Corporate practice

Corporations:A Contemporary Approach

Chapter 1Introduction to the Firm

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Kandinsky, Fragment 2 for Composition VII (1913)



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Corporate practice

Law profession

Citizen of world

Bar exam

Why BusOrgs?



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1. Fundamentals– Introduction to firm– Corporate basics

2. Corporations and policy– Corporate federalism– Corporate social responsibility – Corporate political action

3. Corporate form– Organizational choices– Incorporation– Locating corporate authority

4. Corporate finance– Numeracy for corporate lawyers– Capital structure

5. Corporate externalities– Piercing corporate veil– Corporate environmental liability– Corporate criminal liability

6. Corporate governance – Shareholder voting– Shareholder information rights– Public shareholder activism

7. Fiduciary duties– Shareholder litigation– Board decision making – Board oversight – Director conflicts– Executive compensation – Corporate groups

8. Stock trading– Securities markets– Securities fraud class actions– Insider trading

9. Corporate deals– Sale of control– Antitakeover devices– Deal protection

10. Close corporations– Planning– Oppression





5. Corporate externalities– Piercing corporate veil– Corporate environmental

liability– Corporate criminal liability



10. Close corporations1. Planning2. Oppression



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ScheduleFall 2014

Workshops: Sep 11 / Sep 25 / Oct 9 / Nov 13 No classes: Oct 26-30 / Nov 3-6 Exam period: Dec 8-19



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Grading (see Syllabus)

Three components:1.Shareholder proposal memo – due Nov 21 (20%)2.Multiple-choice exam – during exam period (30%)3. Final essay exam – during exam period (50%)

Your input …



1. College / major / p

ost-college experience

2. Business background: 1-zero to 5-lots (describe)

3. Reason taking course: bar, practice, lawyer, worldly

4. In my free time … (how you de-stress)

Name / Year

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What you will learn …

1. Basic vocabulary / essential concepts2. Business understanding3. Corporation in law / society4. Policy – learn to learn



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Frank Partnoy

Class “panels” …Mon: Abaldukarim DarrTue: Dickens KennedyWed: Kipinen PriceThu: Rivers Zimlich

Class groups …Five (5) classmates seated nearby



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Michael Klotz (3L)[Teaching Assistant]

Laptops …



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Module I – Fundamentals

• Risks and risk allocation– Controllable/noncontrollable risks– Risk control devices: diversification, insurance,

incentives– Allocation devices: owner/agent

• Fiduciary duties– Source: judge-made law– Party expectations vs. legal norms– Understanding of human motivations

• Role of law– Mandatory vs. default rules– Types of defaults: majoritarian, tailored, penalty– Nature of US corporate law

Citizen of world

Law profession

Corporate practice

Bar exam



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The “business firm”

• Meinhard v. Salmon– Allocating risks– Fiduciary duties

• Business firm– Essential questions– This course

• Role of law– Mandatory vs. default rules– US corporate law

Meinhard v. Salmon(NY 1928)

(1) The business story(2) The parties’ motivations?

(3) Which business organization?(4) Nature and extent of fiduciary duties?



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Hotel Bristol Salmon Tower



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Meinhard(capitalist)

Salmon(manager)

• Risks– uncontrollable – controllable

• Expected returns– weighted average– risk tolerance

• Manage risk– insurance– diversification– internal allocation– externalization

• Firm organization– Risk to principal– Risk to agent– Shared risk



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Expected returns(what are returns worth)

Scenarios Return (M’s share)

Probability Expected(weighted)

Upturn(best-case)

$15,000 30% $4,500

Middling (likely-case)

$10,000 50% $5,000

Downturn (worst-case)

($6,000) 20% ($1,200)

TOTAL $8,300

Business organization choicesin Meinhard v. Salmon …

• Who bears risk?• What agency costs arise?• How is risk-taking compensated?



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Employer-employee

Meinhard

Lender-borrower

Joint ownership

Salmon

Meinhard(owner)

----Salmon(owner)Salmon

(owner)

Meinhard(owner)

Business organization choices…



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Fiduciary duties in Meinhard v. Salmon …

• What did plaintiff argue?• What did court hold?• What was remedy?



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“Joint adventurers, like copartners, owe to one another, while the enterprise continues, the duty of the finest loyalty.”

“A trustee is held to something stricter than the morals of the market place.”

“Not honesty alone, but the punctilio of an honor the most sensitive, is then the standard of behavior.”

“Uncompromising rigidity has been the attitude of courts of equity when petitioned to undermine the rule of undivided loyalty …”

Bejamin Cardozo(1870-1938)



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“There was no general partnership, merely a joint venture for a limited object, to end at a fixed time.”

“The new lease, covering additional property, containing many new and unusual terms and conditions, with a possible duration of 80 years, was more nearly the purchase of the reversion than the ordinary renewal with which the authorities are concerned.”

William Andrews(1858-1936)



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Essential elements of “business firm”

• Basic structure– Terms of relationship– Who is “owner” / “manager”?

• Financing– Sharing of profits/losses– Insiders’ liability to outsiders

• Governance – Powers of “manager”– Oversight by “owner”– Information rights of “owner”

• Fiduciary duties– Discretion/duties of “manager”– Method of enforcement

• Liquidity rights– Terminate relationship– What if no “owner” market?

• Change relationship

Capitalist(owner)

Manager(manager)



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5. Corporate externalities– Piercing corporate veil– Corporate environmental liability– Corporate criminal liability



8. Stock trading– Securities markets– Securities fraud class actions– Insider trading

9. Corporate deals– Sale of control– Antitakeover devices– Deal protection

10. Close corporations– Planning– Oppression

Group Hypo

Your BusOrg professor is co-author of a Corporations casebook published by West. As part of his deal with West, he receives complimentary “author” copies.

A bookseller has come by the professor’s office and offers to buy copies for $30. Should he sell?

The professor’s contract with West does not address the resale of complimentary author copies.

The professor and his co-author (who share royalties equally) have no agreement about whether they can sell their complimentary copies.

Please advise your professor. Corporations:A Contemporary Approach


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Group Answers

Consider co-author•Duty to co-author – don’t sell (13)

• As co-venturer, fiduciary duty to co-author• Conflict of interest: sales reduce royalties to co-author• Must inform co-author; need consent of co-author

•No duty to co-author – free to sell (3) • No conflict of interest identified; co-author can sell his copies• No duties beyond writing/publishing agreement

Consider West•Duty to West – don’t sell (7)

• Fiduciary duty to West; can’t compete, undercut profits • Gave right to distribute to West; author must be loyal• Protect your reputation; publishers may shun you

•No duty to West – free to sell (7) • No fiduciary relationship; no limits in contract• “Complimentary” copies means belong to author; no E(V)



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Model AnswerDear Professor,

You asked for my advice on whether you can sell your complimentary “author” copies of your book to a bookseller.

My advice is that you not sell your “author” copies, until you consult with your co-author. Given your relationship, you have a duty not to benefit yourself at his expense – such as by selling your “author” copies so as to reduce his royalties. Nonetheless, you and your co-author could agree on how to handle this.

Your contract with West, on the other hand, does not prevent you from selling your “author” copies. They’re yours! Assuming that you have not misrepresented anything to West and that such sales by authors are not uncommon, you have no duty to West. Although your limited sales of “author” copies may reduce sales for the publisher, that’s your prerogative.

I could cite law, but that would make this a legal memo. You asked for my advice.

Sincerely, Your trusted adviser



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Identify type of rule …Rule 1 - Every employer shall pay to each

of his employees wages at not less than $7.25 an hour.

Rule 2 - An employment, having no specified term, may be terminated at the will of either party on notice to the other.

Rule 3 - An agent, as fiduciary, must use reasonable efforts to give his principal information relevant to affairs entrusted to him and which, as the agent has notice, the principal would desire to have.

Rule 4 - An employee cannot compete with his employer during the term of employment. After employment terminates, a non-compete covenant will not be implied.

Mandatory rule - cannot agree otherwise

Default rule - can agree otherwise

1. Majoritarian (most parties would choose)

2. Tailored (fits parties’ expectations)

3. Penalty (forces parties to negotiate)



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Role of law (in business firms)



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Company law rules(131 E.U. directives)22

14

95

Some U.S. statesAll U.S. statesNo U.S. jurisdiction

US v. Europe(who is more mandatory?)



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Mandatory company law rules

(67 E.U. directives)9

4

54

Some U.S. statesAll U.S. statesNo U.S. jurisdiction

US v. Europe(who is more mandatory?)

Group Hypo

Your BusOrg professor is co-author of a Corporations casebook published by West. As part of his deal with West, he receives complimentary “author” copies.

A bookseller has come by the professor’s office and offers to buy copies for $30. Should he sell?

The professor’s contract with West does not address the resale of complimentary author copies.

The professor and his co-author (who share royalties equally) have no agreement about whether they can sell their complimentary copies.

Please advise your professor. Corporations:A Contemporary Approach


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Group Answers

Consider co-author•Duty to co-author – don’t sell (13)

• As co-venturer, fiduciary duty to co-author• Conflict of interest: sales reduce royalties to co-author• Must inform co-author; need consent of co-author

•No duty to co-author – free to sell (3) • No conflict of interest identified; co-author can sell his copies• No duties beyond writing/publishing agreement

Consider West•Duty to West – don’t sell (7)

• Fiduciary duty to West; can’t compete, undercut profits • Gave right to distribute to West; author must be loyal• Protect your reputation; publishers may shun you

•No duty to West – free to sell (7) • No fiduciary relationship; no limits in contract• “Complimentary” copies means belong to author; no E(V)



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Model AnswerDear Professor,

You asked for my advice on whether you can sell your complimentary “author” copies of your book to a bookseller.

My advice is that you not sell your “author” copies, until you consult with your co-author. Given your relationship, you have a duty not to benefit yourself at his expense – such as by selling your “author” copies so as to reduce his royalties. Nonetheless, you and your co-author could agree on how to handle this.

Your contract with West, on the other hand, does not prevent you from selling your “author” copies. They’re yours! Assuming that you have not misrepresented anything to West and that such sales by authors are not uncommon, you have no duty to West. Although your limited sales of “author” copies may reduce sales for the publisher, that’s your prerogative.

I could cite law, but that would make this a legal memo. You asked for my advice.

Sincerely, Your trusted adviser



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The end



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Corporate practice

Law profession

Citizen of world

Bar exam

Why BusOrgs?



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Being physically

active

How de-stress?

Being social /

kind

Being creative

Watching TV

Enjoying solitude

Corporate practice

Documents

Transcript of Corporate practice