I Intro to Law of Enterprise Organization NYU School of Law.docVIP

i intro to law of enterprise organizationa. efficiencies1. pareto efficiency- no change can be made making at least one person better off without making at least one person worse offdoesnt go to net valuedoesnt address externalities2. kaldor-hicks efficiency if at least one person would gain, after all losers are compensateddoesnt involve actual compensation3. both ignore distributive effects and legitimacy of original asset distributionb. developing the firm1. adam smith believed agency costs of monitoring managers and assuring incentive alignment would be to high2. coase theorized extra-organizational transaction costs would be higher than inter-organizational agency costs.c. agency costsmonitoringbonding- trust creation costsresidual incentive alignment costsii agencyrestatement 2nd of agency (rsa)1. fiduciary relation resulting from:a. manifestation of consent by principal that agent shall act on his behalf and subject to his controlb. consent by agent2.termination by either partymaster/servant vs. ic1. extent of control over detailsa. work hours2. is agent involved in a distinct occupation3. is the work typically done by an employee or an ic4. skill required5. who provides tools and workplace6. length of time of employment7. payment by time or by job8. is the work part of the employers regular business9. what do the parties believe10. is the employer in businessactual authorityapparent authority reasonable 3d party may infer authority from acts or statements of pinherent authority a would ordinarily have such authority and t doesnt know otherwise 161 a. liability in tort respondeat superior1. generally liable if and only if there is a master/servant relationship and agent is acting within the scope of his employment.2. rs2 228 within scope of employment if:a. type of work employed to performb. occurs within time/space parameters of employmentc. intent at least in part to serve employer, andd. in case of use of force, force not unexpectable by master3. 230 forbidden act may be w/in scope of employment4. 231 criminal or tortious acts may be w/in scope5. 232 failure to act may be w/in scopehumble v. martin woman leaves car at station, car rolls away and injures humble owns station and schneider, ic runs it agreement with schneider found to create agency relationshipo perform other duties as required by companyo humble pays majority of utility expenseso humble set hours of operationo terminable at will of humblehoover v. sun oil sun owns all equipment and station and leases to barone no agency relationship foundo barone independently determined hours of operation and hiring conditionso barone had risk of profitabilityo no control over day to day operationsb. liability in contractnogales service center ariz. 1980 p. 20 arcos rep promises a fuel discount if certain conditions, arco reneges trial court refused to give instruction on inherent authority appeals upheld for procedural reasons, but inherent seems to have been present jenson v. cargill minn. 1981 p. 16 cargill financed warren grain mill agency found due to extent of cargills control over operations cargill an active participant in managing the business, and made the key economic decisions illustrates risk of overly active creditors becoming ps under lawc. nature of fiduciary relationshipduty of obedienceduty of care good faith manner to best advance ps interests not to work for self benefitduty of loyalty good faith as a reasonable person would become informed in exercising agency1. duty of loyaltya. rs2 387 duty to act solely for ps benefit in all matters connected w/ agencyb. 338 duty to give p any profit made in connections with transactions conducted on behalf of pc. 389 duty not to deal as adverse party without ps knowledge - voidabled. 390 when acting as adverse party w/ principals consent, duty to deal fairly and disclose all facts which a knows or should know would reasonably affect ps judgment tarnowski v. resop minn. 1952 p. 34 a takes secret commission on coin op franchise purchase by p deal found to not actually contain what it was purported to contain p remedy from agent includes1. secret commission2. costs of recovery from seller3. recovers more than he lostrestatement 2 of trusts203 trustee accountable for any profit arising from administration of trust even if it doesnt arise from breach of trust205 liability in case of breach liable for any depreciation of estate any profits made by trustee any profits which might otherwise have been made by trust206 liability for breach of loyalty - 205 applicable when trustee sells property to himselfin re gleeson ill. 1954 p. 36 tenant becomes trustee when landowner dies increases rent and extends lease for next season claims too difficult to secure a new tenant trustee was honest with beneficiaries court holds he was barred from dealing with himself as trustee and must return all profitso regardless of good faith or disclosureiii. joint ownership: partnershippartnership property: tenancy in partnershipmeinhard v. salmon ny 1928 p. 43 duty of loyalty jv covering lease of building in ny one partner approached re: leasing a larger piece of land and does deal other partner feels left out punctilio of on honor the most sensitive salmon should have shared at least notice of the opportunity w/ his partner meinhard gets 49% of the new venturevohland v. sweet ind. 1982 p. 47 sweet employed in exchange for 20% of profits doesnt participate in mgt or financing, or file as a partner 7(4) upa receipt of share of profits is pf evidence of partnership throughout course inventory increases through investment of earnings, which otherwise would have belonged by 20% to sweet. sweet found to be a partner entitled to “wind up” nb: if vohland had reinvested solely out of his 80% he probably could have avoided thismunn v. scelera conn. 1980 p. 51 brothers agree to build house, go bankrupt before going kaput, s agree to have house finished by brother a brother a defaults and s seek recovery against brother b upa 34-39 dissolution does not discharge one partner from responsibilities, but when a party assumes partnership obligation, departing party absolved w.r.t t if t, knowing of the agreement, consents to a material change in nature or time of payment obligations. court finds brother b non-liable b/e s materially altered the contract w.r.t. payment terms.in re comark cal. 1985 p. 55 partnership goes bankrupt, but individual partners do not partnership creditor wins judgment against on partners property court hold creditor cannot enforce because such property must be accessible to partnership creditors as a whole, to be distributed by the bankruptcy trustee.jingle rule (p. 57 and slides)parity ruleupa 4078 bankruptcy (ch 7) rupa 807partnership creditors always have first claim on partnership assetspersonal creditors have first claim on personal assetspartnership (only as a whole comark) and personal creditors on parityapplies only if partnership is not in ch7 bankruptcy, and upa is in forcenational biscuit v. stroud n.c. 1959 p. 58 stroud and freeman partners in a grocery stroud tells nabisco he wont be responsible for any more orders freeman places orders general partners under upa 18 have equal rights in mgt and conduct of partnership business. stroud held liable b/e he couldnt restrict power and authority of his general partner to conduct “ordinary matters connected with partnership business”dissolution and disassociationuparupa29 dissolution upon any change of partnership relations i.e. exit of a p, dissolution forces winding up601 disassociation, pursuant to agreement pship can continue if a p departs37 winding up, orderly liquidation and settlement of pship affairs801 dissolution onset of liquidation and winding up30 termination, follows winding up38 dissolution caused in any way, except in violation of pship agreement, unless otherwise agreed, each p may call for p property to be used to pay off liabilities, and remainder to be distributed in cash (sale of assets)issuesability of ps to opt out of statutory wind-up when a partner leaves (adams v. jarvis)mode of liquidation in statutory wind-up (dreifurst v. dreifurst)limitations on power to force statutory dissolution and wind up (page v. page)adams v. jarvis wis. 1964 p. 63 dr. adams withdraws from 3 doc partnership pshp agreement holds withdrawal does not result in termination trial court finds withdrawal works as dissolution appeal finds parties are free to structure a pship such that withdrawal does not force such a dissolution which would force winding updreifurst v. dreifurst wis. 1979 p. 66 3 brothers own 3 mills in partnership, one wants dissolution and wind up and sale of assets trial court just splits the mills upa 38 allows payment in cash ergo sale of assets in kind distribution only if agreed to by partnership or in mich.o no creditorso sale sense less b/e nobody else interested in assetso in kind is fair nb if in kind is really more economically suitable, remaining ps can buy withdrawing ps rights to a liquidation, and theyre probably free to bid on assets.page v. page cal. 1961 p. 70 partnership agreement to run laundry when partnership appears to be about to make good money, big p calls for dissolution little p argues big p wants opportunity for himself restrictions on dissolution only through a term of partnership term can be implied only when supported by evidenceo i.e. to make a certain amount of money oro recoup investment if had proven bad faith (fiduciary breach), dissolution would be wrongful and could sue for damageslimited partnership limited liability for limited partners who dont manage the business must always be one general partner if ltd partners exercise mgt powers they may lose their ltd liabilityoriginally liked b/e you can get partnership (1 tier) taxation with corp. ltd liabilitynow mostly llcsdelaney v. fidelity lease ltd tex. 1975 p. 74 3 ltd partners formed a corp. to act as general partner corp only function was to operate the partnership no requirement that creditor show reliance on partnership if they controlled partnership through the corporation than they are liable as general partnersllc can have partnership taxation unless publicly traded equityactual authorityapparent authority reasonable 3d party may infer authority from acts or statements of pinherent authority a would ordinarily have such authority and t doesnt know otherwise 161iv. introduction to the corporate form5 basic characteristics of a corporation legal personality with indefinite life ltd liability for investors free transferability of share interests centralized management appointed by equity investors ownership and profit sharing by capital investment (only sort of, only by ipo price)why does delaware dominate?race to the bottom/race to the top?management paradise or most efficient body of law and best procedure?corporation statutes are primarily enablingcant always contract around themjudicially created fiduciary dutiesfederal securities lawmandated terms: voting stock board of directors shareholder voting for certain transactionscharter also defines: corporations name, original capital structure different voting shares/rights can board issue blank check preferred? may establish size of board and other governance terms annual elections or classifiedbylaws must conform to incorporation statute and charter operating rules responsibilities of executives and directorssometimes sh have inalienable right to alter bylaws, sometimes directors onlyshareholder agreementsagreements between shcase for limited liability easterbrook and fischel p. 93 decreases need for monitoring corporation less need to monitor other sh (in case of joint and several liability) makes diversification and passivity a more rational strategy the above promote free transfer, which incentives mgt to act efficiently makes creditors real monitors of mgt tort exposure (hh notes 38)centralized managementboard can act contrary to sh majoritybod has primary management powerautomatic self cleansing v. cunningham eng. 1906 p.98 hh p. 42 articles provide majority required for special resolution compelling board wanted board to sell some assets at specific terms but only has 55% majority judge doesnt force sale protects boards responsibility to the minoritydel 271 requires board motion and sh vote on sale of assets, board can still decide against sale even if sh are pro, why?board still has duty of care and loyalty to the minority (liability)del 141 certificate of incorporation may modify board powerrbca 8.01 permits modification of board powers by sh agreement (which must also be in articles) under 7.32 but only if the corp. isnt exchange tradedjennings v. pittsburgh mercantile pa. 1964 p. 103 hh 46 executive solicits re agent to explore a sale and leaseback deal of all co. owned land assures board approval and offers commission board does not approve and doesnt pay commission court held no authority for this transactiono agent cant unilaterally create apparent authorityo transaction at issue was so drastic thato jennings was on constructive notice to verify authoritymenard v. dage mti ind. 2000 p. 106 hh 46 president operated co. for years w/o board input president signs and sale is held valid ruled to have inherent authority pres even told menard he had to go back and get approval puzzlingv. debt, equity, and economic valuebasic concepts of valuation hh 47economic risk calculi hh50efficient capital market hypothesis- stock prices reflect all public info. bearing on value of stock p. 123 hh 58debt v. equityinterest is pretax, dividends are notvi. protection of creditorsltd liability means creditors can only recover from corp. ergo greater risk.protection strategies mandatory disclosure financial statements rules regulating corporate capital safeguard duties imposed on directors, creditors, or sha. regulating corporate capitala. requiring equity contributionsb. restricting distributionsi. dividend testsii. fraudulent conveyance doctrineiii. fiduciary duties to creditorsiv. equitable subordinationv. piercing the corporate veilb. dividend testsa. minimum level of capital (abandoned in us)b. prohibitions on issuing dividends when net assets fall below a certain stated amounti. stated amount chosen by companyii. cant pay dividends when value falls belowc. capital surplus testi. can only pay dividends out of surplusii. some re only, some also paid in surplusd. del 170a nimble dividend testi. capital surplus or if no surplus can pay out ofii. current or preceding year net profitse. equity insolvency testi. cant pay dividends if inability to meet debt obligations would resultf. tests can be avoidedi. sh can reduce stated capitalii. can revalue assets upward c. distribution constraintsa. ny bus corp law 510 may only pay out of surplus and cannot render company insolventi. 516a4 can only reduce stated capital w/ sh approvalb. dgcl 170 nimble test i. capital surplus or if no surplus can pay out ofii. current or preceding year net profitsc. cal 500 modified retained earningsi. re orii. assets, as long as assets remain 1.25x liabilities and cacld. rmbca 6.4 i. cant pay dividends if it would make you unable to pay debts as they come due orii. if liabilities plus preferential sh claims exceed assetsiii. but can use a fair value asset test (not bound to balance sheet value)d. standards based dutiesa. director liabilityb. credit lyonnaise del.1991 hh72i. del: when a firm is insolvent or “in the vicinity of insolvency” duty to consider not only sh, but creditors as well ii. firms must maximize value of a firm as a wholeiii. why didnt the bond holders have to covenant for this?e. creditor liability: fraudulent transfersa. fraudulent conveyance doctrine-effective obligation to t parties dealing with an insolvent or near insolvent debtor must give fair value in any transaction or can be targeted by debtors creditors.b. ufta 4a1 & ufca 7 p. 140i. present or future creditors may void transactions with intent to hinder, delay or defraud any creditor of a debtorii. void transfers made w/o reasonably equivalent value if debtor left w/ unreasonably little assets in relation to its business or debtor intended, or reasonably should have known that he was incurring debts beyond his ability to pay when due, or if the debtor becomes insolventiii. kupetz v. wolf future creditors who knew or could easily have found out about transfers cannot attack themc.i. capital surplus or if no surplus can pay out ofii. current or preceding year net profitsf. leveraged buyouts crease senior preferred debt, displacing equity and old debtg. equitable subordination applies where controlling party is also a creditora. costello v. fazio 9th cir. 1958 p. 142 hh 78i. partnership with fazio as principal contributorii. partners withdraw most of their investments and incorporateiii. corporation goes bankrupt 2 years later, complete turnover of creditorsiv. new capital found to be inadequate v. when a partnership is incorpora