Table of Contents

Preface xxxi Acknowledgments xxxiii

Chapter 1. Introduction to Business Organizations 1

A. How Is Business Conducted in the United States? 1 B. Introductory Principles 4 C. Introduction to Forms of Organization 4 1. Sole Proprietorships 5 2. General Partnerships 7 3. Limited Liability Partnerships 7 4. Limited Partnerships 8 5. Corporations 8 6. Limited Liability Companies 9 7. Other Forms of Organization 9 Statutory Close Corporation 10 Professional Corporations 10 Professional Limited Liability Company 10 Benefit Corporations 10 Low-Profit Limited Liability Company 11 Nonprofit Corporation 11 D. Considerations for Choice of Business Enterprise 11 1. Ease of Formation and Administrative Start-Up Costs 11 2. Continuity of Existence 12 3. Transferability 12 4. Management 13 5. Raising Capital 14 6. Taxation 14 Federal Income Tax Classification 14 Subchapter S Corporation 15

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Allocating Profits and Losses and Differences Between Subchapter K and Subchapter S 18 Spotlight: The Tax Cuts and Jobs Act 19 7. Risk and Liability Exposure 20 Liability Shields: Comparing Entities 20 Veil Piercing 20 Midland Interiors, Inc. v. Burleigh 22 Veil Piercing in the Parent-Subsidiary Context 29 Veil Piercing and LLCs 30 Single-Member LLCs: Veil Piercing and Charging Orders 31 Spotlight: Start-Up Businesses 32 Ethics Issues 33 Chapter Summary 34 Applying the Concepts 35 Business Organizations in Practice 36

Chapter 2. Agency Law and Agency Relationships in Business Organizations 39

A. What Is an Agency Relationship? 39 B. How Are Agency Relationships Formed? 40 Shiplet v. Copeland 41 C. Agents, Authority, and Contract Liability 47 1. Actual Authority 47 2. Apparent Authority 48 Themis Capital, LLC v. Democratic Republic of Congo 50 3. Estoppel 55 4. Inherent Authority and Inherent Agency Power 56 5. Ratification 57 D. Confirming Agent Authority in Business Dealings 57 E. Agents, Principals, and Tort Liability 58 F. Fiduciary Duties of Agents 59 1. Performance 59 2. Notification and Disclosure 60 3. Loyalty 60 4. Accounting 60 5. Agent’s Liability for Breach of Fiduciary Duty 60 Table of Contents xiii

G. The Principal’s Duties 61 1. Compensation 61 2. Reimbursement and Indemnification 61 3. Cooperation 61 H. Contractual Liability of Agents 62 I. Defining and Limiting Authority and Power 63 J. Termination of Agency Relationship 63 Chapter Summary 64 Applying the Concepts 64 Business Organizations in Practice 67

Chapter 3. General Partnerships 69

A. What Is a General Partnership? 69 B. What Law Governs a General Partnership? 70 1. Choice of Law 70 2. The UPA and RUPA 70 3. The Partnership Agreement 73 C. Taxation of Partnerships 73 D. How Are General Partnerships Formed? 76 1. Partnership Formation and Inadvertent Partnerships 76 Fredianelli v. Jenkins 78 2. Administrative Formation-​Stage Requirements 88 E. Management and Control Rights and Voting Rules 89 1. Equal Rights to Participate in Management, Per Capita Voting 89 2. Ordinary Course versus Non-​Ordinary Course Activities 89 3. Customizing Voting Rules 90 Summers v. Dooley 91 F. Partner as Agent 94 1. Partners Owe Duties of Care and Loyalty to Their Fellow Partners and the Partnership 94 Frame v. Maynard 95 2. Partners’ Authority to Bind the Partnership 100 G. Partner Liability Rules 103 1. Unlimited Personal Liability 103 2. Limited Liability Partnerships 104 H. A Partner’s Interest in the Partnership 104 1. Distribution Rights Are Transferable, but Partnership Status, Management Rights, and Information Rights Are Not Transferable 104 xiv Table of Contents

I. Partnership Property 105 1. Partnership Capital and Partnership Property 105 2. Rights in Partnership Property 106 J. Allocation of Profits and Losses 107 1. Distributions and Losses Shared Equally Under Default Rules 107 2. Compensation 108 3. Tax Burden Distributions 108 K. Partners’ Information Rights, Right to an Accounting 109 L. Entering and Withdrawing from the Partnership 109 M. Dissolution, Disassociation, and Winding Up 109 1. Dissolution, Winding Up, and Termination Under the UPA 110 Dissolution Under the UPA 110 Spotlight: Winding Up and Termination Under the UPA 111 Creel v. Lilly 111 Spotlight: Wrongful Dissolution 125 2. Dissociation, Dissolution, Winding Up, and Termination Under the RUPA 126 Dissociation 126 Effect of Partner Dissociation Under the RUPA 126 3. Opportunities for Private Ordering 130 N. Dissolution, Winding Up, Termination, and Service Partners 130 Spotlight: The Tax Cuts and Jobs Act: New Tax Provisions for Pass-Through Businesses 130 Chapter Summary 132 Applying the Concepts 133 Business Organizations in Practice 136

Chapter 4. Registered Limited Liability Partners 139

A. What Is a Registered Limited Liability Partnership? 139 B. Governing Law 141 C. Taxation of LLPs 141 D. How Are LLPs Formed? 142 E. Other Requirements 142 1. Insurance, Financial, and Other Reporting Requirements 142 2. Licensing Requirements and Fees 144 3. Naming Requirements 144 4. Foreign LLP Registration 144 F. Voting and Governance Rules and Agency Powers 148 Table of Contents xv

G. Liability Rules 148 1. Partial Shield States 148 2. Full Shield States 149 In re Promedicus Health Group, LLP 152 H. Dissolution and Liquidation of LLPs 155 Chapter Summary 155 Applying the Concepts 156 Business Organizations in Practice 157

Chapter 5. Limited Partnerships and Limited Liability Limited Partnerships 159

A. What Is a Limited Partnership? 160 B. What Law Governs Limited Partnerships? 161 1. Uniform Limited Partnership Acts 161 2. Governing Law 162 3. The Limited Partnership Agreement 162 C. Taxation of Limited Partnerships 162 D. How Are Limited Partnerships Formed? 163 1. The Limited Partnership Certificate 163 Name 163 Registered Office and Agent 164 Names and Addresses of General Partners 164 Dissolution Date 164 Other Matters 165 2. Errors or Deficiencies in the Certificate of Limited Partnership 165 3. Amending the Limited Partnership Certificate 167 E. Management and Control and Voting Rules 167 1. General Partners: Control Rights, Agent Status, and Fiduciary Obligations 167 Spotlight: Is It Possible to Eliminate Fiduciary Duties via Contract? 170 Employees Retirement System of the City of St. Louis v. TC Pipelines GP, Inc., et al. 171 2. Limited Partners 178 F. Liability Rules 179 1. Unlimited Personal Liability for General Partners 179 2. Limited Liability for Limited Partners 179 RULPA’s Control Rule 179 Shimko v. Guenther 181 Potential for Contractual Liability 187 xvi Table of Contents

G. Partners’ Interest in the Limited Partnership 187 Distribution Rights Transferable, but Partner Status, Management and Control, and Informational Rights Not Transferable 187 H. Allocation of Profits, Losses, and Distributions 187 I. Actions by Limited Partners 188 J. Partner Withdrawal and Dissolution and Winding Up of Limited Partnerships 189 1. Partner Withdrawal 189 Withdrawal of Limited Partners 189 Withdrawal of General Partners 189 2. Dissolution 191 K. Family Limited Partnerships 194 L. Master Limited Partnerships 194 M. Limited Liability Limited Partnerships 195 N. Foreign Limited Partnerships 196 O. Uniform Limited Partnership Act of 2001 (Last Amended 2013) 197 P. Quick Review: Summary Charts 199 Chapter Summary 202 Applying the Concepts 203 Business Organizations in Practice 204

Chapter 6. Introduction to Business Corporations 207

A. What Is a Corporation? 207 B. Governing Law 209 1. The State of Incorporation 209 2. Choosing a State of Incorporation 210 3. The Internal Affairs Doctrine 211 VantagePoint Venture Partners 1996 v. Examen, Inc. 212 American International Group, Inc. v. Greenberg 221 Spotlight: Internal Affairs and Forum Selection Bylaws 225 C. Taxation of Corporations 227 1. Subchapter C 227 2. Avoiding or Minimizing the Effects of Double Taxation 228 S-​Corporations 228 Small Corporations Whose Shareholders Are Employees 228 Section 1244 Stock 228 Qualified Small Business Stock 229 3. Other Taxes 230 Table of Contents xvii

D. Formation: Pre-​Incorporation Activities by Promoters 230 1. Duties of Promoters to One Another 230 2. Pre-​Incorporation Contracts by Promoters 231 Promoter Liability on Pre-Incorporation Contracts 231 Corporation Liability on Pre-​Incorporation Promoter Contracts 232 Ratner v. Central National Bank of Miami 234 E. Formation: Incorporation Mechanics 237 Choosing a Corporate Name 237 Selection 237 Reservation 238 Registration 238 Assumed Names 240 F. Formation: The Articles of Incorporation 240 1. Contents of Articles of Incorporation 241 Name and Address 241 Agent for Service of Process 241 Corporate Purposes 243 Description of Stock 245 Incorporators 245 Other Elements as Required by State Law 245 2. Optional Provisions in Articles of Incorporation 246 3. Preemptive Rights 246 4. Filing of Articles of Incorporation 247 G. Corporate Purpose versus Corporate Powers 248 1. Corporate Purpose 248 2. TheUltra Vires Doctrine 249 H. Post-​Incorporation Organizational Activities 250 1. Bylaws 250 Introductory Information 251 Information About Directors 251 Information About Officers 252 Information About Shareholders 252 Miscellaneous Information 252 2. Corporate Supplies 253 3. Organizational Meeting 254 Election of Directors 254 Appointment of Officers 254 Adoption of Bylaws 254 xviii Table of Contents

Acceptance of Pre-​Incorporation Stock Subscriptions 255 Acceptance of Pre-​Incorporation Contracts 255 Approval of Corporate Seal and Form of Stock Certificate 255 Banking and Accounting Information 255 S Election 255 Confirmation of § 1244 Stock 256 Issuance of Stock 256 Other Actions Taken at Organizational Meetings 256 4. Annual Report 257 I. Defects in Incorporation Process 258 J. Qualifying to Transact Business in Other States 259 Chapter Summary 260 Applying the Concepts 261 Business Organizations in Practice 264

Chapter 7. Introduction to Corporate Finance 267

A. Introduction 267 B. Equity 268 1. Introduction 268 2. Par Value and No Par Value Stock 269 3. Consideration for Shares 270 4. Classes of Stock 271 Common Stock 271 Preferred Stock 274 The Frederick Hsu Living Trust v. ODN Holding Corp. 280 Series of Stock 300 Share Subscriptions, Stock Options, Rights, and Warrants 301 5. Stock Certificates 302 C. Debt 304 1. Promissory Notes 304 2. Loan Agreement 306 3. Types of Debt 307 4. Common Features of Debt Securities 310 Redemption Terms 310 Convertible Debt and Conversion Terms 311 Priority and Subordination Rights 312 Voting Rights 313 Table of Contents xix

D. The Lawyer’s Role: Negotiating Debt or Equity Financing 313 E. Internally Generated Funds 314 F. Capital Structure 314 G. Securities Offerings 316 Chapter Summary 316 Applying the Concepts 317 Business Organizations in Practice 318

Chapter 8. Introduction to Corporate Governance 321

A. Hierarchy of Corporate Control and Centralized Management 322 B. Shareholders 322 1. Introduction: The Shareholder Franchise 322 Schnell v. Chris-​Craft Industries, Inc. 324 2. Shareholder Meetings 327 Annual Meetings 328 Special Meetings 329 Place of Meetings 329 Notice of Meetings 330 Quorum 333 Proxies 333 3. Conducting the Meeting 335 Shareholder Meetings for Publicly Traded Companies 336 Minutes of Meeting 336 4. Modern Trends in Shareholder Meetings 338 5. Shareholder Action Without a Meeting 339 6. Voting Requirements and Standards 340 Voting on Matters Other Than Election of Directors 340 Voting for Directors: Straight Voting 341 Voting for Directors: Cumulative Voting 341 Voting for Directors: Majority and Plurality Voting 343 Shareholder Voting Generally: Class Voting 344 Shareholder Voting Generally: Contingent Voting 344 Shareholder Voting Generally: Disproportionate Voting 344 Nonvoting Stock 345 Shareholder Voting Agreements 346 Shareholder Voting Trusts 346 xx Table of Contents

C. Directors 347 1. Introduction 347 2. Number and Qualifications of Directors 347 3. Director Functions and Responsibilities 350 Functions and Responsibilities Commonly Associated with the Board of Directors 350 Committees 351 4. Election, Term, Vacancies, and Removal of Directors 352 Election 352 Term 354 Vacancies 354 Removal 354 5. Directors’ Meetings 356 Regular Meetings 356 Special Meetings 356 Place of Meetings 357 Notice of Meetings 357 Waiver of Notice 358 Klaassen v. Allegro Development Corp. 359 Quorum 369 Conducting the Meeting 369 Proxies 370 Minutes 370 6. Directors’ Action Without a Meeting 371 7. Compensation of Directors 372 D. Officers 373 1. Introduction 373 2. Qualifications, Appointment, and Tenure 373 3. Officers’ Functions and Responsibilities 375 4. Titles of Officers 376 President 376 Vice President 376 Secretary 376 Treasurer 376 Other Officers 377 5. Authority of Officers 377 E. Bylaws 377 Introduction 377 CA, Inc. v. AFSCME Employees Pension Plan 379 Table of Contents xxi

Chapter Summary 390 Applying the Concepts 390 Business Organizations in Practice 392

Chapter 9. Corporate Governance: The Business Judgment Rule, Fiduciary Duties, and Governance Reforms 395

A. Introduction: Centralized Management, Fiduciary Duties, and the Business Judgment Rule 396 B. Directors and the Duty of Care 397 Smith v. Van Gorkom 398 C. Duty of Loyalty 416 1. The Corporate Opportunity Doctrine — Usurping a Corporate Opportunity 417 AngioScore, Inc. v. TriReme Medical, Inc. 418 2. Conflicting Interest Transactions 432 When Is a Director Interested (or Disinterested)? 435 When Is a Director Independent (or Lacking Independence)? 435 When Is a Conflict Disclosed or Otherwise Known? 436 When Is a Transaction Entirely Fair to the Corporation? 436 Voidability versus Director Liability for Breach of Fiduciary Duty 436 D. Caremark Claims, the Duty of Loyalty, and Acts or Omissions Not in Good Faith 436 In re Caremark International Inc. Derivative Litigation 437 1. Caremark Claims, Bad Faith, and § 102(b)(7) Exculpation Provisions 447 2. Caremark and Risky Business Practices versus Illegal Conduct 448 3. Caremark Duties, Regulatory Oversight, and “Monoline” Businesses 448 4. Caremark and Cybersecurity 450 E. Shareholder Litigation 450 1. Overview of Direct Actions 450 2. Overview of Derivative Actions 451 3. Distinguishing Direct from Derivative Actions 452 Tooley v. Donaldson, Lufkin & Jenrette, Inc. 453 4. Derivative Action Requirements 458 Standing 459 The Demand Requirement — Universal Demand 459 The Demand Requirement — Del. Ch. R. 23.1 460 Aronson Test: Demand Futility and Board Decisions 461 xxii Table of Contents

Rales Test: Demand Futility and Caremark Claims 464 In re Citigroup Inc. Shareholder Derivative Litigation 465 F. Zapata and Special Litigation Committees 477 G. Modern Practice: Insurance, Statutory Limitations, and Indemnification 478 H. Rights and Duties of Officers 479 1. Authority of Officers 479 2. Officers’ Standard of Conduct, Liability, and Indemnification 480 Chapter Summary 480 Applying the Concepts 481 Business Organizations in Practice 484

Chapter 10. Shareholder Rights and Protections and Close Corporations 489

A. Immutable Rights 490 Shareholder Information and Inspection Rights 490 Lebanon County Employees’ Retirement Fund v. AmerisourceBergen Corp. 491 B. Distinguishing Between Controlling versus Minority Shareholders and Close Corporations 503 1. Controlling versus Minority Shareholders 503 2. Closely Held Corporations 504 What Is a Close Corporation? 504 Common Characteristics of Close Corporations 506 Spotlight: Veil Piercing and Close Corporations 507 Formation of Close Corporations 507 C. Controlling Shareholders in Close Corporations 509 Heightened Fiduciary Duties for Controlling Shareholders 509 Donahue v. Rodd Electrotype Company of New England, Inc. 510 D. Negotiated Rights, Protections, and Obligations 521 1. Documenting Shareholder Rights and Protections 525 2. Share Transfer Restrictions 525 F.B.I. Farms, Inc. v. Moore 527 3. Operation of Close Corporations and Management Flexibility 535 E. Judicial Dissolution of Close Corporations 536 Judicial Dissolution and Minority Shareholders in Close Corporations 536 Table of Contents xxiii

Straka v. Acara Zucarelli Lenda & Associates CPAs, P.C. 537 Dissolution over the Objections of Minority Shareholders 544 Chapter Summary 544 Applying the Concepts 545 Business Organizations in Practice 546

Chapter 11. Changes in the Corporate Structure and Corporate Combinations 549

A. Amending and Restating the Articles of Incorporation 550 1. Reasons for Amending Articles of Incorporation 550 2. Procedure for Amending Articles 550 3. Articles of Amendment 551 4. Restating Articles of Incorporation 554 B. Amending the Bylaws of the Corporation 554 C. Corporate Combinations 555 1. Mergers and Consolidations 556 Mergers 556 Varieties of Mergers 557 Consolidations 560 Procedures for Effecting Mergers and Consolidations 560 Modern Trends in Mergers and Consolidations 566 2. Share Exchanges 567 3. Purchase of Assets 569 4. Purchase of Stock 570 5. Sale of All or Substantially All Assets 571 6. Structuring Considerations 573 Federal Income Tax Considerations 573 Managing Liability Risk 574 Welco Industries, Inc. v. Applied Companies 576 Shareholder Voting Issues 582 Appraisal Rights Issues 583 Contract Assignment 583 Governmental Approvals and Licensing Requirements 584 7. De Facto Merger Doctrine and Freeze-​Outs 584 8. Limitation of Shareholder Remedies, Creditor Rights 585 xxiv Table of Contents

D. Hostile Takeovers 585 1. Introduction 585 2. Preparing for the Takeover 586 3. The Tender Offer 587 4. Post-​Tender Offer Transactions 588 5. Proxy Fights 589 6. Defensive Strategies 590 Pre-​Tender Offer Defenses 590 Post-​Tender Offer Defenses 592 7. Unocal and Enhanced Scrutiny of Defensive Measures 593 Unocal Corp. v. Mesa Petroleum Co. 594 8. Revlon Duties 604 Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc. 605 9. Takeover Terminology 616 E. Leveraged Buyouts and Share Repurchases 617 F. Governmental Regulation 618 G. Controlling Shareholder Transactions 619 Kahn v. M & F Worldwide Corp. 620 H. Domestication and Entity Conversion 634 1. Domestication 634 2. Entity Conversion 635 I. Termination of Corporate Existence 636 1. Overview: Termination of Corporate Existence 636 2. Voluntary Dissolution 636 Articles of Dissolution 637 Revocation of Dissolution 639 MBCA Approach 639 3. Administrative Dissolution 640 Grounds and Procedure for Administrative Dissolution 640 Reinstatement After Administrative Dissolution 640 4. Involuntary or Judicial Dissolution 640 Action by the State 641 Action by a Creditor 641 Action by Shareholder(s) 641 J. Liquidation 642 1. Introduction 642 2. Nonjudicial Liquidation 642 3. Judicial Liquidation 643 Table of Contents xxv

4. Claims Against the Corporation 643 Known Claims 643 Unknown Claims 643 K. Distributions to Shareholders 644 Chapter Summary 644 Applying the Concepts 646 Business Organizations in Practice 647

Chapter 12. Limited Liability Companies 651

A. What Is a Limited Liability Company? 651 LLCs versus LLPs 652 B. What Law Governs Limited Liability Companies? 653 1. The Uniform Limited Liability Company Act 653 2. Series LLCs 654 3. The Operating Agreement 654 Shapiro v. Ettenson 656 C. Taxation 663 D. How Are LLCs Created? 664 The Certificate or Articles of Organization 664 E. Management and Control Rules and Member Voting 666 1. The Operating Agreement 666 2. Member-​Managed versus Manager-​Managed 666 Goldstein v. Pikus 668 3. Meetings and Voting 673 4. Agency and Authority 673 5. Fiduciary Duties and Fiduciary Waivers 674 6. Additional Management Issues for the Operating Agreement 677 F. LLC Liability Rules 677 Limited Liability and Management Rights 677 G. Members’ Interests in the LLC 678 Transferability of LLC Interests; Potential for Practical Constraints on the Admission of New Members 678 H. Allocation of Distributions 679 I. Dissociation and Dissolution of LLCs 679 1. Events Causing Dissociation 679 2. Events Causing Dissolution 680 3. Winding Up 680 Huggins v. Scott 682 xxvi Table of Contents

J. Actions by LLC Members 687 Tzolis v. Wolf 688 K. Conversions, Mergers, and Domestications 693 L. Professional Limited Liability Companies 695 M. Family Limited Liability Companies 695 N. Low-​Profit Limited Liability Companies (L3Cs) 695 O. Initial Public Offerings Using Up-C Structures 696 P. Checklists and Overviews 697 Chapter Summary 702 Applying the Concepts 703 Business Organizations in Practice 705

Chapter 13. Securities Regulation in Business Organizations: Securities Offerings, Anti-​Fraud Rules, Corporate Governance Reforms, and the Proxy System 707

A. Introduction to Securities Offerings 708 B. Securities Offerings and the Securities Act of 1933 708 1. Definition of a Security 708 Securities and Exchange Commission v. Mutual Benefits Corp. 710 2. Registration Requirements for Securities Offerings 718 3. Sales of Unregistered Securities 720 4. Exemptions from Registration of Securities Offerings 720 Public Offerings 720 Non-​public or Private Offerings 721 Exemptions for Certain Securities 721 Exemptions for Limited Offerings Under Regulation D 722 Exemption Under Regulation A+ 724 Exemption for Intrastate Offerings 725 Shelf Registrations 725 Crowdfunding 726 Direct Public Offerings 728 Exemption for Non-​Issuers 728 Going Private 728 5. Anti-​Fraud Provisions of the 1933 Act 728 C. Secondary Trading and the Regulation of Markets and Securities Industry Professionals Under the Securities Exchange Act of 1934 731 1. Introduction 731 2. Registration and Exemptions Under the ’34 Act 732 Table of Contents xxvii

3. Periodic and Event-​Driven Reporting Requirements 734 4. Event-​Driven Reporting, Internal Controls, and Certification Requirements Under Sarbanes-​Oxley 735 Internal Controls Reporting 735 Enhanced, and More Timely, Disclosure on Form 8-​K 737 Certifications: Reliability and Accuracy of Corporate Disclosures 737 Other SOX Reforms 737 5. Anti-​Fraud Provisions of the ’34 Act 739 Misstatements or Omissions 740 Materiality 741 Scienter 741 In Connection with the Purchase or Sale of Securities 742 Reliance 742 Economic Loss 743 Loss Causation 743 6. Insider Trading 744 United States v. O’Hagan 745 Tipper/​Tippee Liability 753 Rule 14e-​3 754 Compliance and Internal Controls 754 7. Remedies and Penalties for Violation of ’34 Act 754 8. Short-​Swing Profits: § 16(b) 755 D. Proxy Regulation 755 1. Overview 755 2. Shareholder Proposals: Rules and Mechanics 756 3. Shareholder Proposals: Topics and Trends 759 Proxy Access 759 Shareholder Proposals Relating to Environmental, Social, Political, or Governance Issues 760 Say on Pay 765 E. State Securities Regulation 766 F. Listing Standards 768 Chapter Summary 768 Applying the Concepts 768 Business Organizations in Practice 773

Glossary 775 Table of Cases 803 Index 807