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2014 archive

This is the archive for Caroline Bradley’s Business Associations blog for Spring 2014

2014 Course Materials Page

Here is the Spring 2014 Final Exam and the Spring 2014 Exam Memo.

Here is the list of statutes you are responsible for for the purposes of the exam:
Partnerships:
RUPA/Florida Revised Uniform Partnership Act.:
FL §§ 620.8202 (RUPA § 202); 620.8401 (RUPA §401); 620.8404 (RUPA §404) (originally omitted in error); 620.8103 (RUPA §103); 620.8301 (RUPA §301); 620.8303 (RUPA § 303); 620.8306 (RUPA 306); 620.8601-620.8807 (RUPA Art. 6, 7 and 8)

LLCs:
Florida LLC statute:§§ 605.0105, 605.0402, 605.0403, 605.0404, 605.0405, 605.0406, 605.0407, 605.04074, 605.04091, 605.04092, 605.04093

Corporations:
Florida Statutes §607.07401, 607.0830, 607.0831, 607.0832
DGCL §§ 141, 144, 145

Securities Exchange Act 1934: §10(b), Rule 10b-5

WEEK 15: April 21-23 As we are pretending that Wednesday is a Monday this week we will have three classes. On Monday we will finish O’Hagan, look at Dirks and think about how the two cases fit together. There have been a number of insider trading cases recently which have focused on trading by one spouse based on information received from the other spouse. As an example read this Complaint in SEC v Chen.
It is worth noticing that in February 2014 in Chadbourne & Parke LLP v Troice (which I am not requiring you to read) the Supreme Court held that the SLUSA provision relating to a “misrepresentation or omission of a material fact in connection with the purchase or sale of a covered security” which is the criterion for pre-emption of a state suit should be interpreted to mean that there be a misrepresentation that is “material to a decision by one or more individuals (other than the fraudster) to buy or sell a ‘covered security'”. Justice Kennedy dissenting thought that this decision undermined O’Hagan, which has a very different view of the “in connection with” requirement.

On Tuesday and Wednesday we will talk about the themes of the course (relevant to the essay questions on the exam), deal with questions ytou may weant to ask, and discuss some past exams. We will begin with 2012, but it makes sense for you to also look at 2009 and 2008.

WEEK 14: April 14-18: On Monday we will discuss Basic v Levinson. The fraud on the market theory recognized in Basic v Levinson is currently before the Supreme Court in Halliburton v. Erica P. John Fund, Inc.. Read this discussion by Ronald Mann of the oral argument. Please also read West v Prudential Securities for Monday. For Tuesday read Santa Fe v Green and Goodwin v Agassiz (we will omit Deutschman v Beneficial). For Thursday please read Texas Gulf Sulphur and O’Hagan (though this will probably also take up at least some of the following Monday’s class). On Thursday we will also do the evaluations.

On April 22 and 23 I propose to go over some past exam questions and address other questions you may have about the course. I am of course happy to answer your questions outside class either by email or in person.

WEEK 13: April 7-11 As classes end on April 23 (and although that day is a Wednesday we are to pretend it is a Monday) we now have 9 classes left. Next week we will begin by addressing any questions you may have about Kahn v M&F Worldwide Corp and then we will discuss the Walt Disney case (i.e. read to page 390). On Tuesday we will discuss Stone v Ritter and please also read Robinson v Glynn (i.e. to page 407). For Thursday please read Doran and Basic v Levinson (casebook pages 407-414 and 433-446 (omitting the intervening pages). The fraud on the market theory recognized in Basic v Levinson is currently before the Supreme Court in Halliburton v. Erica P. John Fund, Inc.. Read this discussion by Ronald Mann of the oral argument.

We will cover Santa Fe v Green the following week and the material on insider trading (casebook pp 462-493). And in the last week we will have some time for review, including some time to discuss some past exam questions.

WEEK 12: Mar. 31- Apr. 4: On Monday we will begin with the Benihana case. Please also read Broz and E-Bay for Monday (to p 355). For Tuesday please read to page 372 (Sinclair Oil, Zahn v Transamerica, Fliegler v Lawrence and Wheelabrator, and for Thursday please read Kahn v M&F Worldwide Corp (Del 2014) and Walt Disney (to Casebook p 390).

You will also want to read the provisions of the Delaware and Florida statutes delaing with directors’ duties. Here are links to the Delaware General Corporation Law (here is the link to the provisions on directors (see ss 141, 144 and 145)) and the Florida Business Corporation Act (see particularly s 607.0830 General standards for directors, 607.0831 Liability of directors, and 607.0832 Director conflicts of interest).

Mar. 31: With respect to the issue of how directors should make their decisions this brief excerpt from a long decision by Vice Chancellor Laster of the Delaware Chancery Court in In Re Trados (Del. Ch. Aug. 2013) may be helpful (note that Gheewalla, cited here, is the decision I have referred to where the court holds that directors do not owe duties to creditors):

.. Judicial opinions … often refer to directors owing fiduciary duties –to the corporation and its shareholders. Gheewalla 930 A.2d at 99… This formulation captures the foundational relationship in which directors owe duties to the corporation for the ultimate benefit of the entity‘s residual claimants. Nevertheless, “stockholders‘ best interest must always, within legal limits, be the end. Other constituencies may be considered only instrumentally to advance that end.”… The duty to act for the ultimate benefit of stockholders does not require that directors fulfill the wishes of a particular subset of the stockholder base…. Stockholders may have idiosyncratic reasons for preferring decisions that misallocate capital. Directors must exercise their independent fiduciary judgment; they need not cater to stockholder whim….
Three of the directors… were fiduciaries for VC funds that received disparate consideration in the Merger in the form of a liquidation preference. Each faced the dual fiduciary problem identified in Weinberger v. UOP, Inc. 457 A.2d 701, 710 (Del. 1983), where the Delaware Supreme Court held that there was “no dilution”of the duty of loyalty when a director “holds dual or multiple”fiduciary obligations. If the interests of the beneficiaries to whom the dual fiduciary owes duties are aligned, then there is no conflict…. But if the interests of the beneficiaries diverge, the fiduciary faces an inherent conflict of interest…. “preferred dominated boards may favor immediate ‘liquidity events’ (such as dissolution or sale of the business) even if operating the firm as a stand-alone going concern would generate more value for shareholders.”

WEEK 11: Mar 24-28 On Monday we will begin by thinking about what the effect of the McConnell v Hunt clause would be under Florida statutes s 605.0105, we will then finish up the LLC material. Please also read Kamin v American Express (to p312). For Tuesday please read to page 333 (although we will likely not get further than Smith v Van Gorkom), and for Thursday to page 350.

With respect to the questions after Racing Investment Fund v Clay Ward, Florida Statutes s. 605.0403 states:

(5) An operating agreement may provide that the limited liability company interest of a member who fails to make a contribution that the member is obligated to make is subject to specified penalties for or specified consequences of the failure. The penalty or consequence may take the form of reducing or eliminating the defaulting member’s proportionate interest in a limited liability company, subordinating the defaulting member’s limited liability company interest to that of nondefaulting members, a forced sale of that limited liability company interest, forfeiture of the defaulting member’s limited liability company interest, the lending by other members of the amount necessary to meet the defaulting member’s commitment, a fixing of the value of the defaulting member’s limited liability company interest by appraisal or by formula and redemption or sale of the defaulting member’s limited liability company interest at such value, or other penalty or consequence.

Here is an example of a suggested provision for a LLC operating agreement which limits the Manager’s liability:

… the Manager may compete with the business of the Company, is not required to refrain from dealing with the Company in the conduct or winding up of the Company’s business as or on behalf of a party having an interest adverse to the Company, and is not obligated to account to the Company and hold as trustee any property, profit, or benefit derived by the Manager in the conduct or winding up of the Company’s business or derived from the use by the Manager of property of the Company, including (without limitation) an appropriation of an opportunity of the Company.

Here are the Florida LLC provisions I assigned earlier (with thanks to Ivane Sargent).

Note: I moved the comments that appeared on this page to the archive.

WEEK 10: Mar 17-21 I hope you had a good break. This week we will begin on Monday with Dodge v Ford and Shlensky v Wrigley. Then we will move on to LLCs. Before the break I asked you to look at Florida LLC statute (especially ss 605.0105, 605.0402, 605.0403, 605.0404, 605.0405, 605.0406, 605.0407, 605.04074, 605.04091, 605.04092, 605.04093) and Touch of Italy Salumeria & Pasticceria, llc, v. Louis Bascio and Frank Bascio, Trading as Frank and Louie’s Italian Store (Del. Ch. 2014). We will start with the Delaware case (perhaps on Monday) then move on to the cases in the Casebook. Please read Water, Waste and Land, Elf Atochem, Fisk Ventures LLC v Segal (in the 8th ed. and not in the 7th) and Kaycee Land and Livestock for Tuesday (i.e. to page 291) and McConnell v Hunt, Racing Investment Fund 2000, LLC v Clay Ward Agency Inc. (in the 8th ed. and not in the 7th), and New Horizons Supply Co-operative for Thursday (i.e. to p 307).

WEEK 9: Mar. 10-14: Spring Break. I hope you enjoy the break. I will post assignments for the week after spring break at the end of next week – probably late on Friday. But if you really need to read ahead then please read the material in the casebook on LLCs, together with the material I assigned for this week but that we did not get to: the Florida LLC statute (especially ss 605.0105, 605.0402, 605.0403, 605.0404, 605.0405, 605.0406, 605.0407, 605.04074, 605.04091, 605.04092, 605.04093) and Touch of Italy Salumeria & Pasticceria, llc, v. Louis Bascio and Frank Bascio, Trading as Frank and Louie’s Italian Store (Del. Ch. 2014).

WEEK 8: March 3-7: For Monday please prepare to casebook page 250 (finishing derivative litigation- assigned for last Tuesday but we didn’t get there!), and for Tuesday to page 267 (role and purposes of corporations).
With respect to derivative litigation, on February 17, Chindex Corporation (“an American healthcare company providing services in China through the operations of United Family Healthcare, a network of private primary care hospitals and affiliated ambulatory clinics”) announced that it was to be acquired by “a buyer consortium (the “Buyer Consortium”) of an affiliate of TPG (together with its affiliates, “TPG”), an affiliate of Shanghai Fosun Pharmaceutical (Group) Co., Ltd. (“Fosun”), and Ms. Roberta Lipson, the CEO of the Company” at a price of $19.50 per share in cash. Law firms have already announced they are investigating: the Shuman Law Firm in Boulder, Colorado, the Law Offices of Vincent Wong in New York, Rigrodsky & Long (Delaware and New York), Robbins Arroyo LLP (California) and Johnson & Weaver, LLP (California and New York).

For Thursday’s class please read the Florida LLC statute (especially ss 605.0105, 605.0402, 605.0403, 605.0404, 605.0405, 605.0406, 605.0407, 605.04074, 605.04091, 605.04092, 605.04093) and Touch of Italy Salumeria & Pasticceria, llc, v. Louis Bascio and Frank Bascio, Trading as Frank and Louie’s Italian Store (Del. Ch. 2014).

Note Mar. 3: When we discussed veil piercing I suggested that there would be facts in veil piercing cases that would look like fraudulent transfers. Here is a case where the courts found liability for fraudulent transfers and that the veil piercing claim was therefore moot: Centerpoint Energy Services, Inc. v Cameel Halim, (7th Cir. 2014). The plaintiff creditor gas company sued the Halims (a married couple) and their wholly-owned llc, WR Property Management, LLC. Centrepoint provided gas to Wilmette Real Estate & Management Co., LLC, wholly owned by the Halims. After Centerpoint sued for payment of the gas bill all of Wilmette’s assets were transferred to WR Property Management (and Wilmette, which had collected money for gas from lessees of the buildings where the gas was supplied, paid the money to the Halims rather than to Centerpoint). Judge Posner writes that “CES, unable to collect the judgment, sued the Halims and WR in federal court, alleging fraudulent conveyance of Wilmette’s assets to the Halims and WR in violation of the Fraudulent Transfer Act; successor liability (of WR as successor to Wilmette); and alter ego liability -the Halims were the alter ego of Wilmette and liable therefore for its debts regardless of any fraudulent transfers.The district judge granted summary judgment for CES on the fraudulent-conveyance and successor-liability claims and having done so dismissed the alter ego charge as moot.”Posner writes “There is no more need for us than there was for the district judge to address CES’s third claim for relief-that the Halims are the alter ego of Wilmette and WR. But we don’t want to leave the impression that it is a negligible claim; it is a strong claim. The Halims commingled Wilmette’s assets with their personal assets, failing … to comply with the formalities that would have provided documentary evidence of an allocation of assets between them and Wilmette. And now they are doing the same with WR’s assets. They began in April 2011 to drain WR’s assets into yet another company of their creation, CH Ventures, LLC, and the process is, it appears, now complete, leaving WR the same kind of empty shell as Wilmette.”

Note Mar. 4 on demand: I am providing the following passage from Rales v Blasband (Del. Supr. 1993) (this case is cited in a footnote in Grimes v Donald) because I think it should help with thinking about situations like the embezzlement hypothetical:

Not all derivative suits fall into the paradigm addressed by Aronson and its progeny. The essential predicate for the Aronson test is the fact that a decision of the board of directors is being challenged in the derivative suit… where there is no conscious decision by directors to act or refrain from acting, the business judgment rule has no application …. Consistent with the context and rationale of the Aronson decision, a court should not apply the Aronson test for demand futility where the board that would be considering the demand did not make a business decision which is being challenged in the derivative suit. This situation would arise in three principal scenarios: (1) where a business decision was made by the board of a company, but a majority of the directors making the decision have been replaced; (2) where the subject of the derivative suit is not a business decision of the board; and (3) where, as here, the decision being challenged was made by the board of a different corporation.
Instead, it is appropriate in these situations to examine whether the board that would be addressing the demand can impartially consider its merits without being influenced by improper considerations. Thus, a court must determine whether or not the particularized factual allegations of a derivative stockholder complaint create a reasonable doubt that, as of the time the complaint is filed, the board of directors could have properly exercised its independent and disinterested business judgment in responding to a demand. If the derivative plaintiff satisfies this burden, then demand will be excused as futile.

WEEK 7: February 24-28 Next week we will begin at page 191, finish up veil piercing and move on to derivative suits. For Monday please read to page 225, and for Tuesday to page 250. The casebook focuses on Delaware, but please also read Florida Statutes s. 607.07401 Shareholders’ derivative actions.

On Thursday Peter Lederer will visit our class. Please prepare for Thursday’s class by reading his Swiss Verein Comment. As we have recently been thinking about the idea of using business forms to manage liability risks this is timely. But I think we may also have the opportunity to discuss some of the recent changes in the practice of law, as Peter Lederer has been thinking a lot about these issues recently.

I promised you some links: to Florida Statutes s.607.06401 Distributions to shareholders (please read this); to the Florida Uniform Fraudulent Transfer Act (provided for information) and In Re Access Cardiosystems, Inc., 340 B.R. 127 (Bankr. D. Mass. 2006) (on promoter liability, provided for information).

WEEK 6: February 17-21 We will begin on Monday (briefly) with Kovacik v Reed and we will also discuss buyout agreements and buyouts under RUPA and limited liability in partnership type entities. Read to Casebook p 168. See Florida Statutes s. 620.8701 Purchase of dissociated partner’s interest (RUPA s. 701). And see also s. 620.8306(3) which sets out the rule of limited liability in a limited liability partnership and s. 620.9001 Statement of qualification. Please also read In Re: Thelen LLP (2d. Cir 2013) which addresses issues arising in the context of the bankruptcy of a law firm (operating as a llp). If you are using the 7th edition note that the 8th ed. does not include Jewel v Boxer or the Meehan v Shaughnessy excerpt relating to rights to fees).
Holzman v de Escamilla sets out the old limited partnership control rule. The Florida Limited Partnership Act of 2005 is much more protective of the limited partners than the rule in the case or in the statute cited at the bottom of page 167:

620.1303 No liability as limited partner for limited partnership obligations.-An obligation of a limited partnership, whether arising in contract, tort, or otherwise, is not the obligation of a limited partner. A limited partner is not personally liable, directly or indirectly, by way of contribution or otherwise, for an obligation of the limited partnership solely by reason of being a limited partner, even if the limited partner participates in the management and control of the limited partnership.

For Tuesday please read to page 191 and for Thursday to page 210.

Wrongful dissolution update Feb. 12: In March 2013 the New York Court of Appeals found in Gelman v. Buehler that two recent business school graduates had not formed a partnership for a term when they agreed orally to raise money to buy a business, manage it for a period of time and then sell it. After one of the partners withdrew, the other sued him for wrongful dissolution, but the Court of Appeals found that there was no wrongful dissolution.

In 2012 the Georgia Supreme Court in Jordan v Moses held with respect to wrongful dissolution:

The gravamen of a wrongful dissolution claim is a partner’s attempt to appropriate, through the dissolution, the assets or business of the partnership, which may include prospective business, without adequate compensation to the remaining partners.

WEEK 5: February 10-14 For Monday’s class please prepare to page 131, for Tuesday to page 148, and for Thursday to page 165. Please be sure to read the following sections of the Florida Partnership Act: 620.8103 Effect of partnership agreement; nonwaivable provisions (RUPA s. 103); 620.8301 Partner agent of partnership (RUPA s. 301); 620.8303 Statement of partnership authority (RUPA s. 303); 620.8306 Partner’s liability(RUPA s. 306); also sections 620.8601 through 620.8807 (RUPA Art. 6, 7 and 8 dealing with dissociation, buyout and dissolution).

Wrongful dissolution update Feb. 12: In March 2013 the New York Court of Appeals found in Gelman v. Buehler that two recent business school graduates had not formed a partnership for a term when they agreed orally to raise money to buy a business, manage it for a period of time and then sell it. After one of the partners withdrew, the other sued him for wrongful dissolution, but the Court of Appeals found that there was no wrongful dissolution.

In 2012 the Georgia Supreme Court in Jordan v Moses held with respect to wrongful dissolution:

The gravamen of a wrongful dissolution claim is a partner’s attempt to appropriate, through the dissolution, the assets or business of the partnership, which may include prospective business, without adequate compensation to the remaining partners.

WEEK 4: February 3-7 On Monday we will pick up Reading v Regem and the hypotheticals on pages 71-2, then we will discuss Rash v JV Intermediate (10th Cir 2007) and the Town and Country case. For Monday please also read the Florida Revised Uniform Partnership Act. Read the entire statute and to page 84 in the Casebook. In order to think about Fenwick in particular please read sections 620.8202 (this is section 202 of the Revised Uniform Partnership Act or RUPA) and 620.8401 (RUPA section 401 and the updated version of UPA s 18 in the casebook at page 83).

For Tuesday please read to page 96 of the Casebook and for Thursday to page 122 (Sandvick v Lacrosse (ND 2008) was not in the 7th edition and now appears in the 8th after Meinhard v Salmon.)

Week 3: January 27-31 We will begin on Monday morning with problem 1 on page 24 of the Casebook. Please also read to page 34 (including the problems on page 28, which we will discuss. For Tuesday please prepare to page 52 and for Thursday to page 78. Rash v JV Intermediate (10th Cir 2007) was not in the 7th edition – it appears in the 8th edition after Reading v Regem.

This means that we will not begin the partnership material until the following week. You will need to read the Florida Revised Uniform Partnership Act first and I will assign some of the partnership material in the casebook for week 4. Note that Sandvick v Lacrosse (ND 2008) was not in the 7th edition and now appears in the 8th after Meinhard v Salmon.

Comments: Brandon Evans – January 30, 2014 “So I do not see an email option here so I am going to post a comment. I was thinking about the McDonalds case and the British Military case based on the theory of reliance. McD was found liable because the reliance that the client had on McD culinary delicacies reputation. The franchise paid royalties in order to reap rewards from the reputation. In the BM case the police officers relied on the honor (reputation) that the British Military had. So then any damages that the Crown is awarded could be seen as royalties for the usage of the BM reputation that allowed the profit. The question then becomes does pursuing the money aid or hurt the BM reputation? Are there any policy questions related to this issue?”
Bradley – February 6, 2014 “The Judge is pretty clear in the Reading case that the Army had no right to seek the payments Reading received, so I don’t think it really makes sense to see this as an example of Reading diverting payments from the Army to himself. There is surely harm to the Army from Reading’s actions — perhaps his liability would discourage others from acting in the same way?”

WEEK 2: January 20-24 If you have not yet read the Class Policies please do so. I failed to state in class this morning that the exam will be a 3 hour closed book exam, but this is spelled out in the class policies document. I will provide a statutes list which will set out the statutes you will be responsible for on the exam and if I want you to discuss the wording of statutes in the exam I will give you the relevant statutes.
Next week we do not have class on Monday because it is Martin Luther King Day. We will begin with agency: you will already be familiar with the concept of respondeat superior, and we will see that agents can also bind their principals to liability under contracts. From the perspective of an unpaid creditor, agency principles can be used to reach into deep pockets (if the principal is wealthy or has insurance). When thinking about the materials on authority bear in mind that officers of corporations (CEOs, CFOs etc) are agents of their corporations. The principles that apply to determine whether they have authority to bind their corporations are general agency principles.
For Tuesday please read to page 24 of the casebook. For Thursday please read to page 64.
The following week we will finish the agency material and move on to partnership. You will need to read the Florida Revised Uniform Partnership Act and please read in the casebook to page 122. (There are two cases in this material in the 8th edition that did not appear in the 7th: Rash v JV Intermediate (10th Cir 2007) (after Reading v Regem) and Sandvick v Lacrosse (ND 2008) (after Meinhard v Salmon).

First class assignment: For class on Thursday January 16 please read:
1. Deloitte Review, Government and the Publicly Accountable Enterprise
2. Perry Ellis International, Code of Ethics
3. Joseph Grenny, Research: We Should Speak Up About Ethical Violations More Often (Jan. 8, 2014)

After reading these materials, think about the recent West Virginia chemical leak which deprived people and businesses of clean water for a significant period of time. Then read this comment (and watch the video of Gary Southern, CEO of Freedom Industries talking about the leak).

The assigned casebook is William A Klein, J Mark Ramseyer & Stephen M Bainbridge, Business Associations, 8th. Edition (2012). This edition of the book adds a small number of cases to those covered in the previous edition. If you can find a copy of the 7th edition and are prepared to deal with differences in pagination and the need to read some of the cases online the 7th edition would work. I am not assigning a statutes book because of the expense. However you will need to read statutes for this class. We will focus primarily on Florida and Delaware statutes in this class. I will provide links to statutes on the blog as well as details of class assignments, questions for discussion and links to additional material.

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