BUSINESS ASSOCIATIONS

Transcription

1 BUSINESS ASSOCIATIONS General collective action problem (free riders) - applies to a lot of areas information & how to create, value, verify, transfer it,... - a key issue, including informational asymmetry agency law is also an important part of corporate law Introduction charts is why form business enterprises, 8 is organization of production, 9 is methods of coordination, 10 is theory of firm why do parties form business entities? in general, want to reduce the overall transaction costs could have quasi-govt entities do everything could have everyone as an independent entity in a marketplace but business entities have various advantages lower search costs - don t have to find suppliers for each piece less communication/negotiation costs - information costs related to prices, locating goods, making deals but the longer term the contract is, the more like a firm economies of scale localization - less transportation costs diversification of risks at high level are some disadvantages to firms lose competitiveness lose information about market price of goods capital-intensive to acquire various parts management/overhead costs - agent costs - each employee has their own self-interests increased risk due to specialization of individual parts of companies - only one consumer for internal supplier theory of the firm - information costs are very important want to structure deals to minimize the cost of future verification, conflicts,... in firm, decisions are made by fiat, which minimizes costs - but structural factors cause this power to be diffuse Coase Theorem - transaction/information costs affect market in real world in general, prices accumulate the demand and supply of individuals in marketplace - good indicator of value of goods when produce in a firm, lose this information because don t have marketplace competition but note that the market price for a share only reflects the value of a minority share - premium for controlling position Efficient Capital Market Hypothesis - if there are lots of players (looking for corp info & trading), any new info will quickly be reflected in market price (included in market s informational bundle), even if info itself isn t explicitly propagated what quick means depends on the stock (the # of people following it) there is a lot of empirical data showing that markets are efficient, at least to some degree if believe the hypothesis, importance of disclosure reqs are lessened people hurt are those w/o the info while the price is being adjusted to reflect new info also says can t make systematic arbitrage profits (those based on info not generally known & thus not reflected in market price) mainly because can t always have informational advantage when competition for the info but if everyone knows & believes hypothesis, won t work - everyone stops looking for info, so can have advantage problem of adverse selection - in general, any time two individuals entering into contract and one has more info than other the other will discount for the risk caused by lack of information - problem of informational asymmetry the other side can provide governance structure to reassure you and to deal w/ future problems Market For Lemons: article by Ackerloff (?) 1

2 example of used car lot, 5 possible cars, all appear identical and are selling for same amt car saleman has more information about cars than buyers - how can he reveal info to buyer? since there is some risk that car you are buying is a lemon, buyer will discount the amt willing to pay taken to a logical extreme, the market will disappear due to informational problem problems: hard or costly to verify the information given to buyer can get around problem by signalling - send signals to buyer to reassure warranty is one example - but further question of how know that the warranty is good another example of adverse selection problem is employment - what signals do potential employees give to reassure employer? The Statutes Uniform Partnership Act (UPA) (focus on 1914 rather than 1994, since 1914 still governs in most states) although starting to change, partnership law has been very uniform among states Uniform Limited Partnership Act (ULPA) of 1976 w/ 85 amnds - because dissatisfaction w/ early version started earlier than w/ UPA, changes occurred earlier and more variation in states Model Business Corporation Act (RMBCA) of 1984 state corp law has historically had more variation than partnership law a model statute proposed by ABA rather than a uniform statute proposed by National Conference of Commissioners model statutes contemplate that there may be amnds to reflect local interests Basic Business Forms corporations - separate legal entity, need to file a document as part of formation (more info below - Selection & Dev of Business Form) powers to enter into contracts, borrow money, sue & be sued, own real & personal property, have corporate seal,... also have implied powers reasonably necessary to accomplish it purposes limited liability, centralized management, continuity of existence because responsible for own debts, gives limited liability to shareholders management powers & limited liability may co-exist in single person (unlike ltd partshp) centralized mngt - board of directors manage, individuals shareholders don t have say in ordinary business also, they can t act on corp s behalf shareholders are ultimate owners, board of directors are managers of corp, & officers act to implement decisions of board shares in corp are generally freely transferrable partnership - an association rather than a legal entity (but treated like an entity for some purposes - can own property) no formalities required (like filing a paper) each partner is both a principal and an agent - generally have authority to bind the other partners unlimited liability (for general partner) unless otherwise agreed: no transferability of interests, limited duration, decentralized mngt (everyone participates) & authority UPA 6 - Partnership Defined - association of two or more persons as co-owners of biz for profit Law of Agency chart 1 - Restatement of Agency, 1 RSA 1 - Agency Defined - fiduciary relationship where one party (principal) consents that another (agent) can act on their behalf actions of the agent bind the principal don t have to pigeon-hole relationship into either master-servant or independent contractor the greater the independence, the more likely to be an independent contractor agency used in two senses - law of agency (defines duties) & economics of agency (explains agency costs from monitoring,...) principles of agency law are the same no matter what business form is used agency law matters because directors of corps are agents of shareholders, employees can be agents 2

3 The Partnership charts is UPA defn of partnership, 3 is relations among partners, 4 is property rights of partners, 5 is partners vs 3rd parties each partner is both an agent & a principal - have very high fiduciary duty to other partners partnership issues - fiduciary duty, inadvertent partners partnership agreement is a governance structure - deal w/ future conflicts between partners, and between partnership & outsiders generally need universal agreement to change the basics - add new partners, change partnership agreement,... Duties of Partners to Each Other can be an affirmative duty to disclose information to partner that would be beneficial to them, like a business opportunity thus, an informational problem - agent had more info than principal & didn t disclose it otherwise, other party would have to monitor the agent to ensure accuracy of information received - adds transaction costs UPA 21 - Partner Accountable As A Fiduciary - must account to the partnership for any benefit, and hold profits as trustee can cause confusion/problems when one partner deals w/ partnership in a arms-length transaction UPA (1994) also has this fiduciary duty for the conduct & winding up of the partnership, but not for the formation ** Meinhard v. Salmon, 1928, NY SCt p. 52 (8 LL) case involves obligation of loyalty and fiduciary duty amongst partners - very high duty not to usurp business opportunities related to business, and here there was a close nexus between original joint venture and new opportunity - involves a leased bldg and another party that paid 50% of costs and shared 50% of profits, but other party had no management power - later deal involved a lease of land that included the original lease dissent - this was a joint venture rather than a partnership (other party never received an assigned interest in the lease and couldn t have renewed the lease had there been a renewal option) w/ a specific term, so new opportunity was not an extension of the old one a joint venture is an association of members agreeing to share profits - usually limited to a single transaction UPA (1994) 404(c) essentially adopts the same duty of care as applies in corporate context - UPA didn t define a duty of care Inadvertent Partnerships partnerships are normally based on express mutual consent of parties - however, can have inadvertent partnerships inadvertent partnerships arise in two situations between members, employee might try to share in profits 3rd parties look to non-partners for damages inadvertent partnerships are something to be wary of - don t need formality to form one if partners, joint & several liability for debts may have affirmative fiduciary duties UPA 7(4) - Existence of Partnership - receipt of profits is prima facie evidence of co-owners (share profits, control,..) these cases usually arise when creditors trying to find someone to pay debts - one way is to get other parties declared to be partners either partners in fact, or partners by estoppel note: when drafting agreements today, put stmt that this relationship/agreement is not meant to be a partnership lendors to partnership are often one group that is targeted often negative powers to prevent some things is good middle-ground - gives some power, but not affirmative management is broad access to information enough to give power/control to lendor? probably not Martin v. Peyton, 1927, NY SCt p. 118 (20 LL) look at all circumstances to determine if partnership was formed - question here is whether a partnership is formed, where loan is made to a partnership & agreement stated that no partnership was intended - the stmt in agreement that no partnership was formed was not dispositive (won t allow form to change substance) - even though loan being repaid w/ % of profits, other factors consistent w/ loan (no day-to-day management,...), and no partnership was formed 3

4 Smith v. Kelley, 1971, KY appellate p. 123 (21 LL) intention among parties is what establishes a partnership between them, although a partnership by estoppel may arise as to 3rd parties - question of whether an employee was a partner in accounting firm, where held out to clients and tax authorities as partner, but internally is not treated as one - employee sued for profits, but was found not to be a partner for employee, this is worst of both worlds - can be held liable to 3rd parties as partner, but don t get to share in profits UPA 16 - Estoppel - if represent self or consent to another s representation that partner, liable as partner to 3rd party that relied for partnership by estoppel, need reliance on part of 3rd party Young v. Jones, 1992, SC dist p. 124 (21 LL) no partnership by estoppel because the?s did not rely on a representation, & no partnership in fact because firms are organized separately (not supported by facts) - question of whether a US firm and its foreign affiliate operate as partners by estoppel when the foreign affiliate uses the firm name and trademark and the US firm makes no distinction in advertising between firm and its affiliates - not here, because the?s did not rely on Price-Waterhouse s representation that all part of same partnership - also, the UPA says that only applies to 3rd parties that give credit to the partnership, whereas here the 3rd parties gave money to a firm that Price-Waterhouse had audited Selection and Development of Business Forms a few people want to start a business - what are the legal & business issues which affect this decision? options - partnership, ltd. partnership, LLC, corporation (either C or S ),... - incorporate unless there is a reason not to - look at various factors who are the parties involved, and how many of them? what are their interests? how do their interests conflict? what is the purpose of the business? what are parties contributions? differences in investor goals? partnerships and corps have various differences - ltd liability & tax are big drivers pass-through taxation (partnerships & S corps) limited liability (corps, ltd partnership, LLC) transferability (much easier for C corps) LLCs allow pass-through taxation & ltd liability w/o stringent requirements of S Corps - but newness & tax issues are big questions corporation parties - incorporators, directors, managers, stockholders, employees, contractors, creditors, customers, govt, suppliers creditors can include contractual, tort, govt,... who have limited liability? - stockholders, sometimes directors & managers (either contractually or statutorily for some acts) corp can also buy insurance for directors & managers why give stockholders limited liability? creates a negative externality - not full responsibility for actions but helps raise capital because can get investments from many people who don t have to worry about actions of other owners also, if unlimited liability, different people value investment differently based on own assets, so can t have single stock market in corp, shareholders generally retain some powers - amendments to articles, merger, sale of substantially all assets, dissolution statutory close corp - if qualify, broad latitude in shareholder agreements that affect management or other factors must identify itself as such in articles include limitations in articles as to number of shareholders and/or transferability of shares in Del, no more than 30 people holding stock, restriction on transferability, no public offerings, stmt that closed corp chart 22 - board of directors MBCA Requirement for and Duties of Directors - corp must have board, who exercises all corporate powers in managing close corps are exception to needing board board can delegate authority to manage corp to officers articles can specify qualifications for directors (only shareholders, residents of state of incorp,...) MBCA Number & Election of Directors - directors elected at annual mtgs, # can be fixed or in range used to be that at least 3 were required - now, generally 1 is enough 4

5 MBCA Election of Directors by Different Classes - articles may authorize election of some directors by classes of shares MBCA Terms of Directors - specifies rules on length of directors terms - generally 1 yr unless staggered MBCA Staggered Terms for Directors - if nine or more directors, can stagger into 2 or 3 groups (& have terms of 2 or 3 yrs) MBCA Removal of Directors by Shareholders - can vote to remove, and generally can remove w/o cause if elected by a voting group (particular class of shares) or by cumulative voting, use similar procedures in removal at common law, shareholders need cause to remove a director generally, board can t remove directors unless specific authorization, and split on ability of corps to remove directors need quorum to meet - usually a majority of authorized #, but can be set lower (usually down to 1/3) officers generally hold their positions at pleasure of board officers have some power to bind corp actual authority - authority that a reasonable person in the officer s position would reasonably believe had been conferred by board apparent authority - authority that corp allows 3rd parties to reasonably believe that an officer possesses ratification - if board later ratifies, even an unauthorized act may bind corp president s authority - generally, can bind in transactions arising in ordinary & regular course of business, but not extraordinary Legal Restrictions some groups, like lawyers, doctors,... are not allowed to incorporate - want to avoid ltd liability certain businesses like banks, utilities,... typically have specific statutes Limited Liability as a practical matter, availability of limited liability is less important than seems (particularly for small firms) purchase of insurance can help avoid tort liability creditors often insist on secured loans or personal guarantees if have little or no assets, effectively judgment-proof but, ltd liability does protect from tax claims, wage claims, warranty claims, small suppliers, service providers (accts,...) Federal Income Taxation taxes usually the most important factor in selecting business form - pass-through vs. double taxation of corps Informality, Flexibility, Cost corporate form requires more formalities than partnerships - meetings, elections, consents,... corp is thus more expensive - also must pay an annual franchise tax, possibly a state income tax, more expensive to form,... Miscellaneous Factors Continuity of Life corps normally have perpetual duration, while under UPA there are problems when a partner leaves/dies (UPA 1994 makes easier) Centralization of Management while corps would normally have (board of directors) & partnerships wouldn t (everyone equal), can generally be altered by contract Free Transferability of Interest typically shares of corp are freely transferable and partnership interest isn t, but not completely true for closely-held corp, no market for shares and may be shareholder agreements that limit ability to sell anyway 5