Business Associations and Intro to Securities Law. Fall 2011 Abe Cable

Transcription

1 Business Associations and Intro to Securities Law Fall 2011 Abe Cable

2 Dissolution and Winding Up UPA (1917) Owen v. Cohen (court order) Page v. Page (rightful withdrawal) Regular operations Dissolution UPA 38(1): Winding up period (e.g., court order, completion of term, or at will partnership without restriction) Requires distributing or selling assets Final termination Nordale s position But UPA 38(2): Continuation by remaining partners allowed following wrongful dissolution (e.g., leaving before term or in violation of an agreement) Requires buy out less damages for breach G&S s position And: Continuation by unanimous agreement (e.g., partnership agreement includes continuation clause )

3 Buyout Formula v. Dissolution Entitlement Takeaway 1: Courts honor buyout formulas, even if resulting in lower payout than default rules Takeaway 2: That s good because one size d/n fit all No partnership dissolution calculations on exam

4 Buy Out Formula v. Dissolution Entitlement Capital accounts + 25% of remaining net assets (after using $100K to pay out capital accounts)** Buy out formula in agreement Departing Partner Other Partners Profit % Building value Cash Capital account Liabilities Net assets (bldg. + cash liabilities) Avg. annual profits from rent Dissolution entitlement under UPA $25,000 25% $175,000 $200,000 $262,500 $75,000 75% $525,000 Total $100, % $1,000,000 $100,000 $50,000 $1,050,000 $700,000 * $200,000 = $25,000 + $175,000 ** $262,500= $25,000+ (.25 * ($1,050,000 - $100,000)) Capital account + avg. profits*

5 Buy Out Formula v. Dissolution Entitlement (Law Firm) Capital accounts + 25% of remaining net assets (after using $100K to pay out capital accounts)** Buy out formula in agreement Departing Partner Other Partners Profit % Cash Capital account Liabilities Net assets (bldg. + cash liabilities) Avg. annual profits from rent Dissolution entitlement under UPA $25,000 25% $175,000 $200,000 $25,000 $75,000 75% $525,000 Total $100, % $100,000 $0 $100,000 $700,000 * $200,000 = $25,000 + $175,000 ** $25,000= $25,000+ (.25 * ($100,000 - $100,000)) Capital account + avg. profits*

6 Friendly Amendment to Tuesday s Discussion General rule: A partner is personally liable for obligations of the partnership incurred while the partner is a partner (RUPA 306 & 703) Fuzzy area: For notes or leases that require payments over time, when is the obligation incurred?

7 Comments to RUPA 306 (contracts)* When an obligation is incurred is determined by other law.... Under that law, and for the limited purpose of determining when partnership contract obligations are incurred, the reasonable expectations of creditors and the partners are paramount. Therefore, partnership obligations under or relating to a note, contract, or other agreement generally are incurred when the note, contract, or other agreement is made. *Comment relates to conversion of general partnership to limited liability partnership, but may also be informative as to substituted partners in a general partnership.

8 If substituted, who is personally liable? Month-to-month tenancy; behind on rent at date of transfer Former partner up to transfer date; new partner after Long-term lease signed by partnership after transfer If partnership default, new partner Long-term lease signed by partnership before transfer; default after transfer RUPA commentary suggests former partner Note: these all potentially deplete partnership assets.

9 Comments to RUPA 306 (torts)* For the limited purpose of determining when partnership tort obligations are incurred, a distinction is intended between injury and the conduct causing that injury. The purpose of the distinction is to prevent unjust results. Partnership obligations under or relating to a tort generally are incurred when the tort conduct occurs rather than at the time of the actual injury or harm. * Again, comment technically relates to conversion to limited liability partnership.

10 The Nature of the Corporation Chapter 3

11 Sources of Law Well-developed default rules Detailed statutory provisions DE + MBCA Case law re fiduciary duties Why DE? Once upon a time, management friendly? Knowledgeable/neutral courts

12 Corporations Basics Shareholders (owners) $ capital Votes: elect board; extraordinary transactions $ dividends + share value Management Board of directors (oversee officers & extraordinary transactions) Officers (manage day-to-day operations) Employees

13 Kinds of Corporations Public or Publicly traded 1,000s of passive shareholders Company had IPO; now filing reports with SEC and traded on an exchange (NYSE; Nasdaq) Shares are liquid Close or privately held Small # of shareholders Shareholders also directors & officers Shares are hard to sell

14 Formation Ritual Name initial directors Issue stock Next year & annually: Re-elect directors & officers File articles: capital structure & voting rights Organizational meeting: appoint officers adopt bylaws Authorize shareholder agreements

15 Meet Fairway Technologies, Inc. Paul Havel & Clifton Molatore founded company in August 2000 Makes golf clubs Havel had golf industry experience; Molatore is a $ guy Corporation formed in the state of Jefferson, which follows MBCA A client of Hastings Law Group

16 Articles of Incorporation Who signs these? Hint: Article VII

17 Articles of Incorporation Lawyer is frequently incorporator Under MBCA 2.05, incorporator files articles then either Organizes company herself or Names initial directors (in articles or otherwise), and directors do rest

18 Articles of Incorporation Broad outline of capital structure Authorized shares Max # that board can issue w/o shareholder approval (The # actually issued at any point are outstanding )

19 How many authorized shares for Fairway Technologies, Inc.?

20 Articles of Incorporation Common stock is default Right to residual value (net assets upon dissolution) Economic and voting on per share basis

21 Articles of Incorporation MBCA 6.01 & 6.02 Articles may designate preferred stock Voting preferences Economic preferences dividends liquidation preference Conversion rights Blank check preferred Board designates preferences Fairway articles: 2.1(B)

22 Articles of Incorporation Examples of preferred stock: Venture capital investment in startup company Bank bailouts

23 Articles of Incorporation The shareholders constitution MBCA 2.02: Bare minimum Optional provisions (stay tuned...)

24 Organizational Consent What s this in lieu of... meeting stuff? Clue: MBCA 2.05(b)

25 Organizational Consent If all directors sign a consent = meeting MBCA 8.21(a) for matters other than org meeting

26 Organizational Consent MBCA 2.05 requires org meeting to: Adopt bylaws Elect officers Conduct such other business as desired

27 Bylaws Required by MBCA 2.06 What does 2.06 require be in the bylaws?

28 Bylaws Normally included: Repeat provisions of statute and articles so clients don t forget Describes governance procedure (voting rules, notice requirements, etc.) Describes officer duties and authority Sets rules for bylaw amendments

29 Appoint Officers MBCA 8.40 requires very little Some states require president, secretary, etc. Can you think why clear designation of authority important? (Hint: week 1)

30 Typical Officers President / Chief Executive Officer (CEO) Head honcho Often board member Sometimes board Chairman Sometimes CEO/president separate Secretary Official corporate record keeper Sometimes in house counsel Treasurer / Chief Financial Officer (CFO) Responsible for financial planning/accounting

31 Stock Issuance Subscription = agreement to purchase on specified terms Issuance = further ritual of certificating & entering on stock register after payment

32 Stock Issuance Can you determine how many shares of Fairway Technologies, Inc., are outstanding?

33 Stock Issuance Don t focus on par value Can matter for DE franchise tax Otherwise, rarely matters MBCA 6.21 (b) can be issued for tangible property, intangible property, services, or other benefits (c) board must determine consideration to be adequate Can you think why consideration must be adequate? Hint: we did the math

34 Stock Issuance (Molatore subscription agreement) Subscriber hereby irrevocably subscribes for and agrees to purchase 50,000 shares of the Corporation's Common Stock (the "Shares") for a purchase price of $1.00 per share payable in cash.

35 Stock Issuance (Havel subscription agreement) Subscriber hereby irrevocably subscribes for and agrees to purchase 50,000 shares of the Corporation's Common Stock (the "Shares") for a purchase price of $1.00 per share payable by contribution to the Corporation of all the Subscriber's right, title, and interest in and to (a) the ideas, concepts, and plans for the business of the Corporation, including, without limitation, as outlined in the Corporation's business plan and any modification, enhancement, improvement, or executive summary thereof, (b) contact lists of funding sources for the venture, (c) business relationships and contact lists for future company business, and (d) the trademark ECO.CLUB, Registration No , in each case on the terms and subject to the conditions set forth in the Assignment Agreement dated August 23, 2000, between Subscriber and the Corporation.

36 Corporations: Limited Liability Chapter 3 Section 2

37 Limited Liability MBCA 6.22(b) Unless otherwise provided in the articles of incorporation, a shareholder of a corporation is not personally liable for the acts or debts of the corporation except that he may become personally liable by reason of his own acts or conduct

38 Walkovsky v. Carlton Carlton and associates What are assets/liabilities of the corps? XYZ Cab Corporation ABC Cab Corporation Seon Cab Corporation

39 Walkovsky v. Carlton Carlton and associates Who s getting sued for the tort? XYZ Cab Corporation ABC Cab Corporation Seon Cab Corporation

40 Walkovsky v. Carlton [I]t is one thing to assert that a corporation is a fragment of a larger corporate combine which actually conducts the business.... It is quite another to claim that the corporation is a dummy for its individual stockholders who are in reality carrying on the business in their personal capacities for purely personal rather than corporate ends.... In the first [instance], only a larger corporate entity would be held financially responsible... while, in the other the stockholder would be personally liable.

41 Walkovsky v. Carlton Carlton and associates Can you distinguish: XYZ Cab Corporation ABC Cab Corporation Seon Cab Corporation Enterprise liability From Piercing the corporate veil?

42 Walkovsky v. Carlton Carlton and associates XYZ Cab Corporation ABC Cab Corporation Seon Cab Corporation Enterprise liability v. Piercing the corporate veil

43 Walkovsky v. Carlton What does the court hold, and why?

44 Walkovsky v. Carlton Enterprise liability? Sounds likely (though procedurally, court isn t addressing this) PCV? No Not enough that assets/insurance fall short

45 Olympic Financial v. Consumer Credit Corp (S.D. Tex 1998) Enterprise liability factors: Common employees Common record keeping Centralized accounting One corp pays another corp s employees Common business name One corp s employees work for other corp Undocumented $ transfers between corps Unclear $ allocations among corps Same officers Same shareholders Same telephone # In other words, are $, employees, and operations combined?

46 Sea Land v. Pepper Source Marchese Andre What is the corporate structure? Pepper Source Other corps Tie-Net

47 Sea Land v. Pepper Source Marchese Andre Who is Sea-Land suing, and why? Pepper Source Other corps Tie-Net

48 Sea Land v. Pepper Source Marchese Andre How is PS getting to other corps and Tie-Net? Pepper Source Other corps Tie-Net

49 Reverse Piercing No evidence that corps weren t kept separate (not enterprise liability) Applies PCV test downward so that creditor of Marchese reaches assets of other corporations Better for reverse-piercer than taking control of stock

50 Sea-Land v. Pepper Source PVC black letter law: 1. Unity of interest & ownership. Factors include: (a) Lack of formalities (b) Comingling of funds or assets (c) Under capitalization (d) Use by one corp of assets of another (basically, same as (b) above) 2. Promotion of injustice. Hard to pin down, but often either: (a) Fraud-ish conduct (b) Unjust enrichment

51 Sea Land v. Pepper Source What did the court hold, and why?

52 Sea Land v. Pepper Source Unity of interest and ownership Yes Corporations were his playthings Used corporate funds for personal expenses Promote injustice Probably On remand, lower court says yes Tax fraud Personal benefits (not mere sloppiness) at expense of corporate creditors Assurances to Sea Land that debts would be paid