Business Associations

Agency
A. Agency-- fiduciary relationship that exists when the principal manifests assent for the
agent to act on the principal’s behalf and subject to his control (agent manifests assent).
RE § 1.
1. Relationship only exists if principal has made a manifestation. RE § 15
B. Three ways to create the power
1. Actual/Real
a. (1) agent reasonably believes (2) in accordance with principal’s
manifestation (3) principal wishes the agent to act
b. Express or Implied (specific instructions not required)
2. Apparent (3P reasonably believes)
a. (1) 3P reasonably believes (2) agent has authority to act for principal and
(3) belief arises out of principal’s manifestations
i. Zummach v. Polasek et al.-- “the principal may by words or
conduct lead a third person to believe reasonably that the agent
has authority to act for the principal with respect to the forbidden
act. If under such circumstances the agent acts, the principal is
bound, although the agent had no authority”
1. Principal told customers to pay agent, it’s not the
customer’s fault that the agent was acting wrongly
ii. Walker v. Pacific Mobile Homes-- doesn’t matter that the customer
was dumb, it is not the customer’s responsibility to interrogate the
employee’s scope of agency
3. Inherent
a. Agency relationship derived from the agency relation and exists for the
protection of persons harmed by or dealing with a servant
● Authority to perform one service implies authority to perform
necessary related acts. Walker
● Look at general business customs of a particular trade. Epstein
4. Epstein v. Corporacion Peruana de Vapores-- captain bought copious amounts
of cigarettes and liquor to smuggle and boat owner refused to pay on theory
captain had no express, apparent, or implied authority to make the purchase
C. Two ways the power is impose
1. Estoppel
a. (1) 3P is justifiably induced (2) makes a detrimental change in position (3)
because;
● (a) person intentionally or carelessly caused belief or
● (b) had notice and did not correct.
2. Ratification
a. Principal binds itself to the prior act of the agent;
● (1) manifests assent, or
● (2) engage in conduct that justifies reasonable assumption
Partnerships
A. RUPA
→ Formation
1. Partnership is an entity distinct from partners. § 201
2. § 202(a) Partnership;
a. (1) association of two or more persons
b. (2) carrying on as co-owners
c. (3) business for profit
d. → Whether they intend to form a partnership is irrelevant
● Intent to engage in partnership activities is relevant (see
Brandenburg v. Brandenburg)
● Zajac v. Harris-- recognition of partnership where no conscious or
deliberate intention of entering into legal relationship
○ Issue: determining partnership vs employer-employee
relationship
3. 202(c) determining partnership
a. Share of profits = presumption of partnership
I. Unless;
1) Wages or other compensation
2) Rent/lease
3) Debt installment
4) Sale of goodwill
I. Not gross returns
b. Common ownership of property for business purpose = evidence, but
does not establish by itself
→ Partnership Property
1. § 203-- property acquired by partnership is partnership property
a. 204(a)(2)-- a partner with an indication on instrument, even without
indication of name of partnership
2. § 204-- what is partnership property
a. (c) property is presumed to be partnership property if purchased
partnership assets
b. (d) if acquired in the name or one or more partners (with no indication of
persons capacity as partner) presumed to be separate property.
→ Partners to 3P’s
1. § 301-- Partner agent
a. (1) Partner is acting in a way that binds the partnership if (1) apparently
carrying on in the ordinary course of partnership or (2) business of the
kind carried on by partnership, Unless;
● (a) Limited partner’s authority to act, and
● (b) 3P knows that such authority has been limited
b. (2)-- If doesn’t meet (1), still binds if authorized by all partners
 c. Blackmon v. Hale (Adams misappropriated funds of one of his own clients
that Hale signed over to him out of the partner trust account on Adams’
request)--
i. If Adams received money while acting w/in the scope of his
apparent authority OR on behalf of the partnership in the course of
its business, all partners are jointly and severally liable for
plaintiff’s losses BUT if Adams acting in individual capacity AND
plaintiff knew he was acting solely in the capacity, partners are not
liable
ii. Since Adams directed plaintiff to write check to the partnership
trust account, plaintiff is justified in believing that he was dealing
with the partnership
d. Zemelman v. Boston Ins. Co. (Zemelman made false statements in an
insurance claim for fire damage of partnership property so claim was
denied)
i. “A partner becomes liable for the fraud of his co-partner, because
of the relation each bears to the other of agent in the partnership
business,” i.e., don’t be partners with dumb people, because who
bear the risks for their actions
e. Ellis v. Mihelis-- sale contract not binding, because not partnership
property so both brothers needed to individually sign or authorize the
contract, i.e., Pericles didn’t have authority to act on behalf of Elias for the
sale of property that was used by the partnership, but not partnership
property
2. § 302 transfer of partnership property;
a. (a) Partnership property may be transferred by:
i. An instrument of transfer executed by a partner in the partnership
name (owned by partnership)
ii. An instrument of transfer executed by a partner in whose name
the property is held (owned by individual partner)
iii. An instrument of transfer executed by the partners whose names
the property is held (owned by two or more partners)
b. (b) Partnership may recover property from a transferee only if:
i. (1) It proves the execution of the instrument of transfer did not
bind the partnership under 301; AND
ii. (2) transferee knew person who executed instrument of transfer
3. § 303-- can file a statement of partnership authority to limit agent authority and to
provide notice
a. (d) → rescinding transferee
b. (e) → rescinding real estate transaction
→ Partners to Each Other (and partnership)
1. § 401 Partner rights and duties
a. (a) capital account = (assets - liabilities) + share of income
 b. (b) partners share equally in profits (chargeable in same proportion for
losses)
c. (f) partners have equal rights in management and control
d. (g) a partners may use or possess partnership property only on behalf of
the partnership
e. (i) all partners have to consent to new partner
f. (j) voting
● Ordinary course: Majority
● Not in ordinary course (different than UPA): all
2. § 403 information
a. (a) Must keep books at chief executive office
b. (b) Must give access to books (reasonable charge)
c. (c) Each partner, without demand, must give information concerning
partners affairs reasonably required for the proper exercise of partners
rights
● demand→ any other information
3. § 404 duty of care and loyalty
a. (b) loyalty
i. 1) hold as trustee property and profit derived in the conduct and
winding up of partnership
ii. 2) refrain from dealing for benefit of party adverse to partnership
iii. 3) refrain from competing with partnership before dissolution
b. (c) care
i. Refrain from engage in in (1) gross negligent or reckless conduct,
(2) intentional misconduct, or (3) a knowing violation
c. (d) exercise rights in accordance with good faith and fair dealing
i. Punctilio of honor most sacred
d. (e) → Partner doesn’t violate by merely acting in own self interest
4. § 405 (no UPA equivalent)
a. A cause of action by or against a partner is governed by this act
→ Dissolution/Dissociation
1. Two paths → (1) dissociation (Art. 7) or (2) dissolution (Art. 8), Art. 6 decides which
path
2. Art. 6
a. § 601-- events causing dissociation;
i. (1) partnerships notice of partners expressed will
ii. (2) termination of event
iii. (3) partners expulsion pursuant to agreement
iv. (4) expulsion by unanimous vote if;
1. Unlawful conduct
2. Transfer of substantially all of partners interest
3. Court order
4. Partnership that is a partner is being wound up
v. (6) partner;
 1. Becoming bankrupt
2. Assigning interest to creditor
vi. (7) individual partner;
1. Dies
2. Appointment of guardian
3. Judicial determination of incapability
b. § 602-- power to dissociate/wrongful dissociation
i. (a) Partner can dissociate at any time by express will (rightfully or
wrongfully)
ii. (b) Wrongful if;
1. Breach of agreement
2. Occurs before the expiration of term or task
a. (1) partners withdraws by express will
i. UNLESS--
1. 90 days after someone else has
dissociated (death or bankruptcy)
2. Expelled by judicial determination
3. Partner is debtor in bankruptcy
4. If not individual, entity is willfully
dissolved
iii. (c) wrongful partner is liable to partners for damages caused by
dissociation in addition to other obligations already owed
c. § 603--
i. (a) article 8-- if dissociation = dissolution. Article 7 = if everything
else
ii. (b) upon a partner’s dissociation:
1. (1) partner’s right to participate in the management and
conduct of the partnership business terminates;
2. (2) partner’s duty of loyalty to refrain from competition
terminates; and
3. (3) partner’s (1) duty of loyalty to (a) hold in trust
partnership property and (b) refrain from dealing with
adverse parties and (2) duty of care terminates
3. Art. 7
a. § 701-- Purchase of Dissociated Partner’s Interest
i. (a) if dissociation and not dissolution, the partnership interest must
be purchased with buyout price pursuant to (b)
ii. (b) buyout price = the greater of liquidation value or sale of entire
business as going concern (on date of dissociation)
iii. (c) damages subtracted from buyout price
iv. (d) partnership must indemnify dissociated partner for future acts
for two years after (only under §702)
 v. (h) partner who wrongfully dissociates before expiration of definite
term or task is not entitled to payment until the expiration of the
term or completion of the task
1. Unless partner can establish earlier payment will not cause
undue hardship
vi. (i) dissociated partner may instigate court action against
partnership to determine buyout price of that partner’s interest
b. § 702-- for two years after dissociation partnership is bound by act of
dissociated partner only if other party;
i. (1) reasonably believed he was then a partner;
ii. (2) did not have notice; and
iii. (3) did not have knowledge under §303
c. § 703-- dissociated partner is not liable for partnership liabilities after
dissociation except:
i. (b) if within 2 years of dissociation, partner is liable under
obligations under §306, if the other party in the transaction:
1. (1) reasonably believed dissociated partner was then a
partner; and
2. (2) did not have notice of other partner’s dissociation
3. (3) did not have knowledge under §303(e) or notice under
§704(c)
ii. If creditor agrees to waive obligation of dissociated partner,
partner is not liable
d. § 704-- can file statement of dissociation (notice under 303(e))
e. § 705-- use of partnership name by continuing partnership does not of
itself make the dissociated partner liable for obligation
4. Art. 8
a. § 801-- partnership goes into dissolution if:
i. (1) express will to withdraw as partner (except as a dissociated
partner under 601(2)-(10));
ii. (2) if definite term or task
1. (i) within 90 days after partner’s dissociation by death or
other;
2. (ii) express will of all partners; or
3. (iii) the term expires
iii. (4) unlawful
iv. (5), (6) court decree
b. § 802-- partnership continues after dissolution
i. (a) after dissolution continues only for winding up
ii. (b) after dissolution, before winding up, all partners may waive
right to wind up and continue
1. Resumes business as if dissolution never occurred
2. All liabilities stay attached to partnership
c. § 803-- Right to Wind up
 i. (a) a partner who has not wrongfully dissociate may participate in
winding up, but may apply for judicial supervision of the winding
up (show good cause)
ii. (c) may preserve partnership as a going concern for a reasonable
time
d. § 804-- Partnership is bound by partner’s act after dissolution that:
i. (1) is appropriate for winding up; or
ii. (2) (a)would have bound partnership under §301 before
dissolution, and (b) other party did not have notice
e. § 805-- may file a statement of dissolution (gives notice for purpose of
§303(e))
f. § 806-- partner is liable for partnership liabilities that were appropriate for
winding up (see §804)
g. § 807-- settling accounts
i. (a) asset first go to creditor obligations and then cash is paid in net
amount to partners in accordance with right to distribution
ii. (b) partner = entitled to settlement of partnership accounts
1. Partner must contribute for capital account deficit
iii. (c) ^If one partner fails to contribute
1. Partners contribute in amount in proportion in the way they
share losses
iv. (e) an estate can be made to contribute
v. (f) an assignee may enforce a partner’s obligation to contribute to
the partnership

B. UPA
→ Formation
1. § 6 partnership def;
a. (1) association of two or more persons
b. (2) carrying on as co-owners
c. (3) business for profit
2. § 7 determining partnership
a. Share of profits =prima facie evidence of partnership
I. Unless;
1) Wages or other compensation
2) Rent/lease
3) Debt installment
4) Sale of goodwill
II. Not Gross Returns
b. Common ownership of property for business purpose = evidence, but
does not establish by itself
3. Dority v. Driesel (development of subdivision; Daon advertised, Driesel built
houses)
 a. Joint venture-- partnership for a single transaction; partnership law
controls joint ventures
i. Contract of joint venture may be implied from the conduct of the
parties; test: right of a party to share the profits and losses and the
right to exert some control
ii. “The fact that parties act in concert to achieve some economic
objective, while relevant to the inquiry, is not enough to create a
joint venture”
b. Partnership by estoppel
i. Liability attaches to anyone who holds himself out or allows
himself to be held out as a partner, thereby causing another to
reasonably rely to their detriment on the representation
ii. Daon putting Driesel’s logo on the subdivision’s advertisement is
not strong enough for people to assume they were partners
→ Partnership Property
1. § 8 what is partnership property?
a. (1) property brought in or subsequently acquired, on account of
partnership
i. Hillock v. Grape-- property doesn’t become partnership property
unless owner intends or allows it
b. (2) property acquired with partnership funds (unless contrary intention
appears)
c. (3) title in partnership name
d. (4) conveyance in partnership name
2. § 24 property rights of partner
a. (1) his rights in specific partnership property
i. Partner treated as co-owner has as tenant in partnership
ii. Each partner has equal right to possess property for partnership
purpose § 25(2)(a)
b. (2) interest in the partnership (economic)
i. Interest is his share of the profits and surplus
c. (3) in partnership management
3. § 27 assignment of partner's interest
a. Conveyance does not (a) cause dissolution or (b) offer transferee rights in
management
b. Can only transfer economic rights, not management rights
→ Partners to 3P’s
1. § 9 partner powers
a. (1) action by any partner in usual way of business binds the partnership
unless;
● (a) Limitedpartner’s authority to act, and
● (b) 3P knows that such authority has been limited
● → every partner = agent of partnership
 b. (2) if not carrying on partnership in usual way, act doesn’t bind unless
authorized by all partners
c. (3) One partner does not have authority to;
● Dispose of good-will
● Leverage property to creditors
2. § 13 wrongful act of partner, in (1) ordinary course of business or (2) with
authority, makes partnership liable
3. Martin v. Peyton-- only those who are partners between themselves may be
charged for partnership debts by others; making a deal to split profits in a
business opportunity is not enough to say that they are co-owners in a business
for profit
→ Partners to Each Other
1. § 18-- Default rules (if no partnership agreement);
a. (a) all partners share equally in profit
● Must contribute equally for losses
b. (e) all partners equal rights in management and conduct
c. (f) no partner is entitled to compensation
● Except→ Surviving partner in winding up (reasonable compensation)
d. (g) Need consent of all partners to become a partner
e. (h) Voting;
● Ordinary matters: Majority
● Act in contravention of partnership agreement: ALL
● McCallum v. Asbury-- plaintiff held to his deal, because this was
not in contravention of the partnership agreement (so doesn't
require unanimous consent) and plaintiff knew about the provision
when he joined the partnership
● National Biscuit Co v. Stroud-- illustrates the problem of a two-
person partnership-- Freeman buying bread in the “ordinary matter
connected with the partnership business,” and although Stroud
didn’t want to, he had to share in the risk because half is not a
majority, so he could not stop it
2. § 19-- every partner shall have access to the books
a. Must keep at PPB
3. § 20-- when demanded, partners have to give full information on all things
4. § 21-- fiduciary
a. Any profit derived by partner in (a) formation (b) liquidation (c) conduct or
(d) use of partnership property, must hold as trustee benefit for
partnership
b. Fouchek v. Janicek-- “when a partner wrongfully snatches a seed of
opportunity form the granary of his firm, he cannot, thereafter, excuse
himself from sharing with his copartners the fruits of his planting, even
though the harvest occurs after they have terminated their association
i. to hold someone for breach of §21 fiduciary duty, plaintiff must
demonstrate:
 1. (1) associate was a copartner
2. (2) the transaction is one of a kind that the partnership can
legally embrace and act upon
3. (3) the transaction is connected with the formation,
conduct, or liquidation of the partnership or use of the
partnership property by the accused copartner
4. (4) the transaction is of such nature that it is within the
scope of the business of the firm
5. (5) the transaction complained of comprehends something
of value to the partnership (present or future value)
6. (6) the transaction is one that the accused partner has
acted upon to his apparent or sole advantage without the
full knowledge or consent of his other partners
5. § 22-- Right to formal accounting if;
a. (1) wrongfully excluded from partnership (a) business or (b) property
b. (2) rights under agreement
c. (3) § 21
d. (4) → if just and reasonable
6. § 23-- continuation beyond stated time
a. (1) If continue past time or purpose in partnership agreement, rights and
duties remain the same but now its partnership at will
b. (2) continuation without liquidation is prima facie evidence of continuation
→ Dissolution
1. § 29-- dissolution = partner ceasing to be associated with partnership
2. § 30-- dissolution is not termination.
a. Partnership continues until winding up is complete
3. § 31-- causes of dissolution;
a. (1) without violation of agreement;
i. a) Term or task is complete
ii. b) Express will-- if no term or task is stated
iii. c) Express will of ALL-- even if term or task stated
iv. d) expulsion
b. (2) in contravention of agreement;
i. Express will (see consequences § 38(2))
c. (3) other;
i. Break a law
ii. Death of partner
iii. Bankruptcy of any partner
iv. Court order § 32 (court can decree dissolution if lunatic or
consistent breach of partnership agreement)
d. Page v. Page (military base laundromat/brother creditor)-- can dissolve
after a “definite term or particular undertaking” is achieved (i.e., repaying
debts), but nothing in this case showed that partnership for a term was
 implied in the agreement (different outcome if it can be proved the brother
is acting in bad faith for his own personal gain)
4. § 33-- dissolution terminates all authority for any partner to act for partnership
5. § 34-- (right to contribution from Co-partners) dissolution by (1) act, (2) death, or
(3) bankruptcy-- each partner is liable for any partners’ action after dissolution.
Unless;
a. 1) partner acting had knowledge of dissolution, or
b. 2) if by death or bankruptcy, partner acting had notice or knowledge
6. § 35-- Power to bind to 3P’s after dissolution
a. How to bind;
i. (1) act appropriate for winding up
ii. (2) would normally bind (if no dissolution) and,
1. (a) 3P extended credit before dissolution and no
knowledge or notice of dissolution, OR
2. (b) 1) knew of partnership before dissolution, 2) no
knowledge or notice, 3) no advertisement in newspaper of
general circulation
b. When you can’t bind (exceptions^);
i. Dissolved because of unlawful act;
ii. Partner becomes bankrupt;
iii. Partner has no authority; (still binding if meets section 2(a)
requirements above)
7. § 36-- effect of dissolution on existing partner liability
a. (1) dissolution does not discharge existing liability
b. (2) when a partner can be discharged;
i. (a) by agreement with (a) himself (b) partnership creditor (c)
partner who is continuing partnership;
1. And, can be inferred by course of dealing between (1)
creditor having knowledge of dissolution and (2)
person/partnership continuing the business
ii. (b) person agrees to assume partnership obligations and creditors
consents to material alteration in nature or time of payment
iii. (c) individual property of deceased partner will go to individual
debt before partnership debt
8. § 37-- (unless otherwise agreed) partners who have not wrongfully dissolved
have the right to wind up
9. § 38-- Rights to partnership property;
a. (1) not wrongful-- first pay off liabilities and Surplus paid in cash the net
amount owing to partners
i. → If partner is expelled, he receives cash only in the net amount due
him from partnership
b. (2) wrongful dissolution--
i. Rights not wrongful partners;
1. Rights to distribution in # (1) above
 2. Right to breach of contract against wrongful partners
ii. What not-wrongful partners can do;
1. Continue business in the same name, so long as they pay
wrongful partner is interest and indemnify him against all
future liabilities
iii. Rights of wrongful partner;
1. If not continued; same rights as not-wrongful but subject
breach of contract damages (for violating partnership
agreement)
2. If continued;
a. Value of interest in partnership, less damages
caused by dissolution
b. → Partner interest does not include value of good-will
10. § 39-- Rights when Agreement Violated by Fraud or Misrepresentation
a. The rightful party entitled to rescind is also entitled to;
i. (1) lien on or right of retention of surplus of partnership property
(after satisfying partnership liabilities),
ii. (2) to stand in the place of creditors for any payments made by
wrongful actor, AND
iii. (3) to be indemnified by wrongful actor against all debts and
liabilities of the partnership
11. § 40 Rules for Distribution
a. (a) the assets of the partnership are (in order to pay liabilities):
i. (i) partnership property,
ii. (ii) contributions of partners necessary for payment of all liabilities
in subsection (b)
b. (b) liabilities of the partnership (ranked by order of payment):
i. (i) creditors other than partners
ii. (ii) loan from partner
iii. (iii) payment owed to partners in respect of capital
iv. (iv) payment owed to partners in respect of profits
c. (d) partners are joint and severally liable for surplus of liabilities
i. If one partner is insolvent, solvent partners contribute in proportion
in which they share in profits
12. → skipped 41, 42, 43

Difference between entities

1. Limited Liabilities
a. Yes -- Corp, LLP (limited partner), LLC
b. No -- Partnership, LLP (general partner)
2. Free Transferability
a. Yes -- Corp,
i. Close corp can have internal restrictions
b. No -- Partnership, LLP, LLC
 i. Can only transfer economic interest, not legal
ii. All shareholders must consent
iii. LLC-- New partner can only be admitted by consent of all members, like
normal partnership
3. Unlimited life
a. Yes -- Corp., LLC
b. No -- Partnership, LLP
4. Centralized Management
a. Partnership -- majority rule for ordinary business decisions
i. Everyone is presumed an agent for carrying on in the ordinary manner
b. Corp. -- centralized board of directors
c. LLC -- can be member managed or manager managed
d. LLP -- general partner is in charge
5. Choice of Law
a. Corp. -- can make home in any state
b. Partnership -- Probably the state where most business occurs
6. Formation
a.

Corporations
→ Formation
1. Internal affairs doctrine -- law of state of incorporation governs internal affairs
2. MBCA Ch. 2
a. § 2.01 -- Incorporators deliver articles to secretary of state
b. § 2.02 -- Articles of incorp.
i. (a) Must have
1. Name
a. Must be (a) distinguishable from other corporations and (b)
contain an entity abbreviation (co., corp., or inc.) § 4.01
b. Exception-- can use indistinguishable names if owned by
same ownership group
2. Number of shares
a. Authorized to be issued
b. Distinction
i. (1) authorized -- outer limit of shares approved
ii. (2) Issued -- In existence
iii. (3) Outstanding -- How many outside company
ownership (excludes treasury stock)
3. Street and mailing address of corporations initial registered office
a. → also name of registered agent at office
4. Name and address of each inorporator
ii. (b) May have
1. (2) Par value of stock
 2. (4) provision limiting director liability for (a) actions taken or (b)
failure to act, except for
a. 1) self-dealing
b. 2) intentional infliction of harm
c. 3) intentional violation of criminal
3. (5) Permitting or making obligatory indemnification under § 8.50
for (a) action taken or (b) failure to act-- unless;
a. 1) self-dealing
b. 2) intentional infliction of harm
c. 3) Unlawful distributions (§ 8.32) → defined in 6.40
d. 4) intentional violation of criminal law
c. § 2.06 -- Bylaws
i. (a) Corp. has to adopt bylaws for incorporation
1. Private -- so can keep out of articles and put in bylaws to avoid
attention
ii. (b) Can contain anything not inconsistent with law or articles of
incorporation
d. § 2.07 -- emergency bylaws
3. Del -- § 102
4. Close Corp. → § 342
5. Amendment to articles of incorporation -- MBCA § 10.01, 10.20
a. § 10.01-- Authority to Amend
i. (a) can amend at any time
ii. (b) shareholder has no property right in a provision of articles
b. § 10.03-- Amendment by directors + shareholders
i. (a) Amendment must first be adopted by board
ii. (b) Then shareholders
1. Don’t need shareholder approval if 10.05,
2. Don’t need shareholder approval also if 10.06, or 10.07
3. Approval is at shareholder meeting
6. Amendment to Bylaws -- MBCA § 10.20
a. (a) shareholders can always amend or repeal
b. (b) Directors may amend or appeal unless;
i. (1) (a) it is in articles of incorporation (§ 10.21) or (b) is relating to the
election of directors (§ 10.22), or
ii. (2) amending a bylaw that expressly provides that board cannot amend,
adopt, or repeal a bylaw
→ Board
1. Board of directors manages the business and affairs of the corporation-- MBCA § 8.01,
Del § 141
2. § 8.01
a. (a) each corp. Shall have board of directors
b. (b) corporate powers are exercised under authority of board of directors
3. Director Meetings
 a. 8.20 Meetings
i. (a) allows regular or special meetings
ii. (b) Participation -- allows any means of communication
1. Rule-- must simultaneously hear each other (deemed present if
so)
b. 8.22 Notice of meeting
i. (a) regular meeting = no notice
ii. (b) special meeting = 2 days
1. Purpose doesn’t have to be stated
2. § 8.23 -- Waiver
a. waiver in (1) writing, (2) signed by director, and (3)
delivered to corp.
b. Or, can waive notice by participating in meeting
c. 8.21 Action without meeting
i. Can take action without meeting if EACH director signs a (1) consent
describing the action to be taken and (2) delivers to the corporation
d. Quorum Rules § 8.24 (Del § 216)
i. (a) Quorum = majority
1. (c) need majority of quorum in votes, unless bylaws or articles
provide otherwise
ii. (b) Bylaws or articles can fix number for quorum, but can’t be less than ⅓
iii. (d) How to dissent; (protects from liability later)
1. (1) object to the entire meeting
2. (2) dissent or abstention is entered in the minutes of the meeting,
or
3. (3) the director delivers written notice of dissent
iv. (d) right of dissent or abstention doesn’t apply if vote in favor of action
e. § 8.25 Committees of the board
i. (a) board can create a committee
ii. (d) committee can exercise powers of the board of directors, but may not

1. (4) adopt or amend bylaws

2. (1) authorize distributions
iii. NASDAQ -- requires a separate audit committee
f. § 7.32(a)(4) allows director proxies
→ Shareholders
1. Voting Arrangements
a. § 7.32 -- Shareholder Agreements
i. → Operates as a contract between shareholders
ii. (b) Agreement must be
1. (1) approved by all shareholders and (2) set forth in (a) the articles
or (b) a written agreement
2. Amendment -- needs to be done by all persons who are
shareholders at the time of amendment
 iii. (a) A valid agreement is effective among all shareholders
b. § 7.30 -- Voting Trust
i. Trustee has right to vote shares if shareholder;
1. (1) signs agreement, and
2. (2) transfers shares to trustee
ii. Trustee -- has to deliver a list of trust members to corp.
iii. LIMIT-- can only last for max 10 years
c. § 7.31 -- Voting Agreement (Proxy)
i. Allows two or more shareholders to agree on the way they vote shares
(proxy)
ii. Specifically enforceable (equitable remedy)
iii. → proxy § 7.22
2. Types of shareholder voting (three types)
a. 1) Class Voting -- stock is divided into two or more classes, each of which is
entitled to elect a certain number of directors or approve transactions as a class
b. 2) Cumulative Voting (REQUIRED IN NE) -- shareholders elect directors in rough
proportion to the share they own
S×d
i. X= +1
D+1
1. X -- number of shares required to elect directors
2. S -- shares represented at the meeting
3. d -- number of directors you want to elect
4. D -- total number of directors to be elected
c. 3) Supermajority Voting -- requires that a supermajority of shareholders approve
specified actions.
3. Shareholder Meeting
a. § 7.01 Annual Meeting
i. (a) directors are elected at the annual meeting
ii. (a) the time of meeting is fixed in the bylaws
b. § 7.02 Special Meeting
i. (a) shall have special meeting when;
1. (1) majority of board of directors decide
2. (2) shareholders with at least 10% of all votes entitled to be cast
on an issue
a. → needs to be something shareholders are entitled to vote on
b. Can fix higher or lower percentage in bylaws → but not above
25%
c. § 7.05 Notice -- same for both special and annual meeting
i. Notice no fewer than 10 nor more than 60 days
ii. § 7.06 -- Waiver -- allowed to waive, waiver needs to be in (1) writing (2)
signed by the shareholder entitled to vote, and (3) delivered to corp.
d. § 7.21 Voting at meeting
i. (a) each outstanding share gets one vote per issue (strait voting)
1. Unless articles say otherwise
 ii. (b) Corporation cannot vote treasury stock
e. § 7.22 -- Proxy Voting at shareholder meeting
f. Quorum
i. Needs to be established in articles (usually majority of shares entitled to
vote)
ii. § 7.25 Voting groups
1. Can only take action if a quorum present
2. Quorum = Majority of votes entitled to be cast
4. Shareholder proposals
a. Lovenheim v. Iroquis Brands
i. proposals are includible if a significant relationship to the issuers business
is demonstrated on the face of the resolution or supporting statement
→ Agency Concepts in Corporations
1. Same three types as in partnerships
2. Inherent Authority-- whether board has given officer authority to act -- Menard v. Sullivan
a. (1) usually accompany or are incidental to transactions which the agent is
authorized to conduct if
b. (2) the other party reasonably believes that the agent is authorized to do them
c. (3) has no notice that he is not so authorized
3. Officers only have authority given to them in bylaws MBCA § 8.41
4. Corporate Officer
a. 8.43-- Resignation and removal
b. 8.44 -- Contract rights of officers
→ Duties
→ Care and loyalty should always be considered together
1. Care
a. (1) Action
i. MBCA -- § 8.30(a),(b)
ii. Business Judgment Rule applies -- gives a presumption in favor of
business decision by director, three requirements;
1. (1) acted in informed basis
a. Smith v. Van Gorkon (Del)
i. Boards must have a process to adequately inform
themselves before a business decision
b. § 8.30 -- use “like position” standard in § 8.30
2. (2) good faith, and
a. “Gross negligence is not enough” -- Disney
3. (3) in best interests of the corp
a. Breach of duty of loyalty rebuts this presumption
b. When rebutted, considered under fairness standard -- burden on
∆ to show
i. (1) fair dealing process, and
ii. (2) fair price
 iii. Schlensky -- unless bad faith or fraud, validity of a business decision is a
non judiciable issue
1. Corporate Waste -- Money was wasted for no benefit (Disney)
a. Exception to the general rule that business judgement’s
(lacking other concerns) are judiciable

b. (2) Inaction (monitoring)

i. MBCA
1. § 8.30(b) -- When (a) becoming informed or (b) devoting attention,
director needs to discharge their duties with the care that a person
in a like position would reasonably believe appropriate under
similar circumstances (avoid hindsight bias)
a. (a) Informed -- gain sufficient familiarity with the
background facts and circumstances to make an informed
judgement (cmts.)
b. (b) attention -- not expected to anticipate problems, but --
where something has occurred to make it obvious to the
board that the corporation needs to be addressing a
problem -- this duty comes into play (cmts.)
2. Francis -- There is a continuing obligation to keep informed (lack
of knowledge is not a defense
ii. Del (§ 141)
1. Graham-- Del uses a Red Flag Test
a. Reasonable person would have seen the signs
b. Directors are entitled to rely on the honesty and integrity of
their subordinates until something occurs to put them on
suspicion
2. Legal Risks (lower standard than business)
a. Caremark Factors;
i. (1) Directors knew, or should have known violations
were occurring,
ii. (2) that directors took no steps in good faith to
prevent, and
iii. (3) such failure proximately resulted in the losses
complained of
3. Business Risks (Impossible standard for π)
a. Citigroup-- (suit complaining board did not pay attention to
subprime mortgages)
i. π must prove;
1. (1) Knew they were not discharging or were
in conscious disregard for their
responsibilities, and
2. (2) Bad faith is required
2. Loyalty
a. Director has interests contrary to corporation -- required to put corporation
interests above his own
b. BJR does not apply, so burden on defendant to show they did not breach duty
c. MBCA Subchapter F applies to “Director Conflicting Interest Transactions”
i. MBCA § 8.60 -- Director’s conflicting interest transaction --
1. (1) director was a party,
2. (2) director had knowledge and a material financial interest known
to the director, or
a. Material financial interest -- financial interest in a
transaction that would reasonably be expected to impair
the objectivity of the director’s judgment when participating
in action on authorization of the transaction
3. (3) director knew that a related person was a party or had a
material financial interest
a. Related person -- (i) spouse, (ii) issue, siblings, elders, or
siblings or issue of the same, (iii) person living in same
home, (iv) entity controlled by the individual or related
natural person, (v) domestic or foreign business or
nonprofit, unincorporated entity, or trust/estate in which
director has a role, or (vi) employer
d. MBCA § 8.61 (safe harbor provision)
i. Director is not liable for breach of duty of loyalty if;
1. (1) Directors action taken in compliance with § 8.62
a. § 8.62-- Authorized by;
i. (1) by majority of qualified directors,
1. § 1.43 -- not a director who
a. 1) is a director conflicting interest
transaction, or
b. 2) has material relationship with
another director which it is
ii. (2) after required disclosure, and
1. 8.60 -- need to disclose;
a. 1) existence and nature of the
director’s conflict, and
b. 2) all facts a director would
reasonably believe to be material in
deciding whether to proceed with the
transaction
iii. (3) provided that
1. (a) deliberated and voted outside interested
persons presence, and
2. (b) (not relevant)
2. (2) Shareholders action taken in compliance with § 8.63
a. § 8.63-- approved by,
 i. (1) majority of all qualified shares,
1. Qualified shares -- all shares except (1)
conflicted directors or (2) a related person
ii. (2) after notice is given, and
1. 8.60 -- need to disclose;
a. 1) existence and nature of the
director’s conflict, and
b. 2) all facts a director would
reasonably believe to be material in
deciding whether to proceed with the
transaction
iii. (3) interested director removes his unqualified
shares
3. (3) Was fair to the corp.
a. § 8.60 “Fair to the corp” -- the transaction as a whole was
beneficial to the corporation
i. Consider;
1. 1) Procedural → fair in terms of the director’s
dealings with the corporation, and
2. 2) Substance → comparable to what might have
been obtainable in an arm’s length transaction,
given the consideration paid or received by the
corporation
ii. Del § 144-- if a director has a financial interest, it is void
1. Financial interest - relationship might reasonably be expected to
affect his judgment in a particular manner adverse to corp.
2. the transaction is not void if
a. (1) (a) material facts are disclosed (or know) to board and
(b) board, in good faith, (c) authorizes by majority of
disinterested directors
i. If disinterested approve -- then business judgment
rule
b. (2) (a) material facts are disclosed (or know) to board and
(b) approved in good faith (c) by vote of stockholders, or
i. Then corporate waste standard
c. (3) contract is fair to corp.
i. Burden is on ∆ director
ii. Needs to be (1) procedurally fair, and (2)
substantively fair
e. Corporate Opportunity Doctrine
i. Forbids a director, officer or manager, employee from diverting to himself
any business opportunity that belongs to the corporation
ii. MBCA § 2.02(b)(6)-- eliminates the duty of director to disclose corp
opportunity
 iii. § 8.70 -- Safe harbor -- not subject for liability for taking business
opportunity if;
1. (a)(1) brings it to attention of corp and,
a. (i) qualified directors disclaims the corp’s interest, or
i. → § 8.62 procedure
b. (ii) Shareholders disclaim
i. → § 8.63 procedure
c. ^ before above, must disclose “all material facts
concerning the business opportunity known to the director
or officer”
2. (b) if director doesn’t follow procedure → No implication it was a corp
opportunity is created.
iv. ALI -- § 5.05 (pg. 914)
1. (b) define corp. Opportunity
a. (1) person offering expects it to be offered to corp
b. (2) director should reasonably expect to believe it would be
in the interest of corp., OR
c. (3) closely related business to corp.
v. Tests for corp. Opportunity
1. (1) Interest of expectancy -- something corp would value
2. (2) line of business -- “logically and naturally related”
3. (3) Fairness
3. Exculpation (only with duty of care)
a. § 2.02(b)(4) -- can eliminate or limit liability of director for any action taken or
failure to take an act, except for
i. (1) amount of financial benefit to which the director is not entitled (self-
dealing)
ii. (2) intentional infliction of harm
iii. (3) violation of distribution limit (8.32)
iv. (4) intentional violation of criminal law
b. → Exculpation -- doesn’t apply if director (1) didn’t act in good faith or (2) breached the
duty of loyalty
4. Indemnification
a. Rules of indemnification
i. Permitted to indemnify; § 8.51(a)(1)
1. 1) if;
a. (1) Acted in good faith, and
b. (2) reasonably believed
i. (a) official capacity -- conduct was in the best
interests of corp.
ii. (b) all others -- was at least not opposed to the best
interests of corp.
c. → If criminal -- no reasonable cause to believe his conduct was
unlawful
 2. 2) Or, allowed under articles
ii. Required to indemnify, § 8.52 or
1. Director won on merits or otherwise
iii. Prohibited § 8.51(d)(2) -- may not indemnify if;
1. (1) derivative action, or
2. (2) director was liable self-dealing
b. Process of indemnification
i. Qualified Directors -- § 1.43 -- for § 8.53 or 8.55
1. (1) not party to preceding
2. (2) not a director’s conflicting interest transaction, and
a. Director had (a) knowledge and a (b) material financial
interest (8.60)
3. (3) no material relationship with an interested director
a. Material relationship = relationship that would reasonably
be expected to impair the objectivity of directors judgment
ii. § 8.53-- Advancement --
1. (a) can advance funds if;
a. Director signs writing that he will repay if (1) not entitled to
mandatory and (2) is not entitled under § 8.54 of 8.55
2. (c) authorizations shall be made:
a. (1) by board of directors:
i. If two or more qualified directors (1.43), by a
majority vote; or
ii. If fewer than two qualified directors, then regular
quorum rules apply and unqualified directors may
vote
b. (2) by shareholders (except no votes of shares under
control of unqualified director)
iii. § 8.55-- Determination and Authorization of Indemnification
1. (a) cannot be indemnified until (1) determination that director is
within § 8.51(a) and (2) it is thereafter authorized
2. (b) determination shall be made by:
a. (1) Board of directors by majority vote of all qualified
directors (if more than two), or majority of members of a
committee of qualified directors
b. (2) Special legal counsel selected by
i. Two or more qualified director, or
ii. If less two, board of directors (including disqualified
directors)
c. (3) Shareholders
3. (c) authorization shall be made by:
a. (1) two or more qualified directors; or
b. (2) if not two, board of directors (including disqualified
directors)
 iv. § 8.54 can get court ordered indemnification and advancement
5. Close Corporation-- treated the same as partnership
a. Strictest good faith standard -- “Punctilio of honor most sensitive”
→ Piercing the Corporate Veil
1. General elements:
a. (1) Control,
i. Control goes above ownership -- need more “domination”
b. (2) control or ownership was used to (a) “commit a fraud or perpetuate a
dishonest act” (Freeman v. Complex Computing) or (b) to defeat “justice and
equity” (Polan)
i. Includes the traditional piercing factors below
c. (3) those acts proximately caused the injury to the plaintiff
1. As a general rule, a corp will have limited liability unless a sufficient reason to the
contrary appears:
a. (1) Ignoring corporate formalities (Marriott case)
i. Corp is not being treated as a separate entity by shareholders (i.e.,
serving as an “alter ego” or “mere instrumentality”)
ii. Taking advantage of parent-subsidiary relationship or affiliated
corporations to limit asset pool
1. Enterprise Liability Doctrine -- disregard of multiple corporations of
the same business under common ownership.
b. (2) Inadequate capitalization (Taxi case)
i. Shareholders must “put at the risk of the business unencumbered capital
reasonably adequate for its prospective liabilities”
c. (3) Fraud, avoidance of existing obligations, or evasion of statutory provisions
i. E.g. creating new corp to escape liabilities from judgment against old corp
d. (4) Comingling of assets
2. Make point of distinguishing
a. Involuntary creditors -- should be more likely to recover
b. Voluntary creditors
3. Equitable subordination and Uniform fraudulent conveyances act (pg. 127-128)
→ Operations
1. Financial Analysis
a. Balance Sheet (assets = liabilities + equity)
i. Categories
1. Asset - probable future economic benefit
2. Liability -- probable future economic outlay
3. Equity -- interests of owners
a. Retained earnings -- increased by net income from
previous year (not distributed to shareholders)
ii. → Should categorize according to liquidity-- E.g., Short term assets, short term
liabilities
iii. Additional paid in capital = (amount of money received over par value)
b. Valuation
 i. Discounted cash flows model or income
1. FV =PV (1+i)❑❑n
a. i -- periodic interest rates
b. n -- number of periods
2. PV =
FV or 1
FV ×
¿¿ ¿¿
3. If interest rates decrease, the cost of a business increases
ii. Book value method
1. Assets - liabilities = book value (net asset value)
iii. Net present value -- value today of future stream of cash flows
2. Financing (two main types)
a. Equity (6.01 authorizes both common and preferred)
i. Common -- voting rights, right to growth in corporation
ii. Preferred -- right to dividends, usually no voting right, advanced rights in
liquidation
1. Cumulative preferred -- if corporation misses dividends, the
dividends keep accumulating every year
2. Non-cumulative -- dividend is forgotten if not paid
b. Debt
c. Options
i. Option-- the right to buy stock at a specified time and place
ii. Call option-- the right, but not the obligation, to buy a specified asset at a
fixed price
1. Warrants -- another form of call option in connection with capital-
raising transactions
iii. Put option-- the right, but not the obligation, to buy a specified asset at a
fixed price
iv. Strike price-- the option price
d. Legal Capital -- legal concept of the corporation’s equity capital structure and the
value of capital
i. Legal capital = (par value x number of shares outstanding)
ii. Began as a way to protect creditors, but no longer functional
iii. MBCA 6.21 eliminated the concept of settling par value and stated capital
3. Limitations on distributions
a. → director is personally liability when distribute too much capital
i. But corp can indemnify the consequence
b. Del.
i. § 170 can only pay dividends out of
1. (1) surplus, and
a. § 154 - “surplus” = Total equity - par value
2. (2) net profits for fiscal year
ii. § 160 can buy back stock whenever, except if
1. (1) Capital of corp is impaired, or
2. (2) Purchase would impair the capital of corp.
 3. ^ (capital is impaired if exceed total equity - par value)
c. MBCA. § 6.40
i. (a) board of directors can authorize distribution
ii. (c) amount of dividend may not exceed;
1. Equity insolvency test
a. RULE-- corp is not able “(1) to pay debts (2) as they
become due (3) in the usual course of business”
b. Cash flow analysis-- consider ability to refinance
2. Balance sheet test
a. RULE-- (total assets) less than (sum of total liabilities +
preferred shareholder capital)
4. Right to inspect records
a. § 16.02 MBCA-- Inspection rights to beneficial owners
i. (1) bylaws, minutes of shareholder meetings, and like documents—
readily inspect
ii. (2) accounting records, board meeting minutes, shareholder list
1. RULE—must have (1) proper purpose and (2) describe with
reasonable particularity how directly connected with that
purpose
b. Del § 220 -- limited to inspection for a proper purpose, and also extend to
beneficial owners
5. Combinations / restructuring
a. ALWAYS -- consider if P has enough shares authorized -- if not, need
shareholder approval
b. Types of Combinations or Reorganizations
i. (1) Statutory Merger
1. T is merged into P, T shares cease to exist and are converted into
P shares (Liabilities of T become P’s)
2. MBCA
a. P shareholders
i. Only vote if dilutive-- more than 20% § 6.21(f)
1. Only need majority if required
2. No appraisal rights unless vote
b. T shareholders
i. Must vote
ii. Appraisal rights unless, market exception
1. (1) publicly traded stock before, and
2. (2) receive cash or publicly traded after
3. Del (look at pg. 1005) (notes 999-1023)
ii. (2) Triangular merger
1. Leaves T assets in sub of P-- T shareholder receive consideration
2. MBCA
a. P shareholders
i. Only vote if dilutive -- more than 20%
 1. Majority
2. No appraisal rights unless vote
b. T Shareholders
i. Same as statutory (1) above^
3. Del (pg. 1007)
iii. (3) Purchase of assets
1. P purchases all or substantially all of T’s assets and assumes
some or all of T’s liabilities in exchange for P stock. T will dissolve
after
2. MBCA
a. P shareholders
i. Only vote if dilutive to shares
1. Maj. needed
2. Appraisal rights only if vote
b. T shareholders
i. No vote required § 12.01
1. Sale in ordinary course
2. Sale to sub
ii. Vote required § 12.02 TEST
1. If corp is left “without a significant continuing
business activity”
2. Conclusively retained significant activity if
retain;
a. (1) 25% of total assets, and
b. (2) 25% of income from (a)
operations or (b) revenue from
continuing operations
iii. Procedure if § 12.02
1. Board approves, then shareholders approve
iv. Abandonment -- § 12.02(f) -- if at any time the
board decides to abandon planned sale, can do so
without shareholder approval of abandonment.
iv. (4) Tender Offers
1. P offers to buy T shares directly from shareholders (avoids T
board approval)
2. P -- only need board approval (unless dilutive)
3. T -- no shareholder vote, just buy the offer
c. Dissenters rights (appraisal rights)
i. Shareholder is entitled to get court to determine FMV § 13.02(a)
ii. No right to appraisal for publicly traded corp. § 13.02(b)
iii. Procedure -- §§ 13.20 - 13.21
6. Dissension and Oppression
a. § 14.30 Dissolution -- may dissolve if -- in court proceeding -- can prove
i. 1) directors are
 1. (a) deadlocked,
2. (b) shareholders unable to break deadlock, and
3. (c) irreparable injury to the corp is threatened or being threatened
ii. 2) directors in control are acting, or will act, in an
1. (a) oppressive or
a. Oppressive conduct -- defeating the minorities’ reasonable
expectations of returns for committing their capital to the
venture
i. Not subjective: what the majority of the
shareholders knew or should have known at the
time they joined
b. Firing/un-reelection -- minority presumption that it was
oppressive. Wilkes v. Springside Nursing
i. Controlling group needs to demonstrate legitimate
business purpose (burden then shifts to minority)
ii. Minority -- can show alternative course of action
that is less harmful to minority
2. (b) fraudulent manners
iii. 3) directors are deadlocked for at least two shareholder meetings
1. ^ can only be a year
iv. 4) corporate assets are being wasted or misapplied to noncorporate
purposes
1. Same burden-shifting test as oppression
b. § 14.34 → Corp can elect to purchase share of minority
i. Corp can purchase fair value of shares of all petitioning shareholders
within 90 days after petition is filed

Limited Liability Companies

→ Introduction
1. Policy -- set up for maximum freedom to contract. Limited default rules
2. Single member LLC -- disregarded entity (taxed as sole proprietorship)
3. Multiple member LLC -- taxed as partnership
→ Formation
1. § 201
a. (a) must (1) sign and (2) delivery certificate of organization to secretary of state
b. (b) Certificate must include
i. (1) name → § 108
1. Must contain LLC designation
2. Must be distinguishable
a. If not, must apply to state to use it
ii. (2) street and mailing address of initial designated officer)
iii. (3) if no members -- statement making that known
c. (d) → timing (so long as there are members, not (b)(3))
 i. (1) Formed when secretary has (1) filed and (2) it has at least one
member and (3) certificate doesn’t delay it
ii. (2) Can provide a delayed effective date
2. § 113 must designate an (1) office and (2) agent for service of process
3. Proof Publication -- Nebraska requires publication in legal news
4. § 104 -- Nature, purpose, and duration
a. (a) distinct entity
b. (b) may have any lawful purpose
c. (c) perpetual duration
5. § 105-- Powers -- LLC has capacity to sue and be sued
6. § 106 -- Governing law = state of certification
a. Governs (1) internal affairs and (2) liability of partners
7. § 208 -- Certificate of existence
a. Policy -- allows someone to get company information
b. (a) on request -- secretary may give certificate of existence -- must include
i. (1) companies name
ii. (2) date of formation
iii. (3) All fees, taxes, and penalties not paid
iv. (4) - (8) others
8. § 209 -- Annual Report
a. (a) each year, must file annual report -- must include → same requirements as certificate
of organization
b. (c) between January 1 and April 15
9. → Foreign limited liability company → §§ 803-805
→ Operating Agreement
1. § 110 -- scope, function, limit
a. (a) operating agreement governs
i. (1) relations among members and LLC
ii. (2) rights and duties of a manager
iii. (3) activities of the company
iv. (4) means and conditions for amending operating agreement
b. (b) If not addressed in operating → This act governs
c. (c) operating agreement may not,
i. (2) forum shop law → § 106
ii. (4) except for below → eliminate duty of (a) loyalty (b) care or (c) other
fiduciary duties
iii. (5) except for below → eliminate contractual obligations of good faith and fair
dealing
iv. (11) restrict rights under § 112 except for § 112(b)
d. (d) if not manifestly unreasonable, operating agreement may (look at table in
cmts. On pg. 998)
i. (1) Restrict or eliminate,
1. (A) duty to account and hold as trustee profits and profit
2. (C) to refrain from competing with company
 ii. (3) Alter the duty of care -- except for intentional or knowing violation of
law
iii. (4) Alter any other duty-- including eliminating aspects of the duty
iv. (5) set standard to measure the performance of contractual obligation of
(a) good faith and (b) fair dealing.
e. (g) -- Indemnification -- may alter or eliminate the indemnification or limit
manager or members liability, EXCEPT FOR
i. (1) breach of duty of loyalty
ii. (2) receives a benefit for which they are not entitled
iii. (3) improper distribution → § 406
iv. (4) intentional infliction of harm on the company or member, or
v. (5) intentional violation of criminal law
2. § 111-- Operating Agreement
a. (a) LLC is bound and may enforce operating agreement
b. (b) → members are deemed to assent to agreement
3. § 112-- Effect on 3P’s
a. (a) Allow’s operating agreement to give veto power to lenders or 3P’s
b. (b) operating agreement governs how dissociated members and transferee
members are treated
c. (c),(d) governs records
4. Haney -- when operating agreement states exit right, can they force judicial statutory
dissolution
a. General rule-- When operating agreement provides dissolution right to dissenter
who is allowed to receive FMV of interest—Court should not force statutory
dissolution
b. But -- if would cause inequitable result -- then court can ignore exit right
→ Limited Liability
1. § 304 liability of member and manager
a. (a) debts, obligations, or other liabilities are solely responsibility of
i. → (1) LLC and (2) do not become debts of member because they are also a
manager
b. (b) Failure to observe any particular formalities in (a) powers or (b) management
is not ground for imposing personality liability
→ Becoming a Member
1. § 401-- Becoming a member
a. On formation
i. (a) If one member -- agreement between member and organizer
1. ^ can be same person
ii. (b) If multiple -- those people that agreed before formation (all pre-
members)
1. Organizer doesn’t have to be a member
b. (c) After formation-- person becomes member by,
i. (1) operating agreement,
ii. (3) UNANIMITY -- consent of all members
 iii. (4) if -- ceases to have any members -- 90 days later,
1. last member (1) designates a person and (2) that person consents
→ Operation
1. No default rule for income sharing
a. But → § 404 right to distribution (default rule)
i. (a) if makes distribution = must be in equal shares between members and
dissociated members
2. Limits on distributions→ § 405
3. § 407 Management
a. (a) default -- member manages (unless expressly provided)
b. (b) Rules of member managed
i. (1) management vested in members
ii. (2) each member = equal rights in management
iii. (3) Ordinary course decisions = maj. Vote
iv. (4) Outside ordinary course = unanimous
v. (5) Amendment to operating agreement = requires unanimous
c. (c) Rules of manager managed
i. (1) except below → every decision is exclusive to managers
ii. (2) managers have equal rights in management
iii. (3) Ordinary course -- Maj. of managers
iv. (4) ALL members required to approve,
1. Sell substantially all assets
2. Outside ordinary course
3. Approve merger
4. Amend operating agreement
v. (5) Manager may be chosen at any time by consent of Majority of the
members
1. Can also be removed at any time by same way
d. (d) No meeting required -- to take an above act
e. (e) a member who wrongfully causes dissolution → cannot participate in any of the
above
4. § 301 -- Agency
a. (a) A member is not agent solely by being a member
b. (b) → not being a member doesn’t prevent liability to LLC
5. Transferring interests
a. § 501 -- Transferable interest in personal property
b. § 502 -- Transfer of Transferable Interest
i. (a) can,
1. (1) transfer entire interest and
2. (2) does not by itself cause a member’s dissolution
3. (3) but does not entitle a transferee to,
a. Participate in management,
b. To have access to records
i. Except in dissolution (c)
 ii. (b) Transferee gets economic rights
iii. (e) LLC doesn’t have to give effect until the company has notice of the
transfer
iv. Other sections we left out
→ Duties
1. § 409 Standards of Conduct for members and managers
a. Member of member managed -- duty of loyalty in (b) and duty of care in ©
i. (b) duty of loyalty, includes;
1. (1) To account
2. (2) Refrain from dealing in company in way -- or on behalf of
another person -- in interest adverse to company
a. (e) → defense that the transaction was fair
3. (3) refrain from competing in company activities
4. (f)-- Defense -- on consent of all members may authorize -- after
all material facts have been disclosed -- an act that would violate
duty of loyalty
ii. (c) duty of care
1. Act with the care that a (1) person in a like position would
reasonably exercise under similar circumstances and (2) in the
best interests of the company
b. Manager-Managed
i. (b) and (c) → apply only to managers and not members
ii. (d) -- duty of contractual good faith and fair dealing -- applies to both
members and managers
iii. (g)(5) → Member does not have fiduciary to duty company solely by being a
member
iv. Sub (f) → only applies to members
→ Ending or Exiting the LLC
1. Dissociation
a. § 601 Members power to dissociate / wrongful dissociation
i. (a) member -- has power to dissociate at any time -- by express will
(under §602(1))
ii. (b) wrongful dissociation only if,
1. (1) in breach of an express provision
2. (2) judicial expulsion § 602(5)
3. (3) Becomes a debtor
4. (4) If member is company, trust, or other entity -- dissociated
automatically if dissolved
iii. (c) → wrongfully dissociated member is subject to damages
b. § 602-- person is dissociated when,
i. (1) persons notice of express will to withdraw
ii. (2) event stated in operating agreement
iii. (3) expelled pursuant to operating agreement
 iv. (4) Person is expelled with unanimous consent; (further qualifiers in
statute)
v. (5) on application by company → judicial order if person
1. (a) has or is engaging in wrongful conduct that has adversely or
materially affected the company’s activities
2. (b) willfully or persistently committed -- material breach of
operating agreement
3. (c) engaged or engaging in activities that make is reasonably
practicable to carry on LLC
vi. (6) in case of individual,
1. (a) person dies, or
2. (b) in member managed → (1) guardian is appointed for person, or (2)
judicial order of incompetence
vii. (7) → special member managed situations
viii. (14) company terminates
2. Dissolution
a. § 701 -- Events causing dissolution
i. (a) the company is dissolved -- upon occurrence of any of the following,
1. 1) event statied in operating agreement
2. 2) consent of ALL members
3. 3) 90 days without members
4. 4) application by member to court;
a. (a) Conduct of business is unlawful, or
b. (b) not reasonably practical to carry on
5. 5) on application of member to court, on grounds members in
control have acted,
a. (a) acting in manner that is illegal or fraudulent,
b. (b) acted in manner that was oppressive, or is directly
harmful to applicant
b. § 702 -- Winding Up,
i. (a) company continues after dissolution only for the purpose of winding up
ii. (b) in winding up,
1. (1) → first have to discharge (a) debts and liabilities, (b) close company
activities, (b) distribute assets of company
2. (2) may also,
a. (A) Deliver dissolution statement to secretary
b. (B) Preserve company as going concern for reasonable
time
c. (D) transfer company property
d. (G) perform acts appropriate to winding up
iii. More in section we did not write down (on who is in charge of dissolution)
→ Suits by members
1. §§ 901-906