1. PARTNERSHIPS, CORPORATIONS AND THE VARIANTS PROF. BRUCE MCCANN (707) 874-9204 LECTURE 6 PP. 196-238 Business Organizations 2009-2010 Lectures

2. LLC Re-Cap Creature of Contract Variation between states as to what the operating agreement can do with respect to:  Eliminating fiduciary duties, namely  Duty of Care  Duty of Loyalty California, for example,  Cannot entirely eliminate duty of loyalty in operating agreement  But can specify certain acts which will not constitute breach if not “manifestly unreasonable.” Lec. 6 pp. 208-252 Corporations Prof. McCann 2

3. Duty of Loyalty Duty to account for property or profit or benefit derived by the member from LLC property. Duty not to appropriate an LLC opportunity Duty to avoid conflicts of interest Duty to refrain from competing Acts in violation require consent of the members. Lec. 6 pp. 208-252 Corporations Prof. McCann 3

4. Duty of Care Duty to refrain from grossly negligent or reckless conduct, intentional misconduct, or a knowing violation of law. Agreement cannot unreasonably reduce this duty of care. Lec. 6 pp. 208-252 Corporations Prof. McCann 4

5. Dunbar v Tignor Can a court order dissolution where neither the operating agreement nor the statutory framework authorize it? Lec. 6 pp. 208-252 Corporations Prof. McCann 5

6. Equitable Jurisdiction - Delaware § 111. Jurisdiction to interpret, apply, enforce or determine the validity of corporate instruments and provisions of this title. (a) Any civil action to interpret, apply, enforce or determine the validity of the provisions of: (1) The certificate of incorporation or the bylaws of a corporation; (2) Any instrument, document or agreement by which a corporation creates or sells, or offers to create or sell, any of its stock, or any rights or options respecting its stock; (3) Any written restrictions on the transfer, registration of transfer or ownership of securities under § 202 of this title;§ 202 (4) Any proxy under § 212 or 215 of this title;§ 212215 (5) Any voting trust or other voting agreement under § 218 of this title;§ 218 (6) Any agreement or certificate of merger or consolidation governed by § 251-253, 255-258, 263 or 264 of this title;251-253255-258263 264 (7) Any certificate of conversion under § 265 or 266 of this title;§ 265266 (8) Any certificate of domestication, transfer or continuance under § 388, 389 or 390 of this title; or§ 388389390 (9) Any other instrument, document, agreement, or certificate required by any provision of this title; May be brought in the Court of Chancery, except to the extent that a statute confers exclusive jurisdiction on a court, agency or tribunal other than the Court of Chancery. (b) Any civil action to interpret, apply or enforce any provision of this title may be brought in the Court of Chancery. (72 Del. Laws, c. 123, § 2; 74 Del. Laws, c. 84, § 1.) Lec. 6 pp. 208-252 Corporations Prof. McCann 6

7. McConnell v Hunt Redux Is a finding of wrongoing by a member a precondition to finding it is not “reasonably practicable” to continue in business? Lec. 6 pp. 208-252 Corporations Prof. McCann 7

8. The Schizophrenic LLC A “partnership” for purposes of diversity jurisdiction (unlike corporation). Not a “partnership” for purposes of liquor law application rights A “partnership” for tax purposes Not a “partnership” for purposes of bank privacy Not a “person” for purposes of bank privacy, even where a single member LLC A distinct entity and a “third party” even if all members are the same as those already in the transaction (where rules prohibit conveyance to third party without consent). Treated like corporation for purposes of appearing in pro per Lec. 6 pp. 208-252 Corporations Prof. McCann 8

9. Equity Interest ULLA 701 SECTION 701. COMPANY PURCHASE OF DISTRIBUTIONAL INTEREST. (a) A limited liability company shall purchase a distributional interest of a: (1) member of an at-will company for its fair value determined as of the date of the member's dissociation if the member's dissociation does not result in a dissolution and winding up of the company's business under Section 801; or Lec. 6 pp. 208-252 Corporations Prof. McCann 9

10. Cont’d (b) A limited liability company must deliver a purchase offer …not later than 30 days after the date determined under subsection (a). The purchase offer must be accompanied by: (1) a statement of the company's assets and liabilities as of the date determined under subsection (a); (2) the latest available balance sheet and income statement, if any; and (3) an explanation of how the estimated amount of the payment was calculated. Lec. 6 pp. 208-252 Corporations Prof. McCann 10

11. Cont’d (c) If the price and other terms of a purchase of a distributional interest are fixed or are to be determined by the operating agreement, the price and terms so fixed or determined govern the purchase unless the purchaser defaults. If a default occurs, the dissociated member is entitled to commence a proceeding to have the company dissolved under Section 801(4)(iv). Lec. 6 pp. 208-252 Corporations Prof. McCann 11

12. Cont’d (d) If an agreement to purchase the distributional interest is not made within 120 days after the date determined under subsection (a), the dissociated member, within another 120 days, may commence a proceeding against the limited liability company to enforce the purchase. The company at its expense shall notify in writing all of the remaining members, and any other person the court directs, of the commencement of the proceeding. The jurisdiction of the court in which the proceeding is commenced under this subsection is plenary and exclusive. Lec. 6 pp. 208-252 Corporations Prof. McCann 12

13. Cont’d (e) The court shall determine the fair value of the distributional interest in accordance with the standards set forth in Section 702 together with the terms for the purchase. Upon making these determinations, the court shall order the limited liability company to purchase or cause the purchase of the interest. (f) Damages for wrongful dissociation under Section 602(b), and all other amounts owing, whether or not currently due, from the dissociated member to a limited liability company, must be offset against the purchase price. Lec. 6 pp. 208-252 Corporations Prof. McCann 13

14. Comment to Sec. 702 Comment The default valuation standard is fair value. Under this broad standard, a court is free to determine the fair value of a distributional interest on a fair market, liquidation, or any other method deemed appropriate under the circumstances. A fair market value standard is not used because it is too narrow, often inappropriate, and assumes a fact not contemplated by this section -- a willing buyer and a willing seller. Lec. 6 pp. 208-252 Corporations Prof. McCann 14

15. The Corporation A government sanctioned entity organized so as to allow multiple persons (or other entities) to participate in the growth and profits of a venture; confident of some level of transparency regarding its actions; able to participate at some level in selecting management; all while avoiding personal liability. Lec. 6 pp. 208-252 Corporations Prof. McCann 15

16. THE 3 “CORPORATIONS” TODAY For Profit (Business ) Corporations  Private: No established market for the shares. Includes Closely Held and Statutory Close  Public : i.e., Subject to Reporting requirements of §13 of Securities Exchange Act of 1934 Non-Profit  Charitable (501(c)(3) – donations tax-deductible  Mutual Benefit – Boy Scouts, tax exempt but donations taxed Public  Municipalities  Cities (Chartered Cities)  Government corporations (TVA, Postal Service) Prof. McCann 16

17. “Closely Held” vs Statutory Close Corporation Lec. 8, pp 286-342 Corps Prof. McCann Any corporation can be held by a small number of shareholders. One shareholder is not uncommon. A “closely held” corporation is a term with no particular legal significance other than to mean:  Few shareholders  Most of whom participate in management  No general market for the stock (because of limitations on control and liquidity) and  Some limitations on transfer of the stock Courts now widely allow shareholders to control management via controlling director’s powers.

18. Statutory Close Corporation Lec. 8, pp 286-342 Corps Prof. McCann Specifically so-identified in Articles Limited as to number of shareholders possible, usually 30 or 35. Stock certificates must bear “legend” detailing that there are restrictions on transfer Prohibited from making a public offering If adhere to rules, statutes allow exemption from claims regarding improper limits on directors’ powers Delaware allows shareholders to manage directly without a board of directors.

19. Not An Exclusive Club – Del. Incorporation Delaware Code Title 8 / Chapter 1 Subchapter I. Formation § 101. Incorporators; how corporation formed; purposes. (a) Any person, partnership, association or corporation, singly or jointly with others, and without regard to such person's or entity's residence, domicile or state of incorporation, may incorporate or organize a corporation under this chapter by filing with the Division of Corporations in the Department of State a certificate of incorporation which shall be executed, acknowledged and filed in accordance with § 103 of this title.§ 103 Lec. 6 pp. 208-252 Corporations Prof. McCann 19

20. Formation Usually an agreement to go forward  Promoters Agreements  What will be formed?  For what purpose?  Who will invest and how much?  Who will manage?  How will profits be divided?  What is the exit strategy?  Who will be indemnified and how for preincorporation acts? Lec. 6 pp. 208-252 Corporations Prof. McCann 20

21. California Corps Code 204 Lec. 8, pp 286-342 Corps Prof. McCann The articles of incorporation may set forth: (a) Any or all of the following provisions, which shall not be effective unless expressly provided in the articles: * * * (5) A provision requiring, for any or all corporate actions … the vote of a larger proportion or of all of the shares of any class or series, or the vote or quorum for taking action of a larger proportion or of all of the directors, than is otherwise required by this division.