Burrill: Legal Environment of Business

1
Burrill Legal Environment of Business

• Business Entities and Managers Duties

2
Business Entities

• Choices
• Sole Proprietors
• Partnerships
• General
• Limited
• Limited Liability

3
Business Entities

• Choices
• Corporations
• Types
• Domestic/foreign
• Municipal/private
• Non-profit/for-profit
• Public/non-public

4
Business Entities

• Choices
• Corporations
• Types
• C
• S

5
Business Entities

• Choices
• Limited Liability Companies

6
Business Entities

• Choices
• Business Trusts
• Joint Ventures
• Cooperatives

7
Business Entities

• Choices-Franchising
• State and Federal regulations
• Trademark issues
• Cost of start up

8
Business Entities

• Choices-Foreign Business
• Agents
• Branch office
• Subsidiary

9
Business Entities

• Criteria
• Liability
• Taxes
• Flexibility

10
Business Entities

• Key issues
• Limited liability
• Perpetual life

11
Business Entities

• Key issues
• Transfer of interest
• Centralized management

12
Business Entities

• Formation Issues
• Sole Proprietorships
• Trade Name filings
• DBAs

13
Business Entities

• Formation Issues
• General Partnerships-inadvertent
• Limited Liability Partnerships
• Filing Registration Statement

14
Business Entities

• Formation Issues
• Limited Partnerships
• Filing Limited Partnership Certificate
• Foreign Filings

15
Business Entities

• Formation Issues
• Corporations
• Filing Articles of Incorporation
• Name choice
• Capitalization

16
Business Entities

• Formation Issues
• Limited Liability Companies
• Filing Articles of Organization

17
Business Entities

• Operational Issues
• Sole Proprietorships
• Personal liability
• Asset transfers
• Management

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Business Entities-

• Operational Issues
• General Partnerships
• Liability
• Authority
• Management

19
Business Entities-

• Operational Issues
• Limited Liability Partnerships
• Management
• Authority
• Fiduciary duty

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Business Entities

• Operational Issues
• Limited Partnerships
• General partners
• Management authority
• Limited Partners-authority

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Business Entities

• Operational Issues
• Corporations
• Management
• Board
• Shareholders
• Authority

22
Business Entities

• Operational Issues
• Limited Liability Companies
• Member v. Manager management issues

23
Business Entities

• Operational Issues
• Piercing the Veil
• Limited Partnerships
• LLPs
• LLCs
• Corporations

24
Business Entities

• Termination Issues
• Sole Proprietorships
• Notifying third parties

25
Business Entities

• Termination Issues
• General Partnerships
• Notifying third parties
• Solvent v. insolvent situation

26
Business Entities

• Termination Issues
• Limited Liability Partnerships
• Same rules as general partnerships without
  personal liability

27
Business Entities

• Termination Issues
• Limited Partnerships
• Similar to general partnerships

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Business Entities

• Termination Issues
• Limited Liability Companies

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Business Entities

• Termination Issues
• Corporations
• Mergers and acquisitions
• Appraisal rights

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Business Entities

• Termination Issues
• Who gets paid?
• Creditors
• Owners
• How do you decide?

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Business Entities

• Termination Issues
• Statute of limitations
• Known creditors
• Unknown creditors

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Business Entities

• Termination Issues
• Next Economy Legislation
• See separate outline

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Management Responsibilities/ Fiduciary Duties

• Directors and officers are a corporations agents
  and owe a fiduciary duty to the corporation and
  its shareholders.

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Management Responsibilities/ Fiduciary Duties

• Partners/members are a partnerships agents
  owing a fiduciary duty to the partnership and its
  partners.

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Managers Fiduciary Duties

• Managers are
• Corporate directors and officers.
• Members of LLCs.
• Partners of partnerships.

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Duties of Managers

• Fiduciary

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Duties of Managers

• Loyalty
• Care

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Duties of Managers

• Good Faith
• Managers have an obligation to act in good faith
  and in what they believe to be the best interest
  of the company.

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Duties of Managers

• Managers Liabilities
• Breach of duty

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Duties of Managers

• Managers Liabilities
• Protections
• Business judgment rule
• Corporate indemnity and insurance

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The Business Judgment Rule

• Courts presume managers have acted in good
  faith and in the honest belief that the action
  taken was in the companys best interest.

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The Business Judgment Rule

• Effect on Managers Burden of Proof-switches
  burden
• This presumption can only be rebutted by
  showing that the managers acted in bad faith,
  engaged in fraudulent conduct or were grossly
  negligent.

43
The Business Judgment Rule

• Informed Decision
• The business judgment rule applies if the
  managers make an informed decision.
• Smith v. Van Gorkom, 488 A. 2d 858 (1985)

44
The Business Judgment Rule

• Written and Reasoned Opinion
• To avoid Van Gorkom like concerns managers
  should hire an investment adviser. The advisors
  opinion should be in writing.

45
The Business Judgment Rule

• Disinterested Decision
• Managers can not
• Appear on both sides of the transaction
• Derive any personal financial benefit from the
  transaction.
• Gottsacker case-see separate case and article

46
Statutory Limitations on Managers Liability

• Most states have adopted legislation to allow
  the owners to limit the monetary liability of
  managers for breaches of their duties.

47
Statutory Limitations on Managers Liability

• Corporate Statutes
• Some corporate statutes permit the certificate
  of incorporation to include a provision limiting
  or eliminating the personal liability of managers
  to the corporation or to its stockholders for
  monetary damages for breach of fiduciary duty.
  Such a provision cannot eliminate the liability
  of a manager, but can limit it.

48
The Business Judgment Rule

• Reasonable Supervision
• In Re Caremark Intl Derivative Litigation

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The Business Judgment Rule

• Business Opportunities
• Fiduciaries must first offer business
  opportunities to the company and then, if the
  company rejects it, they may pursue it on their
  own.
• Has the company really rejected the opportunity?

50
The Business Judgment Rule

• Takeover Defenses
• Preserves the position of current management and
  directors.
• Managers have a personal interest whenever a
  board opposes a hostile takeover.

51
Managers Decision About Selling the Company

• The Companys Intrinsic Value
• Managers must assess the adequacy of the
  premium how the premium compares with that paid
  in other takeovers in the same or similar
  industries and the intrinsic or fair value of
  the company as a going concern and on a
  liquidation basis.

52
Managers Decision About Selling the Company

• Nonprice Considerations
• Managers must familiarize themselves with any
  material nonprice provision

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Managers Decision About Selling the Company

• When must managers consider maximizing
  shareholder value?

54
Managers Decision About Selling the Company

• Do managers have an obligation to consider a
  tender offer from one corporation although the
  managers have expressed a desire to not receive
  competing bids because it is engaged in a
  friendly merger agreement with another company?

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Managers Decision About Selling the Company

• Officers Reports
• No statement is entitled to blind reliance.

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Managers Decision About Selling the Company

• Delegation of Authority
• Delegation exposes managers to greater risks of
  liability.

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Managers Decision About Selling the Company

• Experts Reports-Managers should
• Engage a reputable investment banking firm to
  prepare valuation study and to give a written
  opinion as to the financial fairness of the
  transaction.

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Managers Decision About Selling the Company

• Experts Reports-Managers should
• Pursue reasonable inquiry and to exercise
  reasonable oversight in connection with
  investment bankers and other advisors.

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Managers Decision About Selling the Company

• Experts Reports
• A conclusory fairness opinion of an investment
  banker is not a sufficient basis for a managers
  decision.

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Managers Decision About Selling the Company

• Defensive Tactics
• Examples
• Poison pills
• White knight merger
• Issuing additional stock
• Creating ESOP
• Standstill agreements

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Managers Decision About Selling the Company

• Defensive Tactics
• Issues of management entrenchment arise whenever
  a target company adopts defensive tactics
  designed to thwart a hostile takeover

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Duty of Managers to Disclose Preliminary Merger
Negotiations

• Managers face difficult decisions when
  deciding when they must disclose an offer to buy
  the company or the companys participation in
  merger negotiations.

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Duties of Controlling Owner

• An owner who owns sufficient shares to outvote
  the other owners, and thus control the company,
  is the controlling owner. Controlling owners
  owe a fiduciary duty and to the other owners.

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Duties of Controlling Owner

• Sale of Control
• A controlling interest in company usually
  commands a higher price per share than a minority
  interest. Does this control premium belong to
  the company or to the majority owner?

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Duties of Controlling Owner

• Freeze-outs
• A freeze-out forces the minority to convert its
  ownership to cash.