Shlensky v wrigley case brief

Business Law

CHAPTER 17

GOVERNANCE AND STRUCTURE:

FORMS OF DOING BUSINESS

LECTURE OUTLINE

See Exhibit 17.1 and PowerPoint Slides 17-1, 17-2, and 17-3 to help students compare the various organizations.

17-1 Sole Proprietorships (See PowerPoint Slide 17-4)

17-1a Formation

· Done by an individual

· May have a fictitious name

Example: Ralph Jones d/b/a Spuds Brewery

· No formal requirements for formation

· May have to publish d/b/a name

17-1b Sources of Funding (See PowerPoint Slide 17-5)

· Loans

· Government help

17-1c Liability (Full Personal Liability of Owner)

17-1d Tax Consequences

· Owner claims all income and losses

· No separate filing requirement

17-1e Management and Control (All Assets With One Person)

17-1f Transferability of Interest (See PowerPoint Slide 17-6)

· Business can be sold – property, inventory, and goodwill

· Owner will usually sign a noncompete agreement

17-2 Partnerships (See PowerPoint Slide 17-7)

· Governed by the Uniform Partnership Act (UPA)

· Adopted in 49 of 50 states

· In absence of agreement UPA controls

· Revised Uniform Partnership Act (1994) – adopted in most states now

· Definition – Voluntary Association of Two or More Persons/CoOwners in a Business for Profit (See PowerPoint Slide 17-8)

17-2a Formation

336 Part IV Business Management and Governance

Chapter 17 Governance and Structure: Forms of Doing Business 336

335

© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.

© 2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.

· Voluntary formation: by agreement

· Draw up articles of partnership

· See lists in Exhibit 17.2 and PowerPoint Slide 17-9 for requirements and suggestions

· Involuntary formation: partnerships by implication (See PowerPoint Slide 17-10)

· Sharing of profits

· Constitutes prima facie evidence that a partnership exists

· Exceptions – rent, wages, annuity to widow or estate, payment for goodwill

Examples: Shopping center leases with percentage of profits (landlord is not partner), employee profit sharing plans (they are not partners)

See PowerPoint Slide 17-11.

CASE BRIEF 17.1

Blumberg v. Ambrose

2015 WL 5604474 (E.D. Mich. 2015)

FACTS: During the summer of 2004, Roberta Blumberg (plaintiff) and Michael Ambrose (with LLC referred to as defendants) worked together at the health clinic of Tamarack Camps. Blumberg was a registered nurse and the Director of Health and Safety at Tamarack, while Ambrose was an undergraduate student and a clinical assistant. Blumberg and Ambrose collaborated to create and market a for-profit web-based electronic medical records program called “CampDoc” that would allow camps to input and access the medical records of their campers. This program was expanded to allow parents the ability to fill out health forms and medical histories on-line, as well as electronically submit information regarding allergies and medications. Blumberg participated in both the design and the development of the CampDoc system, including its prototype, and Ambrose wrote the code for the CampDoc software.

In the summer of 2009, Blumberg and Ambrose were able to pilot the software program at Tamarack. With the success of the pilot program, the two decided to market and sell the CampDoc program to other camps across the county.

In October 2009, Ambrose filed articles of incorporation for CampDoc as a Michigan limited liability company and, unbeknownst to Blumberg, included himself as the sole member. As part of organizing the company, Ambrose told Blumberg that she needed to sign several documents, including an employment agreement, which she did in May 2010. However, Blumberg did not believe that these documents altered her relationship as a partner with Ambrose. Ambrose also had conversations with Blumberg in 2011 about her interest in the profits of CampDoc, and he told her that “she would receive some percentage of the profits from the business.”

From 2010 to March 2012, Blumberg attended conferences for CampDoc. Blumberg “brought several dozen camps on board in 2011,” but she was not paid for that work. In 2012, Blumberg quit her job “as a registered nurse to devote [her] attention to CampDoc.” Blumberg never received compensation for her services in 2009. Blumberg was paid $100 in 2010, $1,000 in 2011, $6,250.02 in 2012, and $18,750.06 in 2013. Ambrose believed Blumberg's services in 2010 and 2011 were worth more than what she actually received, and that it was his intention to make Blumberg “a millionaire.”

In September 2012, Ambrose provided Blumberg with four more documents to sign − a consulting agreement, a participation plan agreement, a non-compete/non-disclosure agreement, and a confidentiality agreement. Although Blumberg claims that Ambrose considered her a “co-founder,” and called her “the heart and face of the company,” Ambrose's lawyers advised him that she should not be listed as an owner of CampDoc. Rather, Ambrose suggested that Blumberg own a “phantom” interest in the company, which would be “the equivalent of real equity.”

After reviewing the documents, Blumberg informed Ambrose that she intended to seek legal advice. Ambrose then terminated Blumberg's “employment” with CampDoc the following day.

Blumberg filed suit seeking to have the association between herself and Ambrose declared a partnership under Michigan's Uniform Partnership Act.

ISSUE: Had the parties created a partnership?

DECISION: There were enough factual issues that the court could not grant summary judgment. The parties worked together as a team. They intended to share profits from the company. Blumberg worked without compensation. They had formed the idea together and worked to develop it and then sell it.

ANSWER TO CONSIDER 17.2: A partnership agreement had been executed. Income was to be split and all final decisions were to be made by Chaiken. The three were not sharing profits, and there was no intent to create a partnership. The Commission’s decision that there was not a partnership was upheld. Chaiken was liable for unemployment taxes. Chaiken v. Employment Security Comm'n, 274 A.2d 707 (Del. 1971).

· Involuntary formation: partnership by estoppel (or ostensible partner) (See PowerPoint Slide 17-12)

· Results when someone allows the inference to be made that he/she is a partner

· Allowing name to be used to get a loan

17-2b Sources of Funding (See PowerPoint Slide 17-13)

· Capital contributions of partners

· Loans by partners

· Outside loans

ANSWER TO CONSIDER 17.3: Yes, Pope was an ostensible partner; credit was extended on that belief. There was the appearance of a relationship. Pope v. Triangle Chemical Co., 277 S.E.2d 758 (Ga. 1981).

17-2c Partner Liability (See PowerPoint Slide 17-14)

· Mutual principals and agents

· Partnership assets reachable by partnership creditors

· Personal assets reachable by partnership creditors when partnership assets are exhausted

CASE BRIEF 17.2

Vrabel v. Acri

103 N.E.2d 564 (Oh. 1952)

FACTS: Stephen Vrabel and a companion went into the Acri Café in Youngstown to buy alcoholic drinks. Without provocation, Michael Acri shot and killed the companion and seriously injured Vrabel. Michael was convicted of murder and sentenced to a life term. Florence and Michael Acri had owned the Acri Café as partners since 1933. From the time of their marriage in 1931 until 1946 (the shooting occurred in 1947), Michael had been in and out of hospitals, clinics, and so on for mental disorders. Michael did beat Florence during their arguments but had no other history of violence. He had been in exclusive control of the café at the time of the shooting since 1946 when Florence had obtained a legal separation. Vrabel brought suit against Florence seeking damages.

DECISION BELOW: The trial court awarded Vrabel $7,500.

ISSUE ON APPEAL: Was Florence liable as a partner to Vrabel for the injuries inflicted by Michael?

DECISION: No. The act was wrongful and malicious and not within Florence’s control since she had been excluded from the café for some time.

17-2d Tax Consequences in Partnerships (See PowerPoint Slide 17-15)

· Partnership does not pay taxes

· Partnership files informational return

· Partners report income and losses on their returns

17-2e Management and Control (See PowerPoint Slides 17-16 and 17-17)

· Partnership authority

· Unless otherwise agreed, each has equal management authority

· May delegate daytoday authority to one partner

· Each partner is mutual principal and agent of the others

· Borrowing – done routinely in most partnerships

· Unanimous consent required for:

· Confession of judgment

· Selling goodwill

· Admission of another partner

· No compensation for work unless agreed

· Partner fiduciary duties (See PowerPoint Slide 17-18)

· Mutual principals and agents

· Each is to act in the best interests of the partnership

· Partnership property

· Property contributed to the firm or purchased with partnership assets

· Own property as tenants in partnership

· Equal rights to possession and use for partnership purposes

· Upon death of partner, rights automatically transfer to remaining partners

Example: A, B, and C are partners. B dies. A and C own property. B’s widow has right to value of B’s interest but not the property.

· Partner’s interests

· Personal property

· Transferable

ANSWER TO CONSIDER 17.4: The theory is a simple one – the Facebook shares were partnership property and could not be distributed. The partnership owned the shares and they had to either be sold and the proceeds distributed or the shares had to be allocated by investor interest. The case turned on the simple concept of partnership property.

An excerpt from the court opinion appears below:

The Favored LPs argue in the first instance that they had an ownership interest in the Partnership's underlying Facebook shares. That is wrong.

By claiming an ownership interest in particular Facebook shares, the Favored LPs are claiming an ownership interest in specific Partnership property. By statute, a limited partnership is a separate entity, and individual partners do not have any rights in specific partnership property. The LP Act says just that: “A partner has no interest in specific limited partnership property”. What a partner instead owns is a “partnership interest.” The LP Act defines that term as “a partner's share of the profits and losses of a limited partnership and the right to receive distributions of partnership assets”. Ownership of a partnership interest does not carry with it any rights to specific limited partnership property.

Although clear as a matter of statutory law, the Partnership Agreement reiterated these propositions. Section 1.4 of the Partnership Agreement, titled “Purposes, Business and Objections,” confirmed that investors in the Partnership were not obtaining an ownership interest in Facebook shares. It stated:

The purpose of the Partnership and the business to be carried on and the objectives to be attached by it are to invest its funds in the stock of Facebook. Notwithstanding the foregoing, each Limited Partner hereby acknowledges and agrees that he is investing in the Partnership and will acquire an equity interest in the Partnership, and will not, in connection with this Agreement or related investment, own nor acquire any shares of stock in Facebook. ESG Capital Partners II LP v. Passport Special Opportunities Master Fund LP, 2015 WL 9060982 (Ct. Chancery 2015).

17-2f Transferability of Interests (See PowerPoint Slides 17-19 and 17-20)

· Partner’s interest is personal property

· Can be pledged to creditors and transferred

· Transferee does not become a partner

· Admission of new partner requires unanimous consent

· Transferring partner is not relieved of liability

· Some partnership agreements require partners to offer it first to remaining partners

17-2g Dissolution and Termination of the Partnership (See PowerPoint Slides 17-21 and 17-22)

· One partner no longer associated with the partnership

Examples: Retirement, death

· Need not result in termination; can just be a change in structure or can proceed to termination

· Termination

· Assets are liquidated

· Distribute in this order: outside creditors; partners’ advances (loans); capital contributions; profits

· Dissolution by agreement

· Dissolution by operation of law: death of a partner, bankruptcy of partnership or partner

· Dissolution by court order

17-3 Limited Partnerships

· Governed by Uniform Limited Partnership Act (ULPA) (See PowerPoint Slide 17-23)

Recent revision is called Revised Uniform Limited Partnership Act (RULPA)

· Adopted in nearly all states

· Use ULPA or RULPA when no agreement

· RULPA has limited adopters but will see more

· ULPA was drafted at a time when limited partnerships were not popular and size was smaller

· RULPA addresses the needs of the larger limited partnership

354 Part IV Business Management and Governance

Chapter 17 Governance and Structure: Forms of Doing Business 355

© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.

© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.

· Structure (See PowerPoint Slide 17-24)

· Must have at least one general partner

· Must have at least one limited partner

· Liability of limited partner is limited to capital contribution

· Liability of general partner is all personal assets are subject to attachment

17-3a Formation (See PowerPoint Slides 17-25 and 17-26)

· Must meet statutory requirements; if not met a general partnership is created

· Must file certificate of limited partnership; see text for list of requirements and note differences between ULPA and RULPA

· RULPA is much briefer

· Corrections can be filed by limited partners

17-3b Sources of Funding (See PowerPoint Slide 17-27)

· Limited partners provide most of the financing

· Limited partners can contribute services under RULPA

· Loans are used – called advances when made by partners

· Under RULPA, limited partners can use services already given as a contribution

17-3c Liability (See PowerPoint Slide 17-28)

· Limited partners have limited liability

· Cannot participate in management

· Cannot use their names in partnership name

· Must file correctly

· Under RULPA, can do the following and still retain limited liability status:

· Can be an employee

· Can consult with and advise the general partner

· Can act as a surety or guarantor for the limited partnership

· Can vote on amendments, dissolution, sale of property, and debt assumptions

17-3d Tax Consequences (See PowerPoint Slide 17-29)

· Taxed the same as general partnerships

· Partners report profits and losses on individual returns

· Limited partners get direct tax benefits with limited liability

· IRS scrutinizes to be certain it is a partnership and not a corporation

17-3e Management and Control (See PowerPoint Slide 17-30)

Management is responsibility of general partner

· Profits and distributions

· Authority belongs to general partner to make decisions here

· Profits and losses are allocated on the basis of capital contributions

· RULPA requires agreement for splitting profits and losses to be in writing

· Partner authority (See PowerPoint Slide 17-31)

· General partner has same authority as in general partnership

· Can restrict by agreement

· Consent of limited partners required for:

· Admitting a new general partner

· Admitting a new limited partner (can give authority in the agreement)

· Extraordinary transactions (selling assets)

· Limited partners have right to inspect books and records

17-3f Transferability of Interests (See PowerPoint Slide 17-32)

· ULPA allows transfer of interests

· May have significant restrictions on transfer to prevent liability under federal securities laws

· The more easily an interest can be transferred, the more likely the IRS is to label it a corporation

· Transfer of a limited partner’s interest does not dissolve the partnership

· Under RULPA, assigning limited partner can be given the authority to make the assignee a limited partner

17-3g Dissolution and Termination of a Limited Partnership (See PowerPoint Slide 17-33)

· RULPA provides for the following means:

· Expiration of time period in agreement or event as provided in agreement

· Unanimous written consent of all partners

· By court order

· Withdrawal of general partner

· If termination is elected, assets are distributed as follows (See PowerPoint Slide 17-34)

· Outside creditors

· Partners’ distributions

· Return of capital contributions

· Remainder split according to agreement

17-4 Corporations

· Characteristics (See PowerPoint Slide 17-35)

· Unlimited duration

· Free transferability of interest

· Limited liability

· Centralized management

· Legal existence

· Can hold title to property

· Can sue or be sued

17-4a Types of Corporations (See PowerPoint Slides 17-36 and 17-37)

· Profit

· Not for profit

· Domestic – in the state of incorporation

· Foreign – everywhere else

· Government corporations – like Fannie Mae (until its collapse)

· Professional corporations – limited liability on everything except professional malpractice

· Close or closely held corporations

· Limited number of shareholders

· Subject to less formality

· Subchapter S or S corporation

· IRS election to be treated as partnership for tax purposes

· Still have limited liability

· Limits on size for this election

BUSINESS PLANNING TIP (Corporation Requirements): Cover the Small Business Protection Act and requirements for Subchapter S Corporations.

17-4b The Law of Corporations (See PowerPoint Slide 17-38)

· Model Business Corporation Act (MBCA)

· Liberal statute

· One-third of the states have adopted

· Revised in 1984

17-4c Formation (See PowerPoint Slide 17-39)

· Must comply with statutory requirements

· Where to incorporate

· Status of state’s corporation laws

· State tax laws

· Ability to attract employees

· Incentives

· File articles of incorporation (See PowerPoint Slides 17-40 and 17-41)

· Name

· Names and addresses of all incorporators

· Capital structure of the corporation

· Types of stock

· Classes of stock

· Rights of shareholders

· Voting rights

· Statutory agent

· Incorporators (See PowerPoint Slide 17-42)

· Idea people – also called promoters

· Will be personally liable for contracts entered into before incorporation

· Corporation can ratify contracts – promoter is secondarily liable

· Corporation can enter into a novation with the third party – promoter or incorporator is released from liability

· Postformation

· Must hold initial meeting after incorporation (See PowerPoint Slide 17-43)

· Elect new directors

· Adopt bylaws (daytoday procedures)

17-4d Capital and Sources of Corporate Funds (See PowerPoint Slides 17-44 and 17-45)

· Shortterm financing – loans from banks

· Debt financing – bond market

· Equity financing – shareholders

· Common stock

· Usually most voluminous

· Get dividends

· Voting shares

· Preferred stock

· Priority for payment of dividends and liquidation of corporate assets

· Cumulative preferred – guaranteed certain amount for dividend (if not paid one year, carried over to the next year)

17-4e Liability Issues (See PowerPoint Slides 17-46 and 17-47)

· Must make full payment for shares – if not, there is liability

Examples: Promising to pay, paying with undervalued property

· If corporate veil is pierced, there is shareholder liability

· Means corporate immunity from liability is set aside

· Reasons for piercing

· Inadequate capitalization – must put enough money at the risk of the business

· Alter ego theory – separate nature of corporation is disregarded; no formalities – personal and corporate properties are mixed together

· Ignoring corporate formalities

· Forming to perpetrate a fraud on creditors

See PowerPoint Slide 17-48.

CASE BRIEF 17.3

U.S. v. Bestfoods, Inc.

524 U.S. 51 (1998)

FACTS: In 1957, Ott Chemical Co. manufactured chemicals at its plant near Muskegon, Michigan, and both intentionally and unintentionally, dumped hazardous substances in the soil and groundwater near the plant. Ott was sold to CPC International, Inc.

In 1965, CPC incorporated a wholly owned subsidiary (Ott II) to buy Ott’s assets. Ott II then continued both the chemical production and dumping. Ott II’s officers and directors had positions and duties at both CPC and Ott.

In 1972, CPC (now Bestfoods) sold Ott II to Story Chemical, which operated the plant until its bankruptcy in 1977. Aerojet-General Corp. bought the plant from the bankruptcy trustee and manufactured chemicals until 1986.

DECISIONS BELOW: The District Court held both CPC and Aerojet liable. After a divided panel of the Court of Appeals for the Sixth Circuit reversed in part, the court granted rehearing en banc and vacated the panel decision. This time, 7 judges to 6, the court again reversed the District Court in part.

ISSUE ON APPEAL: Can a parent be held liable for the CERCLA violations of a subsidiary?

DECISION: The case is remanded for a determination of whether the parent companies were sufficiently involved in operations to warrant liability under a corporate veil theory.

17-4f Corporate Tax Consequences (See PowerPoint Slide 17-49)

· Double taxation

· Corporation pays on income

· Shareholders pay tax on dividends

· S Corporation is an alternative

17-4g Corporate Management and Control: Directors and Officers (See PowerPoint Slide 17-50)

· Election of directors

· Board – hires officers and sets policy

· Executive Committee – delegated authority in between board meetings

· Role of directors (See PowerPoint Slide 17-51)

· Dodd-Frank Wall Street Reform and Consumer Financial Protection Act requires that a vote be held on officer pay – at least once every three years for shareholders to approve officer pay packages

· Compensation committee members must be independent

· Claw-back provisions are required for compensation earned through fraud or other illegality

· Limited deductibility of $1 million of pay continues

· Shareholders continue to make proposals on compensation and some corporations now mandate shareholder approval EVERY year – not just an affirmation vote

FOR THE MANAGER'S DESK − CEO COMPENSATION: Review with the students the various levels of compensation. Discuss levels of compensation relationships with performance.

There are two schools of thought on executive compensation. The first school, an economics-based one, is that CEOs should be paid whatever the market will bear. A second school of thought maintains that CEOs are paid too much and their pay should be tied to the wages of the employees and the performance of the company.

The argument has been made that large CEO salaries are subsidized with taxes because they are deductible. There have been congressional proposals to place a cap on the amount of CEO pay that would be deductible.

Many follow the philosophy that CEO pay should be tied to maximums above worker compensation and that the payment should not go up unless the company’s financial health is improved.

Currently the compensation committee of the board of directors of a company establishes officer pay. Their independence has been called into question in recent cases since these directors are often doing business with the company.

Institutional investors have been demanding more say in board matters and have raised objections about CEO pay. However, there are some questions about having outside investors set the management pay incentives in a company. These investors would then be involved in micro-managing the company which is not the role of either the board or the shareholders. The issue that also arises is at what point do the shareholders simply sell their shares and move onto other companies that pay officers within reasonable bounds? Traditionally, the market has functioned as shareholders move from stock to stock depending upon the performance of the company. Shouldn’t these investors express their dissatisfaction with the pay system via the market, with sales?

Dodd-Frank imposes new independence requirements on those who sit on compensation committee of the board. Dodd-Frank also gives shareholders a “say on pay.” That is, they have a vote on approval of compensation. It is not an action vote, but it reflects shareholders’ position on pay. Some companies have had shareholder resolutions that changed their articles of incorporation to require shareholder approval – their standards go beyond the law.

· Director liability

· Fiduciary

· Business judgment – must give time and effort

See PowerPoint Slide 17-52.

CASE BRIEF 17.4

Brehm v. Eisner

746 A.2d 244 (Del. 2000)

FACTS: Michael Eisner, then-CEO and Chairman of Disney, hired Michael Ovitz as his second-in-command at Disney. Mr. Eisner had a history of not working well with powerful second-in-commands, and Mr. Ovitz was a powerful Hollywood talent agent and producer. In less than one year, Mr. Ovitz and Mr. Eisner were at such odds, that Mr. Eisner and the board agreed to pay Mr. Ovitz over $38,000,000 in cash compensation and 3,000,000 in Disney stock to leave the company. The shareholders brought suit against the Disney board alleging that the board’s supervision of Eisner was lax, that the hiring was a poor business decision, and that the amount paid to end the arrangement constituted waste. The board says it just made a mistake.

The Delaware Court of Chancery dismissed the shareholders’ complaint because of the business judgment rules. The shareholders appealed

ISSUE ON APPEAL: Was the decision to hire and terminate Mr. Ovitz protected under the business judgment rule?

DECISION: Yes. The pay-out was outrageous, the processes of the board were not crackerjack, and the shareholders were justifiably upset, but they had not established that the board did not have its reasons for just getting rid of Ovitz with the pay-out. There were downsides to litigating with Ovitz and dragging the company through the process.

ANSWER TO CONSIDER 17.5: Shlensky felt the directors were missing the opportunity to make money. However, the court held in the case that the directors had considered all the factors and just decided differently than Shlensky would. Directors can be wrong so long as their decisions are researched, experts are consulted, and appropriate time is spent on the final decision. Shlensky v. Wrigley, 237 N.W.2d 776 (Ill. 1968).

NOTE: Lights and night games were eventually added by the Cubs.

· Corporate opportunity doctrine

· Director has duty to give opportunities first to corporation

· If they do not, profits belong to corporation

· Officer liability (See PowerPoint Slide 17-53)

· Increasing personal liability

· Increasing prosecutions

· Shareholder litigation against boards and officers: derivative suits

· Officers, boards, Sarbanes-Oxley, and Dodd-Frank (See PowerPoint Slides 17-54 and 17-55)

· Sarbanes-Oxley brought substantial reforms

· Reforms go beyond MBCA

· Dodd-Frank requires disclosure about combination of CEO and chairman’s job into one job

· Prohibitions on loans to officers

· Code of ethics for financial reporting

· Separate from regular codes

· 97% of publicly held companies have codes

· Stiffer penalties for false financial information

· Role of legal counsel for corporations

· Must investigate whether violations have occurred

· Lawyer must inform the CEO of the investigation

· Lawyer must report material violations to CEO

· If no action is taken, lawyer must go up the ladder to the board (independent members)

· Company must create a legal compliance committee

ANSWER TO ETHICAL ISSUES (Officers’ Personal Lives and Problems for Companies): While we would like to argue that our personal lives are no one’s business, the reality is that the behavior of CEOs affect companies and affect share prices of publicly traded companies. Leadership demands accountability, both from a business and personal perspective. The company is vulnerable for many reasons – markets don’t like uncertainty and evidence of poor judgment makes markets uncertain about companies. Also, there is a fine line between office romances and harassment. There can be big judgments and lots of bad press coverage when a harassment suit hits. The tips on controlling conduct provided here are important for companies and officers to follow.

· Role of the chairman and CEO − chairman and CEO job being split remains an open and debated question

1. Role of the compensation committee − compensation committee must be independent

1. Board membership − majority of directors must be independent

17-4h Corporate Management and Control: Shareholders (See PowerPoint Slides 17-56, 17-57 and 17-58)

· Board is governing body

· Can have executive committee for daytoday issues

· Board elects officers and decides salaries

· Shareholder rights: annual meetings

· Elect the board

· Can demand an annual meeting if one not held in thirteen months

· Shareholder rights: voting

· Can give a proxy

· Voting authority

· Good for eleven months

· Pooling agreements – group of shareholders agrees to vote a certain way

· Voting trust

· Title to shares signed over to trustee

· Trustee does the voting

· Shareholders still have dividends

· Trust agreement must be filed in corporate office

BUSINESS STRATEGY − GOVERNING CORPORATE GOVERNANCE: When companies get into legal or ethical difficulty, government monitors often step in to change behaviors. The list of changes that E*Trade made after the revelations about compensation of its CEO are good ones to illustrate how a board can take back control from management. Curbing perks, advance preparation for board meetings, orientation, and open access to management are all principles of good corporate governance.

· Shareholders rights in business combinations

· Board resolution required for

· Merger

· Consolidation

· Asset sale

· Notice given to shareholders of resolution and meeting

· Each shareholder gets notice

· Even nonvoting shares will vote in these major changes

· Shareholder approval

· Majority under MBCA

· All shares vote

· Not required for short-form mergers – merger between subsidiary and parent that owns 90 percent of the subsidiary

· Shareholder rights: the dissenting shareholders

· Those who don’t vote for the merger

· Entitled to appraisal rights

· Demand value of their shares

· Must have filed a written objection to the merger before the sale

· Given fair value of shares as of the day before the vote

· Freeze-outs – mergers undertaken to get rid of minority shareholders

· Courts require business purpose for freeze-out (other than getting rid of minority shareholders)

· Majority shareholders owe fiduciary duty to minority shareholders

· Shareholders have access to books and records (See PowerPoint Slide 17-59)

· Under revised MBCA, no ownership requirements

· Must have proper purpose

· Business motivation

· Not political or philosophical motivation

· Transfer restrictions (See PowerPoint Slide 17-60)

· Must be noted or referenced on stock certificates

· Must serve a necessary purpose

· Must be reasonable

FOR THE MANAGER’S DESK − THE BATTLES FOR SILICON VALLEY CONTROL: The battles in high-tech companies continue because founders often hold a majority of the stock, but they often reach a peak in terms of their business skills and often cannot carry the company forward. the result has been significant wrestling for board control and hence the ability to name new CEOs, other than controlling shareholders. The tricky part is keeping the company running as the board and control disputes continue.

17-4i The Dissolution of a Corporation (See PowerPoint Slide 17-61)

· Voluntary

· Board resolution

· Shareholder approval

· Involuntary

· Forced by court or state agency

· Example: Fraud

17-5 Limited Liability Companies

· History (See PowerPoint Slide 17-62)

· Been in existence internationally for some time

· GMBH – Europe

· Limitada – South America

· LLC – U.S.

· Nature

· Aggregate organization

· Liability shield

· Income flows through

17-5a Formation (See PowerPoint Slide 17-63)

· Articles of organization

· Filed centrally

· Name must disclose status

17-5b Sources of Funding

Members Contribute Capital (See PowerPoint Slide 17-64)

17-5c Liability

Members stand to lose capital contributions, but their personal assets are not subject to attachment

CASE BRIEF 17.5

Martin v. Freeman

272 P.3d 1182 (Colo. App. 2012)

FACTS: Dean C.B. Freeman managed Tradewinds as a single member LLC. Tradewinds contracted to have Robert C. Martin construct an airplane hangar. In 2006, Tradewinds sued Martin for breaching the construction agreement. In 2007, while the litigation against Martin was pending, Tradewinds sold its only meaningful asset, an airplane, for $300,000, and the proceeds of that sale were diverted to Freeman, who paid Tradewinds' litigation expenses. The trial court declared Martin the prevailing party and awarded him $36,645.40 in costs.

Because the proceeds of the sale of Tradewinds' only significant asset, the airplane, went directly to Freeman, the LLC was without any assets. Martin filed suit to pierce the LLC veil.

DECISION BELOW: The trial court pierced the LLC veil and found Freeman personally liable for the cost award entered against Tradewinds. Tradewinds and Freeman (defendants) appealed.

ISSUE ON APPEAL: Could the LLC be pierced to pay the creditor?

DECISION: Yes, the LLC could be pierced like a corporate veil. The judge held: (1) LLC was sole member's alter ego for purposes of piercing the corporate veil; (2) LLC's sale of its sole asset during litigation was an attempt to defeat potential creditor's rightful claim for purposes of piercing the corporate veil; and (3) in a matter of first impression, a party seeking to pierce the corporate veil did not have to show wrongful intent.

17-5d Tax Consequences (See PowerPoint Slide 17-65)

· Income passes through to members; LLC does not pay taxes

· Use BUSINESS PLANNING TIP on page 627 to cover IRS recognition of flow-through nature of LLC

17-5e Management and Control (See PowerPoint Slide 17-66)

· Operating Agreement – specifies voting rights

· One member or an outside consultant can have operating authority delegated to him or her

17-5f Transferability of Interest

· Interest can be transferred

· They do not become a member unless majority of remaining members approve

FOR THE MANAGER’S DESK − STEPHEN BALDWIN AND HIS LLC WITH KEVIN COSTNER: In this interesting pop culture example, the issue boiled down to how much they knew and what they were entitled to know. Although Costner won the case, it is an important reminder to let investors know what is up with the business, including, as here, major pending contracts and deals.

17-5g Dissolution and Termination (See PowerPoint Slide 17-67)

· Upon withdrawal, death or expulsion

· Judicial dissolution

· By agreement

17-6 Limited Liability Partnerships (See PowerPoint Slides 17-68 and 17-69)

17-6a Formation

· Strict formal requirements

· Filing requirements

· Name

· Registered agent

· Address

· Number of partners

· Description of business

17-6b Sources of Funding

Partner Capital Contributions

17-6c Liability

· Limited liability for all

· Some exceptions for professionals

17-6d Tax Consequences

Flow-Through/Pass-Through Status

17-6e Management and Control

Can Manage Without Liability Exposure

17-6f Transferability

Restricted

17-6g Dissolution and Termination

Same As For Limited Partnership

17-7 International Issues in Business Structure (See PowerPoint Slide 17-70)

· Joint Ventures Increasing

· Joint Ventures with Countries Themselves

· Business Structure Varies

Example: Germany and differing board structures

BIOGRAPHY: THE CEO WHO RAISED THE PRICE OF HIS COMPANY'S DRUG BY 5,000%

Some would say that Shkreli was a Milton Friedman apostle – maximizing shareholder profits. However, the size of the price increase caused difficulties for the company in terms of the congressional hearings as well as in the possibility of increased regulation that will perhaps limit the controls pharmas have over pricing. Public outrage moves the regulatory needle and the decision may not have been in the shareholders’ long-term interests.

The board does hire the CEO and could fire the CEO, but when the CEO has a controlling interest he can fire the board and keep himself in position. The shareholders might have a derivative action that could raise questions about the CEO’s conduct and the board’s level of supervision.

SUPPLEMENTAL READINGS (Not Required)

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Bebchuk, Lucian Arye, “The Case for Increasing Shareholder Power,” 118 HARV. L. REV. 833 (January 2005).

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