his/her
conduct
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v. Duties
1. Partners owe the partnership fiduciary duties of:
a. Loyalty
i. A partner should disclose all material facts of
opportunity received BASED on being in
partnership
ii. Meinhard v. Salmon:
1. FACTS:
a. P and D were partners on a
property. As the end of their
contract was approaching, D
entered into an agreement with
another party. P sues D for
breach of fiduciary duty for
failing to inform P of the new
opportunity.
2. HOLDING:
a. D breached fiduciary duty by
not informing P of the deal. D
had a higher duty because he
had more knowledge. Failure to
disclose was breach of duty
b. Care
c. Good Faith and Fair Dealings
i. Starr v. Fordham:
1. FACTS:
a. P joined D’s law firm. P signs
agreement. 1st year they
divided profits evenly. 2d year
firm only wanted to give 6.3% of
profits. P sued for breach of
fiduciary and good faith/fair
dealings
2. FAIRNESS STANDARD
a. Fiduciary duties are rooted in
equity
3. HOLDING:
a. D breached his fiduciary duty
i. When P signed the
agreement he assumed
fair compensation, Court
went with the reasonable
expectations of P as
opposed to equal shares
default rule
ii. Clancy v. King
1. FACTS:
a. Husband and wife enter into
agreement. P says that he
reserved the right to get out of
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their contract. Q is whether P

was asking to leave his contract
in bad faith because the
marriage had gone south
2. HOLDING:
a. Partnership agreement can alter
certain duties, but case was
remanded to determine whether
asking to leave the contract was
in bad faith.
b. Cannot eliminate the covenant
of good faith and fair dealings
vi. Voting:
1. Activities within the ORDINARY course of business in
partnership require MAJORITY of partners
2. Activities NOT within the ordinary course of business
of the partnership require ALL of the partners
3. To change the partnership agreement and to add a
new partner need unanimous consent.
h. Allocations and Distributions
i. A partnership is a flow-through and profits are allocated to a
capital account
1. Profits are allocated among partners and must be
reported as INCOME
2. Partners pay taxes for allocations even if they don’t
receive it as a distribution
ii. Distribution is the portion of profits a partner actually receives
in cash
iii. Partners pay taxed for the allocation EVEN IF they do not receive
it as a distribution
iv. Partners are NOT entitled to a salary unless the agreement
explicitly says they are
v. Each partner receives equal allocation of profits/losses unless
the partnership agreement dictates otherwise
i. Dissociation and Dissolution
i. Dissociation denotes the change in the relationship caused
by a partner’s ceasing to be associated in the carrying on
of the business
1. Partner can dissociate at ANY TIME (rightfully or
wrongfully)
ii. Events Triggering Dissociation (RUPA § 601) A person is
dissociated as a partner when…
1. Partner’s express will – if partnership is at will, this leads
to dissolution
2. An event stated in the agreement as causing the person’s
dissociation occurs
3. Partner is expelled
a. By something within the partnership agreement;
OR
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b. By affirmative vote or consent of all other partners

IF:
i. It is unlawful to carry on the business w/ that
individual as a partner
ii. There has been a transfer of that partner’s
entire transferrable interest
4. Partner is a debtor in bankruptcy
5. Partner died
iii. Wrongful Dissociation (RUPA § 602)
1. Partner’s dissociation is wrongful ONLY IF the dissociation
a. Is in breach of an express provision of the
partnership agreement; OR
b. Before the end/completion of a term partnership
iv. Effect of Dissociation (RUPA § 603)
v. Purchase of Interest Of Dissociated Partner (RUPA § 701)
1. If dissociation WITHOUT causing dissolution and winding
up, buyout price will be HIGHER OF:
a. Liquidation value; OR
b. The value based on a sale of the entire business as
a going concern without the person
2. If WRONGFUL dissociation:
a. No payout until end of term; AND
b. Amount received will be reduced by any damages
incurred as a result of wrongful withdrawal
vi. Events Causing Dissolution (RUPA § 801)
1. A partnership is dissolved and its business MUST be
wound upon ANY OF THE FOLLOWING:
a. It becomes unlawful to continue all or substantially
all of the partnership’s business
b. If all the partners agree
c. If a partner is a term partnership ceases to be a
partner, HALF REMAINING CAN VOTE TO DISSOLVE
d. Court ordered dissolution
2. McCormick v. Brevig:
a. FACTS:
i. Brother and sister inherit ranch, 50/50
partnership. Concerns over mgmt. District
Court ordered brother pay out sister’s
portion. Q: Did D.C. err by failing to order
liquidation and allowing brother to purchase
sister’s interest?
b. HOLDING:
i. YES
1. When dissolution is court ordered,
partnership’s assets must be
liquidated and distributed in
accordance with respective interests
IV. Corporations
a. Promoter Liability
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i. Promoter = persons involved in the initial organizing/creation of

corporation
ii. G.Rule:
1. Promoter is bound by any contract entered to on behalf of
a non-existent corporation; UNLESS there is CLEAR
intent by the parties that the future corporation and NOT
the promoter be bound by the agreement
iii. Release from personal liability:
1. Once corporation has been formed—in order to release
promoter from personal liability, the corporation must
adopt the contract, AND there MUST be a NOVATION
from the other parties to the contract
a. Novation: previous contract is extinguished by a
new valid contract, by (1) substituting of parties or
the undertakings; (2) with consent of all parties; (3)
based on valid consideration
i. NO CONSIDERATION REQUIRED where the
parties to contract and 3d party are all in
agreement that one party will be released
from the contract obligations and the third
party substituted in its place, a novation has
occurred and additional consideration is not
required
2. Burden is on the agent to prove:
a. Principal’s corporation status was FULLY AND
ADEQUATELY disclosed to the third party
3. Defective Corporation:
a. If promoter honestly believes the corporation is
already formed, but it was not due to defective
corporation—Promoter will be released from liability
iv. Moneywatch Companies v. Wilbers:
1. FACTS:
a. D signed a lease in his name because his
corporation had not been formed. Once corporation
formed D just substituted corporation’s name for
his on the lease. D stopped paying rent, landlord
attempts to collect from D, but D says Corporation
not him liable.
2. HOLDING:
a. NO novation here.
i. Under the theory of undisclosed principal—
the promoter is liable; if you want to
extinguish your liability as a promoter D
should have specifically asked the landlord
ii. D signed the lease agreements as an
individual and P did not intend to lease to
corporation
v. Third party has NO duty to inquire into the corporation’s status
of the principal even when it is within that party’s capabilities to
do so
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b. Internal Affairs Doctrine:

i. When disputes arise from the INTERNAL AFFAIRS of a
corporation, the disputes will be resolved/governed by the law of
the state of INCORPORATION
1. EXCEPTION: When the corporation has little contact with
the state of its incorporation, the law of some other state
will apply when: (1) the relevant rules of the other state
embody an important policy of the state; AND (2) the
matter involved does not affect the corporation’s
internal administration and therefore cannot be
practicably determined differently in different states.
a. Over ½ of the publically traded companies are
incorporated in DE  most fiduciary duty law
comes from DE
c. Corporation Formation
i. A corporation can be incorporated in any state regardless of
whether or not it will operate within that state
1. Domestic: a corporation which is incorporated in the state
that it operates
2. Foreign: a corporation that operates in a state, but is
incorporated in another state
ii. Corporation Name (MBCA § 2.01):
1. Reserving and registering the name: (CA 90 days, MBCA
120 days in advance)
a. Indication of corporation status
i. Ltd, corp., inc.,
b. Distinguishable
i. Must be different from other corporation on
file with the Secretary of State (MBCA)
1. CA: cannot be deceptively similar
iii. Incorporation Documents(MBCA § 2.02):
1. Certification of Incorporation (DE)/Articles of Incorporation
(MBCA)
a. Document that creates and governs the corporation
b. Submitted to the secretary of state
2. Requirements:
a. Corporation name
b. Name & Address of each person who is
incorporating the new entity
c. Name and address of the Identify of a person or
other corporation acting as agent
d. Statement of authorized capital (number of
authorized shares)
e. Purpose of the corporation
i. Only required in DE and CA
ii. MBCA default is any lawful purpose
f. MBCA 8.03: There must be at least one board
member named in the articles and it must be a
PERSON (as opposed to a corporation MBCA § 8.02)
g. CA: Minimum of 3 directors § 212(a)
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i. UNLESS if only 1 shareholder than only 1

director
ii. If 2 shareholders only 2 director’s necessary
iv. Effective date of Incorporation:
1. Articles become effective on the day the Secretary of
State stamps them
v. Organize the New Corporation:
1. Organizational meeting of board members (appoint
officers etc…)
a. Name Directors
b. Appoint Officers
c. Adopt bylaws
2. Write Bylaws
3. Board of Directors:
a. CA: requires 3 members on board UNLESS you have
less than 3 shareholders
i. 2 shareholders  2 or 3 directors
ii. 1 shareholder  1 director
vi. Defense of Personal Liability: Defective Formation
1. De Jure Corporation
a. Corporation in good standing becomes “de jure”
once articles have been approved by the Secretary
of State
2. De Facto Corporation:
a. To find de facto corporation owner must show—
i. Law authorizing corporations
ii. Good faith effort to incorporate
iii. Parties conducted themselves as a
corporation
b. Hill v. County Concrete Company, Inc.
i. FACTS:
1. D received order for concrete from
C&M. D delivered concrete, but check
bounced. D wants to hold P liable
because never validly incorporated
C&M. P’s attorney told him could not
validly incorporate as C&M because
name was taken. P says de facto
corporation was formed and can’t hold
individual liable
ii. HOLDING:
1. C&M was NOT de facto because didn’t
act in good faith and should have told
D it’s new name
3. MBCA § 2.04:
a. “All persons purporting to act as or on behalf of a
corporation, knowing there was no incorporation
under this Act, are jointly and severally liable for all
liabilities created while so acting.”
Business Associations Spring 2018 17
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b. Persons purporting to act as or on behalf of a

corporation and KNOW that there was no valid
incorporation will be PERSONALLY LIABLE
i. Christmas Lumbar Co v. Valiga:
ii. Frontier Refining v. Kunkle:
1. FACTS:
a. P sold petroleum, D wanted to
open his own gas station. D did
not have the capital so goes to
3d party to help raise money. 3d
party said only $ if corporation.
D did not form corp, but claimed
did and P sold petroleum to
corp. D defaulted on gas
payments. P tries to collect from
3d party.
2. HOLDING:
a. D was personally liable, but
NOT 3d party because 3d party
was just funding. This was NOT
a partnership. D held himself
out to be a corporation.
4. Ultra Vires Doctrine:
a. Any action taken by a corporation that is beyond its
power will be VOID
b. Corporations do NOT have the power to commit
waste
i. Waste: the exchange of corporation assets
for consideration SO small that no one would
think it is reasonable
1. EX)
5. Corporation by Estoppel:
a. Prevents a 3d party from denying the existence of a
defective corporation, where the 3d party has
treated it like a corporation and denial would
result in UNJUST harm
i. Factors for determination:
1. Would be contrary to general
principles of law to let D avoid
liability?
2. What was the intent of the parties
at the time of contracting?
3. Has D relied on P’s
misrepresentations regarding
corporate status to its detriment?
b. Brown v. WP Media
i. FACTS:
1. Media company said operating
agreement void b/c Corp’s articles of
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incorporation filed after operating

agreement executed.
ii. HOLDING:
1. Media company was estopped from
denying the corp’s existence because
media company treated like
corporation. Wasn’t until wanted to
sue for breach that questioned validity
c. Payer v. The SLG Carbon, LLC
i. FACTS:
1. P & D enter into contract for purchase
of property owned by D. P signed
agreement as CEO of purported corp,
but at time corp not incorporated. D
said that P failed to meet to complete
contract, eventually told P that they
found another buyer. P is suing for
breach of contract. D says no contract
because not incorporated at signing.
ii. HOLDING:
1. Corporation by estoppel.
a. D did not rely to their detriment
b. D admitted would have done
nothing different if contract
btwn individual or corp.
d. Numbers Basics
i. Accounting
1. Balance Sheet = Assets are SUM of liability and equity
2. Income Statement = From all revenues, deduct the
costs/expenses which leaves you with income
3. Statement of Cash flow = similar to a checkbook, divides
flow into 3 categories
a. Cash from OPERATIONS
b. Cash from INVESTMENTS
c. Cash from FINANCING ACTIVITIES
4. GAAP: Generally Accepted Accounting Principals
a. Matching Principle: Matching expenses to
revenues for period of time that allows for
comparability, to see which increases overtime
i. Match income to expenses incurred during
that period
ii. Benefit:
1. Allows executives to see how well the
business is doing
b. Conservatism: All businesses thought to be
engaging in, and playing by same rules. Allows
prospective investors to make decisions regarding
comparable businesses
i. Data should be conservative
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ii. Err on the side of understating revenues and

value of assets AND overstating costs and
liabilities
5. Tax Concerns:
a. Corporation pays taxes on its income AND the
shareholders also pay tax on their dividends
(payment received)—if NO dividend, ONLY
corporation pays taxes.
e. Features of a Corporation
i. Separate entity
1. Corporations are viewed as individuals, the corporation
itself is able to enter into contracts/incur debts/file
lawsuits
2. The assets of the corporation are held by the corporation
and NOT the individual shareholders
ii. Limited Liability:
1. Shareholders are NOT liable for debts and obligations of
corporation
f. Securities:
i. Ways to finance the corporation
1. Authorized Shares = Maximum number of shares that a
corporation can sell
a. If you want MORE THAN ONE class of stock,
articles MUST specify the number of shares the
corporation is authorized to issue
2. Issued Shares = Number of shares the corporation DID
sell
3. Equity: Equity represents an ownership interest in the
business rather than a loan to the business
a. Common Stock: MBCA § 6.01: All shares are
identical UNLESS the articles indicate
i. If you want preferred stock have to include it
in your articles
ii. Each share of stock comes with:
1. Voting rights,
2. Proportionate amount of dividend
distributions
3. Right to its proportionate amount of
the corporation’s assets upon
dissolution
iii. Right to receive distributions
iv. Dividends NOT guaranteed
v. Residual ownership interests
b. Preferred Stock: Stock that has priority over
stock in either the payment of
dividends/distribution of assets on dissolution, or
both
i. Fixed dividends & gets dividends before
common stock owner
ii. Fixed liquidation rights
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iii. Types of Preferred Stock

1. Dividend Preference:
a. Gets distribution before
common stock holder
2. Cumulative v. Non Cumulative
Preference:
a. Cumulative is when a
shareholder gets paid dividends
on past years if there was no
past year payout in addition to
the current year
3. Participating Preferred:
a. Hybrid of common & preferred
stock
b. Preferred payment, then
COMMON + Participating
preferred
4. Dissolution Preference:
a. Receives liquidation share
before common stock holder;
when corporation is ending, you
liquidate the assets, pay
creditors, and then pay the
preferred liquidation
shareholders, THEN common
stockholders
5. Redeemable & Convertible Preferred:
a. Redeemable: Shareholders
bargain for right to require
corporation to repurchase their
shares. This protects
corporation from perpetually.
Corp will usually redeem shares
when dividends become too
expensive
b. Convertible: SH has option for
exchanging shares for fixed
amount of security in the
corporation
6. Blank Check Preferred MBCA § 6.02:
a. Allows board flexibility to
establish the financial terms for
particular class/series at time of
issuance
b. Allows board to take into
account current economic
conditions in specifying terms of
stock in plans to sell
c. Method companies use to
simplify the process of creating
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a new class of preferred stock to

raise additional funds from
sophisticated investors without
obtaining shareholder approval
d. Articles authorizes a number of
preferred shares, but leaves
privileges blank
7. Voting or Non-Voting Preferred:
a. Default Rule: One share, one
vote
b. Preferred is typically non-voting
i. BUT if corporation fails to
declare distributions,
investors will bargain for
voting rights on their
preferred stock
ii. Voting rights will give
them enough power to
change the management
of the board so they can
get paid
c. Making Changes to Preferences or Preferred Stock:
i. Requires amendment to articles by:
1. Board vote; AND
2. Shareholder vote from preferred
shares
ii. Filing of Amended Articles
d. Consideration for Shares:
i. MBCA = anything of value
ii. California §409
1. Permitted:
a. Money
b. Tangible/intangible property
c. Services ALREADY performed
d. Non-cash consideration
2. Prohibited:
a. Future services
b. Good will
iii. Delaware:
1. Cash, property, or rights
2. DE IS ONLY PLACE THAT REQUIRES PAR
VALUE
iv. AMOUNT of Consideration:
1. Depends on whether shares are
a. PAR VALUE
e. Par Value
i. Minimum/lowest amount that stock can be
issued for
1. CA and MBCA = NO par value
2. DE retains par value concept
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ii. Watered Stock Liability

1. Selling stock for LESS than par value
2. Used if INVALID consideration used for
stock
a. Corporation/creditors can sue to
recover the water if the shares
were sold for LESS than par
value
f. Debt:
i. Loans taken out as capital
ii. Lender gets periodic interest payments
determined at time the loan is made
iii. If corporation dissolves, loan gets repaid in
full
iv. Lender has no right to participate in the
corporation’s management
v. Inside v. Outside Debt:
1. Outside = borrowing from a 3d party
2. Inside = when SH loan money
vi. Thin Capitalization = High Debts
vii. Pros & Cons of Debt Financing
1. PRO:
a. Interest payments are
deductible
b. Salaries are an expense that
can be deducted from income
statements and what you are
taxed on
2. CONS:
a. Interest payments are
mandatory and if you default,
you must deal with the
consequences
g. Mechanics of Issuing Stock
i. Subscription Agreement:
1. Contract made btwn promoters and prospective investors,
which states promoter will set up businessa and investors
will promise to contribute capital
a. Statutes say pre-incorporation—subscription
agreements are enforceable for 6 months UNLESS
another period of time is expressly agreed upon
ii. Issuing Stock:
1. Capital raising contribution
a. Corporation sells consideration for capital from
investors in order to pay for corporation
iii. RULE: Board of directors decides when and on what terms
shares will be issued
iv. Dilution: as the number of shares increase, the % of
ownership/share power decreases
h. Piercing the Corporate Veil
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i. ALLOWS SHAREHOLDER TO BE HELD PERSONALLY LIABLE

ii. Factors to be Considered When Determining Whether to PCV:
1. Fraudulent misrepresentation by corporate
directors
2. Corporation was undercapitalized
a. BIG factor with tort claims who is injured because
they are an involuntary creditor with risk thrust
upon them
i. PCV should NOT be used to rewrite a
contract and award a party something they
did not contract for
3. Failure to observe corporate formalities
a. Are the corporation participants observing
formalities like;
i. Holding shareholder and director’s meetings
ii. Issuing stock
iii. Electing direcotrs and officers
iv. Passing resolutions authorizing payment
v. Keeping corporate minutes
b. Failure to use corporate form in the business name
ALONE is INSUFFICIENT to PCV
c. Absence of corporate records
4. Payment by corporation of individual obligations
a. Comingling of personal and corporate funds
5. Use of corporation to promote fraud, injustice, or
illegality
iii. TEST:
1. Are the interests of the individuals and the ownership of
the corporation essentially the same; AND
2. Would adherence to the fiction of a separate corporation
excuse fraud, promote injustice, or allow evasion of legal
obligations?
iv. Contract Creditors v. Tort Creditors
1. PP behind PCV for these two groups is different
a. Brevet Int’l Inc. v. Great Plains Luggage Co.
i. FACTS:
1. D makes golf bags. One of D’s officer
contacted P to provide mgmt.
services. P orally agreed to provide
services. P sued D seeking
reimbursement of $35,000 start-up
costs saying that it contracted with
the officer directly and should be able
to collect against him. Seeking PCV
ii. HOLDING:
1. NO PCV
a. Evidence that P contracted with
corp (invoices clearly noted
corporation)
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b. P had notice of corporation’s

identity
2. Cannot use PCV to re-write a contract
—allow P to do this would be allowing
the contract creditor to get assets not
originally bargained for
iii. Contract Creditor
b. Baatz v. Arrow Bar
i. FACTS:
1. P injured by 3d party who was served
alcohol at D establishment. P is relying
on vicarious liability because 3d party
was insolvent for injury damages.
Individuals who own D establishment
did not purchase insurance. P wants to
PCV in order to obtain $$$.
2. P said that b/c individuals personally
guaranteed business should be liable
ii. HOLDING:
1. NO PCV
a. P failed to plead facts sufficient
to allow PCV
2. Dissent: This business was marginally
capitalized and should have had
insurance. This was a reasonably
foreseeable risk for a bar owner.
c. Hanewald v. Byran’s Inc
i. FACTS:
1. 2 Individuals incorporated D business,
each owned 50%. Neither one gave
consideration for the shares. P sold his
store to D for $60k ($55k in cash and
$5k in promissory note); D never paid
the $5k promissory note to P but did
pay all of its creditors when D went
under. P wants to get $5k
ii. HOLDING:
1. PCV
a. Individual failed to pay their
interest as required by STATUTE,
which makes them personally
liable
b. P gets a windfall because he
knowingly contracted with a
corporation and is now getting
benefit he did NOT contract for
i. Enterprise Liability
i. A creditor can hold parent/sister company liable for debts of its
subsidiary/sister company
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ii. A parent company will be held liable for the wrongful

actions of its subsidiary IF:
1. Parent corporation exercises control over the subsidiary;
AND
2. The control leads to harm or prevents the subsidiary from
fulfilling its duty
iii. The MORE direct control a parent corporation exercises over its
subsidiary, the more likely a parental liability will exist IF that
direct control leads to harm
iv. The MORE feasible the injury, the more likely the parent
corporation will be held liable
v. Vertical Enterprise Liability
1. Creditor seeks to hold the debtor corporation’s corporate
parent liable
vi. Horizontal Enterprise Liability
1. Creditor seeks to aggregate one or more corporations that
are under common control
vii. Factors to Consider:
1. Parent and subsidiary operate as SINGLE ECONOMIC
ENTITY
a. Corporation formalities are NOT observed.
b. Subsidiary is Undercapitalized
2. Corporation is Misleading to Public
a. Parent and subsidiary do not make it clear to the
public WHO is operating which part of the business
3. Corporation was insolvent
4. Overall injustice/Unfairness
j. Role of Board of Director and Officers
i. Board of Directors: Manage the affairs of the business; elected
by the shareholders; responsible for hiring and monitoring the
officers; protected often by business judgment rule
1. MCBA § 8.01: All corporate powers shall be exercised by
and under the authority of the board of directors, and all
business and affairs of the corporation shall be managed
by or under the direction, and subject to the oversight of
the board of directors
2. BOD are NOT agents of the corporation—they act as
one body and not individuals
3. BOD creates centralized management structure and
manages the business affairs of the corporation
4. Board Responsibilities:
a. Business performance & plans
b. Performance and compensation of senior officers
c. Compliance with law
d. Preparation of the corporation’s financial
statements
5. Delegation of Managerial Powers:
a. RULE: A board can delegate management powers
to officers, but may not abdicate them
i. MBCA § 8.25
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1. A board may establish committees and

delegate all their power to committees
except the power to change the
corporation’s bylaws AND approving
fundamental actions that require
shareholder approval
6. Selection of Initial Directors
a. MCBA §8.03: BOD shall consist of one or more
individuals, with the number specified in or fixed in
accordance with the articles or bylaws
i. CA MINIMUM OF 3 DIRECTORS
b. R: Initial directors must be included in Articles
c. Elections & Terms:
i. MBCA §8.03: At least one director must be
elected at every annual SH meeting.
1. DEFAULT RULE: All directors are
elected annually by the shareholders
ii. MBCA § 8.04: Classified Board
1. The power to elect at least one
director is vested in, or denied to, at
least one class or series of stock.
EACH CLASS OF STOCK CAN ELECT a
certain number of directors
a. Certain classes of stock can
elect a fixed number of
directors
b. Purpose: To distribute SH power
by ensuring a rep on the board
by certain classes of SH
c. Widely used in closely held
corporations
iii. MBCA § 8.06: Staggered Board
1. Instead of electing the entire board at
once, the directors’ terms are divided
into 3 groups
2.
k. Removing Board Members
i. DE 141(k) & MBCA § 8.08
1. “Shareholders may remove one or more directors with or
without cause unless the articles provide that directors
may be removed only for cause”
2. “If a director is elected by a voting group of shareholders,
only the shareholders of that voting group may participate
in voting to remove the director”
3. A director may be removed if the number of votes cast to
remove exceeds the number of votes cast NOT to remove
the director, unless articles require higher number.
4. “A director may be removed by the shareholders only at
the meeting called for the purpose of removing the
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director and the meeting notice must state that removal

of the director is purpose of meeting”
ii. DE RULE §141:
1. Directors elected to STAGGERD/CLASSIFIED board may
ONLY be removed ONLY for cause
iii. Amotion = Shareholder’s power to remove directors during their
terms
l. Mechanics of Board Meetings
i. General Rules:
1. Non-unanimous board action without meeting is invalid
2. Board may be called in any manner approved in advance
by the board
3. Each director has one vote (unless stated otherwise in
articles)
4. Directors CANNOT vote by proxy
5. Individual directors have no power—must act as a
collective unit
ii. Meetings:
1. MBCA § 8.21: Allows boards to take action by separate
written and signed consent of directors, provided that
consent is unanimous
2. Valid Meeting Requirements:
a. Properly Called  Need to call for decisions to hold
meeting at a particular time and place and often
need to specify for a particular reason (special mtgs
only)
b. Proper Notice 
i. Regular Mtgs: MBCA §8.22(a):
1. “Unless the articles of incorporation or
bylaws provide otherwise, regular
meetings of the board of directors may
be held without notice of date, time,
purpose, or place
ii. Special Mtgs: MBCA § 8.22(b)
1. “Special meetings of BOD must be
preceded by at least two days’ notice
of the date, time, and place of the
meeting. The notice need not
describe the purpose of the special
meeting unless required by the
Articles”
iii. Annual Meetings:
1. Corporation shall hold annually at a
time stated in or fixed in accordance
with the bylaws—meeting of
shareholders
2. Requirements:
a. Notice = Between 60 and 10
days before the meeting date
Business Associations Spring 2018 28
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b. Purpose = Must include a

description of the purpose for
which the meeting is called
c. Valid Quorum  Minimum number of voting power
that must be present for BOD actions taken to be
valid
i. MBCA § 8.24: A majority of all directors must
assemble to have a valid meeting, UNLESS
different % set for by bylaws
d. Action Approved By Sufficient Vote 
i. Action will be valid and approved if it
receives the assent of the majority of
directors present at the meeting
1. EX) 9 board members, 5 present
(quorum) and then 3 votes necessary
to approve action.
ii. Breaking a Quorum = tactic used by
director to destroy quorum to preventing
voting by leaving meeting prior to vote
1. DE says that director will still be
counted as present even if chooses to
leave early—AKA not gonna work in
DE
2. Allowed under MBCA
m. Senior Executive Officers
i. Officers are cloaked with actual authority given by the BOD—
when acting in their official capacity there is no personal liability
1. EXCEPT: direct tort liability and corporate vicarious liability
a. HD Irrigating v. Kimble Properties:
i. FACTS:
1. D is owner of Kimble properties &
Hobble diamond cattle co. D sells P
farming equipment that does not work
property. P is suing Kimble as an
individual, Kimble properties, and
Hobble.
ii. HOLDING:
1. ONLY Kimble as an individual and
Kimble properties liable
a. At time of sale, D was acting as
a representative of Kimble
properties NOT Hobble
b. Only Kimble Properties could be
held liable for its officer’s
tortious conduct
ii. Andrew v. Southwest Wyoming Rehab Center
1. FACTS:
a. P was VP of D corporation, fired. P sued corporation
arguing that he had a special fiduciary duty as an
Business Associations Spring 2018 29
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officer, which entitled him to good faith and fair

dealings standard
2. HOLDING:
a. NO. MBCA § 8.43  an officer may be removed at
any time with or without cause
i. The position as an officer, by itself, does not
create a special relationship
3. Even if his employment contract specified a term, officer
could still be removed—BUT he should have just
negotiated a better severance package
iii. Snukal v. Flightways Mfg., Inc
1. FACTS:
a. Lyle is CEO/President/Secretary of D corporation. P
leases house to D corporation. Lyle executes the
agreement as president, but failed to mention his
other positions. D gets behind on payments
2. HOLDING:
a. CA § 313: any instrument in writing…executed or
entered into between any corp and other person,
when signed by the chairman of the board,
president, or any VP and the secretary, any
assistant secretary, CFO or any assistant treasurer
of such corp, is not invalidated as to the corp by
any lack of auth of signing officers in the absence
of actual knowledge on the part of the other
person that the signing officers had no authority to
execute the same
b. Did have the authorization to bind the corporation.
iv. Scope of Officer Authority
1. CEO can act with apparent OR actual authority
a. Power of Position  when an individual held out by
corp. as CEO, they have inherent authority called
the power of position = scope of apparent authority
2. RULE: Torts of officers can create vicarious liability when
within the scope of employment
a. EX) When Iger commits a tort while acting as CEO,
Disney will be vicariously liable and Iger will be
individually liable
3. RULE: Board can delegate specific express authority for
an officer to act, OR the board can grant apparent
authority by holding an officer out as an officer
n. Shareholders
i. Power of Shareholder
1. Shareholder in publically traded corporations are passive
2. Shareholder vote on the people who serve as directors
3. Shareholders vote on fundamental changes in the
ordinary course of business
a. Amending the articles
b. Selling of corporate assets
c. Merging with another business entity
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d. Dissolving or ending corporation

4. Shareholder has power to act in TWO setting WITHOUT
board concurrence:
a. Remove/replace any director
b. Amend the corporation’s bylaws
ii. Mechanics of Shareholder Voting:
1. Two Ways:
a. Meeting; OR
b. Action by written consent (in lieu of meeting)
i. Under MBCA need unanimous consent
ii. DE/CA absolute majority of voteable shares
2. Requirements for Valid SH Meeting:
a. Meeting must be called
b. Corporation must give notice
i. MBCA § 7.05: Annual Meeting need to tell
date, time, place, and if special purpose NO
FEWER THAN 10 days and no longer than 60
days
ii. Waiver of Notice (MBCA § 7.06)
1. SH can waive notice by writing
delivered to the corporation or by
attending the meeting and not
objecting at the beginning to the lack
of notice
iii. Notice of special meeting must include
purpose
c. Quorum
i. MBCA § 7.25
1. MAJORITY OF OUTSTANDING VOTING
SHARES
2. Number can be raised under
DE/MBCA/CA
3. In CA  CAN lower majority required
to minimum 1/3 present
d. Sufficient Vote
i. DE: Majority of shares present
1. Abstentions count as NO
ii. MBCA: Majority of Shares voting
1. Abstentions are true abstentions
iii. CA TWO PART TEST:
1. Majority of Shares Present and Voting
a. True abstentions
2. Majority of required quorum of action
a. IF 1,000 outstanding shares,
need 501 votes yes to pass
iv. FUNDAMENTAL CHANGES:
1. Amending articles, bylaws etc…must
be approved by an ABSOLUTE majority
a. Majority of OUTSTANDING
shares
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3. Record and Beneficial Owners

a. Record Owners: Entity listed in the companies
records as the owner of the shares
b. Beneficial Owner: Equitable owner who is the one
with the financial interest in the shares
4. Voting By Proxy MBCA § 7.22
a. SH may vote their shares in person, or by proxy
b. Proxy is an agency relationship
i. Principal = record owner
ii. Agent = beneficial owner
c. Proxies are freely revocable, BUT can be made
irrevocable
i. Must be IN WRITING and couple with an
interest
d. Limited Proxy = shareholder of record directs the
agent to vote
e. General Proxy = shareholder of record gives agent
authority to vote
f. Proxy good for 11 months
g. MBCA § 707
i. Shareholders as of the record date are those
who are entitled to vote the shares are the
regular and/or special meetings
h. McKesson v. Dedriger:
i. FACTS:
1. Record date May 25, meeting on July
25. D upset about meeting day, but
waits until week before meeting to
argue violated 60 day notice
requirement.
ii. HOLDING:
1. D’s interpretation of timing is correct.
2. Can’t rely on equitable principles to
adjust and say 61 days just because
there wasn’t any harm
iii. Election of Directors & Voting Schemes
1. Straight Voting
a. 1 vote per share
i. EX)
1. A has 10 shares, B has 90 shares.
There are 5 director positions open
a. A may cast 10 votes for each
candidate and B can cast 90 for
each candidate—B effectively
picks the whole board
b. Favors majority shareholders
c. Default rule under MBCA and DE = Straight Voting
2. Cumulative Voting:
a. Can pile all votes on one candidate OR distribute
them
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i. EX)
1. Same facts as above
a. A can cast 50 votes for 1
director
b. Minimum Votes Required to Elect ONE Seat
i. [S/(D+1)] + 1
1. S = # of shares actually voting
2. D = # of directors to be elected
c. Cumulative voting is MANDATORY in CA UNLESSS
company is publically traded
i. In public corporation, can amend bylaws to
limit cumulative voting or stagger director’s
terms
1. STAGGERED TERMS IN CA ARE ILLEGAL
d. MBCA and DE cumulative voting is opt in
3. Humphreys v. Winous:
a. FACTS:
i. 3 board seats, statute allowed cumulative
voting and another allowed staggered
elections—therefore only ONE board member
up for election every year.
iv. Shareholder Inspection Rights
1. DE/MBCA MBCA § 16.02 allow for inspection by
shareholders for proper purpose
a. Proper Purpose = Purpose reasonably related to a
person’s interest as SH and is NOT harmful to the
corporation or other shareholders
2. Corporation bears cost of document production
3. SH has right to inspect BASIC documents
a. List of record dates
b. Shareholder list
c. Voting trust agreements
d. Articles/Bylaws
e. List of current officers
4. Burden falls on SH to make a proper demand
5. Burden falls on Corp to overly broad and improper
purpose
6. LAMPERS v. Hershey:
a. FACTS:
i. P wanted to inspect D’s records to determine
whether D was getting cocoa from bad
countries and violating international protocol.
P sues for access to records.
b. TAKEAWAY:
i. When the purpose of exercising inspection
rights is to investigate corporate
mismanagement, the SH must show by
preponderance of the evidence, a credible
basis from which it can be inferred that there
is a possible mismanagement
Business Associations Spring 2018 33
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c. Competing Interests:
i. Large cost to the corporation to produce
documents; don’t want management to be
distracted
ii. Shareholders have right to gain access to
monitor what is going on with the corp;
Directors will always know more than the SH
7. Hoepner v. Wachovia
a. FACTS:
i. P is SH and CEO of other company. P wants
access to SH list because wants to shut down
D’s merger with other company in favor of
company which he is CEO. Submits request
for SH list so he can solicit votes in favor of
his company re: merger.
b. HOLDING:
i. P had right to access SH list & D had burden
to show improper purpose
1. Just because P was going to share the
SH list with his company does NOT
prevent him from getting access
2. P wanted to communicate with other
SHs—this is essential to role as SH
v. Federal Proxy Rules:
1. Publically traded companies required to file with SEC:
a. 10-Q Quarterly Report
b. 10-K Annual Report
i. Basis for annual report to SH in anticipation
of annual meeting
c. SEC 14(a)(9): Company liable for false/misleading
statements
d. SEC 14(a)(8): A shareholder can propose something
and if it is a proper subject of voting must be
placed on agenda for vote at annual meeting.
2. Proxy Solicitation: An attempt by a group (usually the
corporation itself) to obtain authorization of other
members to vote on their behalf in an organizational
ballot.
3. Proxy Statement: The party attempting proxy solicitation
must send out a proxy statement
a. Requirements:
i. Full and adequate disclosure of all material
facts – EVERY solicitation must have a proxy
statement that discloses:
1. Conflicts of interest
2. Details of compensation plans to be
voted on
3. Compensation paid to 5 highest paid
officers
Business Associations Spring 2018 34
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4. Details of any major corporate change

voted on
o. Fiduciary Duties:
i. Overview:
1. Legal restrictions on BOD that are imposed as
consequences
2. As individuals acting on behalf of corporations, directors
and officers owe certain fiduciary duties to the
corporation
3. Officers/Directors are prevented from using corp assets
for non corp purposes
4. Enforcement:
a. SH file a derivative action on behalf of the
corporation
ii. Duty of Care & Business Judgment Rule
1. Officers and director are required to act in a manner they
REASONABLY BELIEVE to be in the best interest of the
corporation
2. Shlensky v. Wrigley:
a. FACTS:
i. P is a minority shareholder of Cubs. Suing
BOD alleging mismangment and negligence
because did not install stadium lights and
lower attendance at baseball games. D
owned 80% of team and P alleges that D just
did not want to install lights because thought
baseball is “day-time sport.” D makes MTD
b. HOLDING:
i. MTD granted.
1. Failing to install lights on stadium is
insufficient to show D breached duty
of care. P failed to overcome business
judgment rule
3. Business Judgment Rule:
a. Officer/Directors is generally entitled to a protection
of business judgment rule. It is PRESUMED that in
making a business judgment, the BOD acted:
i. (1) on an informed basis;
ii. (2) in good faith; AND
iii. (3) in the honest belief that the action was
taken in the best interest of the company
b. PP:
i. Promote full and free exercise of the
managerial power granted to directors. A
judge is not in the best position to determine
whether a business decision was good or
bad. The court does not have the business
expertise exercised by the BOD/Officers. SH
do not run the business—BOD is tasked with
Business Associations Spring 2018 35
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managerial role in business so defer to their

judgment.
c. REBUTTING THE PRESUMPTION:
i. SH (P) may rebut the presumption by
showing that the director/officer’s decision
was either uninformed, made in bad faith, or
there was a conflict of interest
4. Smith v. Van Gorkom
a. FACTS:
i. P challenged judgment in favor of defendants
seeking recession of cash out merger of one
defendant corporation into another.
b. HOLDING:
i. Gross negligence in approving the sale.
1. Court faults the board for FAILING to
seek advice from a lawyer or banker
prior to calculating the true value of
the company
ii. RULE: Board must exercise informed decision
making
1. To show that a director was
uninformed SH must show that
director acted with gross negligence
by failing to be adequately informed
prior to making a decision
c. DE § 141: “A board member shall be fully protected
in relying in good faith upon the records of the
corporation and upon such information reasonably
believed are within the professional/expert
competence”
i. D’s oral presentation at the end of the board
meeting was insufficient to meet this
standard
d. MBCA § 8.24(d): Directors who are present at the
time the corp action is taken are deemed to assent
to the action UNLESS they object, or their dissent is
noted in the meeting minutes, or soon after the
meeting they give notice to other board members
of their dissent
5. Functioning management is the biggest role for BOD.
Competent and trustworthy internal reporting/record
6. RAINCOAT PROTECTION:
a. MBCA § 2.02(b)(4):
i. Articles may set forth a provision eliminating
or limiting liability of a director to the
corporation or its shareholders for money
damages for any action taken, or failure to
take any action…
Business Associations Spring 2018 36
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1. Shields from personal liability for

breach of duty of care for MONETARY
damages
2. Does NOT eliminate liability for breach
of loyalty/good faith
iii. Duty of Loyalty & Standard of Entire Fairness
1. Director has to act in the best interest of the corp. and
that takes precedent over any personal/individual
interests
a. If an individual agrees to serve on a BOD, they
agree to put the company’s interests over their own
2. Northeast Harbor Golf Club v. Harris:
a. FACTS:
i. President of golf club was approached to buy
a parcel of land next to the golf club that
club was considering buying. She purchased
it and then told BOD that she wasn’t going to
use it
b. HOLDING:
i. President broke her duty of loyalty
1. Purchasing the parcel was a business
opportunity first
c. Corporate Opportunity: Director/Officer becomes
aware of the opportunity:
i. In connection with job or under
circumstances that would reasonably lead to
believe person offering opp expects to be to
corporation
ii. Through use of corporate info
iii. Opportunity to engage in conduct closely
related to business of corp.
d. ALI Test for Corporate Opportunity:
i. Closely related to a business in which the
corporation is engaged or opportunity
acquired through position. An individual MAY
take advantage of an opportunity IF:
1. Full and adequate disclosure of
material fact; AND
2. Corporation makes formal rejection of
the opportunity
e. Line of Business Test:
i. A corporate officer or director may NOT take
a business opportunity IF:
1. Corp. is financially able to exploit the
opportunity;
2. Within the line of business;
3. Corporation has interest in opportunity
4. Conflict between officer/director and
corporation
Business Associations Spring 2018 37
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ii. Company would have been reasonably

expected to be interested in the opportunity
3. Self-Dealing:
a. When a director or officer enter into a contract with
the corporation usually to buy or sell something
from w/ corporation
b. Using position of power to further a private interest,
potentially adverse to the corporation
c. Tomaino v. Concord Oil
i. FACTS:
1. P is part owner and VP of D
corporation. When P got onto board he
told CEO that he was talking with 3d
party company. P set up meeting with
3d party
ii. HOLDING:
d. Geller v. Allied-Lyons:
i. FACTS:
1. P is former VP of Dunkin Donuts.
Approached by D to help D acquire
Dunkin Donuts. Later Dunkin wants to
get bought so P refers D. P never got
finder fee from D.
ii. HOLDING:
1. P breached duty of loyalty and is not
entitled to finder’s fee. It is against PP
for to allow director to receive
personal gain here. P’s disclosure was
half hearted at best. Even absent
harm this violates PP
iii. Although Dunkin did benefit from P’s actions,
no harm is required to discourage this type
of self-dealing. The finder fee could have
induced Geller to facilitate acquisition not in
Dunkin’s best interest
1. NEED FULL AND ADEQUATE
DISCLOSURE
4. Cleansing Statutes
a. CA § 310(a)(1): Disinterested Shareholder
i. Full disclosure of all material facts
ii. Shareholder vote in good faith
iii. By a majority of disinterested shares
b. CA § 310(a)(2): Disinterested Director
i. Full disclosure of all material facts
ii. Good faith approved by disinterested
directors
iii. By a vote sufficient without counting the vote
of any interested director
iv. Transaction is reasonable to the corporation
at the time of authorization
Business Associations Spring 2018 38
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1. Tomaino Fairness? BJR?

c. CA § 310(a)(3): Entire Fairness
i. If not approved by either of the above,
person asserting the validity has burden to
show transaction was just and reasonable at
the time of authorization
1. Fair Dealing:
a. How was the transaction
initiated, structured, negotiated
etc…
2. Fair Price:
a. Evaluates assets, market value,
earnings, future prospects.
Would the corporation received
a fair price—would it have taken
the deal or would it have
bargained for a better price had
it been privy to all the material
facts?
5. HMG v. Gray
a. FACTS:
i. D failed to disclose its interest in buy side
and served as key facilitator/negotiator on
behalf of P corporation. D had burden to
show that it met entire fairness.
b. HOLDING:
i. D FAILED to show entire fairness
1. Clearly had D disclosed he would not
have been able to serve as they key
negotiator
2. Although price was “fair” given
appraisals. Had D disclosed, P might
have taken different approach and
gotten different price.
ii. Both D and another interested party who DID
disclose, but did not disclose D’s interests
are liable here.
6. Shapiro v. Greenfield
a. FACTS:
b. HOLDING:
iv. Fiduciary Duties of Majority Shareholders
p. Shareholder Derivative Actions
i. Basics:
1. Shareholder is bringing an action on behalf of the
corporation
2. Recovery goes back to the corporation
3. Shareholder believes that the corporation has suffered
harm as a result of a breach
ii. Procedural Requirements
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1. Standing: SH/Plaintif must have been a SH at the time of

the alleged harm AND at the time the suit was filed
2. SH CANNOT FILE UNLESS:
a. (1) Demand Refused  P requested that the
board initiation litigation and the board wrongly
refused
i. If SH demands and it is refused, SH Is
conceding that the board is trusthworthy
because they attempted to contact the board
first
b. (2) Demand Excused  P shows that making a
demand would have been futile because the board
could not have evaluated the demand fairly
i. Demand will be excused IF court determines
that there is a reasonable doubt that the
majority of the board is disinterested or
independent
ii. This more likely occurs when the SH is
attempting to say BOD itself is breaching a
fiduciary duty
iii. Beam v. Stewart
1. FACTS:
a. P is a shareholder in MSO and brings derivative
action against MSO and Martha Stewart for breach
of fiduciary duty. D files MTD for failure to comply
with demand requirement.
2. HOLDING:
a. MTD Granted.
i. In order to show demand would be futile,
must allege facts that the courts can find a
reasonable belief that the board cannot be
trusted
ii. P couldn’t show anything more than gossip
that majority of directors were interested
parties
iv. Special Litigation Committee
1. A corporation, in anticipation of a derivative action, can
take certain steps to prevent a court from finding that
making a demand was futile. Corporation can form a
committee to determine whether filing a law suit would be
in the best interest of the corporation.
2. Consists of non-interested directors
3. Standard of Review:
a. DE:
i. Demand Required:
1. When demand was required and
denied BJR applies
ii. Demand Excused:
1. Two Part test:
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a. Corp has burden of proof to

establish that special litigation
committee is entitled to BJR
b. Court applies its own business
judgment
b. NY:
i. Single Standard of Review: BJR
c. NC:
i. SLC has burden to show that SLC is entitled
to BJR
d. MA:
i. SLC has burden to show that its entitled to
BJR
ii. Mass. Court MUST then determine that SLC
made a reasonable decision to dismiss
derivative action using ALI factors
e. NJ:
i. Modified BJR standard
1. For both refused and excused, the
SLC/Board must come forward with
evidence to show decision makers
acted reasonably and in good faith. If
met, Court will defer to SLC judgment.
4. Brehm v. Eisner
a. FACTS:
i. Employment contract for CEO paid him
excessive amount plus stock options.
Included a clause for “no fault termination”
that has insane severance package.
Shareholders argue breach of fiduciary duty
in approving the employment contract.
ii. Shareholders need to overcome presumption
of BJR.
b. HOLDING:
i. P failed to plead sufficient facts to rebut
presumption of BJR. P did not plead
particularized facts to show that the actions
of the board(s) were unreasonable.
q. Failure to Monitor and Duty of Good Faith
i. Duty of Good Faith:
1. FAILURE TO ACT IN GOOD FAITH IS NOT SEPARATE COA 
covered under breach of loyalty
2. Requires that directors act with reasonable diligence in
exercising their corporate managerial powers.
3. Breach occurs when a director:
a. Intentionally neglects their duties as a corporation’s
manager;
b. Acts in bad faith; OR
c. Fails to exercise reasonable oversight of the
corporation
Business Associations Spring 2018 41
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ii. Stone v. Ritter:

1. FACTS:
a. Bank paid fines and civil penalties for failure to file
Suspicious Activity Reports re: money laundering.
SH alleges BOD failed to implement programs. SH
want to demand to be excused because BOD were
personally liable for fines paid.
b. SH NEED to show BOD consciously failed to oversee
the problem OR failed to implement programs
2. HOLDING:
a. BOD did NOT breach fiduciary duty
i. Directors had some system in place
ii. There was no basis for claiming that the
board had ignored any red flags
3. RULE:
a. Directors are liable for failing to engage in proper
corporate oversight where (a) failed to implement
any internal reporting OR information’s system; or
(b) having implemented any system failed to
consciously monitor/oversee.

r. Closely Held Corporations

i. Characteristics:
1. Small # of shareholders
a. CA: less than 35
b. DE: less than 30
2. SH normally serve as BOD
3. Low liquidity
ii. Allocation of Control Devices:
1. SH typically use one or more of the following to ensure
that minority shareholders are not outvoted/taken
advantage of by majority shareholders
a. Pooling Agreements:
i. Agreements in which two or more SH agree
to vote together on certain matters
b. Voting Trusts:
i. Economic rights of stock to one party, and
management of rights to another party
c. Classified Stocks
d. Super majority voting requirements
e. Super majority quorum requirements

iii. Voting Trusts DE § 218:

1. REQUIREMENTS:
a. Voting rights of stock must be separated from other
attributes of ownership
b. Voting rights granted are intended to be irrevocable
for a definite period of time
c. Principal purpose of the grant is to acquire voting
control of the corporation
Business Associations Spring 2018 42
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d. 10 year limit on voting trusts

2. Lehrman v. Cohen
a. FACTS:
i. D and P’s father formed corporation, split
50/50 (Class AC and class AL stocks). Each
could elect 2 board members. Dispute arose
and to eliminate articles were amended to
add an AD stock. AD stock gave SH right to
elect 5th director, but did not give rights to
dividends/distributions. P says voting trust.
b. HOLDING:
i. NOT a voting trust. There was no separation
between voting rights and other shareholder
rights; this was simply a dilution of voting
power—P was fully aware that as a result of
adding AD there would be a dilution.
iv. Pooling Agreement:
1. Pooling Agreement v. Voting Trust:
a. Pooling agreement SH are not entirely relinquishing
their voting power to a 3d party—they are just
agreeing to vote in a certain way
2. Ringling Bros. v. Ringling:
a. FACTS:
i. Ringling and Haley own 315 shares, North
owns 370. Ringling and Haley enter into an
agreement to vote their shares together.
Eventually Haley’s husband doesn’t want to
do this anymore. Was there a valid
agreement
b. HOLDING:
i. Yes. The agreement between Haley and
Ringling was valid, binding, and enforceable.
v. Limitation on Voting in Closely Held Corporations:
1. Agreements cannot restrict, interfere, or attempt to
conflict with the board’s fiduciary duty to the corporation
a. McQuade v. Stoneham:
i. FACTS:
1. P, D, and McGraw enter into K which
states that they would each use their
“best efforts” to continue having each
other on the BOD. P gets replaced and
sues for breach of contract and
requests specific performance.
ii. HOLDING:
1. Contract is INVALID
a. Shareholders may combine to
elect directors, but a contract
cannot place limitations on
director’s ability to do what is in
Business Associations Spring 2018 43
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the best interest of the

corporation.
2. Violates PP—directors can’t manage
the corp. if these contracts would be
enforceable
3. P should have entered into a contract
with the corporation (employment)
instead of the individual directors
a. EXCEPTION TO MCQUADE:
i. Where parties are sole
owners there is no
objection to enforcing an
agreement to vote
certain people as
officers/directors.
ii. Such agreements are
OKAY where: (1)
corporation is closesly
held; (2) all shareholders
are parties to the
agreement; (3) the
invasion of the director’s
power is slight; (4) the
sahreholders’ agreement
contained a provision
that adherence was only
required when best
interest of corporation
iii. (see Clark v. Dodge)
b. Galler v. Galler:
i. FACTS:
1. Brothers enter form closely held
corporation. Enter into agreement
that upon death their interests would
be transferred to the rightful heir. One
brother dies and leaves his interest to
his wife. Wife tries to collect and have
stock transferred to her name. Other
brother says no. Q: Is the agreement
valid?
ii. HOLDING:
1. YES
a. In a close corporation, an
agreement as to the
management of the corporation
agreed to by the directors MUST
be valid where there is no
complaining minority interest,
no fraud or apparent injury to
Business Associations Spring 2018 44
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the public, or clear statutory

violation.
c. Zion v. Kurtz:
i. FACTS:
ii. HOLDING:
vi. Stock Transfer Restrictions & Use of Buy Sell Agreements MBCA §
6.27
1. General Rule: Stock of a corporation may be transferred
by its owner without any restrictions
2. Restrictions on Shares:
a. A closely held corporation may place certain
restrictions on the transfers of shares. These may
require the shareholder transfer them under certain
circumstances or prevent them from transferring
them unless certain conditions are met.
i. COURTS DISFAVOR RESTRICTIONS
1. BUT policy  SH should be allowed, in
closely held corporations in particular,
to control ownership and management
and prevent outsiders from coming in
3. Restrictions are enforceable for any reasonable purpose
4. Requirements for stock transfer restrictions:
a. Notice; AND
b. Reasonable restraint
i. Serve a legitimate purpose
ii. Restraint is not absolute restriction
iii. Terms of the agreement are reasonable
5. Mechanisms for Restriction:
a. Consent Restriction:
i. Permits restrictions limiting transfer to
certain classes of transferees or requires
prior consent of corporation or other
shareholders
1. BOTH MBCA & DE permit prohibition
on transfer that limit transfer to
certain classes or require prior consent
of the shareholder

b. Right of First Refusal:

i. Restriction may require transfer or grant the
corporation an option to purchase first, AND
if the corporation is not interested it would
first go to the shareholders before the
general public
c. Buy Sell Rights
i. Given to the corporation to buy back shares
if certain events occur REGARDLESS of
whether the SH wants to sell his/her shares
ii. SH is obligated to sell to corporation or other
SH
Business Associations Spring 2018 45
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1. Common triggering events:

a. Death
b. Withdraw
c. Deadlock
6. How will value be determined?
a. Need Valuation (Man o’ War)
i. Appraisal
ii. FMV
vii. Problems of Dissension and Deadlock
1. Deadlock = impasse among directors or shareholders
2. Anticipatory Methods for Preventing Deadlock:
a. Cumulative Voting:
i. Avoid deadlocks as long as each faction can
elect at least one director or have different
classes of stock each entitled to vote in a
single director
b. ADR:
i. Parties can agree to ADR if deadlock occurs
1. EX: Ringling Brothers Case
c. MBCA § 7.32(a)(6):
i. “Transfers to one or more shareholders or
other persons all or part of the authority to
exercise the corporate powers or to manage
the business and affairs of the corporation,
including resolution of any issue about which
there exists a deadlock amount directors or
shareholders”
1. EX: Similar to Lehrman which allowed
for tie breaker vote
3. Breaking Deadlock:
a. MBCA: Grants courts discretionary power to
dissolve corp in event of deadlock
b. DE: Courts have right to liquidate, but not dissolve
corp.
c. Director Deadlock:
i. Relief will be granted if directors are
deadlocked AND they are entitled to
equitable relief
d. Shareholder Deadlock:
i. Relief will be granted if show deadlock
4. Involuntary Dissolution:
a. MBCA § 14.30(a)(2)(i): A court may dissolve a
corporation in a proceedings by a shareholder IF:
i. directors are deadlocked in management;
ii. Shareholders are unable to break deadlock;
iii. An irreparable injury to the corporation is
threated or being suffered; OR
iv. The business affairs of the corporation can
no longer be conducted to the advantage of
shareholders
Business Associations Spring 2018 46
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b. MBCA § 14.30(a)(3)(ii):
i. Directors have acted/are acting fraud/illegal
c. MCBA § 14.30(a)(2)(iii): If shareholders deadlock
and fail for 2 consecutive meetings they can incur
the costs of litigation and bring an action for
dissolution
d. MBCA § 14.30(a)(2)(iv): corporation assets are
being misapplied or wasted
e. COURTS ARE RELUCTANT TO ORDER DISSOLUTION
viii. Oppression
1. Intrinsic Fairness:
a.
2. Kiriakides v. Atlas Foods

V. Insider Trading and Securities Fraud

a. RULE 10b-5
i. It shall be unlawful for any person, directly or indirectly by the
use of any means or instrumentalities of interstate commerce,
or of the mails or any facility of any national securities exchange
to:
1. Employ any device, scheme, or artifice to defraud;
2. To make any untrue statement of a material fact or omit a
material fact in order to make the statement made, in
light of the circumstances under which they were made,
not misleading; OR
3. 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/sale of any
security
b. Conduct that leads to violation of 10b-5
1. Elements:
a. Jurisdiction
i. The misrepresentation must be made using
an instrumentality of interstate commerce
1. Dupuy v. Dupuy:
a. Negotiated deal over the phone
b. Sufficient use of an
instrumentality of interstate
commerce
b. Standing
i. Satisfied as long as P was either the buyer or
seller; OR
ii. SEC
c. Scienter
i. D acted with the intent to deceive,
manipulate, or defraud. Satisfied as long as
D KNEW that the misrepresentation was
false or grossly
d. Misstatement of Material Fact
Business Associations Spring 2018 47
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i. IF HARD  Would a reasonable shareholder

find the fact material for voting?
1. Past event/fact
ii. IF SOFT  Balance probability that event
will occur * magnitude of the transaction
1. Forward looking fact
iii. Basic v. Levinson:
1. P was able to show that the ongoing
merger negotiations was a material
fact.
2. Materiality issues are inherently fact
specific.
3. When the misstatement is based on a
speculative event, in order to
determine whether the misrep is
material—weigh magnitude of the
event v. probability that the event
would occur.
a. The bigger the withheld
information, the less important
the probability of it occurring
becomes
iv. IF BASED ON OMMISSION INSTEAD OF
AFFIRMATIVE MISREP  only liability if there
is a DUTY to disclose
1. 10b-5 does NOT create a duty to
disclose material facts, only arises if
something happens that renders a
previously truthful statement to be
false/misleading
a. Half Truth Doctrine: If you
omit something
e. Reliance
i. P must show actual and justifiable reliance
ii. Presumption of reliance when trading price is
public  Burden on D to prove that P traded
based on something other than the trading
price
f. Causation
g. Damages
i. P must detrimental reliance and suffered
economic loss as a result of the
misrepresentation/omission
ii. Securities Fraud
1. Cause of action where one party relies on the material
misrepresentation or omission of another party in the
sale/purchase of a security.
iii. Insider Trading
1. When officer/director has inside info, this is called
information asymmetry
Business Associations Spring 2018 48
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a. WHEN THEY TRADE ON THIS INFORMATION they

may be liable for utilizing information that public
does not have access to
2. Common Law Insider Trading:
a. A director/officer who has obtained nonpublic
information by virtue of office is not under a duty to
disclose that information in buying/selling
HOWEVER there is a duty to disclose if it is a
MATERIAL fact.
b. Goodwin v. Agassiz:
i. FACTS:
1. D had inside information that geologist
had formulated theory that a certain
area had rich deposits. On this
information D bought stock from P. P
sues alleging fraud saying D failed to
disclose this information and he
wouldn’t have sold.
ii. HOLDING:
1. No common law fraud here.
a. This was soft information
without a face to face dealing.
b. D had no duty to disclose this
information to P.
c. It is not necessary for a
director/officer to disclose every
single bit of information they
know or seek out an individual
stock holder in a non-face-to-
face exchange.
3. 10b-5 (Classical) Insider Trading Approach
a. REQUIREMENTS: A person is liable WHEN:
i. While in possession of material nonpublic
information,
ii. They knowingly uses that information to their
advantage in the purchase or sale of a
security
iii. HOWEVER, absent a duty to disclose the
nonpublic information—there is no liability
for insider trading
1. DUTY:
a. Officers/directors have a
fiduciary duty of loyalty. Where
an insider is in possession of
non-public information they
have a duty not to use that
information for their personal
benefit.
b. Duty to Disclose and Abstain from Trading
Business Associations Spring 2018 49
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i. Insiders who are in possession of material,

non-public information, have a duty to
EITHER disclose the information OR abstain
from trading on that information (In Re:
Cady, Roberts)
1. A broker who receives nonpublic
information from an insider has a duty
to disclose the information
2. Anyone with a special relationship
with a company or knowledge that is
nonpublic is bound by the same duties
as officers
ii. Individuals with knowledge of material inside
information must either disclose it to the
public, or abstain from trading until the
information has been sufficiently
disseminated to the public. (Texas Gulf
Sulfur)
iii. Chiraella v. United States
1. FACTS:
a. P is employee of company that
has inside information (printer).
P takes information he finds at
work and buys stock of TARGET
corporations (aka the corp’s
being purchased, but not the
one’s his company is employed
by). SEC seeks enforcement
saying he had a duty to abstain
or disclose because P had
insider information
2. HOLDING:
a. NO liability because P did NOT
have a duty to disclose
i. P owed a duty to his
employer and, as such a
duty to the principal/
bidding corporation but
NOT the target
corporations
iv. State law can impose a fiduciary duty on
company insiders
1. Sometimes need some type of
independent duty to disclose based on
a special relationship
v. FRAMEWORK:
1. Is the information material?
2. Is there a duty to disclose the
information?
iv. Tipper/Tippee Liability
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1. TIPPER:  Person who passes along the nonpublic

material information
2. TIPPEE  Person receiving the information
a. P MUST PROVE THAT:
i. TIPPER breached fiduciary duty in passing
along the information;
1. Dirks v. SEC: There must be a breach
in the insider’s fiduciary duty before a
tippee inherits the duty to disclose the
information.
ii. TIPPER Receives benefit in exchange for the
information
1. Does not have to be a monetary
benefit
a. Salman v. US: In giving
someone a gift the TIPER
receives a benefit. Instead of
giving money to family member
here—TIPPER gave information
iii. TIPPEE knew or should have known that
disclosure was WRONGFUL
1. United States v. Newman:
Government must prove that the
TIPPEE knew that the insider disclosed
confidential information in exchange
for personal benefit.
v. Misappropriation
1. US v. O’Hagan:
a. FACTS:
i. D is a partner at a law firm. Through his job
he learns that another company is going to
bid on Pillsbury. In anticipate of the purchase
and on this information, D buys Pillsbury
stock. D did not owe any fiduciary duty to
target company (Pillsbury), but did have a
fiduciary duty to his firm.
b. HOLDING:
i. IMPOSED liability
1. An individual misappropriates material
nonpublic information and is liable
when they breach a duty to the source
of the information.
c. TAKEAWAY:
i. Imposes a duty on an individual who
misappropriates and steals information from
a source, which they DO have a fiduciary
duty to—EVEN if they have no fiduciary duty
to the company they are using the
information to purchase stock with.
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1. UNDER THIS THEORY CHIRELLA

WOULD BE LIABLE
vi. Section 16(b): Short Swing Trading
1. Prohibits short swing round trip (buy + sell within 6
months) in a reporting company by insiders
(officers/directors) OR holders of more than 10% equity
(at both the time of the purchase and the sale) by
imposing STRICT LIABILITY on violators
2. ELEMENTS:
a. P must be a reporting company
i. 500+ shareholders and $10m in assets
b. D must be a statutory insider
i. Director: EITHER at time of purchase or sale
ii. Officer: EITHER at time of purchase or sale
iii. Beneficial Owner: More than 10% of the
company’s shares AT BOTH the time of
purchase and sale
1. Initial sale brining individual above the
10% threshold does not count towards
short swing
c. D must have both bought and sold STOCK within
SIX MONTHS
i. No fraud is required
ii. No requirement that be based on insider
information
1. Inside knowledge is assumed for these
three categories of people
iii. No intent requirement
3. 16b is a Company’s cause of action (derivative suit)
a. Any recovery is owed to the company
4. PP:
a. Company insiders always have information
b. Short swing trading is BAD for capital market
5. Different from 10b-5
a. No scienter requirement
b. 10b-5 is broader—any security

VI. Unincorporated Entities

a. Limited Liability Partnerships
i. Basics:
1. General partnership where additional owners (LIMITED
PARTNERS) invest money in return for interest, BUT are
not personally liable for the debts for the partnership.
2. Limited partners are viewed as passive investors without
a role in the management in exchange for no control they
have limited liability
ii. Mt. Vernon v. Partridge Associates:
1. Limited partner who invests in the business runs the risk
of losing their investment, but they have no further
liability on the behalf of the business; UNLESS
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a. SECTION 7 kicks in and the limited partner

participates in the CONTROL of the business
iii. Limited Partners:
1. Interests are freely transferrable
2. Limited partners have no management rights
3. Limited partners’ liability is limited to the amount of their
investment
4. No agent partnerships
iv. LLPs UNLIKE PARTNERSHIPS cannot be formed inadvertently 
must file with secretary of state
v. RUPA § 303:
1. An obligation of a limited partnership, whether arising in
contract, tort, or otherwise, is not the obligation of a
limited partner. A limited partner is not personally
liable, directly or indirectly, by way of contribution or
otherwise, for an obligation of the limited partnership
solely by reason of being a limited partner, even if the
limited partner participates in the management and
control of the limited partnership.

b. Limited Liability Corporations

i. Basics:
1. Combines limited liability for owners/managers with pass
through taxation
2. Formation requirements are similar to corporations
a. Public filing and documentation
3. No personal liability
4. Broad contract power
5. Profits and losses flow through the LLC and get distributed
to the members
a. Cash flow problem like with partnerships
i. Members get allocated profits, but if the LLC
doesn’t make distributions they have to have
the liquid to pay income tax liability
ii. Advantages:
1. Limited liability
2. No double taxation
3. Flexibility in Allocation/Operations
4. Everything can be negotiated
iii. CA SPECIFIC:
1. California included PCV
a. Other states give judiciary ability to impose
personal liability