Associations Class Notes
Why did the plaintiff make the argument that he did? In the trust area, if you’re a trustee or an executor or administrator of an estate, and you do something ultra vires, the trust rule generally is that of absolute liability without fault. That rule is related to a rule on conflicts of interest. Unless a trust instrument provides otherwise, a trustee who sells stock to the trust which later goes down in value has absolute liability. Fault need not be shown. In the corporate world, if (1) a conflict of interest is fully and fairly disclosed up front, (2) there’s no injury to creditors and (3) what the director or officer did was reasonable then there is a defense. It can be hard to show those three things.
Why is there a difference between the corporate arena and the law of trust? The law of trust and executors and administrators is designed to deal with the conservation of capital, and the law of business associations deals with the same thing. However, the law of business associations is more entrepreneurial in that it also takes into consideration reasonable risk taking and growth of capital. We’ll see this again in Wills, Trusts, and Estates. The ultra vires stuff is important. What is the lawyer’s role? What are their possible liabilities?
In a major corporate transaction, the third party dealing with the corporation will usually ask his counsel and the lawyer for the corporation whether the contract has been duly and validly adopted by the corporation and is binding on the corporation in accordance with the terms of the contract. This includes, if needed, the approval of the board of directors, and, if needed, the approval of shareholders, but most transactions, even if fairly large, don’t require board and/or shareholder approval. The officers of the company can do a lot by themselves. We will see more on the authority of officers. The lawyer will have to draw up a memo saying whether shareholder approval is needed, whether it has been obtained, if the shareholders are entitled to appraisal rights, whether you need the approval of the board of directors, whether there has been a validly called meeting, whether papers have been circulated, whether you have the right vote, and finally whether the officers have the authority to do what they’re purported to do.
The attorney for the corporation may want to strike the word “duly” and leave “validly”. The two terms are not synonyms! If they were synonymous, they wouldn’t both be used. “Validly” means that “the holy water may not have been sprinkled on right, but it’s still a valid transaction.” When you add “duly”, it means that it’s been performed “in a way that would please a grand hall monitor, superintendent of an authoritarian school; square corners have been turned and everything has been done right.” You have to get the right papers at closing! You can have big headaches in court in the future, even if you win!
In the last 15 years, the Silverado accords have become a big deal. Some lawyers had a retreat and talked about how opinions ought to be worded. If you’re asked to give an opinion subject to the Silverado accords, don’t sign it right away! Double check the definitions! They’re “wacky!” Careful lawyers will add reservations related to environmental laws, RICO, equity orders, and doctrines of good faith and commercial reasonableness. They will also add a section dealing with fraudulent conveyance statutes. “They are murder!” Sometimes you can’t get around this stuff, though. To limit costs, sometimes the other side will accept an opinion of the corporate counsel if, to the best of their knowledge (not having audited or anything like that), “X, Y, and Z are true”. Then there will be a paragraph that describes when the firm is on notice of certain facts. The point is that this is tough stuff. In opinions, you’ll always have to consider ultra vires.
Some big limiting factors on corporate power are loan agreements, mortgages, notes, and other instruments that you’ve signed with creditors. The other side will ask for an opinion saying that these old agreements don’t run against the new one. So ultra vires is a big deal! Pay attention to it! It’s very important in practice!
Organizing the company
naming of corporations and LLCs is getting sticky! It’s mostly a matter of state law, but not
entirely. There are two or three things
you can do. In most states, you can pay
$10 or $15 to reserve a name for
30-60 days. Shipman says this is
wise! It makes sure that no one else has
a name similar to what you’re reserving.
What if you’re a
Trademarks, service marks, and trade dress overlap with local statutes somewhat. There is also the Lanham Act that allows many of these suits to be brought in federal court. These statutes are distant relatives of the patent and copyright statutes. They’re sort of types of intellectual property statutes.
all states, when you authorize the issuance of stock, you must describe it as
either common or preferred stock and you must give the par value for the stock. In
Regulations and bylaws
we call regulations in
a lot of work in advance that goes into forming a corporation. There are tax factors, licensing, zoning,
permits, bank account forms, insurance, and all kinds of other things. “The biggie not covered yet in the casebook
is compliance with
all states have provisions concerning foreign
corporation (meaning out-of-state) qualifying to do business in that state,
e.g. R.C. Chapter 1703. Why do we have
these? (1) They’re a big aid to the tax
authorities to know who to tax. (2) One
of the requirements of these statutes is to designate a registered agent for
service of process. Let’s say a
do people resist this so much? The
consent to service of process statutes don’t stop with torts in
Bendix was a case regarding Chapter
1703 and also a separate tolling statute
Pre-incorporation contracts – Stanley J. How & Assoc., Inc. v. Boss
involved here? Check out the signature
lines! Ed Boss signs for a
What happens if the corporation is formed? If the corporation is formed and you have a highly formal document, namely, a 3-way novation agreement, then it will clearly be valid. A novation is a recognized “animal” of contract law. But things usually aren’t that simple!
The McArthur case talks about ratification and adoption, which are agency terms both in tort and in contract. In torts, we learn that even if there is no authorization up front and even if respondeat superior doesn’t apply, if the principal ratifies the tort afterwards, then you may sue the actual tortfeasor and the principal. For example, if you’re a bus company superintendent and a driver comes in saying: “I socked this dude on the bus to teach him a lesson because he was annoying me”, and then the superintendent says: “I woulda hit him three times”, then that is implied ratification, and the company will be liable. Ratification can be implied.
does this come up in the context of pre-incorporation contracts? In McArthur,
What’s wrong here? In the old days, and the new days in some states, partial performance doesn’t take a contract outside of the statute of frauds. At the time, there was no strong partial performance doctrine! The employee says that this was ratified by the board of directors, and therefore the corporation is bound. The corporation gives two defenses: (1) under British law and many American states, if the principal was not in existence when the agent made the contract, then there can be no ratification because the ratification relates back to the original event, and there was no corporation in existence on that date! Besides, if you relate it back to that date, you’re in violation of the statute of frauds! So this seems like a good argument. But what the court held was that there is a separate of related doctrine of adoption, and that the board could not ratify on April 2, but it could “hop over one compartment” and adopt, which doesn’t relate back to January 2. When we put the day at April 2, there are 11 months to go, and there is no statute of frauds problem. The doctrine of restitution would apply to any corporation that is formed.
What about the lawyer who does the work of bringing a corporation into existence? Does the lawyer have a right to get paid when the corporation is born? The cases are split. Let’s say Peter Promoter walks into your office with his wife, Paula. They want to promote a company and it will take a lot of complicated and detailed work. Can a lawyer represent both of them? You have dual clients. Under Canons 5, 4, and 9 of the Ohio Code of Professional Responsibility, you must warn them (1) of the potential conflicts between them, (2) that there is no strict attorney-client privilege and that what one tells you can be discovered by the other, and (3) that there would be advantages to each one having their separate attorney. If, knowing this, they still want you to represent them, that’s fine, with a major caveat: on every major matter, you would have to stop and explain how the major matter is favorable and unfavorable to each client. It’s a same thing when a married couple comes in and wants you to craft both their wills. This can get hairy!
Here’s a widely used hypo from CLE symposia: H & W come in and want you to draft both of their wills. The ordinary will is fully revocable until the person dies and/or goes crazy (AKA “lose mental capacity”). You draft the wills, and married couples will usually leave to each other. Three months later, W calls, saying that she wants a new will drafted leaving everything to her lover. So the first question is whether you can do that. Of course you can’t! What else do you have to do? At a bare minimum, you must phone the husband and tell him, at minimum, that you can no longer represent him vis-ŕ-vis the will, that you’re no longer representing the wife, and that he should immediately go to a new lawyer to make a new will revoking the old one. You also have to tell the wife that you can no longer represent her at all. Representing joint clients can get sticky! Some say you have to tell H about the lover. Shipman supposes they’ll get the message when you tell them to go get a new lawyer and a new will. What if the husband says, “Why are you telling me this?” You want to make sure that nobody gets killed. Later, we’ll talk about quasi-clients in the corporate area: they’re not quite joint clients, but you incur the same duties. There are also third-party non-clients who are in privity of contract with you, for example: if you represent a corporation selling Greenacre to a third-party, and that party wants your opinion that the contract is cool, and you address the opinion to that party, that is a third-party non-client who is in privity with you. You can be liable in negligence on the opinion to him!
Here’s a hypo we were supposed to think about: Mrs. Smith wants to buy some land for a corporation that hasn’t been formed yet. She doesn’t want the land for herself, but only for the corporation. Can she assure that the land is available if she forms the corporation? She’s not sure if she can get loan from her husband and parents. We’ll represent Smith and the corporation but not anybody else because the conflicts are too strong. From Stanley J. How, we find that a contract between the corporation to be formed and the owner would leave her holding the bag if the corporation isn’t formed. The thing to do is to pay the guy to have an option running a few weeks. The option states that it may be assigned to a corporation to be formed. If the formation of the corporation goes ahead, she assigns the option to the corporation for the cost of the option. If the corporation doesn’t get formed, she’s only out a few hundred dollars for the cost of the option.