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Tuesday, July 15, 2008

A Short Guide To Answering A Business Organizations Essay Question

A couple of my former students mentioned that they were covering business organizations in BarBri this week.  I was reminded that many Bus Orgs students have a hard time getting their heads around the course as a whole.  Bus Orgs is a big survey class, and it can be hard to pull out comprehensive themes.  I tell my students that a good way of tackling a Bus Orgs essay question is to identify (a) the specific type of organization; (b) the roles of the people involved in the problem; and (c) the nature of their dispute.  With these three data points, it is relatively easy to focus in on the handful of issues that come up in a given scenario.  Below the fold, I've pasted my very short guide to taking a Bus Orgs essay exam, which also hits the major substantive points of the class.  But first, the usual caveat:  if you are a student, remember to focus on what your professor taught you, not what I have to say.

Ben Barros

This is a class in business organizations, so one way of organizing the course is by type of organization.

With an exam question, the first thing to do is figure out what type of organization you are dealing with.

The second thing to do is to categorize the parties to the dispute.  Is it between:

Partners and partners?

Partners and creditors?

Shareholders of a corporation and creditors?

Principal and party seeking to bind principal to actions of an agent?

Shareholders and directors?

Majority shareholder v. minority shareholder?

Agency is not an organization per se, though you can think of an agent and principal as a two-person organization of sorts.

Agency is fundamental to everything else in the course.

The basic concepts of fiduciary duty created in agency law run through all of business organizations law.

Two broad fiduciary duties – duty of care and duty of loyalty.

These were introduced in the agency section, but run throughout the course.

Note that modern corporations law uses a more lenient concept of fiduciary duty (esp. duty of care) than traditional agency and partnership cases.

In a sense, business organizations can be seen as networks of people linked by fiduciary relationships.

Authority is the single biggest issue in agency.  Authority usually comes up when someone is trying to enforce a contract.

Remember that the same set of facts might present multiple ways of establishing authority

Also remember that organizations can’t act on their own – they have to act through agents.

In a general partnership, the partners are all agents of the partnership. In a corporation, officers are the agents of the corporation.

Of course, an organization can also appoint other agents to do other things.  As an attorney, you will be an agent for all of your clients.

Even where someone acting for a business organization does not have actual authority, the organization might be bound by the person’s actions on the basis of another type of authority – e.g., apparent authority, estoppel and/or ratification.

Say a corporate officer only has actual authority to sign contracts worth up to $100,000.  There might be other circumstances where a court would hold, e.g., that the officer had apparent authority to sign larger contracts.

Another big issue is the principal’s liability for torts of an agent.

The law of respondeat superior is not particularly clear - be especially ready to argue both sides.  The two biggest issues are (a) control (servant v. independent contractor) and (b) scope of employment.

General partnerships are the most basic business organization.

Each partner is an agent of the partnership.

Each partner is individually liable for the debts and liabilities of the partnership.

Some of the issues that typically come up in the partnership context:

Creditor v. partner

Was a partnership formed?  If so, all partners generally liable for partnership debts.

Partner v. partner:

Was the partnership dissolved?

General rule is that partnerships are terminable at will.

What are the rights, duties and liabilities of departing partners?

What are the rights of partners in management?

General rule is that all partners have an equal right to manage the partnership by majority vote.

When can a partner be expelled?

Limited partnerships offer limited liability to some partners.

A limited partnership always has at least one general partner.  General partners have unlimited liability.

Limited partners have limited liability, but must be passive.  They can become generally liable if they get involved in the management of the partnership.

LLCs offer the limited liability of a corporation and the tax treatment and flexibility of a partnership.

Should know the basics, which is pretty much all we covered.

The most important point – LLCs are the business organization of the future.  As we’ve mentioned throughout the course, they avoid many of the problems of other corporate forms.

Corporations.

Creditors v. the corporation

Likely to present authority issues.

Creditors v. the shareholders.

The whole point of a corporation is to limit shareholder liability.

But do the facts warrant piercing the corporate veil?

Shareholders v. directors and officers.

Basic structure is that the shareholders are the passive owners; they elect a board of directors to oversee management of the corporation; the directors in turn appoint officers to run the corporation on a day-to-day basis.

Say a shareholder objects to something that the directors have done.  What can the shareholder do?

Bring a direct or derivative action.

Derivative = injury to corporation.

Must shareholder post bond for costs?

Must shareholder make demand first?

Can corporation kill the suit by appointing an independent committee?

Direct = injury to shareholder.

Doesn’t have the procedural hurdles present in a derivative action.

Try to have a proposal included in the corporation’s proxy.

When does a corporation have to include a shareholder proposal in the proxy?

Substantive areas of shareholder claims can vary widely.

The first thing to ask is whether there has been a breach of fiduciary duty.

If no, then business judgment rule applies.  Corporation generally wins.

If yes, the business judgment rule does not apply.

This clearly is the case with a breach of the duty of loyalty.

Need to be careful with the duty of care, because the duty of care has been so watered down in the corporate context.

Duty of care:

Standard is not traditional negligence; rather, focus is on neglect of duties.  E.g., did directors fully inform themselves of the relevant facts before making a decision?  Can the directors rely on what the officers tell them?  On what experts tell them?

Can be limited by statute.

Duty of loyalty:

Common problems:

Corporation – director contracts.

Conflicts of interest.

Does ratification fix the problem?

Disclosure claims:

Securities laws come up most often with corporations.

But they can come up in connection with other business organizations when the definition of a security is met.

Know the Howey test.

Securities fraud in an initial prospectus:  ’33 Act Section 11.

Due diligence defense?

Securities fraud in the secondary market:  ’34 Act Section 10(b); SEC Rule 10b-5.

Elements:

Scienter.

Causation.

Materiality.

Reliance.

Distinguish between failure to disclose/fraudulent disclosure and insider trading.

Short-swing profits:  ’34 Act Section 16(b).

Officer or director v. corporation.

Indemnification and insurance.

When are corporations obligated by statute to indemnify their officers and directors?

What are the statutory limits on ability of corporation to indemnify?

Shareholder v. shareholder.

Closely held corporations are unique in this context.

Under what circumstances can a minority shareholder force a buyout by the majority?

Posted by propertyprof on July 15, 2008 at 10:46 AM in Teaching Law | Permalink

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Posted by: Hison Ralli Hison | Oct 25, 2020 2:38:47 PM

Dear Ben,

I am glad to see that you recognize that the business judgment rule does not insulate directors against breach of fiduciary duty claims. I am repeatedly amazed at how many commentators, not to mention judges (especially in a particular jurisdiction famous for corporate law) do not seem to recognize the difference between duties of care and fiduciary duties and to which of these the BJR applies. Perhaps you should hyphenate your nom de plume and add "BusAsProf"?

A brief suggestion -- you might want to add to your derivative action section the question "Who wants/is entitled to relief?" to help students key in on the fact that the derivative action will directly benefit the corporation while a personal action directly benefits the claimant. I find that this helps my students understand the distinction between the respective purposes of these claims.

Clearly, you are not in a jurisdiction that offers oppression remedies, which would not only alter your chart and provide choices between bringing an action for breach of fiduciary duty or an oppression remedy, but also alters the nature of creditor claims against the corporation upon the "eve of" corporate insolvency. See the Supreme Court of Canada's judgment in Peoples Department Stores Ltd. v. Wise for more on this point.

Len

Posted by: Len Rotman | Jul 15, 2008 5:59:01 PM

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